(3) Blue Cross

Blue Cross receives 5,000 claims a day from institutional vendors such as nusring homes and hospitals.

(a) Claims for nursing homes are submitted monthly and primarily set forth the names of the persons in the home during the period for which payment is requested. Reimbursement to a home is based on a fixed rate determined by its "cost of operation."

Since county consultants have authorized the admission of pesrons into homes, the examination of claims for nursing homes by Blue Cross is basically limited to determine if the appropriate amount of money is being paid. It is therefore highly unlikely that in the processing of such claims Blue Cross will detect the many types of abuses which we have mentioned as being engaged in by nursing homes.

A review of claims, for example, will not determine if nursing homes have submitted false claims, misappropriated patients' money, required kickbacks, or received duplicate payments.

Knowledge of such abuses can only effectively be discovered through periodic audits of nursing homes. Such audits have not been taking place.

The combination of lack of audits and the inadequacy of claims review has offered little deterrence to those nursing homes which are tempted to take advantage of the Medi-Cal Program since any unlawful or unethical activities are not likely to be discovered.

(b) The major reviewed performed by Blue Cross relates to claims submitted by hospitals. Examination of such claims is primarily directed toward determining if excessive services were provided. Such claims contain information relating to the diagnosis of patients and the treatment provided to them.

The majority of expenditures to hospitals are made to county and nonprofit hospitals. Discovery of excessive services has been associated primarily with profit-making hospitals.

The examination of claims to discover excessive services is performed by persons trained to detect this abuse. The review of such claims was initiated around November, 1967, with a staff of just two persons. This staff has now been increased to six. Two physicians who work part time for Blue Cross also review questionable claims of hospitals under the Medi-Cal Program (as well as claims submitted to Blue Cross under other government and private contracts).

In the limited time that this review has been going on, abuses have been discovered resulting in a savings of $136,000 to the Medi-Cal Program. B. Investigative Activities

Although the present review system makes it difficult to discover abuses, HCS investigators have opened cases for investigation to determine if a vendor might be engaging in unlawful practices.

The difficulty in discovering abuses has been exceeded only by the inability of investigators and consultants to obtain essential information from HCS and the fiscal agents to pursue investigations on specific cases.

Several factors hamper investigative activities.

(1) To prove that a vendor is abusing the Medi-Cal program so that appropriate action may be taken-be it administrative suspension or criminal action-it is essential to examine documents submitted by the vendor. In the event of a hearing or trial, witnesses will also be needed to testify. Since we are often dealing with elderly people-whose health and memory are a legitimate matter of concern-time is of the essence if any investigation is to be successful.

The fiscal intermediary agents maintain possession of most documents which are pertinent and necessary to any investigation such as claims for services rendered, records of payments made, etc.

Our investigation disclosed that investigators and consultants have not been successful in their attempts to obtain documents and other information from the HCS and the fiscal agents for the purpose of pursuing investigations. The inability to obtain such information within a reasonable period of time not only makes cases moot because of the passage of time, but has the effect of discouring the efforts of persons charged with the responsibility of discovering abuses and performing investigations.

One vivid example of the frustration encountered is illustrated by tracing a request made to Blue Shield in September 1967 by the dental consultants in

one county. Documents were requested on 15 dentists whose activities were suspicious. As time elapsed without receiving the information, additional letters were written to both Blue Shield and HCS requesting the documents. In December 1967, the consultants were advised of the person to whom the request should be directed. The request was again made to this individual. As of this date, the information has still not been received.

Numerous other examples could be cited where investigators and consultants had to literally wait months before receiving answers to inquiries or documents which were requested. In many instances no responses at all were ever received.

The failure to provide documents may indicate a lack of cooperation and communication between HCS and the fiscal agents, or a lack of interest and concern by these organizations as to the importance of such investigations.

If, for example, requests for documents are not being sent to the proper persons both the fiscal agents and HCS have been aware of the problem long enough to have taken corrective action. If the number of requests for information are too great to enable expeditious replies to all requests, priority should be given to those matters involving investigations.

The delay in sending documents may be due to the fact that the fiscal agents microfilm documents which they process for payment. In using this procedure it may require some time to locate the proper microfilm and make the necessary copies. This office, for example, requested from Blue Shield documents concerning the activities of one vendor for a period of three months. Giving this matter top priority it still required 235 man hours and three weeks to provide this information at a cost of $800. While this may explain a reasonable delay, it does not justify the failure wihch has usually been encountered by those persons who have requested documents and other information.

Whatever the reason, the inability of investigators and consultants to obtain documents and other information presents a serious problem and is precluding effective investigation.

In commenting on this problem, it is important to note that Blue Shield has made every effort to cooperate with this office in providing documents which we requested and has often furnished such documents within a reasonable period of time. This would indicate that the ability to provide documents is not the basis for the lack of success which has been experienced by others.

(2) HCS is responsible for administering the Medi-Cal Program. Blue Shield and Blue Cross have contracts to act as fiscal intermediary agents on behalf of the state.

These organizations have a mutual goal and interest in seeing that the MediCal Program is efficiently administered and that abuses by vendors are held to a minimum.

Our investigation reveals, however, that the coordination, cooperation and communication which one would expect to exist between HCS, Blue Cross and Blue Shield does not prevail.

(a) We have already mentioned the inability of an investigator to obtain information from the fiscal agents.

(b) Another example of this lack of communication is seen by the problem of determining which organization will investigate cases. We previously mentioned that Blue Shield has a Utilization Committee which attempts to discover cases of overservicing. There has not been a clear understanding however as to which cases involve fraud and should therefore be referred to HCS.

(c) Problems in the coordination of activities are further manifested by situations where Blue Shield has referred cases to HCS but HCS has no record of receiving the cases. Also, when cases are sent to HCS by Blue Shield recommending either further investigation or suspension of the vendor this is often the last that Blue Shield ever hears of the matter. Recommendations to suspend physicians are made by "peer" committees which exist within county medical societies. Serious frustration on the part of these committees has resulted from the failure of HCS to either take any action or to sustain such recommendations. In regard to cases received from Blue Shield, HCS claims that they are usually not properly reported so that rather than being able to continue investigating cases which are referred, it is necessary for them to start the investigation from scratch. This often results in duplicating work which has already been done by Blue Shield but not properly reported.

(d) Another area of lack of communication or coordination of activities relates to our previous discussion of abuses. We have seen that the activities of certain vendors may tend to overlap with activities of other vendors. Discovery of over

servicing by hospitals or nursing homes, for example, may often give rise upon further inquiry to overservicing by physicians, pharmacists and other vendors. Our investigation disclosed, however, that where abuses have been discovered by one fiscal agent which indicate that other vendors whose claims are reviewed by the other fiscal agent should be investigated there has been a failure to ade quately inform either HCS or the fiscal agent of potential investigations which might prove fruitful.

(3) "Investigation Units" exist in the offices of HCS, Blue Shield and the Department of Social Services of Los Angeles County. Although the three units all have basically the same objectives there has been no supervision or coordination of their activities so that often one unit does not know what the other is doing. Thus, one unit might commence an investigation against a vendor who is already under investigation by another unit, or who has been investigated and cleared by another unit. This duplication of investigative efforts constitutes a serious problem with its resultant unnecessary expenditures and inefficient investigations.

(4) A major weakness in the investigative program of HCS has been the lack of adequate personnel.

(a) Ten field investigators are employed by the Utilization Committee of Blue Shield. Their primary area of concern relates to investigating cases of overservicing by physicians which are handled by administrative action.

There are three investigators on the payroll of Los Angeles County, which county accounts for approximately 45% of the money expended under the program.

HCS employs just two investigators to cover the entire state. These investigators' primary responsibility is in the area of criminal fraud.

It therefore seems that the number of investigators decreases in proportion to the importance and geographic scope of the investigative activities.

Each investigator for HCS has approximately 100 cases. Most investigations require interviews with numerous persons and examination of many documents just to determine if a complaint has merit. Therefore, the investigative "staff" of one in southern California and one in northern California is unable to pursue more than a handful of cases at a time.

(b) The lack of an adequate investigative staff has meant that far too few actions have been brought against vendors who have been cheating the program. Failure to bring such actions precludes Medi-Cal from recovering or offsetting monies to which it may be entitled from such vendors and also enables them to continue participating in the program without much fear of detection. Since there is no noticeable evidence of an investigative program—and hence no threat of criminal prosecution, suspension from Medi-Cal or disciplinary action against a practitioner's license-the current investigative program offers no deterrent to those vendors who may consider taking advantage of the program.

(c) In discussing the lack of an adequate investigative staff, it should be noted that the basic equipment and staff necessary for the effective performance of an investigator has not been provided by HCS. Lack of portable tape recorders for use in the field when doing interviews and secretarial help to prepare reports and summaries of interviews are just two illustrations of the handicaps under which investigators must presently work. The investigator for HCS in southern California, for example, does not even have someone to answer his telephone when he is not in his office.

Other examples could be stated which would illustrate the problems involved in discovering and pursuing investigations. The matters mentioned above, however, amply demonstrate the dire need to review the procedures now being used to determine what appropriate steps should be taken to increase the effectiveness of enforcing the program.

IV. General Administration of Program

In the course of the investigation information was obtained concerning problems which exist in the general administration of the Medi-Cal Program. Many of Medi-Cal's administrative problems indirectly contribute to the abuses which are occurring under the program.

In relating such problems we are aware that Medi-Cal is only two years old and still experiencing growing pains. Many problems could not have been anticipated (e.g., Medi-Cal must conform to constant changes in regulations established by the federal government) or are inherent in the administration of any program this size. Indeed, efforts have already been made to remedy many of the problems which will be mentioned.

(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 responsibility 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