The Many Faces of Health Care Fraud


In previous columns, we have explored the federal government's increasingly aggressive war on health care fraud and waste. A look at some current enforcement activity and recently released government reports on industry practices illustrates not only the pervasiveness of this problem but also the many forms it takes. They range from outright thievery, to sophisticated "gaming" of the reimbursement system by ostensibly reputable providers and insurers, to negligence or incompetence in preparing cost reports, claims and bills. The problem is not only under attack by the federal and state governments, but health insurance companies are also gearing up, and private "whistleblower" suits under the False Claims Act1 are on the rise.

The most rudimentary heath care fraud schemes have much in common with garden variety fraud and racketeering. The perpetrators gather the names and other identifying information of patients, as the well as the names and provider numbers of physicians or other practitioners, set up a billing address and send out fraudulent bills to Medicare, Medicaid and private insurers for services that were never provided. These "boiler room" operations often change locations and close out accounts, move on to gather data on another set of patients and providers, and start all over again. In some cases, physicians and other licensed practitioners have been actively involved in the conspiracy in return for a share of the proceeds.

In one notable recent case, Kaiser Permanente, one of the oldest and largest managed care organizations in California, recently posted a $15,000 reward for information leading to the conviction of the participants in a scam that bilked Kaiser of more than $8 million for medical transportation services for patients of kidney dialysis centers. The perpetrators allegedly obtained the names of seven physicians and a list of dialysis patients, sent letters on physicians' letterhead verifying the need for transportation services and then billed Kaiser for services that were never provided. Several of the perpetrators are believed to have fled the United States.

Fraudulent Billing

Then there are the providers or suppliers who overcharge or fraudulently bill for goods or services that are not as described or not allowed. Recent examples of outright fraud cited by the Office of Inspector General (OIG) of the Department of Health and Human Services in testimony before the Senate Subcommittee on Investigations included the following:

  • Supplier schemes that billed Medicare for adult diapers at $8 per item, while the acquisition cost was only 30 cents per diaper.
  • A father/daughter team that billed Medicare for three times the number of "incontinence care kits" than were actually provided. In an effort to avoid detection, the pair closed and reincorporated their business under different names 31 times. A civil RICO suit filed against the two alleged more than $30 million in damages to the Medicare program.
  • A home pharmacy service that re-distributed and re-billed for leftover drugs after the original patients had died or discontinued treatment.
  • A Medicare provider who listed a fictitious address, which, if it had existed, would have been located in the middle of a runway at Miami International Airport.2

Next come the providers and insurers that have given in to the temptation to exploit the complexity of the reimbursement system. Many of these are well known and respected names in the industry or in their communities. Most notable in this category have been giant clinical laboratory companies that were caught adding expensive and unnecessary tests to the standard battery of tests ordered by physicians.

Of the $1.2 billion in civil settlements and judgments recovered by the federal government in fiscal year 1997, some $517 million was attributable to settlements with just three of these lab companies, SmithKline Beecham, Damon and Laboratory Corporation of America. Columbia HCA, the largest for-profit hospital chain, is currently embroiled in criminal and civil proceedings arising from allegations that it submitted falsified cost reports for certain of its hospitals and conspired to pay higher than market prices in acquiring certain home health agencies in order to reap higher reimbursement rates from Medicare.

Fraud is by no means limited to for-profit companies, however. The organizations that have been caught in the anti-fraud dragnet range from prestigious non-profit hospitals and universities, to giant municipalities like the City of New York. The OIG's "Physicians at Teaching Hospitals" or PATH audit program, discussed in earlier columns,3 continues to reap tens of millions of dollars in recoveries.

Briefly, a number of teaching hospitals and medical schools are being audited or are self-auditing to determine if Medicare Part B was billed for physician services actually provided by residents without proper supervision by attending physicians. Recent settlements include the University of Pittsburgh School of Medicine ($17 million), the University of Texas ($17.2 million - whistleblower's share: $2.5 million), Yale University ($5.5 million), and Southern Illinois University ($600,000).

In October, New York City Health and Hospitals Corp. (HHC) and the New York City Fire Department's Bureau of Emergency Medical Services (EMS) agreed to settle a civil False Claims Act suit that had alleged that the Medicare program had been billed improperly for ambulance transportation that was not medically necessary. Apparently, it had been EMS' practice to bill Medicare for virtually every ambulance transportation of a Medicare patient, even when the patient was ambulatory or could have used other means of transportation.

The settlement called for a payment of $9.5 million and the implementation of a comprehensive institutional compliance plan for both EMS and HHC. The case was commenced as a qui tam suit, and the whistleblower, a former EMS paramedic, will receive a bounty of approximately $1.4 million.

Fiscal Intermediaries

The Medicare program does not process its own claims, but rather contracts with private insurers (such as Blue Cross and Blue Shield plans) to function as intermediaries (Part A claims) or carriers (Part B claims). These intermediaries and carriers not only process bills and pay claims, but they are supposed to be the Medicare program's first line of defense against fraudulent claims.

As is the case with fraud involving their own private insurance coverages, many of these private sector plans have not only been slow to investigate and prevent fraud against the Medicare program, but in several notable cases, have themselves been accused of defrauding Medicare. For example, in July, Health Care Services Corp., (HCSC) also known as Blue Cross and Blue Shield of Illinois, pled guilty to eight felony counts and agreed to pay $144 million to settle claims that it engaged in fraudulent claims-processing practices, gave false information to auditors, and destroyed tens of thousands of claims and other documents.

All of this allegedly was done to make it appear that the company's claims processing ability had improved so as to earn $1.3 million in incentive bonuses for certain executives. Seven employees of HCSC were indicted in connection with this fraudulent scheme. The whistleblower in this case is expected to receive an award of at least $21 million.

In September, Pennsylvania's largest health insurer, Highmark, Inc., agreed to pay $38.5 million to settle allegations that one of its predecessor entities, Pennsylvania Blue Cross, had improperly submitted claims to the Medicare program. Blue Cross plans in states such as California, Massachusetts, Florida, New York and elsewhere have also settled false claims allegations arising from their Medicare claims processing operations.

In December, the OIG issued a highly critical report4 accusing half of the 41 Medicare fiscal intermediaries it audited of not doing enough to combat Medicare fraud. The report noted that, as of 1996, fiscal intermediaries were responsible for processing about 75 percent of Medicare claims, or some $130 billion. The problem intermediaries came under fire for inadequately staffing their anti-fraud units, not following up on reports of fraud, and generally not being aggressive enough in uncovering and preventing fraud against the Medicare program.

A second major report issued by the OIG only one day earlier5 criticized certain fiscal intermediaries for overpaying $43 million for hospital outpatient laboratory services and another $15 million in unnecessary payments for certain hematology tests. Other recent reports by the OIG have highlighted Medicare waste in such areas as unnecessary ambulance services, overpriced prescription drugs, and unnecessarily high rental rates for hospital beds for home use.

Nor is fraud limited to federally funded heath care programs such as Medicare and Medicaid. A number of major universities including the University of Chicago and New York University, have settled federal investigations and/or whistleblower suits over mismanagement or improper use of research grants from the federally-funded National Institutes of Health.

The largest of these settlements was announced in November, when the University of Minnesota agreed to pay $32 million to settle allegations that it reaped $85 million in gross sales of a drug developed with NIH funding but which had not been approved by the Food and Drug Administration. That case is of particular interest since the settlement came on the heels of an Eighth Circuit Court of Appeals decision6 that reversed the dismissal of the whistleblower suit against the university and ruled for the first time that states could be held liable for violating the False Claims Act.

Enforcement Activity

Government enforcement activity is accelerating, with more new funding on the way. The Justice Department's annual report on its anti-fraud activities for fiscal year 1997 released in late October, as well as recent interim reports, detail some of the progress that has been made. For fiscal year 1997, the Justice Department brought 217 criminal cases, obtained convictions of 363 defendants and excluded more than 1,000 persons and businesses from participating in Medicare and other federally funded health care programs. The Department also opened more than 4,000 civil fraud investigations and commenced 89 civil fraud cases.

The Health Insurance Portability and Accountability Act (HIPAA) of 1996,7 also referred to as Kennedy-Kassebaum, not only gave the federal government significant new legal weapons against health care fraud, but also made available sizeable amounts of new funding from fraud recoveries to finance the expansion of anti-fraud efforts. The OIG is to receive $90 million to $100 million in HIPAA funding (in addition to its fiscal year 1999 budget allocation of $29 million), while the Justice Department is to receive $32 million and the FBI $66 million in HIPAA funding.

These large investments signify the importance placed on containing the fraud problem and, even though it may be years before they pay dividends, they are clearly justified. Whether resulting from deliberate acts or negligence, fraud and waste in Medicare and Medicaid, as well as in the private insurance sector, remains a burdensome and unnecessary drain upon the financing of our health care system.

When we hear discussion and debate about how medical care has to be rationed, or how Medicare benefits have to be reduced, it may be useful to consider how much medical care could be purchased with the estimated $80 billion to $100 billion that is lost to heath care fraud and waste each year. Common sense tells us that the debate ends there.

Francis J. Serbaroli is a partner at Cadwalader, Wickersham & Taft.

  1. 31 U.S.C. § 3729 et seq.
  2. "Senate Subcommittee Hears Medicare Fraud Testimony", CCH Medicare and Medicaid Guide, Issue No. 1041, December 15, 1998, p. 4.
  3. Serbaroli, "Fraud Settlement Jolts Teaching Hospitals", New York Law Journal, January 30,1996; "Expanding the War on Health Care Fraud", New York Law Journal, March 18, 1997.
  4. Office of Inspector General, Department of Health and Human Services, "Medicare Fiscal Intermediary Fraud Units," Report No. OEI-03-97-00350, December 2, 1998.
  5. Office of Inspector General, Department of Health and Human Services, Review of Clinical Laboratory Tests Performed by Hospital Outpatient Department Laboratories, Report No. A-01-96-00527, December 1, 1998.
  6. U.S. ex rel. James Zissler v. Regents of the University of Minnesota, 154 F.3d 870 (8th Cir. 1998).
  7. Pub. L. No. 104-191; 100 Stat. 1936 (1996).

This article is reprinted with permission from the February 8th issue of the New York Law Journal © 1999 NLP IP Company.