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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 pay. ment 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 pay. ments 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.

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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.

Under this type of arrangement however a physician may often compromise his professional judgment to the point where he relies upon recommendations made by the nursing home itself as to services to be given to the patient.

For example, our investigation revealed incidents where physicians signed blank prescriptions which were given to them by the nursing home and which were subsequently completed by the home itself. In one instance, a physician thought he was signing a prescription for a drug when in fact it was filled in by a nursing home for a wheel chair for a patient who was ambulatory. In another case, 75 blank prescriptions signed by a doctor were found in a nursing home. Review of claims by consultants have also given rise to suspicion that it is the nursing home which prepares the forms describing the physicial condition of persons who seek admission into the home. The "house physicians” sign such forms although they, in fact, have not examined the patients.

The determination of whether a physician is providing excessive services is one which usually requires the judgment of other physicians. Claims of physicians are processed for payment by Blue Shield. Blue Shield maintains a Utilization Committee which began functioning in February 1967. One major purpose of this committee is to discover physicians who overutilize the program.

As will be seen later in this report, the current method of reviewing claims submitted by physicians does not maximize the discovery of abuses. Nevertheless, as of September 30, 1968, the Utilization Committee had discovered approximately 1000 physicians who had engaged in overutilization. As a result the committee either recovered or made adjustments in the doctors' claims to the extent that Medi-Cal realized a savings of approximately one half million dollars.

In addition to the Utilization Committee, physicians who act as advisors for Blue Shield at the county level have saved the program approximately $2,000,000 in just the first six months of this year based upon their review of claims submitted by physicians.

The question of overservicing also arises when doctors receive huge fees from the welfare program. Over 3 million dollars in payments have been made to just 35 physicians in a period of one year, with payments ranging from $70,000 to $131,000 each. Investigation disclosed overservicing by many of these physicians.

Physicians with a financial interest in pharmacies, laboratories and hospitals are also presented with the opportunity of subjecting Medi-Cal beneficiaries to these services although they may not be required for medical reasons. For example, of four hospitals whose claims are under constant review by Blue Cross to determine if excessive services are being provided, all four are owned by physicians.

One blatant example of unnecessary services in a physician-owned hospital concerns a patient who was hospitalized for sixteen days. Ten blood tests. many of them identical, were taken each day the patient was hospitalized. Of the 160 tests taken, not one revealed an abnormal finding. Multiple X-rays of the chest, skull and cervical spine were also taken although here again no abnormality was ever revealed. This type of overservicing was similarly provided to many other patients in this same hospital. D. Pharmacists

There are approximately 4,900 pharmacies in the State of California. For the fiscal year ending June 30, 1967, pharmacies participating in Medi-Cal received 40 million dollars from the program.

Until recently, the formula used to reimburse pharmacies for drugs they dispensed was the cost of the drug, plus 50% of the cost, plus a fee of $1.15. Thus, if a drug cost $1, the pharmacy would receive $1 plus 50 cents plus $1.15, for a total of $2.65.

Under a recent regulation this was changed to the cost of the drug, plus a professional fee of $2.30 per prescription.

The investigation has revealed numerous ways in which pharmacies are engaging in activities which violate the laws and regulations governing Medi-Cal.

(1) HCS publishes a drug formulary which contains instructions as to the manner in which pharmacies are to determine the cost of their drugs when billing the Medi-Cal Program.

Pharmacists are instructed not to charge the state a price which is in excess of the price charged to the public for the same drug. Based upon investigations made both before and since the enactment of Medi-Cal, it appears that a large number of pharmacies are violating this instruction.

This conclusion is based on the fact that prior to Medi-Cal, Los Angeles County (which contains approximately 45% of the pharmacies in the state) maintained a staff of investigators who would make periodic visits to pharmacies to determine if the county was being charged a higher price than the public for the same drugs. This spot-check revealed that a vast majority of the pharmacies visited were, in fact, selling identical drugs at a lower price to the public than to the welfare program.

With the enactment of Medi-Cal, the staff used by Los Angeles County to do such field audits ceased to exist and HCS does not have personnel who check on pharmacies in this manner. It is therefore highly unlikely that the practice of excessive billing ended with the enactment of the Medi-Cal Program. Indeed, spot-checks which have been made on pharmacies since Medi-Cal revealed that a majority of the pharmacies visited are still charging prices to the state which are in excess of those charged to the public.

There is a special problem involving the difference in drug prices charged to public agencies and private individuals. This involves private health programs which may pay less for drugs than the public welfare program. For example, the United Auto Workers is negotiating a contract under which Blue Shield would cover the expense of drugs purchased by members of the union. Under the proposed contract, the UAW Program would pay less for drugs than the state welfare program.

(2) The drugs formulary instructs the pharmacist to dispense the lowest cost item which he has in stock provided that it meets the requirements of the practitioner as shoun in the prescription. Many pharmacies are not complying with this instruction. For example, in situations where an inexpensive generic drug could have been dispensed, the patient has been given an expensive brand name drug which resulted in greater reimbursement to the pharmacy under the formula previously described.

Many drugs have both a brand and generic name. A brand name is always more expensive than the generic name dru en, the brand name is as much as two or three times more expensive.

Examples of the difference in price can be seen by a comparison of the cost of some leading brand name drugs with the cost of comparable generic drugs.



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3. 00 Seconal sodium (142 gr.):

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4. 65 Noctec caps (712 gr.): 100----- 4. 20 Chloral hydrate caps (742 gr.) :


1. 75 (3) Visits to nursing homes, hospitals, sanitariums and homes of patients rerealed that some pharmacies give patients a generic drug but bill the state as though the brand name drug had been dispensed. Under the formula for reimbursement the excessive expenditure made by Medi-Cal due to such false claims can amount to a significant amount of money.

(4) The investigation revealed that pharmacies often purchase drugs in large quantities but bill Medi-Cal at a cost premised upon a minimum quantity purchase. This results in the pharmacy receiving more than its actual cost for the drug dispensed. Furthermore, Medi-Cal not only pays out excessive money for the cost of the drug, but the excessive expenditure is compounded when this higher cost is used in applying the formula for reimbursement.

Under the formula for reimbursement, a pharmacist is supposed to bill MediCal for his "cost" of the drug dispensed. The drug formulary prescribes that the

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