(A) Communication and Coordination

1. Reference has been made to the difficulty which exists in coordinating the activities of HCS and the fiscal agents in regard to investigating vendors who may be abusing the program.

a. There is also a need for greater communication between HCS and the fiscal agents as to the general administration of the program. HCS and the fiscal agents have not established an effective means of communication to enable HCS to keep abreast of problems confronting the intermediaries in the performance of their duties. For example, frequent changes by HCS in the type of information desired from the fiscal agents have often been made without consultation with the fiscal agents as to the feasibility and cost of making such changes.

b. Blue Cross has not performed audits to determine the accuracy of fees being paid to nursing homes and hospitals.

The amount of payment received by nursing homes and hospitals is determined by a formula which ascertains the "cost of operation" of such institutions. One responsibility of Blue Cross as the fiscal agent for processing claims of nursing homes and hospitals is to perform audits of such institutions to determine if their "cost of operation" justifies the fees they are receiving from Medi-Cal. As previously mentioned, only by doing audits of nursing homes can there be effective discovery of the abuses some homes are engaging in under the program.

Lack of direction from HCS and its failure to formulate policies have contributed significantly to Blue Cross' failure to perform audits until recently. The results of these recent audits reveal that Medi-Cal has been making excessive payments to nursing homes.

As one example, a recent audit by Blue Cross determined that one chain of eight nursing homes has received in excess of $380.000 from Medi-Cal. Other audits which are now in process are disclosing that the majority of institutions audited have also received excessive payments from Medi-Cal.

Audits of hospitals have also recently been commenced by public accounting firms under contract with Blue Cross.

c. The problem of communication also extends into the relationship which HCS has with the counties throughout the state.

(i) There are 58 counties in the State of California. Most of these process Medi-Cal claims for prior authorization. In general there has been a failure on the part of HCS to effectively communicate with these counties for the purpose of discussing problems concerning their duties and the manner in which the laws of Medi-Cal should be applied.

One example of this lack of communication is illustrated by a form which was recently used throughout the state for authorization to admit or retain persons in nursing homes. The form was prepared by HCS without consulting most of the medical consultants who had to determine from the information on the form if the request should be granted. Various county consultants contend that the form should have contained additional information to assist them in making their decisions.

This problem is also seen in the dissemination of a new form which is used in requesting authorization from county consultants to extend the period of time that Medi-Cal beneficiaries can remain in a hospital. This new form was not only devised without the advice of county consultants, but was also distributed to hospitals without prior notification to local consultants.

Another example reflecting lack of communication is illustrated by the fact that for several months consultants for one county were directing correspondence to a division chief at HCS who no longer held his post. County consultants were never notified of the change in the division chief.

(ii) “Communication” between HCS and the counties is also weak in regard to the amount of discretion and responsibility county consultants can exercise on matters not specifically covered by any law or regulation. Needless to say, a multitude of problems arise in various counties for which there is no specific answer provided in any law or regulation governing the program. In such instances, the consultants have a choice of either acting upon their own discretion or requesting direction from HCS. The failure of HCS to respond promptly to requests for advice often results in no action at all being taken by the counties. The failure to clearly advise the counties as to areas of discretionary respon sibility has resulted in counties taking inconsistent positions on matters where there should be uniformity.

(iii) HCS has also issued directives which were inconsistent with existing laws and regulations governing the Medi-Cal Program. The current time lag in cor

recting such inconsistencies-often weeks-would be eliminated by more effective lines of communication.

(B) Evasion of Regulations

Certain "loopholes" exist in the laws and regulations governing Medi-Cal which enable vendors to engage in activities which are contrary to the intent and language of the law.

1. Through a simple subterfuge, physicians who are suspended from the program may continue to receive Medi-Cal payments.

Persons participating as vendors in the Medi-Cal Program possess a vendor number. Usually this number is the same as the professional license number possessed by the vendor. When the vendor is a physician, however, and practices as a member of a group or clinic a vendor number is also assigned to the group or clinic.

As a result, physicians who have been suspended from the program for overservicing or fraud are able to continue treating Medi-Cal patients and to receive payment for their services by submitting their claims under their group or clinic vendor number. This results in the physician being able to evade the purpose of the suspension which is to remove him as a participant in the Medi-Cal Program. 2. The regulations also provide that a physical therapist shall not receive payment for rendering more than six treatments to a patient without having obtained a new prescription from a physician authorizing further treatments. Home health agencies, another type of vendor under the program, are also allowed to provide physical therapy to Medi-Cal patients.

Unlike the individual physical therapist, no limitation has been placed on the amount of payments which can be made to a home health agency for providing physical therapy. As a result, it is common for physical therapists to have an arrangement with home health agencies whereby the latter will submit claims for services rendered by the physical therapists as though the service was rendered by the home health agency itself. In effect the home health agency is merely acting as a billing service for the therapist and receives a fee from the therapist for doing so. Under this arrangement with home health agencies the individual therapists are able to evade the limitation which the Medi-Cal Regulations impose upon them.

(C) Determining “Cost” of Drugs

We have seen that some pharmacies inflate their fees by overstating the cost of the drugs they dispense.

HCS publishes a drug formulary which basically provides that "cost" is intended to be the acquisition cost of the drug. (The formulary defines "cost" as being the lower of the maximum allowable wholesale cost or the actual cost to the pharmacist. The former price refers to a few drugs in the formulary on which there is placed a maximum allowable wholesale cost.)

A new drug formulary has recently been published. "Cost" has again been defined in the same manner. However, appearing under the caption "Billing Instructions" in the new formulary is a section which provides, in part, that the wholesale cost for the standard package of the drug dispensed shall be used in determining the cost of the drug to the pharmacy. A “standard package” is defined as 100's, pints, or pounds or the available size that is closest to said packages.

In providing that "cost" should be figured at the wholesale cost of a "standard package" this section ignores the acquisition cost of the drug. Hence, it gives the pharmacy the advantage of obtaining drugs at a cheaper price by purchasing in large quantities without passing this saving along to Medi-Cal. The effect of this new Medi-Cal instruction is to allow reimbursement to the pharmacy for more than its actual cost in purchasing the drug.

In the past several years a great increase has occurred in the cost of drugs under the welfare program. In 1967 the number of welfare prescriptions filled on a nationwide basis was 26.4% greater than the year before. In California the increase in welfare prescriptions over the same period of time was 37.4%. California also led the nation in both the number of welfare prescriptions filled in 1967 and the amount of dollar volume paid out for prescriptions in that year. The number of welfare prescriptions and their cost for the current fiscal year have both been estimated as being higher than in the past year. It is now anticipated that as a result of the billing instruction in the new drug formulary the cost of drugs will be even greater than predicted.

Although previously mentioned, it is again significant to note that under the new welfare program in California the amount of money reimbursed to phar

macies will be greater than the reimbursement provided under private negotiated contracts.

(D) Purchase of Appliances

Appliances such as wheelchairs, crutches and beds are purchased by both the state for persons eligible for Medi-Cal and by counties for persons who are on welfare but not under the Medi-Cal Program.

1. In Los Angeles County alone Medi-Cal purchases over $250,000 worth of appliances a year. However, whereas Los Angeles County has entered into contracts with suppliers of such appliances to purchase them at a discount the state has no such agreements and purchases identical appliances at a full retail price. The effect is that the Medi-Cal is paying more money (often as much as twenty percent more) than the county for identical medical appliances.

2. When Medi-Cal does purchase an appliance, the patient retains title to it. This means that when there is no longer any need for the appliance, because of death or otherwise, the patient or his family retains possession of the appliance. Prior to Medi-Cal, Los Angeles County developed a procedure whereby appli ances could be reobtained, serviced and stored so as to be available for future use by another welfare patient. No procedure for Medi-Cal to reobtain medical appliances after it gives them to patients-exists under the current program.

(E) Beneficiaries under the Medi-Cal Program who passess certain assets are supposed to pay a portion of the cost of the services they receive.

1. The counties have the responsibility of ascertaining the liability of the patient. There has been a general failure by the counties in assuring that the financial liability of patients for Medi-Cal treatment is being paid.

If the patient's liability is not fulfilled, Medi-Cal ends up paying the vendor money which should have been paid by the patient. One county which is concentrating its efforts in this area has recovered from Medi-Cal patients approximately $20,000 in a period of one year.

2. The state also has a right of subrogation where there may be a third party liability to a Medi-Cal patient. Failure to ascertain cases where subrogation might exist and to pursue such cases is also depriving Medi-Cal of a potential recovery of money.

(F) The failure by the counties and HCS to maintain current records of beneficiary eligibility has also been a source of many problems in administering the program.

1. One problem of constant irritation has been the making of duplicate payments to vendors. This often occurs where an initial claim is rejected because the patient is not found to be eligible for benefits. Upon further inquiry, however, the patient is deemed eligible and a second claim is submitted. This problem with eligibility records has often resulted in payments being made upon both claims. 2. The failure by the counties and HCS to maintain current records on eligibility has also caused the rejection of claims which should have been paid and the payment of claims which should have been rejected. By not keeping records current inquiries as to eligibility have also resulted in undue delay in rendering services and paying vendors.

(G) Processing Claims

Mention has been made that the fiscal agents are responsible for processing claims of vendors. A closer look at their activities is necessary in considering the overall administration of the Medi-Cal Program.

Blue Shield receives 70,000 claims a day to process. These claims are intially reviewed for completeness of form and legibility. They are then examined on an individual claims basis by people trained to determine if the vendor has billed the proper amount for the services and if the services seem reasonable. If the claims seem proper they are forwarded to be microfilmed and to be paid.

Each claim is reviewed for the purpose of preparing it for data processing. This function actually requires some employees to cross out information requested on the forms provided by the state, but which is not needed for the processing of the claim. (E.g., telephone number of vendor.) Other employees have the task of printing names of vendors which are not legible on the claims submitted.

Blue Cross processes some 5,000 claims a day from institutional vendors. They, too, use trained personnel who review claims primarily to determine if the services and amount of claim is proper. These claims are also processed to prepare them for data processing.

Both fiscal agents utilize computers to a great extent. Among other things, the computers are supposed to be used for the purpose of determining who has been paid, amounts which have been paid, and kicking out requests for duplicate pay

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ment. The effectiveness of any computer is dependent upon how it is programmed and the accuracy of information it is given.

1. There have been numerous instances where vendors have received double and triple payment for services they have rendered.

Preliminary investigation has disclosed that one hospital, for example, has received duplicate payments involving some 59 different patients amounting to $17,000 in overpayments.

a. Various reasons exist for such duplicate payments. In the case of the hospital it was found that employees of the fiscal agent insert a diagnostic code on the claim received from the hospital. The code is determined by the diagnosis set forth on the claim. If a duplicate claim is submitted a different employee might interpret the same diagnosis in such a way so as to insert a different code number on the claim. Due to the difference in code numbers the computer will not detect the duplicate claim and payment will be made upon both claims.

b. Another means in which duplicate payments can occur is where a vendor initially submits a claim for $1,000 which shows that the patient's liability for such services is $100. The claim would thus request a net payment to the vendor of $900. If it was subsequently determined that the patient's liability should have been $200 a duplicate claim might be submitted by the vendor requesting $800. Due to the difference in the net amount claimed the computer would once again be unable to detect the duplicate claim and again it is probable that payments of both $800 and $900 would be made to the vendor.

2. There also have been cases where the computers have not properly recorded where vendors have or have not been paid. This type of error often results in inquiries being made by the vendors resulting in additional time and expense in ascertaining if payment has been made.

The inability of the fiscal agents to accurately advise investigators and consultants who request information as to whether vendors have been paid creates further delay and interference in the pursuit of investigations. Investigation disclosed, for example, that upon inquiry as to whether specific vendors have been paid the fiscal agent replied in the negative although such vendors had in fact received payment.

3. The current system of processing claims has not only resulted in making duplicate payments to vendors who have rendered services to patients, but errors in the program have also caused checks to be sent to persons who have never provided services to Medi-Cal patients.

It is difficult to estimate the amount of money which Medi-Cal has mistakenly paid out as a result of the errors we have mentioned. At the outset of the report we noted that as of June 30, 1967, one and a half million dollars in overpayments were voluntarily refunded by vendors. HCS estimates that another one million dollars in overpayments are still outstanding. Unless the vendor is honest and voluntarily notifies the fiscal agents of such duplicate payments it is unlikely that they would be discovered under the current auditing procedures. Both fiscal agents have expressed the desire and need for better computer operations which would assist them in the performance of their duties in processing claims for payment.

RECOMMENDATIONS

The responsibility imposed upon HCS to administer the Medi-Cal Program is not one to be envied. Massive problems have confronted HCS from the initial day the program began operating and many of them still exist today.

Since the operation of the Medi-Cal Program is under constant review by both HCS and the California Legislature we offer herein suggestions concerning certain areas in the program which may be of some benefit to those agencies which are looking for ways to improve the program.

Many of the matters mentioned in this report have been discussed with HCS which has already begun to take steps to remedy some of the weaknesss found in the program.

1. Establish an Effective Investigating Unit

(a) One problem which has been mentioned in regard to the enforcement of the program has been the difficulty in discovering vendors who have taken advantage of the program. Similar difficulty exists in finding those recipients of Medi-Cal who also take advantage of the program.

We have noted that under the current system investigators are employed by HCS, Los Angeles County and the fiscal agents. Failure to coordinate their

activities has resulted not only in duplication of work and needless expenditure of money, but has produced far too few cases against persons abusing the program. HCS investigations have produced few proceedings against vendors. This lack of suspensions and criminal or other disciplinary actions has been caused in great part by the inordinate amount of time which expires between the commencement and the conclusion of investigations. Because of the time lag evidence becomes stale and, in some cases, the witnesses have died. The latter, of course, is a particular problem in the field of medical investigations.

It is therefore recommended that a single investigative unit be established, consisting of at least ten men, under the supervision of one person who would have the responsibility of assigning cases and coordinating investigative activities.

The investigators should be experienced or trained to efficiently perform investigations into the various types of abuses mentioned in this report. Since Los Angeles County receives approximately forty-five percent of the money spent in the welfare program the majority of investigators should be located in the Los Angeles area.

The recommendation of a single investigative unit is not intended to preclude consideration of a proposed arrangement whereby the fiscal agents would have their own investigators.

(b) The investigative staff should be provided with adequate equipment and secretarial help to assist them to perform their duties in an efficient manner. (c) This report has discussed the various means by which vendors have been taking advantage of the program. It is recommended that with use of this knowledge a manual be prepared to set forth basic procedures which should be followed by investigators when doing audits and investigations of specific types of vendors.

(d) Investigations now occur as the result of complaints which may be received. It is suggested that consideration be given to having investigators perform routine audits and investigations without the necessity of receiving a complaint. Such routine investigations would be especially effective in discovering abuses among such vendors as pharmacies and nursing homes and in acting as a deterrent to those who might otherwise consider abusing the program.

(e) The inability of investigators to obtain information from the fiscal agents has hampered effective investigation. Procedures should therefore be established whereby investigators can request and obtain within a reasonable period of time information which is needed for investigations.

(f) Both fiscal agents when processing claims attempt to discover providers who may be engaging in fraud or providing excessive services.

Effective liaison should be established between the investigative unit and the fiscal agents so that they may be apprised of the activities of each other. 2. Improve Procedures to Expedite Suspension Proceedings

If our recommendations for investigations are followed, there should be a vast improvement in the ability of the investigators to expedite cases and, where appropriate, to recommend disciplinary proceedings. While recommendations for criminal or disciplinary action would be referred to agencies other than HCS, in most instances the suspension of the vendor from the program would also be appropriate. This emphasizes the need for improving HCS suspension proceedings.

In the past, HCS' method in acting on suspensions from the program has proven unsatisfactory from the standpoint of both procedure and results. .

It is therefore recommended that HCS take steps to improve the manner in which it handles proceedings to determine if a vendor should be suspended. Two possible sources to which HCS may look for advice in this matter are the Attorney General's Office and the Office of Administrative Procedure since both these offices have extensive experience in the processing of administrative hearings.

3. Publicize Existence and Actions of Investigative Unit

It is recommended that the existence of the investigative unit be made known to the public and to persons providing and receiving benefits under the program. This would encourage information and complaints from the public and would also deter abuses.

The establishment of an effective unit should also result in an increase in the number of criminal actions, suspensions, and disciplinary actions taken against