are quite anxious to work with States to provide the necessary technical assistance so that they can develop a surveillance system somewhat like the one we use in IRS that keeps up with the pattern of expenditures so that we are monitored. Those efforts together I think are a good portion of the answer to the problem described in this article. Senator DOLE. We had the same problem in administering the food stamp program. There have been charges of abuse with families having incomes up to $16,000 or more qualifying for food stamps. I assume you have similar stories.

This article in Time also mentioned so-called "medicaid mills". clinics set up to sort of "ping-pong" patients through several doctors or utilize what we call "family ganging" techniques, where they look at everyone in the family. Is there actual evidence of those types of operations and are they extensive or is that just one isolated story?

Secretary MATHEWS. I am thinking particularly of the State we have just gone into where, with the cooperation of the Governor, we have been looking at a series of cases, but I don't recall one that is exactly of the form that you described here. There is fraud and abuse in medicare and it is very simple. There are any number of devices for carrying it out.

Even with nonprofit institutions, the nursing homes and others, we see the establishment of pharmaceutical companies that are owned by the same people who own the drug companies. There is an indication of improper kickbacks for laboratories that do work. There are a whole host of unsavory practices. There are service problems. The cost to the Federal Government is somewhere in the order of $750 million a year.

Senator DOLE. You say $750 million?

Secretary MATHEWS. That is the figure we used in our last testimony. Secretary TALMADGE. Mr. Secretary, one of the problems which has concerned us currently is the lack of followthrough by the U.S. attorney's office on cases of fraud developed by the medicare and medicaid programs. What actions have you taken to assure that cases will be brought to trial by U.S. attorneys, and do you feel that this is a problem area?

Secretary MATHEWS. We have directed our attack and plotted our strategy in cooperation with the States. By joining with the States in this effort we have been able to get at the problems a lot sooner, bring a case to the point, and fashion the case so that it can be turned over to the prosecutor. I have heard no comment in our Department about difficulties with the Justice Department. I would ask Dr. Weikel to comment. We are bringing these cases in Federal court, in State court, or in both?

Dr. WEIKEL. In the case of medicaid it is to go through the State board for prosecution. If for any reason at all that does not take place, then we are prepared and we have as part of the process involved meeting with the U.S. attorneys in the particular States in which we are working with the fraud and abuse initiative.

Now in the past I think it is fair to say that there has been less than enthusiastic acceptance of medicaid cases by some of the U.S. attorneys. On the other hand, we have some cases. We have one case in New York State involving at least $2 million of Federal funds,

50 to 100 providers, where the U.S. attorney is prosecuting that case and we are working with him in developing the case.

Senator TALMADGE. Do you think there is adequate followup on the medicare-medicaid cases referred to the U.S. attorneys?

Dr. WEIKEL. It is too early for us to give you a concrete answer on that in terms of the new initiative. In the past there was very little activity at the Federal level in medicaid fraud and abuse and therefore we don't have much history. I think medicare probably has much more history than medicaid.

Secretary MATHEWS. In medicare we do have a record of very vigorous activity in bringing cases before and getting action in the Federal court.

Mr. Tierney, do you have those figures at hand that are in the annual report of investigations and prosecutions?

Mr. TIERNEY. I am not sure I have the precise figure, Mr. Secretary. I could give you some general figures that I think would give you the picture, Senator Talmadge. As of June 30, 1976, there have been, since the inception of the medicare program, 43,822 allegations of abuse or fraud; 23,281 of those were fraud allegations. Now these include statements from people who simply say that there is an item in a bill for a service I never received; often their allegation turns out to be a mistake. That gets down, when we finally complete our investigation of such allegations, to somewhere around 2,300 fraud cases which we have gone all the way through a

Senator TALMADGE. What has happened to the 23,000 cases?

Mr. TIERNEY. Then we started to screen those cases.

Senator TALMADGE. You reduced them to 2,300?

Mr. TIERNEY. Yes.

Senator TALMADGE. What happened to the 2,300?

Mr. TIERNEY. In those cases, Mr. Chairman, about 578 of them we referred to the Justice Department.

Senator TALMADGE. How many convictions did you get?

Mr. TIERNEY. I would like to submit that information. Senator TALMADGE. We would like to have it for the record. Mr. TIERNEY. Yes; but let me give you the picture. We have secured 267 indictments and about 200 convictions. Now that does not sound like much but to give it a little perspective, Mr. Chairman, that is more indictments and convictions-I am not saying this is our prime goal in medicare-but that is more indictments and convictions for that kind of fraud than have been secured by all the rest of the health insurance industry combined prior to the medicare program. So I think we have an active program, Mr. Chairman, and I think we have a tremendously effective deterrent program.

[The material referred to above follows:]

DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE.
SOCIAL SECURITY ADMINISTRATION,
Baltimore, Md., July 26, 1976.

Hon. HERMAN E. TALMADGE,

Chairman, Subcommittee on Health, U.S. Senate, Washington, D.C.

DEAR SENATOR TALMADGE: During the course of this morning's hearings you and other members of your subcommittee asked questions about the number of fraud allegations, investigations, and convictions which had occurred in the Medicare program. At the time, I did not have the precise numbers and asked your permission to submit them for the record.

To date, we have received and investigated approximately 20,000 allegations of possible fraud. Generally, these allegations arise from beneficiaries who simply question the receipt of items of service or supplies for which they have been billed. In the vast majority of cases, these allegations turn out to be the result of a mistake or a misunderstanding. Nevertheless, our program integrity units, centrally and regionally, investigate every such assertion.

We have referred 550 cases to the Justice Department for prosecution, 182 cases are awaiting prosecution, and 163 have resulted in convictions. The balance were either declined, or the charges were dismissed, or the defendant acquitted. In addition to these fraud cases, we have investigated some 19,000 incidents of possible abuse of the program. As a result of these investigations we have secured the repayment of approximately $30,000,000. As Senator Packwood pointed out, these end results seem very small in view of the amount of effort expended, but we believe that the deterrent effect of aggressive investigation is valuable to the program.

Sincerely yours,

THOMAS M. TIERNEY, Director, Bureau of Health Insurance.

Senator TALMADGE. My time has expired.
Senator Packwood.

Senator PACKWOOD. Let me go back to the original question I was pursuing. I think if you are successful in all of your criminal indictments regarding fraud-if you are lucky, you may save enough money, maybe, to be the difference in one year's increase in its cost and after that you are off and running again. I think that is what the doctor was about to say, that it is not going to be enough to tighten it up and manage the present program but something else has got to be tightened up. I am curious what are some of the things you are talking about. Where do we start to cut back? What types of services do we minimize or cut off? What kind of service do we cut down?

Dr. ALTMAN. First of all I think the best thing is not to try to second guess the front line people, the providers. You look for incentives either in the form of financial or in the form of regulatory. You essentially ask the provider community to cut back. The surgery program is a good example of that. When you talk about cutbacks of 40 percent in the rate of surgery, that is billions of dollars nationally but that is the first line.

Senator PACKWOOD. I will put it in layman's language. You say to a hospital: Your reimbursements last year were a million dollars; this year we will give you only $950,000. You live with that.

Dr. ALTMAN. That would be the second line. The first line was essentially we create a reimbursement on the HMO's where you have a fixed amount of money and you say to the medical community: You are going to provide any amount of care that you believe is necessary but you are not going to get any more money.

Senator PACKWOOD. Let me ask a question about the HMO's because I recall the doctor's testimony 3 or 4 years ago on the subject of medicare where the HMO said that their real secret on cost study was really in preventive medicine but when it came down to the actual cost of running a hospital for those that had to be hospitalized they could not run them any cheaper than the normal nonprofit or they would not have a hospital.

Dr. ALTMAN. Dr. Cooper is much more familiar with that than I am but that is true. The real savings is not having someone in the hospital in the first place and therefore building a smaller facility so that they use fewer hospital beds per year.

Senator PACKWOOD. In this medicare program how do you go about encouraging less hospital care?

Dr. ALTMAN. We favored a more positive approach towards HMO development than is currently in medicare and medicaid.

Senator PACKWOOD. Let me separate those two. You don't have to have HMO's to reach this goal you are talking about.

Dr. ALTMAN. No.

Senator PACKWOOD. Fewer hospitals.

Dr. ALTMAN. And the alternative way that is in the statute of the 1972 amendments is in the PSO program where you ask medical providers in the community to be concerned about the need for surgery. Again Dr. Cooper is in a much better position to discuss that.

Let me just say on the reimbursement side you want to couple it. The medical side is one side but you do need in my view some kind of financial constraints. There needs to be a budget that a provider goes up against, whether it is a hospital or a physician.

Senator PACKWOOD. Let's go back to what kind of a budget would you need. What do you say to a private practicing physician in order to live within his budget?

Dr. ALTMAN. I am less concerned about the individual physician in the office. When he gets in the institution, the amount of tests he orders, the amount of procedures he has available to him—if the hospital faces a limited budget, it cannot just simply have all the tests that anyone could want, all the drugs, and so there would have to be some give and take within the medical community and the hospital administrative staff on how can we cut back. I would hate to see us try to dictate from on high you could do this and not that. I have listened to medical people enough to know that that is not a wise move.

Senator TALMADGE. Senator Dole.

Senator DOLE. I don't want to take all the time on what actions have been taken so far by U.S. attorneys, but it is my understanding that most violations now are misdemeanors. Is that correct?

Dr. WEIKEL. That is correct.

Senator DOLE. Under the Talmadge bill it will be changed to felonies.

Dr. WEIKEL. In the case of medicaid we are very supportive of that. Senator DOLE. I think the same has been true in other areas where we have had very little, if any, prosecution. It is hard to interest the U.S. attorney in a misdemeanor charge when he is going to spend more time in the investigation than he might be able to justify otherwise. So you support the change from misdemeanors to felonies? Dr. WEIKEL. Very definitely.

Senator DOLE. With reference to the 19,000 complaints pared down to 2,000, did you get some fix on the number of final convictions? Mr. TIERNEY. Yes. As I said to the chairman, Senator, the number of actual convictions is about 200. That is very small.

Senator DOLE. Do you have any idea of the fraud that is involved in terms of total dollars?

Mr. TIERNEY. No, sir, I don't.

Senator DOLE. What is the biggest abuse or "ripoff" you have experienced in medicare and medicaid?

Mr. TIERNEY. Well, Senator, it all depends whether you are talking about individual physicians or whether you are talking about institutions. The ripoff part is not the big thing. When you actually get a case of fraud it is because the doctor is charging for services that he didn't provide or he is agreeing to take an assignment and then goes ahead and bills the patient also. That does not necessarily mean that there is a lot of money involved.

I think, in reply to Senator Packwood's series of questions, it does not make a great difference-the actual recovery of money or the actual fraud involved-but the potential is nevertheless very great.

Now the abuse of services, Senator, probably involves a lot more money than the fraud. In other words, a doctor who keeps on providing more and more and more unnecessary services, commits no fraud. He is abusing the program and his abuse involves substantial amounts of money. The amount of money involved in medicare fraud is not a significant financial item.

Senator DOLE. Mr. Secretary, you have stated in your testimony that much of the internal consolidation and reorganization contemplated by the Talmadge bill can be done administratively-that is, without legislation-and that that is the way you would prefer to handle it. Have you analyzed the bill to see if there are other areas which you might address the same way, and, if so, could that be made available for the record?

Secretary MATHEWS. We would be pleased to make this information available when the Department has completed its analysis of the bill.

I commented on the other because of my concern that these matters be approached on a department wide basis. I have the same conviction the Senator does about the need for expanding our capacity but we have other areas of the Department where we have problems with fraud and abuse. It would make much better sense for us to have a single comprehensive fraud and abuse and Inspector General program combined and allied with our audit effort than it does to have a series for each of the particular problems that we have had. [But whether we do have other activities underway that would have some impact on this legislation, we would be pleased to comment on those in the context of the comment of the Senator.]

Senator TALMADGE. Mr. Tierney, you have had many years of experience dealing with hospitals and doctors, first as the president of the Blue Shield-Blue Cross plan and then as Director of Medicare. Based upon that extensive experience is it your view that arrangements whereby hospital associated physicians such as radiologists and pathologists are paid through a lease or percentage arrangement leads to excessive payments?

Mr. TIERNEY. Senator, I was never a part of Blue Shield, just Blue Cross. That is just for the record.

Senator, this has been a problem since at least the early fifties and I think it has long since been time, as the Secretary said in his testimony, to take a whole new look at that arrangement. This concept of physician payment on a percentage of the gross charges of a radiology department or pathology department is simply, in my opinion, not realistic and does result in inflated costs, inflated bills.