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Testimony on Fraud, Abuse, and Waste Issues Relating to Medicare Medical Equipment and Supplies Reimbursement by Michael F. Mangano
Principal Deputy Inspector General
U.S. Department of Health and Human Services

Before the House Committee on Government Reform and Oversight, Subcommittee on Human Resources and Intergovernmental Affairs and the Subcommittee on Government Management, Information and Technology
May 2, 1996

Good morning. My name is Michael Mangano. I am the Principal Deputy
Inspector General, U.S. Department of Health and Human services. I am pleased
to be here today to discuss issues relating to fraud, abuse, and waste related
to Medicare reimbursement for medical equipment and supplies.

I want to begin my testimony by providing a few introductory remarks about
the Office of Inspector General (OIG) and our unique role in combating fraud and
abuse and improving the effectiveness and efficiency of the Medicare program. I
then want to discuss some of the work we have done over the years related to
medical equipment and supplies, to illustrate the range of both problems and
solutions we've seen in this area.

Finally, I want to discuss some of the fundamental reforms that I are
warranted to make Medicare a more prudent purchaser of medical equipment and
supplies. These reforms include expanding Medicare's ability to reduce
inherently unreasonable prices, authorizing competitive bidding, allowing
greater flexibility in making coverage decisions, and bundling certain
nonprofessional services in nursing home rates.


The OIG was created by law to protect the integrity of HHS programs and to
promoting their economy, efficiency, and effectiveness. The OIG meets this
challenge through a comprehensive program of audits, program evaluations, and
investigations. Our role is to detect and prevent fraud and abuse and to ensure
that beneficiaries receive high quality, necessary services, at appropriate
payment levels.

The Medicare program is administered by the Health Care Financing
Administration (HCFA). Medicare Part A covers hospital and other institutional
care for approximately 37 million persons age 65 or older and for certain
disabled persons. Medicare Part B covers most of the costs of medically
necessary physician and other non- institutional services. At $197 billion, FY
1996 Medicare expenditures will have increased about 9.4 percent over the FY
1995 level of $180 billion. The HCFA contracts with private insurance companies
to process Medicare claims including four specialty contractors that make
payments for medical equipment and supplies paid under Part B.


Vulnerabilities to fraud and abuse in the Medicare program have been well
documented. Because of the huge sums of money being spent, the Medicare program
will always attract some individuals or companies that dishonestly attempt to
take advantage of loopholes or directly violate the law to enrich themselves at
the expense of the taxpayer and the Medicare beneficiary.

Our office has been at the forefront of fighting fraud in the Medicare
program. To leverage our effectiveness, we work with a variety of Federal and
State entities to detect fraud and bring individuals and entities that have
defrauded the program to justice. In Fiscal Year (FY) 1995, we were responsible
for 620 successful criminal prosecutions and 1,563 administrative sanctions
(civil monetary penalties or program exclusions) against individuals or entities
that defrauded or abused the Department's programs and/or beneficiaries. Last
year, the OIG also generated savings, funds, restitutions, penalties, and
receivables of over $10.2 billion (more than $6.9 billion pertained to Medicare
and Medicaid). This represents $115 in savings for each Federal dollar invested
in our office, or $9.7 million in savings per OIG employee.

A year ago, we initiated a two-year partnership of Federal and State
agencies working together to prevent and detect health care fraud in specific
health care industries. This project, called Operation Restore Trust, targets
five States which together account for approximately 40 percent of the nation's
Medicare and Medicaid beneficiaries.

The impetus of the project was to more effectively use existing and expanded
resources devoted to combat health care fraud and abuse. Operation Restore
Trust represents one of the largest and most comprehensive efforts against
health care fraud ever undertaken by the HHS Office of Inspector General (OIG),
the Health Care Financing Administration (HCFA) and the Administration on Aging
(AOA). The project uses the shared resources of the three primary HHS agencies
as well as HCFA contractors and State and local resources to address fraud in
three rapidly growing sectors of the health care industry: home health agencies,
nursing facilities (including hospices) and medical equipment and supplies.

The OIG currently has more than 240 investigations underway that are related
to Operation Restore Trust, including many joint ventures with the Department of
Justice, the Federal Bureau of Investigation (FBI), the United States Postal
Inspection Service, the Defense Criminal Investigative Service, the Railroad
Retirement Board, and other law enforcement agencies.

While I can tell you that I think we have been successful in combating
fraud, I can also tell you that I think there is much to be done. While we have
found that fraud and abuse permeate all aspects of the program and all areas of
the country, we believe that some program areas are more vulnerable than others.
Vulnerabilities in medical equipment and supplies have been of particular
concern to us.



Medical equipment and supplies include several categories of items. Durable
medical equipment (DME) are items that can withstand repeated use and include
oxygen equipment, hospital beds, wheelchairs, and other equipment that
physicians prescribe for home use. Prosthetics and orthotics are devices that
replace all or part of an body organ and include leg, arm, back, and neck braces
as well as artificial legs, arms, and eyes. In addition, Medicare classifies
enteral and parenteral nutrition therapy under the prosthetic device benefit.
Medical supplies include catheter, ostomy, incontinence, and wound care
supplies. Medicare Part B expenditures for all medical equipment and supplies
totaled more than $5 billion in 1994. In addition, Medicare beneficiaries pay a 20
percent copayment for those items.

We have issued numerous reports on problems with this category of service
and undertaken a large number of investigations. Some of the problems we have
seen include:

Filing claims for equipment that was never delivered.

Billing for high cost equipment when lesser cost equipment was actually
provided (upcoding).

Billing for the component parts of a piece of equipment instead of the
entire unit (unbundling).

Delivering equipment that has no medical benefit or delivering medical
equipment to beneficiaries who do not need it.

Medicare reimbursement rates that are clearly excessive when compared to
payments made by other payers or compared to the wholesale costs, or market

Program Reforms

Our work, as well as work by HCFA, the Congress, and the medical equipment
industry have documented these types of deficiencies. As a result, the Congress
and HCFA have taken a number of steps since the late 1980s to curb the abuses in
the medical equipment and supplies area. In particular, two reforms deserve
prominent mention:
A fee schedule for DME was implemented in 1989 and the Omnibus Budget
Reconciliation Act of 1990 established ceiling and floors to the DME fee
schedules to make payments more uniform.

In October 1993, HCFA began transferring claims processing for DME from 32
carriers located throughout the country to 4 regional carriers. As part of this
process, point of sale rules were changed to require suppliers to bill the
carrier that serves the jurisdiction where the beneficiary lives. In addition,
HCFA required suppliers to apply for new provider numbers and meet certain
minimum standards before numbers are issued.

Even with this corrective action, OIG work continues to document certain
deficiencies in Medicare payment for medical equipment and supplies. It is
clear that additional corrective action can be taken to reduce program

OIG Work

We often focus our attention on specific items of equipment or supplies when
we see a significant increase in payments over a short period of time. In the
absence of coverage or coding changes, or new medical information about proper
use and application of technology, such increases have often been an indication
of fraud or inappropriate billings. Such increases have led us to examine
claims for seat lift chairs, incontinence supplies, and wound care supplies.
Also, when investigations indicate that there may be a systemic problem in a
particular area such as body jackets, we initiate reviews to determine the
extent of the problem. Finally, we attempt to look at broader payment issues
related to medical equipment and supplies.

The following is a brief description of some of the work that we have done
in this area over the past few years. A more complete description of this work
can be found in appendix A of my testimony.

Enteral Nutrition Therapy -- We found that Medicare payments for enteral
nutrients are excessive because nursing homes and even other third party payers
are purchasing enteral nutrients at significantly lower prices than current
Medicare levels.

Nebulizer Drugs - We found that Medicare and its beneficiaries could have
saved $37 million if they had used the payment methodology used by Medicaid for
nebulizer drugs.

Wound Care Supplies -- We found that questionable payments of wound care
supplies may have accounted for as much as two-thirds of the $98 million
Medicare allowed for these items from June 1994 through February 1995.

Incontinence Supplies -- We found that questionable billing practices may
account for almost half of the $230 million allowed for incontinence supplies
1993. We have convictions for "carrier shopping,' and billing for incontinence
supplies that were never delivered.

Lymphedema Pumps - Several of our investigations have shown that
manufacturers and providers misrepresent the type of pump issued to Medicare
beneficiaries in order to obtain significantly more reimbursement.

Oxygen Systems -- We found that Medicare, on the average, allowed 174
percent more than the Department of Veterans Affairs reimburses for oxygen
concentrators. We also found significant variation in the services provided to
beneficiaries associated with oxygen concentrators.

Orthotic Body Jackets -- We reported that 95 percent of claims paid by
Medicare ($14 million in 1992) were for non-legitimate devices. We have also
obtained convictions of entities that billed Medicare for body jackets when they
really provided seat pads.

Intraocular Lenses -- We found that ambulatory surgical centers were paying
about $126 for intraocular lenses while the Medicare reimbursement was $200.

Total Parenteral Nutrition (TPN) -- We determined that Medicare overpaid $69
million for TPN in 1991 (43 percent of total expenditures).

Hospital Beds -- We found that an electric hospital bed with a wholesale
price of about $1000 can generate about $7000 in Medicare rental reimbursements
to a supplier over the 5-year useful life of the bed.

Home Blood Glucose Monitors - We found that while monitors could be
purchased for $50 at a drug or grocery store, Medicare fee schedules ranged from
$144 to $21 1.

Transcutaneous Electronic Nerve Stimulators (TENS)- We found that one-third
of the claims for TENS should not have been paid because they were either
possibly fraudulent or failed to meet Medicare coverage requirements for a trial

Seat-Lift Chairs -- Our analysis indicated that aggressive national
marketing by suppliers had resulted in many beneficiaries initiating the request
for the chairs. In 1989, Congress limited Medicare reimbursement to seat-lift
mechanisms only and expenditures for seat-lift chairs and mechanisms dropped
from $122 million in 1988 to $14 million in 1991.

In addition to our audits, and evaluations, we have aggressively pursued
individuals and entities who have defrauded our programs in this area. Between
1990 and 1995, our investigations led to 145 successful criminal prosecutions of
DME suppliers or their employees. During the same period, we imposed 35 civil
money penalties (totaling more than $43 million) and excluded 284 DME companies or
their employees from the Medicare and Medicaid programs. Some examples of these
concluded cases appear in Appendix B of my testimony to illustrate the types of
schemes we have uncovered.


What conclusions do we draw from these experiences?

First, medical equipment and supplies is clearly an area which requires our
attention, and is susceptible to fraud and abuse. This is probably the result
of a combination of factors: high profit margins, ease of entry into the
marketplace, and until regionalization of claims processing and fee schedules, a
real looseness in how Medicare paid claims.

Second, although much progress has been made in this area over the years,
more remains to be done. The accomplishments have been the result of a
concerted effort on the part of our office, HCFA, the Congress, Medicare
contractors, and industry representatives.

Third, there are some things Congress can do to improve the Medicare
program, like stepping in to legislate specific reductions in prices (such as
TENS) or coverage decisions (like limiting Medicare payment to the seat-lift
mechanism). Other statutory improvements can be made to allow greater program
flexibility and to close loopholes in the law. HCFA can promulgate rulemakings
to adjust prices to reflect market conditions (as they did with the glucose
monitors), promulgate more appropriate supplier standards, and continue to
improve coding of equipment and services. Our office and industry
representatives can continue to highlight deficiencies and make constructive
suggestions about how to eliminate them.

But most important, if you were to take away only one thing from my
testimony today, I would wish that it would be this: the Medicare program is far
too United in how it can act and how quickly it can act. I'd like to suggest to
you that significant improvement could be made in protecting the Medicare trust
funds and our Federal and State investment in Medicaid if program managers could
move quickly to address problems such as these when they are identified. Too
frequently, I see one kind of abuse or inefficiency identified, discussed, and
addressed over time, only to see it replaced by a new variation and a new
scheme, or perhaps simply a new market condition. The following are some
specific actions which I believe can be taken to improve the situation:

Inherently Unreasonable Payment Levels

In a competitive health care market, prices will change. In general, even
when the OIG or HCFA identifies a particular piece of equipment as significantly
overpriced (i.e., as "inherently unreasonable"), the Department or carriers
cannot adjust reimbursement levels without going through the regulatory process
that was used to reduce payment level for glucose monitors. The regulatory
process is a resource-intensive and time-consuming process. It can take from 2
to 4 years. The only other alternative is for the Congress to legislatively
reduce the payment amount. We recommend that the Congress enact legislation
which would allow HCFA to apply 'inherent reasonableness" in setting
reimbursement amounts (this would allow downward adjustments). The Department
actually had this authority prior to 1987. Enactment of this provision would
allow HCFA to take more timely action in setting appropriate payment levels.

Competitive Bidding

HCFA does not have the statutory authority which would allow it to take
advantage of its marketplace position to obtain discounts through competitive
bidding. While competitive bidding is not appropriate for every aspect of the
Medicare program, we believe that it can be used effectively in many areas.
Competitive bidding would allow HCFA to contract with specific providers to
deliver a fixed number of items and services to Medicare beneficiaries in
specific geographic locations at a fixed price.

Most people I talk to simply cannot understand why Medicare is not allowed
to do what other businesses can do - take advantage of its market position to
reduce expenses. The Department of Veterans Affairs can do this for its
health care system; States can do it for Medicaid; commercial health maintenance
organizations can do it; every hospital in the country can do it. But Medicare,
which out spends them all, cannot use its marketplace leverage to obtain the
best prices for the products and services delivered to its beneficiaries.

HCFA currently has a competitive bid demonstration project underway. We are
pleased that HCFA is using its current legislative authority in this limited
way. However, we believe that the Congress should expand HCFA authority to use
competitive bidding even prior to the conclusion of the HCFA project.

Coverage Policy

HCFA does not have the authority to quickly and administratively alter
coverage policy when its past policies and definitions prove open to abuse or
when it is determined that an item or service is not medically effective. When
HCFA makes a decision to cover a procedure or item rationally (as opposed to a
specific contractor making a decision to cover an item locally), HCFA has to go
through the rule- making process to withdraw that coverage.

Seat lift chairs provide a compelling example. When we looked into this, we
believed that this piece of equipment was not really medically necessary. It
was, in effect, a comfortable lounge chair with a seatlift mechanism that was
being aggressively marketed at Medicare's expense. Most beneficiaries who
received them did not need them for their stated purpose. We found a simple,
inexpensive seat- lift mechanism would work just as well.

When we called this to HCFA's attention, HCFA began the arduous,
time-consuming regulatory process needed to determine whether to withdraw
coverage of this item. Meanwhile, by 1988, Medicare reimbursements had risen to
$122 million. Fortunately, the Congress stepped in with legislation in 1989 to
limit coverage to the seat-lift mechanism only. Medicare payments dropped to
$14 million in 1991. If Congress had not intervened, Medicare payments would
have continued above $100 million for at least I additional year, and maybe

The Congress should not have to make routine coverage decisions for the
Medicare programmed HCFA should not be prevented from doing so either especially
in the face of an obvious scheme to abuse the program. We recognize the need
for due process and public input on important coverage decisions. However, HCFA
ought to be able to take interim action to withdraw or modify coverage while the
rule-making process is carried out.

Consolidated Billing or "Bundling"

We believe that a long-term solution to some of the abuses we have found
associated with wound care and incontinence supplies is to institute a statutory
bundling of certain nonprofessional services provided in nursing facilities.
When our parents, other relatives, or friends are placed in a nursing home, we
expect that the daily rate that is paid for them covers normal and customary
expenses. We would be surprised, for example, to be billed for nutrition
services, incontinence supplies, or routine wound care. Yet, Medicare and
Medicaid are sometimes billed for these and similar items, above and beyond the
daily rate. Savings could result if these items were purchased by the nursing
facility, acting as a prudent purchaser and taking advantage of discounts,
rather than being billed to Part B and reimbursed under fee schedules. We
also note that when services are billed under Part B, the beneficiary is liable
for coinsurance and deductibles.

As a general matter, we are concerned about the provision of services and
equipment to beneficiaries in nursing facilities because there are a
multiplicity of providers who provide services to the beneficiaries. No single
individual or institution is truly held responsible for managing the
beneficiary's care and ensuring that only needed services are delivered to the
patient. Indeed, many of the incentives run in quite the opposite direction.


It is worth noting, in this era of reinvention and reengineering, that
private sector third-party payers do not operate under the constraints that the
Medicare program operates under. They are not bound by the prescriptive nature
of the Social Security Act or the Administrative Procedures Act. While some of
these requirements may serve useful purposes despite the limits they place on
the Medicare program, some may prevent program managers from taking appropriate
action to improve program operations.

I appreciate the opportunity to appear before you today and to share with
you some of our concerns and work we have done. I would be happy to respond to
any questions you might have.

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