oversight

Medicare: Improprieties by Contractors Compromised Medicare Program Integrity

Published by the Government Accountability Office on 1999-07-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Report to the Chairman,
               Subcommittee             Permanent
                              on Investigations,
               Committee on Governmental Affairs,
               United States Senate

July   1999    MEDICARE


               Improprieties by
               Contractors
               Compromised
               Medicare Program
               Integrity




                         0G A
                          Accountability * Integrity * Reliability


GAO/OSI-99-7
              GAO
                A
    Accountabillty * Integrity * Reliability

United States General Accounting Office                                                                     Office of Special Investigations
Washington, D.C. 20548



                                               B-282186

                                               July 14, 1999

                                               The Honorable Susan M. Collins
                                               Chairman, Permanent Subcommittee on
                                                Investigations
                                               Committee on Governmental Affairs
                                               United States Senate

                                               Dear Madam Chairman:

                                               This report responds to your June 4, 1998, request that we assist the
                                               Subcommittee in its ongoing review of fraud, waste, and abuse in the
                                               Medicare federal health insurance program.' You asked that we determine
                                               if Medicare contractors participate in any improper or questionable
                                               practices that contribute to fraud, waste, or abuse. Specifically, we agreed
                                               to (1) identify recently completed cases of criminal conduct or False
                                               Claims Act 2 violations committed by Medicare contractors, (2) describe the
                                               deceptive Contractor activities set forth in those cases or alleged by
                                               investigating: agents and former contractor employees, and (3) describe
                                               how these activities were carried out without detection by the Health Care
                               /               Financing Administration (HCFA). In addition, in the course of our work,
                                               we assessed the impact of these activities on the Medicare program.

                                               As you are aware, GAO conducted a related review concerning weaknesses
                                               associated with HCFA's oversight of Medicare contractors. A report of that
                                               review, entitled Medicare Contractors: Despite Its Efforts, HCFA Cannot
                                               Ensure Their Effectiveness or Integrity (GAO/HEHS-99-115), addresses
                                               these weaknesses and cites systemic problems within HCFA that allowed
                                               contractor fraud and other improprieties to occur. The report recommends
                                               both that HCFA take specific actions and that Congress consider changes
                                               in HCFXs contracting authority to improve its ability to manage
                                               contractors.

                                               In this report, we focus primarily on three cases in which criminal and/or
                                               civil actions were brought. The three Medicare contractors-Blue Cross


                                               'Medicare covers people age 65 and over and disabled individuals under age 65.
                                               2
                                                 The False Claims Act, 31 U.S.C. § 3729-3733, imposes civil liability on persons, including corporations,
                                               that present or cause the submission of fraudulent requests for payment (claims) to the government




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                   Blpe Shi.ld (BCBS) of Illinois, Blue Shield of California, and BCBS of
                   Michigan--engaged in, orwere alleged to have engaged in, activities
                    designed to create the false appearance that they were meeting the criteria
                   for Medicare contractors as established and evaluated by HCFA. Indeed,
                   one factor common to the three contractors was that contractor employees
                   at all levels participated or acquiesced in such activities to preserve the
                   Medicare contracts and their jobs under the contracts. Details of cases
                   involving three other Medicare contractors-BCBS of Massachusetts,
                   Pennsylvania Blue Shield, and BCBS of Florida-which show a similar
                   pattern of activity, are provided in appendix I. A brief summary of the
                   actions against all six contractors is provided in appendix II.


Results in Brief   Since 1993, criminal and/or civil actions have been taken against at least six
                   Medicare contractors resulting from their performance under Medicare
                   contracts. The alleged contractor activities addressed in those actions
                   occurred during the calendar years 1984 through 1997. With respect to
                   three of the six contractors-BCBS of Illinois, 3 Blue Shield of California,
                   and Pennsylvania Blue Shield 4 -the contractors and/or some of their
                   employees pled guilty to various criminal charges and agreed to pay
                   criminal fines and/or civil penalties. Investigations of the three other
                   contractors-BCBS of Massachusetts, BCBS of Michigan, and BCBS of
                   Florida--resulted in civil settlements only. A total of over $261 million was
                   assessed in criminal and civil penalties against these six contractors.

                   Investigators from the U.S. Department of Health and Human Services
                   Office of Inspector General (HHS-OIG) and the Federal Bureau of
                   Investigation (FBI), relators, 5 and other former contractor employees told



                   'BCBS of Illinois is also known as Health Care Service Corporation.
                   4
                    Highmark: Inc., doing business as Xact Medicare Services, is the corporate successor to Pennsylvania
                   Blue Shield.

                   'Under section 3730 of the False Claims Act, a private individual (known as a "qui tam plaintiff' or
                   "relator") with independent and direct knowledge that an entity has presented, or caused the
                   submission of, fraudulent requests for payment to the government may pursue civil false claims on
                   behalf of the government by filing a qui tam action in the name of the U.S. government If the
                   government decides to join the action, it assumes primary responsibility for prosecuting the case
                   although the qui tam relator may continue as a party to the action. The False Claims Act requires that
                   successful relators receive compensation of 15-30 percent of the recovery from the defendant,
                   depending on whether the government intervenes. The defendant must also reimburse the successful
                   relator for reasonable case expenses and attorney's fees.




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us that, contrary to their contractual requirements and obligations,
contractors

1. improperly screened, processed, and paid claims, resulting in additional
costs to the Medicare program;

2. improperly destroyed or deleted claims;

3. failed to recoup overpayments to Medicare providers within the
prescribed time and to collect required interest payments;

4. falsified documentation and reports to HCFA regarding their
performance; and

5. altered or hid files that involved claims that had been incorrectly
processed or paid (hereinafter problem files) and altered contractor audits
of Medicare providers before HCFAs reviews.

The persons to whom we spoke also told us that these deceptions and
improprieties became a way of doing business and continued for sustained
periods without detection because HCFA, in its review of Medicare
contractors, relied on information provided by contractors without
independent verification. HCFA also gave contractors advance notice of
the files that it intended to review, thereby allowing contractors ample time
to "correct," delete, or hide claim-related documents or redo provider
audits and related workpapers prior to HCFA's review. This system also
resulted in contractors deviating from their normal operating procedures
during HCFA evaluations in order to deceive HCFA about their accuracy
and efficiency in claims processing and customer service. As a result,
criminal and other improper activities were uncovered only after
whistleblowers, or relators, filed qui tam complaints under the False
Claims Act.

Medicare-an approximately $200 billion, federally funded program--loses
money when its contractors pay more than they should on claims and fail
to properly recoup overpayments to providers. Further, in covering up their
shortcomings, contractors obstruct HCFAs ability to evaluate them on their
merits and to correct persistent problems.

The realization that some contractors had defrauded HCFA in order to
achieve maximum evaluation scores rather than maximum performance
was one of several reasons why HCFA changed the manner in which it




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             evaluates contractors beginning with fiscal year 1995.6 However, according
             to documents filed in the BCBS of Illinois case and the Pennsylvania Blue
             Shield case, the criminal and other improper activity by contractors
             continued after HCFA had changed the manner in which it performed the
             evaluations.



Background   Medicare provides coverage in two parts. Medicare Part A, or hospital
             insurance, covers such services as those provided by inpatient hospitals,
             skilled nursing facilities, and hospices. Medicare Part B, or supplementary
             insurance, covers physician services, outpatient laboratory services, and a
             wide array of other health services. Most Medicare beneficiaries receive
             health care on a fee-for-service basis.7 Under fee-for-service, providers are
             reimbursed for each covered service that they deliver to beneficiaries.

             HCFA contracts with insurance companies and other entities to process
             fee-for-service claims. Contractors are known as "fiscal intermediaries" or
             "carriers," depending on the type of claims that they-ee responsible for
             processing. Section 1816 of the Social Security Act (42 tU.S.C. § 1395h)
             authorizes HCFA to contract with' "fiscalintermediaries" to process and
             review all Medicare Part A claims and certain types of outpatient claims
             under Part B.8 In addition, section 1842 of the Social Security Act
             (42 U.S.C'. § 1395u) authorizes HCFA to contract with "carriers" to process
             and review Medicare Part B claims from doctors and suppliers in a
             particular geographical area.

             Through fiscal year 1994, HCFA evaluated contractor performance
             nationwide through its Contractor Performance Evaluation Program
             (CPEP). CPEP evaluated contractors' performance annually against a set
             of standards announced at the beginning of each fiscal year. The standards
             emphasized claims processing, service to the provider and the beneficiary,
             payment safeguards, administrative management, and program efficiency.


             6
              For more detail about HCFA's reasons for changing its contractor evaluation process, see Medicare
             Contrators: Despite Its Efforts- HCFA Cannot Ensure Their Effectiveness or lntegitv
             (GAO/HEHS-99-115), ch. 2.

             7Altemative:ly, Medicare beneficiaries may opt to enroll in Medicare's managed care program by
             choosing a prepaid health plan for which a single monthly payment covers any needed service. This
             report deals primarily with the fee-for-service Medicare plan.

             SThe largest fiscal intermediary is the Blue Cross Blue Shield Association, which subcontracts with
             local Blue Cross plans as it did with BCBS of Michigan.




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                       During CPEP audits, HCFA auditors would examine samples of a
                       contractor's files from various Medicare contractor units to determine a
                       CPEP score for functions performed by each unit.

                       HCFA used the numerical CPEP scores to rank the contractors, correct
                       inadequate performance, and make determinations as to whether contracts
                       should be renewed. In addition, under certain contracts, HCFA used CPEP
                       scores to award incentive payments to or assess liquidated damages'
                       against contractors. 9 According to HCFA, these practices unfortunately
                       resulted in some contractors concentrating on defrauding HCFA to achieve
                       maximum CPEP scores rather than maximum performance. Due, in part, to
                       such fraudulent activities, HCFA terminated CPEP, along with numerical
                       scoring and contractor ranking, in 1994.

                       In fiscal year 1995, the Contractor Performance Evaluation (CPE) replaced
                       CPEP. This process allows review of any contractor activities, including
                       claims processing, customer service, payment safeguards, fiscal
                       responsibility, and administrative activities. HCFA may conduct data
                       reviews and/or process assessments on-site or at its office. In an effort to
                       promote contractors' continuous improvement, HCFA evaluators now have
                       greater flexibility in determining the appropriate types and levels of review
                       for individual contractors. The HCFA Regional Office reviewer provides
                       narrative findings to the contractor and meets with staff to spell out the
                       areas of its operations that require corrective action.

                       Fiscal intermediaries and carriers have a tremendous financial
                       responsibility. A November 1998 report issued by the HHS Inspector
                       General (IG) addressed Fiscal Intermediary Fraud Units and noted that
                       fiscal intermediaries were responsible for $130 billion, or 75 percent, of
                       total Medicare payments for fee-for-service claims in 1996 alone. The same
                       year, carriers handled the other 25 percent, or approximately $43 billion.


Criminal and Civil     The following information addresses the criminal and civil actions taken
Actions
Actions Against        against BCBS of Illinois and Blue Shield of California and the civil action
        Against        taken against BCBS of Michigan. With respect to each of the contractors,
Medicare Contractors   relators had filed qui tam complaints under the False Claims Act, which


                       'Under a limited number of incentive contracts, some contractors, including BCBS of Illinois, received
                       incentive payments for meeting identified performance levels. Some contracts also contained
                       provisions for liquidated damages if performance fell below specified levels.




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                   precipitated investigations by the government and, in two of the three
                   cases, subsequent criminal charges.


BCBS of Illinois   BCBS of Illinois was investigated for activities concerning its
                   responsibilities as a carrier under its Medicare Part B contract for the
                   states of Illinois and Michigan' ° by the HHS-OIG, FBI, and U.S. Postal
                   Inspection Service, in conjunction with the U.S. Attorney's Office
                   (Southern District of Illinois, Fairview Heights, Illinois) and the
                   Department of Justice. The investigation arose after an employee of BCBS
                   of Illinois (the relator) filed a qui tam complaint in March 1995 alleging,
                   among other things, that in carrying out its duties as a Medicare Part B
                   carrier, BCBS of Illinois had knowingly made false statements and
                   submitted false claims to HCFA. Among other things, the complaint alleged
                   that the contractor had failed to process claims in accordance with HCFA
                   guidelines, failed to handle beneficiary and physician telephone inquiries in
                   a timely manner, and falsely reported its performance for CPEP The relator
                   filed an amended complaint in August 1997, alleging additional
                   improprieties. In April 1998, following its investigation, the federal
                   government intervened and took over primary responsibility with respect
                   to a number of the allegations.

                   In July 1998, BCBS of Illinois entered into a settlement agreement with the
                   federal government and the relator, in which it agreed to pay a $140-million
                   settlement amount. In the settlement agreement, BCBS of Illinois admitted
                   it had committed some of the allegations and denied others but did not
                   specify the allegations being admitted or denied.

                   In July 1998, BCBS of Illinois pled guilty to criminal charges of conspiring
                   to obstruct a federal audit (18 U.S.C. § 371--one count), endeavoring to
                   obstruct a federal audit (18 U.S.C. § 1516-one count), and making false
                   statements (18 U.S.C. § 1001-six counts) and agreed to pay a $4-million
                   criminal fine. The relevant periods of criminal conduct were April 1984
                   through February 1996 on the conspiracy count, May 1993 through July
                   1993 on the obstruction count, and October 1994 through November 1994
                   on the false statement counts. In the criminal plea agreement, BCBS of



                   'OBCBS of Illinois was the Medicare Part B carrier for the state of Illinois from at least 1983 through
                   1998. It also became the Medicare Part B carrier for the state of Michigan in 1994, retaining this
                   responsibility through 1998.




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                            Illinois admitted that it had received a total of $1,291,050 in incentive
                            payments from the federal government because of its actions.

                            In addition to the above criminal counts against the corporation, during
                            1998 and early 1999, three former BCBS of Illinois managers pled guilty to
                            criminal charges of conspiracy and obstruction of a federal audit. The
                            activity covered by those plea agreements occurred collectively between
                            1987 and 1994 and was similar to the activity to which BCBS of Illinois pled
                            guilty. One of the three managers also pled guilty to wire fraud. Criminal
                            trials against at least five other managers are pending. They were indicted
                            in July 1998 on charges of conspiracy, obstruction of a federal audit, mail
                            fraud, and wire fraud for the same type of activity, which allegedly
                            occurred between April 1984 and February 1996. Four of the five managers
                            were also indicted on the charge of making false statements in matters
                            within the jurisdiction of HCFA and HHS.


Blue Shield of California   The HHS-OIG investigated Blue Shield of California for activities
                            concerning its responsibilities as a carrier under a Medicare Part B contract
                            covering a portion of the state of California. The investigation began in
                            October 1994 after the filing of a qui tam complaint under the False Claims
                            Act by a former employee (the relator). The complaint, which was
                            amended in July 1995, alleged that Blue Shield of California had knowingly
                            submitted, or caused the submission of, false or fraudulent claims for
                            payment to officials of the federal government. It further alleged that Blue
                            Shield of California had knowingly used false records or statements to
                            obtain payment of the false claims and to conceal, avoid, or decrease an
                            obligation to pay or transmit money or property to the federal government.
                            The complaint, as amended, also alleged that from at least 1987 until 1994,
                            Blue Shield of California had cheated in CPEP evaluations through various
                            improper practices, obtaining significantly higher scores than it should
                            have. In April 1997, the federal government filed a notice of election to
                            intervene in the pending qui tam action.

                            In the resulting settlement agreement filed in April 1997, Blue Shield of
                            California agreed to pay the federal government $12 million. The settlement
                            agreement notes that it was made in compromise of disputed claims and
                            does not constitute an admission of wrongdoing or fault of any kind on the
                            part of Blue Shield of California.

                            In April 1996, Blue Shield of California also pled guilty tot criminal charges
                            of conspiring to obstruct a federal audit (-18 U.S.C. § 371-one count) and



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                   endeavoring to obstruct a federal audit (18. U.S.C. § 1516-two counts) and
                   was ordered to pay a $1.5-million criminal fine. The document supporting
                   the plea agreement, entitled "Factual Basis for Pleas of Guilty," specified
                   that from at least November 1988 through 1994, Blue Shield of California
                   employees and supervisors in multiple units in the Part B component of the
                   Medicare Division had obstructed HCFAs annual CPEP audits and ongoing
                   quality assurance inspections. They had done so by altering files and
                   documents to be reviewed by HCFA. Actions by the contractor included the
                   selection or structuring of samples for HCFA review that were not random
                   as requested by HCFA; the deliberate failure to report errors to HCFA as
                   required; the discarding of documents reflecting errors; and the
                   substitution of revised, backdated documents in place of documents
                   containing errors.

                   The criminal information filed with the criminal plea agreement in this case
                   indicates that the object of the conspiracy was to conceal instances of poor
                   performance under the carrier contract and to deceive HCFA into giving
                   Blue Shield of California artificially inflated CPEP scores, so that Blue
                   Shield of California could retain its Medicare Part B carrier contract.


BCBS of Michigan   HHS-OIG and the FBI started the investigation of BCBS of Michigan after a
                   former employee (relator) filed a qui tam complaint in June 1993.1 The qui
                   tam complaint alleged that BCBS of Michigan had knowingly submitted, or
                   caused the submission of, false or fraudulent claims to the federal
                   government for payment. It also alleged that BCBS of Michigan had
                   knowingly used false records or statements to obtain payment of false or
                   fraudulent claims from the federal government or to conceal, avoid, or
                   decrease an obligation to pay or transmit money or property to the federal
                   government. The complaint further alleged that from 1988 through 1993,
                   BCBS of Michigan (1) routinely engaged in a crash program whereby it
                   performed additional work on the audits of providers and altered
                   workpapers in order to fix deficiencies and then forwarded the doctored
                   papers to HCFA for review rather than the original workpapers as required;
                   (2) concealed its "clean up" efforts from HCFA and the participating
                   hospitals; (3) lied to HCFA about the status of certain of its audits of
                   providers to steer HCFA away from those audits that were so poorly done


                   "As a fiscal intermediary, BCBS of Michigan was responsible for the administration of Part A (hospital
                   insurance) of the federal Medicare program in the state of Michigan, including claims processing and
                   the auditing of provider (hospital) cost reports to ensure that Medicare was not reimbursing hospitals
                   for improper or unallowable charges.




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                           and full of errors that they could not be fixed prior to submission to HCFA;
                           and (4) circumvented a requirement to collect provider overpayments
                           within 30 days by using various evasive means to make it appear that
                           payments were collected on time when, in fact, they were not.

                           In January 1995, this case was settled for $27.6 million. An HHS-OIG agent
                           told us that BCBS of Michigan had readily admitted to the improprieties
                           during the investigation. However, in the settlement agreement, the
                           contractor denied the allegations contained in the qui tam complaint.

                           Also in January 1995, a related but separate civil action, which HCFA had
                           filed against BCBS of Michigan, was settled for $24 million. It involved
                           Medicare Secondary Payer (MSP) issues'2 and BCBS of Michigan's use of
                           Medicare trust fund monies to pay claims for which other insurers may
                           have been responsible.



Deceptive Contractor       Medicare contractors in our review performed, or were alleged to have
                           performed, 3 numerous criminal or otherwise fraudulent or improper
Activities                 activities to deceive HCFA. In the three primary cases on which we
                           focused, federal investigators documented many of the activities alleged by
                           the qui tam relators. The contractors' deceptive activities, or allegations
                           thereof, included, among other things, improper screening, processing, and
                           payment of claims and falsification of reports and documentation.


Common Factors Regarding   All three contractors that we reviewed in depth were accused of
Contractors Reviewed       committing criminal and/or civil violations of law with the goal of inflating
                           CPEP review results and creating the appearance that they were meeting or
                           exceeding HCFAs requirements for Medicare contractors.Two of the
                           contractors pled guilty to criminal violations regarding such acts.


                           '2In the early to mid-1980s, Congress passed legislation making Medicare the secondary payer on claims
                           involving beneficiaries who are also covered by Black Lung, Veterans Health Administration, or private
                           employee health plans, which are now treated as primary payers. HCFA requires carriers to send MSP
                           letters to beneficiaries for completion when a Medicare claim is first filed for their benefit. MSP letters
                           establish whether beneficiaries are covered by other insurance plans, are used to determine the order in
                           which Medicare will pay claims relative to other insurers, and affect the dollar amount Medicare will
                           pay on claims.

                           13Medicare contractors denied or did not acknowledge wrongdoing with respect to all or some of the
                           allegations made by the qui tam relators or investigators. For example, in their respective settlement
                           agreements, BCBS of Michigan denied all allegations while BCBS of Illinois admitted to certain
                           allegations and denied others.




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According to investigators and former contractor employees, the
contractors feared losing their contracts and related employee jobs if they
did not meet HCFA's expectations. HCFA did not renew any of the three
Medicare contracts after the improper activity was exposed.

Investigators and former contractor employees told us that manipulating
samples, covering up errors, and fixing records slated for HCFA's review
became a way of life for each of the contractors. These activities were
viewed as the only way to get through CPEP reviews. According to
investigators and relators, the contractors believed that HCFA's demands
under the contracts were unreasonable, given their staffing and funding
levels. Contractor management, according to relators, viewed their
improprieties as a game all contractors played, "a dance we do," "a wink
and a nod" at the requirements. Further, according to investigators and
relators, contractors believed that it was easier to carry on improper and/or
fraudulent activity than to tell HCFA that they could not meet contract
requirements under existing funding and risk losing the contracts.

According to public records and statements by investigators and former
contractor employees, employees at all levels of the three contractors-
including vice presidents, directors, managers, supervisors, and staff-level
employees-were aware of and participated in criminal and/or other
improper activity. Such activities allegedly spread as employees at various
levels and units taught each other how to commit such improprieties.
Moreover, according to investigators and one former contractor employee,
management harassed or threatened some employees into going along with
improper activity, warning them that they would lose their jobs if they
failed to do so.' 4 "A lot of good people [were] swept up in questionable
activity," according to one relator. Further, at least one investigator and all
three qui tam relators indicated that they believed that criminal and/or
other improper activities also spread between various contractors as
employees moved from one contractor to another and as outside health
care consultants were hired to help improve the contractors' CPEP scores.




14In his amended qui tam complaint, the relator in the Blue Shield of California case alleged that Blue
Shield of California terminated his employment because he had refused the demands of his supervisor
to commit violations of state and federal laws including the False Claims Act, because he had refused
their demands to conceal such violations, and because his supervisors believed that he had reported
Blue Shield of California's misconduct to law enforcement officials. The case was settled by agreement
of the parties in 1997.




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Specific Criminal and/or           According to public records and the statements by investigating agents,
Other Improper Activity or    qui tam relators, and other former contractor employees, the three
           AllegationsThereof contractors on which we focused had engaged in various types of illegal or
                                   improper activities from 1984 through 1997. Those activities are discussed
                                   below.

Improper Screening, Processing,    HCFA required contractors to properly screen and process claims to ensure
and Payment of Claims              that (1) claims submitted for payment were, in fact, eligible for payment
                                   under the Medicare program and (2) Medicare paid the appropriate amount
                                   on claims. Contractors' computer edits were designed to catch claims with
                                   errors or other problems. Claims that contained errors or that were
                                   incomplete were to be developed before payment to ensure that payments
                                   were correct. Failure to do so could result in additional costs to Medicare,
                                   including the contractors' use of Medicare funds to pay claims that were
                                   the responsibility of other insurers, or in over- or underpayment to
                                   claimants.

                                   Both BCBS of Illinois and Blue Shield of California admitted in their plea
                                   agreements and related stipulation of facts/factual basis for plea to
                                   concealing errors from HCFA related to their payment of claims. Moreover,
                                   in a civil action, separate from the qui tam action, HCFA alleged that BCBS
                                   of Michigan had paid MSP claims as if Medicare were the primary payer
                                   when it should have paid the claims with Medicare as the secondary payer.
                                   This action was settled for $24 million in January 1995.

                                   From our interviews, we gained the following information about such
                                   activities.

                                    * According to a former contractor employee other than the relator, BCBS
                                      of Illinois sometimes failed to send out MSP letters to beneficiaries, thus
                                      using Medicare funds to pay claims that were potentially the
                                      responsibility of other insurers. During a computer-system transition in
                                      about 1989-1990, a contractor supervisor directed that approximately
                                      5,000-6,000 claims be paid although no MSP letters had been issued.
                                      According to the investigating agents, when HCFA then requested some
                                      of these claims for CPEP review, BCBS of Illinois falsified the MSP
                                      letters and included them in the files for HCFA review.
                                    * According to the qui tam complaint and another former contractor
                                      employee, BCBS of Illinois, in times of high claim inventory, paid
                                      incomplete or improperly filed claims of less than $50 without
                                      developing them as required. This practice was known as "dumping a



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                             claim" and could result in improper claim payment. It had upper
                             management approval and was frequently done. In her amended qui tam
                             complaint, the relator alleged that this type of activity had taken place
                             from 1984 through March 1995.
                             According to an investigating agent, in an effort to receive the maximum
                             payment for the number of claims processed, Blue Shield of California
                             rushed claims through the processing system, shutting off computer
                             edits designed to catch problem claims. Further, according to the qui
                             tam relator and another former contractor employee, Blue Shield of
                             California paid claims without proper physician signatures or backup
                             documentation and denied other claims instead of developing them as
                             required. Also, according to the relator, Blue Shield of California did not
                             properly develop MSP claims to ensure that the claims were not the
                             responsibility of another insurer and that Medicare paid the appropriate
                             amount.

Improper Destruction or   Contractors admitted or were alleged to have improperly destroyed or
Deletion of Claims        deleted claims before processing them so as to appear to meet HCFA's
                          timeliness standards for claims processing or to maximize their payment
                          for the number of claims they processed.

                          In its criminal plea agreement and stipulation of facts, BCBS of Illinois
                          admitted that, as part of a conspiracy, on or about October 23, 1993, it had
                          shredded a box filled with Railroad Retirement Board medical claims,
                          violating HCFA instructions requiring BCBS of Illinois to transfer the
                          claims to the appropriate carrier. With regard to this activity, according to
                          the qui tam complaint and statements by investigating agents and a former
                          contractor employee other than the relator, a BCBS of Illinois manager
                          shredded an estimated 10,000 3-month-old Medicare claims for Railroad
                          Retirement beneficiaries, rather than forward them to the proper carrier.
                          The claims had been mistakenly mailed to BCBS of Illinois and should have
                          been forwarded to the appropriate carrier, according to HCFA's procedures
                          for erroneously received claims. The manager warned the relator, who had
                          originally found the claims, to tell no one about the shredding incident and
                          threatened to place the blame on the relator if the incident was disclosed,
                          warning that the relator could go to jail. According to the investigating
                          agents, the manager, when interviewed, told them that the claims in
                          question had been electronically submitted to the proper carrier. However,
                          in his later plea agreement and stipulation of facts, the same manager
                          admitted that he had shredded the claims and failed to forward them to the
                          proper carrier.




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                               Furthermore, according to the qui tam complaint and statements by
                               investigating agents and a former contractor employee other than the
                               relator, BCBS of Illinois, using special computer coding, sometimes deleted
                               (by pulling from the normal processing line) claims that contained
                               incomplete or incorrect information, which needed development, in order
                               to eliminate backlogs of unprocessed claims. Once deleted, the claims were
                               neither paid nor developed. Claimants were neither notified of the
                               nonpayment of their claims nor informed of the items that needed
                               development. BCBS of Illinois employees were instructed to tell inquiring
                               claimants that the claims had never been received and should be refiled.
                               Because claimants were not notified of the underlying problems with the
                               original claims, they potentially resubmitted claims with the same
                               problems a number of times. This activity, according to the amended qui
                               tam complaint, occurred from January 1986 through January 1992.

                               Blue Shield of California also allegedly deleted claims. According to the qui
                               tam relator in the Blue Shield of California case, when Blue Shield of
                               California fell behind and was unable to process claims in accord with
                               HCFA's timeliness standards, the contractor sometimes deleted claims and
                               then reentered them with new dates and control numbers. In doing this, the
                               contractor gained additional time to process the claims while it appeared to
                               meet HCFA's timeliness criteria. This type of activity allegedly occurred
                               from 1987 through 1994, according to the qui tam complaint.

                               In addition, according to an investigating agent, a Blue Shield of California
                               manager admitted that 40,000 claims had been deleted without processing.
                               These claims, however, were never reentered. As did BCBS of Illinois, Blue
                               Shield of California told inquiring claimants that their claims had never
                               been received.

Failure to Collect Medicare    HCFA required that contractors recoup overpayments to providers within
Overpayments and Interest as   30 days of the date an overpayment was determined. If overpayments were
Required                       not secured within 30 days, contractors were required to assess interest on
                               the overpayment amount and to withhold the total amount due from future




                               Page 13          GAO/OSI-99-7 Contractor Improprieties Compromise Medicare Program
                              B-282186




                              weekly payments15 to the providers. However, at least one contractor
                              allegedly failed to recoup overpayments and interest as prescribed.

                              The qui tam complaint filed in the BCBS of Michigan case alleged that from
                              1988 through 1993, BCBS of Michigan had circumvented a requirement to
                              collect provider overpayments within 30 days of the overpayment
                              determination date. The contractor allegedly used various evasive means to
                              make it appear that payments were collected on time when, in fact, they
                              were not. In its January 1995 civil settlement agreement, BCBS of Michigan
                              denied all allegations, including this one, but settled the case for
                              $27.6 million.

                              When interviewed, the relator explained to us that BCBS of Michigan had
                              not always been timely in monitoring, discovering, and collecting
                              overpayments and interest. In order to make it appear that it had collected
                              overpayments on time, the relator told us that BCBS of Michigan had set up
                              a special suspense account and withheld a percentage of future weekly
                              payments to the provider. When the account holdings were sufficient to
                              cover the entire overpayment due, BCBS of Michigan indicated to HCFA
                              that it had taken a second look at the provider, discovered an overpayment,
                              and immediately assessed the provider an overpayment. The overpayment
                              was then collected (from the suspense account) within a few days.
                              Alternatively, it divided large overpayments into small segments, then made
                              demand for overpayment one segment at a time, collecting each segment
                              from the suspense account within a day or two of each demand.

                              The relator further stated that by handling overpayments in this way, BCBS
                              of Michigan (1) made it appear that it had collected all overpayments
                              within 30 days of the date of determination of overpayment and (2) denied
                              the Medicare program the interest due on all overpayments not collected
                              within 30 days of the overpayment determination date.

Falsified Reports Regarding   HCFA's CPEP and CPE evaluations of contractor performance included,
Contractor Performance        among other aspects, reviews of claims processing and payment


                               s'Some Part A providers receive weekly payments from HCFA under the Periodic Interim Payment
                              program, based on their prior-year cost reports and current-year quarterly reports. Fiscal
                              intermediaries are required to adjust weekly payments, if necessary, each time the provider files a
                              quarterly report. The goal is for weekly payments to total at least 95 percent of the total actual provider
                              costs for the year. At the end of the year, the fiscal intermediary must collect any overpayment from, or
                              pay any underpayment to, a provider, as determined by the year-end cost report, within 30 days of the
                              date of determination of an overpayment or underpayment, per HCFA criteria.




                              Page 14                 GAO/OSI-99-7 Contractor Improprieties Compromise Medicare Program
B-282186




safeguards. In support of these performance evaluations, Medicare
contractors were required to file periodic reports with HCFA. Both BCBS
of Illinois and Blue Shield of California admitted in their plea agreements
with the government that they had falsified reports to make their
performance appear acceptable to HCFA.

In its criminal plea agreement and stipulation of facts, BCBS of Illinois
admitted that, as part of its conspiracy to obstruct HCFA auditors in the
performance of their official duties, it had

* submitted to HCFA false reports relative to its performance under its
  Medicare Part B contract in various BCBS of Illinois units, resulting in
  false high scores and the false appearance of superior performance from
  April 1984 through February 1996;
* directed the falsification of monthly Post Payment Quality Assurance
  (PPQA)' 6 reports and submitted them electronically to HCFA from 1990
  through September 1995, including the submission of reports to HCFA
  that indicated claims had been processed error-free when, in fact, they
  were not error-free;
* from June 1989 through April 1990, electronically transmitted false data
  to HCFA concerning MSP errors with the effect of BCBS of Illinois'
  receiving CPEP scores on MSP to which it was not entitled; and
* admitted that six of its managers, all acting within the scope of their
  employment, signed a document certifying to BCBS of Illinois that no
  false information, manipulation of Medicare Part B data, or falsification
  of CPEP Medicare Part B scoring had occurred during fiscal year 1994
  (Oct. 1, 1993, through Sept. 30, 1994), when, in truth, such certifications
  were materially false, fictitious, and fraudulent statements.

Similarly, in its criminal plea agreement and factual basis for plea, Blue
Shield of California admitted that from November 1988 through 1994, its
employees and supervisors in multiple units had conspired to obstruct
HCFA's annual CPEP audits and ongoing quality assurance inspections by
deliberately failing to report errors to HCFA.




'6 The Post Payment Quality Assurance Unit at BCBS of Illinois was responsible for checking the
accuracy of those claims that had been paid. To do so, every week it (1) reviewed a sample of claims
that had already been paid and (2) forwarded to HCFA a computerized record of all errors found. HCFA
would later request and review the physical files for a smaller subsample of the same claims, checking
the contractor's accuracy in finding its own errors.




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                               B-282186




                               From our interviews, we gained additional information regarding the
                               falsification of reports that BCBS of Illinois and Blue Shield of California
                               had submitted to HCFA. According to a former contractor employee other
                               than the relator and the relator's attorney, BCBS of Illinois' upper
                               management altered timeliness reports submitted to HCFA regarding the
                               claims-processing function. BCBS of Illinois also falsified monthly
                               telephone reports concerning the number and percentage of customer
                               telephone calls answered within 120 seconds, as required by HCFA,
                               according to investigating agents and the qui tam complaint. Individuals we
                               interviewed told us that HCFA evaluated contractor response time to
                               incoming customer telephone calls, which generally were considered
                               "answered late" if they were not answered within 120 seconds. When BCBS
                               of Illinois monitors showed that it was exceeding the 120-second time limit,
                               supervisors, including the qui tam relator, were instructed to shut off some
                               or all of its. 1-800-telephone lines. This prevented (1) the calls from showing
                               up as "answered late" on computer reports, data from which were
                               forwarded to HCFA, and (2) customer calls from getting through.

                               With respect to Blue Shield of California, according to an investigating
                               agent, in one instance during November 1994, a contractor supervisor
                               instructed an employee to "drop," or not report to HCFA, what HCFA would
                               have considered to be a $465,000 error. According to the investigator, the
                               contractor's Vice President of Medicare Operations, as well as directors
                               and managers, concurred in the dropping of problem claims. The
                               investigator also told us that in at least one instance in 1992, the contractor,
                               in effect, reported to HCFA that it had processed 10.4 percent of its July
                               1992 claim correspondence late, rather than the actual 24 percent that was
                               late. After HCFA discovered the discrepancy, the contractor doctored a
                               letter from a subcontractor to falsely reflect that the subcontractor, and not
                               Blue Shield of California, was responsible for the discrepancy.

Improperly Amended or Hidden   To circumvent HCFA's annual and periodic reviews of the contractors'
Claim and Audit Files          actual performance, according to admissions and allegations, contractors,
                               among other actions, improperly altered problem claim and audit files, hid
                               problem files, or otherwise did not make problem files available to HCFA.
                               Contractors allegedly formed special teams to improperly "fix" problem
                               files prior to HCFAs review.

                               In its criminal plea agreement and stipulation of facts, BCBS of Illinois
                               admitted that, as part of its conspiracy to obstruct HCFA auditors in the
                               performance of their official duties, it had




                               Page 16           GAO/OSI-99-7 Contractor Improprieties Compromise Medicare Program
B-282186




* submitted to HCFA false work-processing samples relative to its
  performance under its Medicare Part B contract, resulting in false high
  scores and the false appearance of superior performance from April
  1984 through February 1996;
* submitted, during May 1993, for HCFA's review 60 cases of telephone
  and written reviews, including 17 cases in which documents from a
  communications unit had been improperly removed, altered, or created
  prior to CPEP to conceal errors;
* accepted HCFA's audit report in July 1993, which included the audit of
  that communications unit, without advising HCFA that BCBS of Illinois
  had tampered with and altered the sample case files upon which the
  auditor's report was based; and
* altered PPQA claim files containing errors, which were to be reviewed
  by HCFA, by improperly changing copies of claim-related documents or
  improperly adding documents to the file to support payments and to
  eliminate the appearance of error. (In the amended qui tam complaint,
  the relator alleged that this type of activity had occurred from 1984
  through 1995.)

Blue Shield of California admitted to similar actions in its plea agreement.
From November 1988 through 1994 to conceal evidence of error, Blue
Shield of California admitted that employees and supervisors in multiple
units had periodically manipulated the selection of samples for HCFA
review'7 and improperly altered the files and documents to be reviewed by
HCFA.

The qui tam complaint filed in the BCBS of Michigan case alleged that from
1988 through 1993, BCBS of Michigan had routinely engaged in a crash
program to "fix," or redo, audits of providers and related workpapers and
forwarded the doctored papers to HCFA for review rather than collecting
and forwarding the original workpapers as required. The complaint also
alleged that the contractor had concealed its "clean up" efforts from HCFA
and the participating hospitals and lied to HCFA about the status of certain
audits in an attempt to steer HCFA away from those audits that were so
poorly done and full of errors that they could not be fixed prior to
submission to HCFA. In its January 1995 civil settlement agreement, BCBS
of Michigan denied the allegations but settled the case for $27.6 million.



'?According to the Criminal Information, Blue Shield of California manipulated the application of skip
factors to eliminate files with significant errors and to select files with fewer errors for HCFA's sample.




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B-282186




Specific examples of the activities set forth in the plea agreements were
provided to us in the interviews we conducted. They include the following:

* According to one former contractor employee other than the relator,
  after discovering 17 errors in a batch of 50 or 60 claim review cases
  during 1993, a BCBS of Illinois supervisor asked the employee to find a
  way to fix the errors. One such claim involved payment for three
  cataract surgeries on one individual. Although required by HCFA, the
  file did not contain an explanation regarding the third surgery. To fix the
  problem, the employee fabricated notes indicating that the contractor
  had contacted the claimant and determined that two surgeries had been
  done on one eye on different days as a result of one of the surgeries
  being unsuccessful. Had BCBS of Illinois not fixed the errors, it would
  have failed CPEP for this particular function.
* For the weekly quality assurance reviews, Blue Shield of California
  improperly fixed claims that had been processed incorrectly and were
  to be reviewed by HCFA, according to statements by a former
  contractor employee other than the relator. It did so, for example, by (1)
  stamping "signature on file" on claims that had been paid without a
  doctor's signature; (2) detaching documents, such as another insurance
  company's Explanation of Benefits, from improperly denied MSP claims
  to give the appearance that the denials were correct; and (3) altering
  procedure codes to make it appear that claims had been paid properly
  when they had not.
* From sample claims that HCFA had requested for review, according to
  the relator in the Blue Shield of California case, employees of that
  contractor deleted references to motor vehicle accidents for which
  Medicare had paid medical claims that may not have been its
  responsibility.

The contractors used various means to accomplish their objective.
According to investigating agents and former BCBS of Illinois employees,
including the qui tam relator, after HCFA had notified BCBS of Illinois in
advance of the records it would review during the annual CPEP, the
contractor manipulated the claims that HCFA was to review before HCFA
arrived. To do so, the contractor set up a "war room" where employees
improperly altered problem areas in the sample claim files to be reviewed.
Their modifications included, among other things, (1) fabricating evidence
by adding, creating, or altering existing documents to support payments
and (2) removing and hiding files that could not be conveniently amended.




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                      B-282186




                      Blue Shield of California followed a similar process. It created a special
                      team, generally a small circle of managers, to improperly correct problems
                      in the sample claims that HCFA had requested for review, according to the
                      investigating agent and the qui tam relator.

                      The qui tam relator in the BCBS of Michigan case explained to us that this
                      contractor had hired outside health care consultants to work with a
                      contractor "CPEP team" of auditors to prereview the records of its audits
                      of providers (hospitals) that were slated for CPEP review. Based on their
                      review, the consultants assigned an initial CPEP score to the records,
                      which generally fell in the 30- to 50-percent range, according to the relator.
                      Because HCFA required a CPEP percentage score ranging in the upper 90s,
                      the team changed the audit records to correct the areas needing
                      improvement. Their actions included, among other things, redoing original
                      workpapers, improperly altering audit records, doing audit work not
                      previously done as required, and obtaining new information from providers
                      that should have been collected in the original audit. In some cases, BCBS
                      of Michigan's CPEP team determined that an audit could not be adequately
                      fixed in time for CPEP In those cases, the contractor steered HCFA away
                      from the problem audit by lying about its status.



Reasons Why HCFA      The investigations by the HHS-OIG, FBI, and U.S. Postal Inspection Service
Did Not Detect        (in conjunction with the U.S. Attorney's Office and the Department of
                      Justice) of each of the contractors we reviewed in depth began with the
Fraudulent and        filing of a qui tam action by a current or former employee of the contractor.
Improper Activities   Prior to the qui tam actions being filed, HCFA had not detected the
                      contractors' fraudulent and improper activities.

                      According to the HHS-OIG agent who investigated Blue Shield of
                      California, HCFA received an anonymous complaint 2 years prior to the qui
                      tam complaint, which alleged that the contractor had given false
                      documents to HCFA to pass its annual CPEP review. According to a HCFA
                      regional employee, HCFA reviewed the contractor at that time. The
                      contractor stated that a computer system problem had resulted in incorrect
                      workload reports and presented a document, purportedly from the
                      computer system company, indicating that the problem was a computer
                      error. Much later, it was determined that Blue Shield of California had
                      fabricated the document.

                      Interviewees, including the federal investigators, provided us the following
                      reasons for HCFA's failure to detect contractor improprieties:



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B-282186




* HCFA notified contractors in advance concerning (1) the dates on which
  it would conduct CPEP reviews and (2) the specific or probable records
  that would be reviewed. This gave contractors the time and opportunity
  to manipulate samples and adjust or hide problems.
* HCFA had contractors pull the records to be reviewed and relied on the
  documents provided by contractors, which consisted largely of copies,
  not originals. Document copies could be, and were, easily altered and
  recopied without detection. HCFA did not examine the original
  documents or sources, such as microfilm/microfiche or online or stored
  computer data. HCFA relied on what it was given without verification.
  In the case of BCBS of Michigan, HCFA had the contractor send the
  documents to it rather than conduct an on-site review. The relator in
  that case noted that HCFA would have detected problems if it had
  shown up on-site unannounced and selected random files for review.
* In some cases, HCFA representatives form relationships that are too
  close with contractors, losing their objectivity and ability to conduct
  meaningful reviews. This is especially true when a HCFA representative
  has a long or exclusive relationship with a contractor. One interviewee
  noted that if the contractor looks bad, the HCFA representative who
  performs the monitoring also looks bad.
* HCFA places too much trust in contractors, according to some
  investigators and former contractor employees. One investigator noted
  that with the change from CPEP to CPE, HCFA now places an even
  greater reliance on the integrity of contractors. For example, according
  to the investigator, HCFA now relies more fully on contractors' quality
  assurance units to review the accuracy of Medicare claims paid by the
  contractors and does not routinely review a subsample of the claims
  reviewed by each contractor's quality assurance unit.
* To circumvent HCFA's reviews of the contractors' actual performance
  and in anticipation of HCFA's review of specific processes, contractors
  allegedly deviated from normal procedures in an effort to deceive HCFA
  about their accuracy and efficiency in claims processing and customer
  service. For example, a former BCBS of Illinois employee other than the
  relator told us that in order to circumvent HCFA's periodic unannounced
   "test" telephone calls, which were designed to check the contractor's
  response time, he tracked HCFAs calls and established HCFA's pattern
  of calling. In response to that pattern, the unit manager put extra
  employees on the telephone lines during the anticipated times of the
  HCFA call until the call was received. In addition, according to the qui
  tam relator and another former contractor employee, in anticipation of
  CPEP, BCBS of Illinois reassigned its two most experienced




Page 20         GAO/OSI-99-7 Contractor Improprieties Compromise Medicare Program
                   B-282186




                       employees to conduct the claim reviews's that occurred on the 1-2 days
                       preselected by HCFA for review. Contractor managers instructed these
                       employees to slow down the review process and take their time in order
                       to ensure that the reviews were done with 100-percent accuracy and
                       included proper documentation.


Impact on the      Improprieties by Medicare contractors contribute to fraud, waste, and
Medicare Program   abuse in the approximately $200-billion-a-year Medicare program by
                   impacting both the Medicare trust fund and customer service in the
                   following ways:

                   * When contractors improperly turn off edits and fail to properly develop,
                     process, or audit claims, several things occur: (1) Medicare pays more
                     or less than it should on claims; (2) beneficiaries, who are obligated to
                     pay a 20-percent co-payment on assigned claims,'9 lose if they pay 20
                     percent of an excessively computed amount; and (3) providers and
                     beneficiaries are forced to resubmit claims that were improperly
                     destroyed, deleted, or denied, causing delays in payment and
                     unnecessary duplication of effort. When claims are denied or deleted
                     without the claimants being notified of any underlying problems with
                     the claims, the claimants may file replacement claims containing the
                     same mistakes.
                   * When contractors fail to recoup overpayments to providers within the
                     HCFA-mandated time period, then cover up their failure to do so,
                     Medicare suffers not only from the untimely repayment of such
                     overpayments but also from the lost interest that should have been
                     assessed on overdue overpayments.
                   * Contractors that cover up their shortcomings deny HCFA the
                     opportunity to evaluate them on their true merits and to correct
                     recurring problems.



                   'SContractors conduct claim reviews when they receive requests for reconsideration of claims decisions
                   from beneficiaries or providers contending that they were paid an incorrect amount All reviews entail
                   follow-up to determine the accuracy of payments made on questioned claims. CPEP reviews evaluated
                   how well the contractor had conducted claim reviews.

                   "If a claim is assigned-meaning the provider has agreed to accept direct payment from Medicare
                   based on the Medicare-allowable amount-the provider submits the claim to HCFA's Medicare
                   contractor. The contractor determines the allowable amount and pays the provider 80 percent of that
                   amount. Even if the claim amount is greater than the allowable amount, the provider must charge the
                   beneficiary the remaining 20 percent of the allowable amount and no more.




                   Page 21                GAO/OSI-99-7 Contractor Improprieties Compromise Medicare Program
              B-282186




Scope and     We conducted our investigation from September 1998 to April 1999. We
Methodology   interviewed HHS-OIG special agents, special agents of the FBI, and an FBI
              financial analyst who were involved in the investigations of BCBS of
              Illinois, Blue Shield of California, and BCBS of Michigan. We also
              interviewed the pertinent qui tam relators, one of the relator's attorneys,
              and three additional former employees of the Medicare contractors. We
              reviewed relevant case documents where available, including case reports
              and backup documentation. In addition, we reviewed public record
              documents including criminal indictments, criminal informations,
              stipulations of fact, a factual basis for plea, criminal plea agreements, qui
              tam complaints, and civil settlement agreements. We reviewed available
              records regarding the three other Medicare contractors-BCBS of
              Massachusetts, Pennsylvania Blue Shield, and BCBS of Florida-and
              incorporated that material into appendix II. Finally, we reviewed internal
              and external documents relating to the history and nature of the Medicare
              program's administration.


              We will send copies to interested congressionalcommittees and will make
              copies available to others on request. If you have any questions concerning
              this report, please contact one of the individuals listed in appendix III. Key
              contributors to this case are also listed in appendix III.

              Sincerely yours,




              Robert H. Hast
              Acting Assistant Comptroller General
               for Special Investigations




              Page 22            GAO/OSI-99-7 Contractor Improprieties Compromise Medicare Program
Page 23   GAO/OSI-99-7 Contractor Improprieties Compromise Medicare Program
Contents



Letter                                                                                              1

Appendix I                                                                                         26
Overview of Cases
Involving Other
Medicare Contractors

Appendix II                                                                                        29
Summary of Criminal
and Civil Actions
Against Six Medicare
Contractors

Appendix III                                                                                        30
GAO Contacts and
Staff
Acknowledgements

                       Abbreviations

                       BCBS      Blue Cross Blue Shield
                       CPE       Contractor Performance Evaluation
                       CPEP      Contractor Performance Evaluation Program
                       FBI       Federal Bureau of Investigation
                       GAO       General Accounting Office
                       HCFA      Health Care Financing Administration
                       HHS       Department of Health and Human Services
                       HMO       Health Maintenance Organization
                       IG        Inspector General
                       MSP       Medicare Secondary Payer
                       OIG       Office of Inspector General
                       OSI       Office of Special Investigations
                       PPQA      Post Payment Quality Assurance



                       Page 24            OSI-99-7 Contractor Improprieties Compromise Medicare Program
Page 25   OSI-99-7 Contractor Improprieties Compromise Medicare Program
Appendix I

Overview of Cases ]Involving Other Medicare
Contractors

                              Other contractors-BCBS of Massachusetts, Pennsylvania Blue Shield, and
                              BCBS of Florida-reached civil settlements regarding allegations of some
                              of the same improprieties discussed previously. In addition, three
                              contractor employees have pled guilty to criminal charges in the
                              Pennsylvania Blue Shield case, which is ongoing. Their activities related to
                              the following alleged improprieties.



Alleged Improper
Activities During
Contract Performance

Alleged Improper Screening,   Qui tam relators in their complaints alleged that two contractors-
Processing, and Paying of     Pennsylvania Blue Shield and BCBS of Florida-had failed to properly
Medicare Claims               screen, process, and pay claims. This allegedly resulted in additional costs
                              to the Medicare program, including the contractors' use of Medicare funds
                              to pay claims that were the responsibility of other insurers.

                              In an August 1998 civil settlement agreement, the federal government
                              contended that from 1988 through 1996, Pennsylvania Blue Shield had
                              (1) failed to implement Medicare requirements for screening end-stage
                              renal disease laboratory claims; (2) inappropriately used manual computer
                              overrides, or force codes, following the adjustment of claims to bypass
                              electronic audits or edits; and (3) failed to properly process MSP claims.
                              The case was settled for $38.5 million. In the settlement agreement,
                              Pennsylvania Blue Shield made no statement as to its agreement with, or
                              denial of, the allegations.

                              Accusations of similar actions by BCBS of Florida were settled civilly in
                              August 1993 for $10 million. BCBS of Florida, during a period of backlogged
                              claims, allegedly (1) forced Medicare claims through the system to override
                              audits and edits intended to prevent the payment of ineligible, unallowable,
                              or duplicate claims and (2) created false and fictitious prescriptions for
                              certain claims for durable medical equipment. The contractor was also
                              accused of turning off system audits and edits, including some mandated
                              by HCFA, without HCFA's knowledge or approval. In the settlement
                              agreement, BCBS of Florida denied the allegations.




                              Page 26          GAO/OSI-99-7 Contractor Improprieties Compromise Medicare Program
                             Appendix I
                             Overview of Cases Involving Other Medicare
                             Contractors




Alleged Improper Denial or   BCBS of Florida was also accused of denying or deleting unprocessed
Deletion of Claims           Medicare claims from the processing system, regardless of whether such
                             claims satisfied Medicare coverage rules, when it experienced a backlog of
                             claims. This allegation was also addressed in the $10-million civil
                             settlement in which BCBS of Florida denied the allegations.


Alleged Failure to Collect   Pennsylvania Blue Shield allegedly failed to recover overpayments
Medicare Overpayments in     resulting from computer system errors. Its August 1998 civil settlement of
1Timely   Fashion            the case for $38.5 million also covered these actions. In that civil settlement
                             agreement, Pennsylvania Blue Shield made no statement as to its
                             agreement with, or denial of, the allegation.



Allegations That             BCBS of Massachusetts and Pennsylvania Blue Shield allegedly falsified
                             annual and periodic reports and documentation to HCFA regarding their
Contractors Prevented        peformance.
Adequate HCFA
Evaluation of Their          In 1994, BCBS of Massachusetts reached a $2.75-million civil settlement
                             regarding accusations that it had committed CPEP fraud, which included
Performance                  inflating the number of claims the contractor had processed, under its
                             Medicare Part B contract. In its settlement agreement, BCBS of
                             Massachusetts denied the allegations except as otherwise expressly set
                             forth in its Internal Review reports (not available). As part of its settlement
                             agreement, BCBS of Massachusetts agreed to implement a Medicare Fraud
                             and Abuse Program Improvement Plan, designed to increase resources
                             devoted to the elimination of fraud and abuse by providers of medical
                             services. The contractor retained its Part A intermediary and Part B carrier
                             contracts until July 1997, when HCFA did not renew them.

                             In 1996, BCBS of Massachusetts also attained a separate Health
                             Maintenance Organization (HMO) contract from HCFA. Less than 2 months
                             later, however, HCFA suspended the HMO contract after it was discovered
                             that the contractor had falsified statements related to its application for the
                             HMO contract. In 1997, BCBS of Massachusetts reached another civil
                             settlement for $700,000 regarding the HMO accusations. In that settlement
                             agreement, BCBS of Massachusetts contended that the acts in question
                             were the unauthorized acts of a single employee, undertaken without the
                             knowledge or approval of BCBS of Massachusetts' management. The
                             contractor's intermediary and carrier contracts were not renewed in 1997.




                             Page 27             GAO/OSI-99-7 Contractor Improprieties Compromise Medicare Program
Appendix I
Overview of Cases Involving Other Medicare
Contractors




Pennsylvania Blue Shield allegedly committed CPEP fraud by obstructing
government audits of its performance as a contractor. This action was
covered under its August 1998 civil settlement for $38.5 million. Also in
1998, three Pennsylvania Blue Shield managers pled guilty to criminal
charges of conspiracy, making false statements, and/or aiding and abetting
in making false statements or causing false statements to be made in
connection with Medicare. The related criminal informations state that at
least two of the managers had conspired to (1) knowingly make materially
false statements to HCFA regarding Pennsylvania Blue Shield's failure to
comply with Medicare program rules, regulations, policies, and procedures;
(2) knowingly cause false, fictitious, and fraudulent information to be
submitted to HCFA agency reviews of Pennsylvania Blue Shield's
operations; (3) conceal material facts from HCFA officials relating to
Pennsylvania Blue Shield's failure to comply with Medicare program rules,
regulations, practices, and procedures; and (4) make false statements to
HCFA in connection with CPEP as part of a scheme to defraud HCFA and
to distort; the audit results in a fashion that favored Pennsylvania Blue
Shield. One way in which Pennsylvania Blue Shield falsified data was to
falsely represent to HCFA personnel that they were being provided
statistically valid random case samples for review. In fact, the case samples
were not random, and Pennsylvania Blue Shield employees had screened
and manipulated them to ensure a high degree of accuracy prior to
submitting them to HCFA for examination.




Page 28             GAO/OSI-99-7 Contractor Improprieties Compromise Medicare Program
Appendix II

Summary of Criminal and Civil Actions
Against Six Medicare Contractors

Contractor                                  Charge                                    Adjudication
Pennsylvania Blue Shield (Highmark, Inc.)   Medicare Secondary Payer and CPEP fraud Civil settlement of $38.5 million on
                                            issues.                                   08/14/98.
                                                                                      Criminal conviction of three employees
                                                                                      during 1998.
                                                                                      Investigation ongoing.
BCBS of Illinois                            Altered documents to increase evaluation  Civil settlement of $140 million on 07/16/98.
(Health Care Service Corporation)           scores.                                   Criminal conviction of corporation 07/16/98
                                             Bypassed computer edits.                 with a $4-million fine.
                                             Destroyed claims.                        Criminal conviction of three employees
                                             Used Medicare Trust Fund to pay private  during 1998 and early 1999.
                                            claims.                                   Indictment of five other employees during
                                                                                      July 1998 with criminal trials pending.
BCBS of Massachusetts                       Falsified statements on HMO applications. Civil settlement of $700,000 on 09/18/97.
Blue Shield of California                   Falsified documents.                      Criminal conviction of corporation on
                                            Hid ongoing processing errors.            04/26/96 with a $1.5-million fine.
                                            Failed to process claims timely.          Civil settlement of $12 million on 04/30/97.
                                             Destroyed claims.
BCBS of Michigan                             Used Medicare Trust Fund to pay private  Civil settlement of $24 million on 01/10/95.
                                            claims.
                                            Medicare Secondary Payer issues.
BCBS of Michigan                             Falsified documents to support audits.   Civil settlement of $27.6 million on
                                                                                      01/10/95.
BCBS of Massachusetts                       CPEP fraud.                               Civil settlement of $2.75 million on
                                             Inflated number of claims processed.     09/28/94.
BCBS of Florida                             Created physician orders.                 Civil settlement of $10 million on 08/04/93.
                                            Bypassed computer edits.




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Appendix III

GAO Contacts and Staff Acknowledgements



GAO Contacts      Robert H. Hast, (202) 512-7455
                  Stephen V.Iannucci, (202) 512-6722



Acknowledgments   In addition to those named above, Mary C. Balberchak, Lisanne Bradley, M.
                  Jane Hunt, Robert E. Lippencott, and Barry L. Shillito made key
                  contributions to this case.




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