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Testimony on The False Claims Act by Robert A. Berenson, M.D.
Director, Center for Health Plans & Providers
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Committee on Judiciary, Subcommittee onm Immigrations & Claims
April 28, 1998


Chairman Smith and Members of the Subcommittee, thank you for convening this hearing today to discuss hospital initiatives pursed under the False Claims Act. The False Claims Act is an important tool for our law enforcement partners to pursue fraud and abuse in the Medicare program.

Fighting fraud and abuse is one of our highest priorities. Letting providers who intentionally submit improper bills merely pay back the money turns the Medicare Trust Funds into a nointerest loan program. That is something we simply cannot afford to tolerate. In too many instances, when providers found to be billing improperly were merely made to pay back the money, they went on to continue the very same improper billing practices and waited until being caught again to pay back the money. We need the penalties under the False Claims Act if we are to put an end to these deliberate improper billing practices.

The Health Care Financing Administration administers the Medicare program and, in partnership with the State, the Medicaid and Children's Health Insurance programs. The concerns raised today relate to Medicare payment for hospital services. As you know, the Medicare program provides health insurance to almost thirty-nine million aged and disabled Americans. More than 6,000 hospitals participate in the Medicare program. These hospitals provide acute inpatient care, long term, rehabilitative, and psychiatric care, as well as outpatient services to Medicare beneficiaries nationwide.

The Health Care Financing Administration maintains a commitment to working with providers to ensure that the Medicare program rules are clear. It is the provider's obligation to know these rules and to appropriately bill the Medicare program.


Medicare payments for hospital services are estimated to total almost $100 billion (including acute care hospital, pps-exempt hospital, and outpatient hospital) in Federal Fiscal Year 1998. An essential part of running this public program is ensuring that providers bill properly. Although our providers bill appropriately most of the time, there is stiff an unacceptable error rate.

The Fiscal Year (FY) 1997 Chief Financial Officers (CFO) audit by the Department of Health and Human Services Office of the Inspector General (OIG) estimated that net Medicare improper payments totaled $20 billion or 11 percent of total Medicare fee-for-service benefit payments. Of the $20 billion in improper payments, about $6.5 billion, or 32 percent was to hospitals, including $4 billion in acute hospital inpatient payments, $2 billion in outpatient payments and $4 billion in payments to long term care, rehabilitation, psychiatric and children's hospitals.

It is important to stress that we cannot determine what portion of the improper payments identified in the audit were due to fraud and abuse. It also is important to stress that Medicare contractors paid claims correctly 98 percent of the time based on information provided on the claim. The true error rate was found only when auditors and medical experts obtained medical records from providers and discovered that the documentation did not support the claims.

The largest factor in improper payments to hospitals is claims for services that are not medically necessary. Almost fifty percent of improper hospital claims were identified by medical professionals who found that the documentation provided did not show that the service was medically necessary. These cases include some obvious abuses such as a hospital admitting a patient five years after a stroke to provide medication and physical therapy thirty-seven days.

But obvious cases are just the tip of the iceberg. We have no tolerance for fraud which is why we are developing, in conjunction with our Peer Review Organizations, pilot programs to test ways to ensure the medical necessity of inpatient hospital claims. The projects will focus on identifying unnecessary readmissions, and the necessity of billings for specific cardiac procedures. HCFA will continue its efforts to aggressively implement corrective actions to address improper payments to Medicare providers.


The Medicare program has two parts, Part A and Part B. Part A of Medicare provides coverage for inpatient hospital, skilled nursing facility, hospice and some home health care. Part B provides coverage for several types of health services including physician services, outpatient hospital services, laboratory services and durable medical equipment. The Health Care Financing Administration develops policies related to the Medicare program but contracts with some seventy different insurers, referred to as "contractors," to administer Medicare, including claims processing, audit functions, and provider education.

Medicare pays for most inpatient hospital care through its prospective payment system (PPS), which pays hospitals a predetermined amount for each Medicare discharge based on the patient's diagnosis. Medicare pays hospital outpatient departments in a variety of ways depending on the service. Generally, outpatient department services are paid for based on a pre-determined fee schedule or on the lower of the hospital's costs or charges.


The Health Care Financing Administration issues policy through regulations, program memorandum to our contractors, and manual issuances to the contractors and to the providers. The Administrative Procedures Act provides direction, in most cases, on when a policy should be implemented via regulation. In addition to this formal policy guidance, HCFA consults with associations and providers on an ongoing basis to explain new legislation and regulations as well as respond to questions on existing rules.


The Health Care Financing Administration consults with provider associations and other interested parties in developing regulations. HCFA usually starts by publishing a proposed regulation in the Federal Register with, generally, a sixty day period for public comment. HCFA considers public comments and evaluates the policy recommendations included in the public comments for inclusion in the final rule. The final rule is generally effective sixty days after publication.

Program Memorandum

The Health Care Financing Administration sends program memoranda to contractors to inform them of changes in policy or to clarify existing policy. Our contractors then communicate these policy changes or clarifications to providers. In most cases, HCFA will also send the contractors a program memorandum with instructions on how to implement any changes included in a new regulation. The contractors then incorporate these program memoranda changes into their manuals.

Manual Issuance

The Health Care Financing Administration also distributes and updates manuals that provide guidance to Medicare contractors and providers.


The Medicare prospective payment system for acute care hospitals relies on hospitals to correctly code patients' diagnoses for Medicare payment. A panel of representatives from HCFA, the American Hospital Association, the America Health Information Management Association, and the National Center for Health Statistics Coding makes recommendations concerning coding policy. HCFA includes major coding changes in the annual prospective payment system regulation. The panel publishes a quarterly report, the Coding Clinic, which hospitals obtain from the AHA.

This quarterly report includes smaller coding changes and clarifications.

Medicare pays for laboratory services in hospital outpatient departments according to a fee schedule. The fee schedule stipulates Medicare payment for each lab service and "panel", or group, of services. In billing Medicare, the hospital uses codes to indicate the lab services provided.

A panel organized by the American Medical Association (AMA) with members from physician specialty societies and a HCFA representative maintains and updates the laboratory codes. HCFA incorporates the panel's coding changes into its current policy.


Ensuring the integrity of the Medicare program requires the efforts and coordination between several Departments. The Health Care Financing Administration has adopted a strategy to deter fraud in the Medicare program. We also have a process for handling honest billing mistakes.

This committee has expressed particular interest in civil and criminal prosecution for Medicare fraud. HCFA as an agency does not prosecute providers. If HCFA or one of HCFA's contractors suspects a provider of fraudulent activity, HCFA or the contractor refers the case to the OIG. The OIG then evaluates whether the case should be referred to the Department of Justice.

Billing Mistakes

If hospitals make billing errors, we want to find those errors, preferably before we make payment. We are significantly increasing our efforts to screen claims before they are paid, to review them afterwards, and to audit providers with billing patterns that are out of the ordinary. And, we are using increasingly sophisticated claims analysis software to search out unusual billing patterns that suggest where we need to take a closer look. Our decision to refer a case to the OIG may be in response to several factors including beneficiary complaints, unusual billing patterns, tips from law enforcement, and cost report audits..

If we find errors after we make payment, make no mistake about it, we do want the money back. But we are not looking to put anyone in jail for honest mistakes, and we are not going to refer hospitals to the OIG for occasional errors.

Health Care Financing Administration Fraud Strategy

The Health Care Financing Administration employs a four-part strategy to deter fraud and abuse. The strategy focuses on prevention, early detection, coordination, and enforcement.

Prevention means paying right the first time, the most desirable approach. Prevention is the best means to guarantee the initial accuracy of both claims and payments, and to avoid having to "pay and chase", a lengthy, uncertain and expensive process. HCFA is committed to making Medicare rules as clear as possible so that providers may bill correctly and with confidence.

Early detection is the second key ingredient of our approach. We can identify patterns of fraudulent activity early by using data to monitor unusual billing patterns and other indicators of the integrity and financial status of providers, promptly identifying and collecting overpayments, and making appropriate referrals to law enforcement. I would like to emphasize again that if we finds errors, we want the money back. But whether any further action is warranted should be determined by the facts and circumstances of each case.

Coordination with our partners is another important way we can maximize our success. We share information and tactics for fighting fraud and abuse with the States, the Department of Justice, including the Federal Bureau of Investigations (FBI), and the private sector.

When we do find "bad apples" among our many good providers, we take enforcement action against them, including suspension of payment, referral to the OIG for potential exclusion for the program, disenrollment, collection of overpayments, and imposition of civil monetary penalties. Investing in prevention, early detection, and enforcement has a proven record of returns to the Medicare Trust Fund. Medicare Integrity Program alone saved an estimated $7.5 billion in FY 1997 - mostly by preventing inappropriate payments--through audits, medical reviews, and ensuring that Medicare does not pay for claims owed by private insurers.

Department of Justice and HHS OIG National Studies

The DOJ and OIG may embark on a national study of a particular issue or provider without a referral from HCFA. The DOJ and OIG work directly with the Medicare contractors and intermediaries to collect necessary data for their national projects.


We have ant obligation to the American taxpayer to take fraud and abuse in the Medicare program seriously. Although HCFA does not prosecute providers, we recognize that the False Claims Act represents an important tool for our law enforcement partners. We must have its substantial penalties if we are going to put an end to deliberate improper billing practices. Without its substantial penalties, fraud and abuse would become even bigger problems than they are today.

We also have an obligation to treat providers fairly. If providers make billing errors, we want to find errors before we make payment or get our money back. But, let me say again, we are not looking to put anyone in jail for honest mistakes, and we are not going to refer providers to the Inspector General for occasional errors. I would be happy to answer any questions you may have. 9

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