EXHIBIT A REPORT ON MEDI-CAL PROGRAM BY THE CALIFORNIA DEPARTMENT OF JUSTICE, NOVEMBER 6, 1968 February 5, 1968. Memorandum to: Herbert Davis, Deputy Attorney General, Los Angeles. This office continues to receive information concerning widespread abuses of the state's Medi-Cal Program. These alleged abuses include fraud, kickbacks, inflated charges and double-billing by persons providing services under the program. We have held two meetings in San Francisco to explore this problem and have concluded that it merits investigation. Since the bulk of the Medi-Cal expenditures are in Southern California, any investigation should properly be directed from the Los Angeles office. It is assigned to you, as head of our Health Plan Registration Unit. In conducting this investigation, our aim should be to improve-not to impede this program. Medi-Cal is an essential state program, which is allegedly being hampered by fraud and mismanagement. Our primary effort should be to determine the extent of fraud-if any-and the possible remedies, either through criminal prosecution or administrative action. We should also be prepared to make recommendations to improve the management of the program, if our investigation discloses areas requiring improvement. CHARLES A. O'BRIEN, Chief Deputy Attorney General. November 6, 1968. Memorandum to: Charles A. O'Brien, Chief Deputy Attorney General. INTRODUCTION On February 5, 1968, the Attorney General ordered an investigation of the California Medical Assistance Program (Medi-Cal). The investigation was based upon information received in this office from numerous persons which indicated extensive fraudulent activities and other abuses by persons participating in the Medi-Cal Program. The Medi-Cal Program commenced on March 1, 1966. For the fiscal year ending June 30, 1967, Medi-Cal paid approximately $600,000,000 to 70,000 vendors who provided services to 1.5 million persons eligible to receive benefits under the program. It is estimated that Medi-Cal will spend around $800,000,000 in the current fiscal year. Of the money spent under the Medi-Cal Program, approximately fifty per cent is paid by the federal government with the state and counties contributing the remainder of such funds. Our investigation indicates that illegal and unethical activities of persons providing services under Medi-Cal are siphoning millions of dollars annually from the program. Poor administration of the program has contributed to further needless expenditure of money by Medi-Cal. The vast scope of the program precludes any precise estimate of the total amount of funds paid out due to poor administration of the program, outright fraudulent activities and the excessive providing of services. Our investigation leads us to conclude that six to eight million dollars annually is being drained from the program by illegal and unethical activities of various professionals involved in Medi-Cal. This would not include funds paid out in error and as a result of faulty administration. The primary abuses of the program involve submission of false claims, kickbacks, and overservicing. In February 1967, Governor Reagan appointed a Task Force to review the administration of the Medi-Cal Program. This committee recommended changes which would allegedly save Medi-Cal $90,000,000 annually. The Office of Health Care Services, which administers Medi-Cal, estimates a total of 2.5 million dollars in overpayments have been made to individual practitioners since the inception of the program. For the fiscal year ending June 30, 1968, vendors voluntarily returned 1.5 million dollars in overpayments. Thousands of dollars in overpayments are still voluntarily being returned each month. In addition to the violations of the laws and regulations of Medi-Cal by the vendors, the investigation disclosed that an effective enforcement program to discover, investigate and deter such activities does not exist. The complex nature of Medi-Cal and the large numbers of participants-both vendors and recipients of health care services-prohibited a thorough investigation by the Department of Justice into the conduct of each individual vendor suspected of engaging in unlawful or unethical activities. The investigation was therefore conducted primarily to determine the nature of abuses being engaged in under the program. This report does not attempt a complete "white paper" on the Medi-Cal Program. It does attempt to identify the problems and supply new guidelines-especially in the area of enforcement-which will result in savings for the taxpayers by curtailing the current amount of abuse. In preparing this report we recognized the problems confronted by Health Care Services in administering a program which was hastily conceived and implemented. The necessary planning and research needed for the effective operation of the worthy goal of the Medi-Cal Program unfortunately did not accompany the initial enactment of the program. This is certainly not the fault of Health Care Services. There is a lesson here for both the state and federal governments. The enactment of federal legislation which requires immediate response from the states to take advantage of federal funding is laden with peril, as well as with token prosperity. Unprepared and without sufficient analysis, the states are rushed into formulating programs which are both essential and ill-considered. There should be an effort by both federal and state governments to transform such programs into more meaningful and fruitful cooperative actions. SUMMARY OF RECOMMENDATIONS 1. Establish an Effective Investigating Unit. 2. Improve Procedures to Expedite Suspension Proceedings. 3. Publicize Existence and Actions of Investigating Unit. 4. Establish Liaison with Professional Licensing Boards. 5. Improve Communication Between Organizations Participating in the Administration of the Program. 6. New Regulations. 7. Review Procedure of Processing Claims. 8. Improve Use of Computers. 9. Review Claims on a Local Basis. 10. Post Examination of Claims. 11. Controlling the Cost of Drugs. 12. Scope of Benefits. 13. Third Party Liability. 14. Purchase of Appliances. THE INVESTIGATION I. Background Medi-Cal became effective on March 1, 1966. The program was placed under the supervision of the Health and Welfare Agency which established the Office of Health Care Services (HCS) to administer the program. Prior to Medi-Cal's enactment, the State of California provided health care services to indigents through a variety of different programs known as Public Assistance Medical Care and Medical Assistance to the Aged. These programs were administered by the various counties in the state. Administration of these programs involved determining eligibility of recipients, authorizing vendors to provide health care services and receiving, reviewing and processing claims of vendors for payment. (Some counties contracted with California Physicians' Service to assist them in administering the program.) Professional consultants were used by the counties to assist in reviewing claims and to authorize requests to provide services. Medi-Cal was passed in response to Title 19 of the Social Security Law which provided that the federal government would share on a 50-50 basis in the cost of California's new program including services then being financed entirely by the state or county. This permitted the unification of all major governmental health care systems which provided care for the indigents into a single system financed by the state, counties and federal government. 24-798-69-pt. 3-14 The state contracted with California Physicians' Service (Blue Shield) and Hospital Service of California and Hospital Service of Southern California (Blue Cross) to act as fiscal intermediary agents. As a result of these contracts the processing of claims for payment was largely shifted from the counties to Blue Shield and Blue Cross, although county consultants were still retained to grant requests for prior authorization. Blue Shield is responsible for processing claims of individual vendors (e.g., physicians, dentists, etc.). All claims are processed by Blue Shield in their San Francisco office. Blue Cross is responsible for processing claims of institutional vendors (e.g., nursing homes, hospitals, etc.). Claims in Northern California are processed in Oakland. Claims in Southern California are processed in Los Angeles. II. Vendor Abuses The investigation revealed that vendors are engaging in unlawful activities and are also bilking the program by providing excessive services to beneficiaries. (1) Unlawful Activities.-The methods by which vendors participating in Medi-Cal engage in unlawful activities can be classified into two main categories: Submission of false claims and kickbacks. (a) Submission of false claims.-This occurs when vendors request payment for services which they have never rendered or falsify information on claims (e.g., knowingly request excessive reimbursement). The submission of a false claim for payment is a felony. (Penal Code section 72.) The acceptance of payment upon a false claim would also constitute the crime of theft. (b) Kickbacks.-Vendors violate Medi-Cal regulations when they agree to give or accept kickbacks-money or other forms of unearned consideration-in return for the opportunity to provide services to Medi-Cal beneficiaries. Such activity is a ground for suspension from the program. Depending upon the type of vendor it might also be grounds for a criminal prosecution or disciplinary action against his license. (2) Overservicing.-While some vendors have cheated Medi-Cal by engaging in unlawful activities, others have taken advantage of the program by providing excessive and unnecessary services for the primary purpose of obtaining greater reimbursement under the program. Overservicing is grounds for suspending a vendor from participating in the Medi-Cal Program. Discussed herein are various types of abuses by vendors which were found to be prevalent under the program. In describing these abuses we recognize that they may in fact be engaged in by only a small number of providers. Nevertheless, the extent to which they do occur and the millions of dollars drained from the program by such activities merit their exposure to the public and to appropriate public agencies. A. Nursing Homes There are approximately 1,000 nursing homes licensed by the State of California. This class of vendors receives approximately $140,000,000 a year for providing services under the Medi-Cal Program. Except for hospitals this is the largest portion of Medi-Cal funds paid to any single class of vendors. The maximum fee paid to nursing homes for caring for a Medi-Cal beneficiary is $14 a day. This fee is based on a formula which determines the homes' “cost of operation." The investigation revealed that nursing homes are engaging in numerous activities which violate the laws and regulations governing Medi-Cal. (1) Many nursing homes require beneficiaries or their relatives to pay money "under the table" to secure admission of the beneficiary into the home. Such payments are often required not just upon the initial admission of the beneficiary but also for each month the beneficiary is kept in the home. A Medi-Cal regulation provides that vendors under the program shall not, in addition to being reimbursed from Medi-Cal, collect or demand reimbursement from beneficiaries or from other persons on behalf of beneficiaries. (2) Medi-Cal beneficiaries in nursing homes receive $15.00 per month from the county for incidental expenses (e.g., cigarettes, candy, etc.). In many homes this money is maintained by the nursing home on behalf of the beneficiary. The investigation has disclosed that some nursing homes misappropriate this incidental expense money which they maintain on behalf of beneficiaries. In one case, for example, it was found that a nursing home was in possession of some $2,000 which belonged to persons who either died or who were discharged from the home. (3) Several nursing homes have been found to be submitting claims to MediCal for services rendered to patients who either died or who had been discharged from the home prior to the period covered in the billing. One home, for example, received $3,000 for rendering services to patients who had in fact died prior to the date of the alleged services. (4) Another abuse which was found relates to the receipt of duplicate payments by nursing homes. This can occur in situations where the fiscal agent accidentally makes the duplicate payment or where the nursing home submits a duplicate payment hoping to be paid twice. In either situation the unethical vendor retains the duplicate payment without notifying the fiscal agent. We have already noted that HCS itself estimates that approximately 2.5 million dollars in overpayments have been made to all types of vendors. Duplicate payments also occur where a nursing home has patients who are eligible to receive benefits from both Medi-Cal and Medicare. While Medi-Cal is only supposed to pay that amount which Medicare does not cover, the submission of duplicate claims under both welfare programs often results in the nursing homes getting paid in full from both Medi-Cal and Medicare. One nursing home, for example, received a duplicate payment of approximately $50,000 by billing in this manner. Nursing homes may also receive duplicate payment in another manner. A home is reimbursed by Medi-Cal for providing a service, yet it also bills and receives payment for this same service from the patient or his relatives. Many persons receiving Medi-Cal benefits do not know that the services they are billed for have already been paid by Medi-Cal. (5) The investigation revealed that it is common practice for nursing homes to require vendors with whom they deal to give kickbacks in order to provide their services to persons in the nursing home. In some instances the kickbacks ranged as high as 35% of the fee received by the vendor. Kickbacks are prohibited by Medi-Cal regulations. Nevertheless, it is a common practice for vendors such as pharmacists, therapists, X-ray technicians and laboratory clinics to give kickbacks in order to obtain business from nursing homes. (6) Nursing homes often provide services to their residents which are greatly in excess of the services actually needed. Such overservicing is cause for dropping a nursing home from the Medi-Cal program. (a) Our investigation indicated that some nursing homes order drugs far in excess of the quantities required by their residents. This situation can occur since physicians often prescribe continuous medication for persons in the homes and the homes determine when to order the medication. For example, one nursing home had a patient who was to take three pills a day. A prescription of 100 pills would have lasted an entire month. The home, however, ordered three prescriptions, each for 100 pills, during this one month. The temptation of this abuse is enhanced in those situations where there is either common ownership between a nursing home and pharmacy or some kickback arrangement betwen the home and a pharmacy. Common interests in nursing homes and pharmacies are, in fact, becoming more prevalent under the welfare program. (b) Another method by which excessive services are provided is where nursing homes have arrangements with vendors such as physicians, dentists, optometrists, podiatrists, etc., which permit them to examine persons in the home whether or not their services are required or requested. Indications of "mass examinations" by such vendors have been observed by county consultants throughout the state in the course of their processing requests for prior authorization. Persons in the home seldom object to such examination since they are not usually required to pay for such services. (c) Information has been obtained which indicates yet a third method by which excessive services are provided by nursing homes. This relates to the situation where a nursing home attempts to "qualify" Medi-Cal patients for Medicare. Since nursing homes receive greater reimbursement for persons who are eligible for Medicare than they do for persons eligible for Medi-Cal it is to their benefit to have a patient classified as a Medicare patient. To be eligible for Medicare benefits while in a nursing home the patient must have been hospitalized for a period of three days. A former administrator of a nursing home has alleged that some nursing homes have an arrangement with hospitals whereby Medi-Cal patients are transferred from the home to the hospital for a period of three days and then returned to the home. The nursing home benefits by this arrangement since it receives reimbursement at the greater rate from Medicare when the patient is returned to the home. The hospital benefits because it is reimbursed for providing services to the patient which usually include laboratory tests, x-rays, etc. (Under such an arrangement the nursing home or hospital usually has a physician who authorizes the patient to be hospitalized.) This type of activity not only provides services to a patient which were not needed nor requested, but the question of "eligibility" may determine whether a nursing home will accept a Medi-Cal patient into the home. In addition to effecting services provided under Medi-Cal, the unlawful activities of nursing homes also effect services provided under the federal program of Medicare. The activities described also result in a needless expenditure of funds under that program. Indeed, the scope of such unlawful activities was a matter of inquiry before a congressional subcommittee on Long Term Care in 1965. Testimony given before this subcommittee indicated that many of the activities we have described concerning nursing homes are prevalent throughout the nation. B. Hospitals The largest share of Medi-Cal funds, approximately $220,000,000 is received by hospitals. Of this amount, $120,000,000 goes to county hospitals. The remainder goes to private and non-profit hospitals. We concentrated our investigation of hospitals on the profit making variety. There have been no indications that the abuses we are studying are prevalent in public and non-profit institutions. Generally, we discovered that many of the abuses which we have seen in nursing homes occur equally in hospitals. Such abuses include overservicing, kickbacks and double billing. These Medi-Cal abuses seem to be predominant in physician-owned hospitals. Since there are no significant differences in the patterns of abuse in nursing homes and hospitals, we will not offer extensive examples of hospital problems. Our comments on nursing homes clearly indicate the Medi-Cal problems which may be found in hospitals. An audit of just seven hospitals, for example, between March and August 1968, resulted in a recovery of $136,000 by Blue Cross. C. Physicians Medi-Cal pays around $95,000,000 a year to 18,000 physicians who participate in the program. (1) The primary fraudulent activity engaged in by physicians as disclosed by the investigation has been submitting claims for services which were not in fact rendered by the physicians. One area in particular where this type of activity occurs relates to physicians submitting claims for having examined patients in nursing homes, although such examinations were not in fact performed. Due to problems which hamper investigative activities into fraudulent activities (discussed infra) the investigation was unable to determine the extent to which this type of conduct occurs. (2) Overservicing is the major problem concerning physicians in the Medi-Cal Program. This involves services which are not necessary for a patient's well being, but which are provided primarily for the purpose of obtaining additional fees under the Medi-Cal Program. (a) Examples of activities involving such overservicing include unnecessary examinations, office visits, laboratory tests, x-rays, injections and surgical procedures. (b) The placement of persons in nursing homes whose physical condition does not require such extensive care is another form of overservicing. In Los Angeles County alone during a one-year period of time some 1300 persons were requested to leave nursing homes by county consultants because their physical condition no longer required such extensive care. (c) Many nursing homes have "house physicians". These are physicians who have an arrangement with nursing homes whereby they take care of the persons in the home. By having a "captive audience" the physician is able to realize a significant amount of income regardless of the actual need of the individual residents. |