FRAUD AND ABUSE IN NURSING HOMES: PHARMACEUTICAL KICKBACK ARRANGEMENTS

CHAPTER I.-INTRODUCTION

With the enactment of Medicaid, which provides medical assistance to low-income persons, and Medicare, which provides health insurance to most individuals 65 years of age or older, a national commitment to improving the accessibility of health services and alleviating the financial burden of illness for poor and aged Americans was firmly established.1 As President Johnson stated in his 1964 health message proposing the creation of these programs:

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The American people are not satisfied with better than average health. As a Nation, they want, they need, and they can afford the best of health: not just for all those of comfortable means, but for all our citizens, old and young, rich and poor. In America, there is no need and no room for second-class health services. There is no need and no room for denying to any of our people the wonders of modern medicine. There is no need and no room for elderly people to suffer the personal economic disaster to which major illness all too commonly exposes them

Since the implementation of Medicare and Medicaid, national health care expenditures have increased dramatically. In fiscal year 1967, the first full year during which both programs actually paid for the provision of health services, national health expenditures were $47.9 billion. Ten years later, in fiscal year 1976, the nation's health care costs reached $139.3 billion. In that decade, national health expenditures increased at an average annual rate of 12.6 percent.

Public spending for health during that ten year period increased even faster than national health spending at an average annual rate of 15.7 percent. Recent budget estimates indicate that these Federal, State and local expenditures for health will continue to rise. Medicaid costs are expected to grow from $14.7 billion in fiscal year 1976 to $20.7 billion in fiscal year 1978-an increase of 41 percent. The Medicare program cost $17.8 billion in fiscal year 1976. In fiscal year 1978, it is estimated to cost $26.1 billion-a 46.6 percent increase.* The Federal share of health costs is also rapidly increasing, from $26.1 billion in fiscal year 1976 to $37.9 billion in fiscal year 1978. Although public spending for all health services has risen dramatically, the rate of public spending for nursing home care has increased virtually faster than any other health service. Public expenditures for nursing

1 Medicare and Medicaid are the popular names given to the two programs enacted by Congress in 1965 that help aged and poor people pay for the costs of their medical care. Medicare, authorized by title 18 of the Social Security Act, is a nationwide health insurance program for the aged and disabled, while Medicaid, authorized by title 19 of the Social Security Act, is a Federally aided, State operated and administered program for low-income persons. Medicare and Medicaid were first authorized by Public Law 89-97, the Social Security Amendments of 1965.

2 "Message from the President of the United States Relative to the Health of the Nation," U.S. House of Representatives 88th Cong., 2d Sess., House Document No. 224, Feb. 10, 1964.

Preliminary estimate from the Office of Research and Statistics, Social Security Administration. Department of Health, Education, and Welfare, ORS Note No. 27, Dec. 22, 1976.

The Budget of the U.S. Government, Fiscal Year 1978, Appendix.

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home care increased at an average annual rate of 23 percent during the decade, fiscal year 1967 through fiscal year 1976.

Rapidly increasing health care costs are a subject of major concern to the Congress, particularly with respect to increasing health expenditures for public programs such as Medicaid and Medicare. Various proposals have been introduced during the 94th and 95th Congresses to control these costs. Much of the legislation introduced is designed in part to reform program reimbursement and administrative mechanisms and, also in part, to control the fradulent and abusive activities of health care providers certified by Federal and State authorities to provide services under Medicaid and Medicare. There is increasing evidence that if unchecked, fraud and abuse by those providing services and care within the Medicaid and Medicare programs may contribute significantly to program costs. While precise figures are not available, fraud and abuse are estimated to represent a significant percentage of Medicaid expenditures. The Department of Health, Education, and Welfare estimated that fraud may account for 5 to 10 percent of program expenditures, while program abuse represents a somewhat larger percentage.5 6 Although estimates are not available for Medicare, fraud and abuse is generally considered by health professionals to represent a smaller percentage of that program's expenditures than similar activities. under Medicaid.

The Social Security Amendments of 1972 (Public Law 92-603) contained specific provisions aimed to combat fraud and abuse by Medicaid and Medicare health care providers. Prior to the enactment of the 1972 Amendments, under then existing provisions of the Social Security Act, a false statement or false representation of material fact by anyone applying for funds under Social Security programs was considered a misdemeanor, punishable by a maximum of one year in prison, a $1,000 fine, or both.

Section 242 of the 1972 Amendments was designed specifically to increase the penalties contained in the Social Security Act for fraudulent acts and false reporting under the Medicaid and Medicare programs. As enacted, section 242 provides criminal penalties for (1) soliciting, offering, or accepting kickbacks or bribes, (2) concealing or failing to disclose knowledge of events affecting a person's right to benefit payments, with the intent to defraud, (3) knowingly and willfully converting benefits or payments to improper use, and (4) false statements or representations of material facts in any application for payment. These practices, under the terms of the 1972 statute, were now punishable by a $10,000 fine, 1-year imprisonment, or both. In addition, any provider who willfully and knowingly lied about the conditions or operations of a health care facility in order to be certified or recertified as a provider of health services under Medicaid and Medicare would now be subject to a $2,000 fine, imprisonment of up to 6 months, or both.

5 "Medicare-Medicaid Anti-Fraud Act," Hearings Before the Subcommittee on Health and Environment, Committee on Interstate and Foreign Commerce, United States House of Representatives, 94th Cong., 2d Sess., Sept. 22, 1976, p. 64, 73.

At the Sept. 22, 1976 hearings of the Subcommittee on Health and the Environment, William A. Morrill, Assistant Secretary for Planning and Evaluation of the Department of Health, Education, and Welfare gave the following definition of "fraud" and "abuse."

"I think in fraud you are talking about a criminal act. That is intent on the part of, say, a provider, to rip off the system. Now 'abuse' is, by contrast, a term that we apply to overutilization or misutilization of the system, improper services being rendered without any intent to defraud the system; but they are erroneous payments or activities of one kind or another, and not necessarily illegal." p. 73.

The provisions of section 242 were intended to supplement any existing penalties provided in State or Federal law with respect to these kinds of fraudulent activities. However, Committee language was quite specific as to the Congressional intent of these new and additional Medicaid and Medicare fraud provisions: 7

Your committee believes that a specific provision defining acts subject to penalty under the Medicare and Medicaid programs should be included to provide penalties for certain practices which have long been regarded by professional organizations as unethical, as well as unlawful in some jurisdictions, and which contribute appreciably to the cost of the Medicare and Medicaid programs. Thus, under the committee bill, the criminal penalty provision would include such practices as the soliciting, offering, or accepting of kickbacks or bribes, including the rebating of a portion of a fee or charge for a patient referral, involving providers of health care services. In addition, the provision would include penalties for concealing or failing to disclose knowledge of any event affecting a person's right to any benefit payment with the intent to defraud, or for knowingly and willfully converting benefits or payments to improper use. Under the bill, the penalty for such acts, as well as false statements or representations of material facts in any application for payment under the Medicare and Medicaid programs, would be a fine of $10,000, 1 year of imprisonment, or both.

Continuing investigation and review of reports by the General Accounting Office have indicated that false statements may have been made by individuals and institutions with respect to health and safety conditions and operating conditions in health care facilities in order to secure approval for participation in the Medicare and Medicaid programs. While the numbers of different individuals and institutions involved in such fraud may not be large in relation to the number participating in the program, your committee believes that a specific penalty for such acts should be provided to deter the making or inducing of such statements. Thus, your committee's bill includes specific provisions under title XVIII (Medicare) and under title XIX (Medicaid) of the Social Security Act whereby anyone who knowingly and willfully makes, or induces or seeks to induce the making of, a false statement of material fact with respect to the conditions and operation of a health care facility or agency in order to secure certification or approval to participate in the Medicare and Medicaid programs would be subject to imprisonment for up to 6 months, a fine not to exceed $2,000, or both.

In the 4 years following the enactment of the 1972 Amendments, fraudulent and abusive practices by Medicaid and Medicare health providers were uncovered in increasing numbers. Numerous investigations by Federal and State agencies and Congressional committees brought forth substantial evidence of these activities committed by physicians, pharmacists, clinical laboratories, shared health facilities (some of which are termed "Medicaid mills"), and nursing homes. It soon became apparent that existing Federal and State procedures to combat fraud and abuse were ineffective and poorly implemented, particularly with respect to the Medicaid program. In 1975, after completing an investigation of suspected Medicaid fraud and abuse in the State of Illinois, the U.S. General Accounting Office made this statement: 8

The (Social and Rehabilitation) Service does not have a unit in headquarters or its regions to provide assistance to States in identifying potential Medicaid fraud and abuse, insure that States are complying with Medicaid fraud and abuse regulations, coordinate with Medicare on fraud and abuse matters, or investigate suspected Medicaid fraud and abuse cases.

Twenty States have never referred a suspected Medicaid fraud case to State or Federal law enforcement agencies for prosecution.

In response to the increasing and sometimes overwhelming evidence of fraudulent activities under Medicaid and Medicare, Congress

"Social Security Amendments of 1971," Committee on Ways and Means, U. S. House of Representatives, 92d Cong., 1st Sess., House Report No. 92-231, May 26, 1971, pp. 107-108.

8 "Improvements Needed in Medicaid Program Management Including Investigations of Suspected Fraud and Abuse," Report of the Comptroller General of the United States, Apr. 14, 1975, p. ii.