In Copyright Since September 11, 2000 Help for Kaiser Permanente Patients on this public service web site. Permission is granted to mirror if credit to the source is given and the material is not offered for sale. The Kaiser Papers is not by Kaiser but is ABOUT Kaiser PRIVACY POLICY ABOUT US| CONTACT | WHY THE KAISERPAPERS | MCRC |Why the thistle is used as a logo on these web pages. |   November 1997California Research Bureau 900 N Street, Suite 300California State Library Sacramento, CA 95814CRB-97-013 (916) 653-7843CRB California Research Bureau, California State LibraryFRAUD AND ABUSE IN THE HEALTHCARE MARKET OF CALIFORNIAByElias S. Lopez, Ph.D.CRB California Research Bureau, California State LibraryFRAUD AND ABUSE IN THE HEALTHCARE MARKET OF CALIFORNIAByElias S. Lopez, Ph.D.California Research Bureau, California State LibraryExecutive SummaryThis report was prepared at the request of the Senate Insurance Committee, Senator Rosenthal,Chair. The objective of this report is to inform the committee and other policy makers about thedifferent types of fraudulent activities that exist throughout the health care delivery system, bothprivate and public. In particular, using information from various sources, it attempts to do thefollowing:Provide a picture of the current structure of the health care market;Pinpoint the areas where the potential for fraud is the greatest; andGive an inventory of the major agencies involved in detecting, investigating, andprosecuting fraud and abuse.Health care fraud has been on the front page of newspapers and magazines. According to theU.S. General Accounting Office (GAO), $1 of every $10 spent on public insurance programs islost to fraud. Columbia/HCA Healthcare Corporation, owner of the largest chain of hospitals inthe country, is under invest­i­ga­tion for supposedly over-charging Medicare millions of dollars.Although the media has brought the issue of health care fraud to the forefront, it often limits thediscussion to public programs, ignoring fraudulent activities in the private sector, where theemployer or the individual is the payor. Yet, the private sector accounts for the bulk of healthcare expenditures, 62 percent.This report finds that the privately funded health care market operates mostly unchecked forfraud, especially the managed care side. The question for policy makers, then, is whethersomething should be done to protect this market from fraud. Not only does fraud affect costs, itaffects the quality of care, particularly in managed care. Moreover, to the extent that fraud in theprivate side goes undetected or unaddressed, it may undermine the anti-fraud efforts ingovernment-sponsored programs.It is important to note that the majority of persons in the business of providing or receiving careare law abiding citizens. The aim of the report is therefore to bring focus to the estimated 2-4percent of indi­vid­uals involved in fraud.California Research Bureau, California State LibraryCONTENTSTHE HEALTH CARE MARKET IN CALIFORNIA......................................................................................... 1MARKET STRUCTURE: ......... 1Layer 1: Original Purchasers ........................................................................................................................ 1Layer 2: Employer Purchasing Cooperatives ................................................................................................. 4Layer 3: Financial  4Layer 4: Provider Groups & Medical Facilities ............................................................................................. 5Layer 5: Individual Providers ........................................................................................................................ 5Layer 6: Patients ........... 5FINANCIAL ARRANGEMENTS IN HEALTH CARE..................................................................................................... 6HEALTH CARE AND THE NATURE OF FRAUD........................................................................................... 7DEFINING FRAUD AND ABU_DI7TYPES OF FRAUD AND ABUSE: ............................................................................................................................. 8CASE EXAMPLES............... 10TWO REASONS WHY FRAUD WILL CONTINUE DESPITE CAPITATION ................................................................... 11HEALTH CARE AND FRAUD CONTROL UNITS IN CALIFORNIA.......................................................... 12FEDERAL UNITS ................ 14STATE UNITS .................... 15LOCAL GOVERNMENT UNITS ............................................................................................................................. 15PRIVATE SECTOR FRAUD CONTROL UNITS ......................................................................................................... 16BIBLIOGRAPHY.............. 17ENDNOTES....................... 19.California Research Bureau, California State Library 1The Health Care Market in CaliforniaA person is more likely to cheat the system when one, there is money, and two, nobody islooking. Certain segments of the health care market happen to have a good dosage of both.Health care is a huge industry in California and there are gigantic sums of money flowingthrough it. For instance, the revenues it earned in 1994, $116 billion1, surpass the retail sales of46 other states2.A person intending to defraud can also find the complexity of the health care market to theiradvantage. Behind the patient-doctor relationship exists a myriad of complex contractual andfinancial arrangements. A basic understanding of how the health care market functions isimperative to understanding the nature and types of fraud.The objective of this section is to give the reader a basic understanding of the health care market.In this section we discuss both the market structure and the financial arrangements normally usedbetween the players.Below we provide a diagram that shows the category of players and where they generally operatewithin the market place. There are six different levels or categories of players.Market Structure:Layer 1: Original PurchasersThe first layer consists of the original purchasers of health care, of which there are threecategories: employers, government, and indi­vid­uals. If one assumes that private insurance ismostly employer paid, then employers in California pay about $43 billion for health care benefitsor 37 percent of the total health care expenditures. The government (federal, state, and local)accounts for another 38 percent. Individuals account for the rest, 25 percent, through copayments,premiums, and medical costs not covered by insurance3.1. Employer-Sponsored Insurance:In looking at employer-sponsored insurance, it helps to make the distinction betweenthose employers that are “fully” insured and those that “self” insure. The difference isthat the former passes the risk for medical care on to another party, while the latterremains at risk for those costs.??“Fully” insured employers are those that pay a monthly premium in exchange formedical insurance. When an employee becomes ill, the medical insurance, and notthe employer, pays for the medical costs.??“Self” insured employers are employers or trade unions that set reserves aside andpay directly for the medical costs of their members. Very little is known about how2 California Research Bureau, California State Librarymany employers are self-insured. Self-insured employers have to register with theU.S. Department of Labor and are exempt from many of the laws and regulations thatgovern health plans and disability insurers through ERISA (Employee RetirementIncome Security Act).2. Government as a Purchaser in Public Programs:The government plays a big role in purchasing medical insurance for three types ofpersons, the low income, the elderly, and the high risk. The two biggest public programsare Medi-Cal and Medicare.??Medi-Cal is a state and county administered program that is jointly funded by thestate and the federal government. The program accounts for $16 billion or 14 percentof all health care expenditures in California. It purchases medical insurance for lowincome indi­vid­uals and the medically needy.??Medicare is a federal program administered by the Health Care FinancingAdministration (HCFA). It accounts for $18 billion or 15 percent of all health careexpenditures in California. Medicare is available to persons 65 years of age and olderand certain disabled persons, regardless of income. Medicare Part A covershospitalization, while Medicare Part B covers doctor bills.3. Individuals as Purchasers:Individuals are the third biggest category of spenders. Following are three types of costsan individual can incur:??Premium Costs??Co-payments and Deductibles??Costs for medical services not covered by insuranceCalifornia Research Bureau, California State Library 3The California Healthcare Market1. Individuals2. Employers3. Government5 in California, representing1.5 million persons or 5% ofthe population.117 Health Plans &About 50 Disability Health Insurers1,800 + Provider Groups6000 + Health Care FacilitiesOver 600,000 Licensed Providers??79,000 phy­si­cians??238,000 registered nurses32 million Californians??28% under 18??61% age 18 to 64??11% age 65 and overLayer 1:Original PurchasersLayer 2:Purchasing CooperativesLayer 3:Financial IntermediariesLayer 4:Provider OrganizationsLayer 5:ProvidersLayer 6:Patients$116 billionin purchases4 California Research Bureau, California State LibraryLayer 2: Employer Purchasing CooperativesIn the diagram above, purchasers, in particular employers, can opt to go through the second levelof market activity, namely, a purchasing cooperative. These organ­i­za­tions negotiate the terms ofthe health care contract, such as premium and scope of benefits, on behalf of their client. Thereare five purchasing cooperatives in California. These are:??The California Public Employees Retirement System (CalPERS),??The Pacific Business Group on Health (PBGH),??The Health Insurance Plan of California (HIPC),??The California Smaller Enterprises Resource Services (CalSERS), and??California Choice.Some of these cooperatives cater to big employers (CalPERS and PBGH), while others to smallemployers (HIPC, CalSERS, and California Choice). These purchasing cooperatives currentlynegotiate the health care insurance for 1.5 million persons, or five percent of the total populationin California4.Layer 3: Financial IntermediariesThe third level of market activity is with the financial intermediaries, normally known as insurersor health plans. Financial intermediaries are disability insurers, managed care organ­i­za­tions,preferred provider organ­i­za­tions, and point of service organ­i­za­tions. These organ­i­za­tions are inthe business of taking risk. By enrolling large volumes of persons they can effectively spread therisk and pay for the medical claims as they occur.1. Indemnity Health Insurers:In California there are approximately 50 disability or indemnity insurers transactinghealth insurance. Disability insurance indemnifies a person from a specified number ofdisabilities, illnesses, or injuries. Normally, a person with indemnity health insurancegoes to the doctor of their choice for treatement on a covered medical condition. Thedoctor then bills the insurance company, who pays a fixed percentage, say 80 percent.The patient pays the remaining balance. In 1994 disability health insurers reported $2.1billion in revenues, covering 1.5 million persons5.2. Health Plans (HMOs):As of August, 1997, the Department of Corporations, which regulates managed careorganizations, listed 54 plans licensed to operate as full service plans and 62 as specialtyplans. Full Service Plans are those that offer primary care, access to specialists, andgeneral acute care as part of the same package. Specialty plans are organ­i­za­tions thatoffer only specialized medical services, such as vision, dental, chiropractic,psychological, or pharmaceutical. Health plans, unlike indemnity insurers, coordinate thedelivery of care by arranging for health care providers for their insured. Also unlikeindemnity insurers, they usual­ly pay for services before they are rendered, usual­ly on acontractual basis.California Research Bureau, California State Library 5One source of confusion in this layer arises with regulatory oversight over these entities. Unlikemost other states where the Department of Insurance regulates both disability health insurers andhealth plans, California is the only state where the Department of Corporations regulates HealthPlans. The Department of Insurance regulates indemnity health insurers, which represents only asmall segment of the market.Layer 4: Provider Groups & Medical FacilitiesIn the fourth layer of the health care market are provider groups and medical facilities. Theseentities provide the medical care. The role of these medical groups and facilities, however, hasshifted under managed care. They now provide the medical care under contract with the healthplans. So, while the health plan is licensed by and accountable to the Department ofCorporations, the subcontracting medical group or facility is carrying out the services. Thesubcontractor often takes risk because they receive a capitation payment.According to a survey conducted by the American Medical Association, there are over 1,800medical groups in California consisting of three phy­si­cians or more6. There are also 8,114medical facilities in California, 5,996 of which are licensed7. The 1,851 unlicensed facilities arecenters run by physical and occupational therapists. Among the licensed facilities, there are 498general acute care hospitals, 751 community clinics, 1,196 skilled nursing facilities, 1,366 homehealth agencies, and 927 developmentally disabled habilitative-nursing centers.Layer 5: Individual ProvidersAt the fifth level are the providers who either have their own patient base or have a contract witha provider group or medical facility. Providers are a very diverse group. In California theDepartment of Consumer Affairs licenses over 600,000 health professionals. Among this groupare phy­si­cians, nurses, pharmacists, psychologists, physical therapists, dentists, chiropractors,optometrists, and a host of other types of providers. In addition, the Department of HealthServices certifies over 400,000 other providers as nurse assistants, home health aides, andhemodialysis technicians.Layer 6: PatientsThe sixth level in the health care market are the consumers of health care or the patients. In 1996there were 32.2 million persons in California8. Of these??11% are age 65 and over;??28% are under 18; and??61% are 18 to 64 years of age.6 California Research Bureau, California State LibraryFinancial Arrangements in Health CareSo far we have shown that the health market is very complex, both because it has many layersand many players. We now present a dis­cus­sion about the two most popular financialarrangements in health care: fee-for-service and capitation.In a fee-for-service system, one party charges the other as the services are incurred. A doctor,for instance, would charge the insurance company after the services were rendered. Theindividual or the patient in such cases ends up paying what the insurance does not pay. Thedoctor might charge $60 dollars for the visit, the insurance pays $40, and the patient pays $20.In a fee-for-service environment, the provider has no set budget. The income of the providerdepends on the frequency and the types of services rendered. Obviously, the more the patientvisits or the more complicated the diagnostic and treatment, the more the provider gets.Unlike fee-for-service, the system of capitation is more akin to having a fixed budget. Take thecase of the doctor above and suppose that he or she is now going to be paid on a capitated basis.Suppose the doctor has a contract that pays $20 per person per month. If the doctor has a patientbase of only 200 then he or she makes gross revenues of $48,000 per year to pay clerical staff,purchase medical equipment, and also earn an income. If instead the doctor has 1,500 patients,the gross revenues escalate to $360,000 per year. Under this system, the more patients theprovider has, the larger the gross revenues. The provider, however, is at risk of costs exceedingincome anytime the expenses of treating patients exceed the gross revenues.Neither one of the two systems above is perfect. The first gives providers the incentive toschedule more examinations than are medically necessary. The second has incentives to curtailmedical care to stay within the budget.California Research Bureau, California State Library 7Health Care and the Nature of FraudThe previous section gave a basic overview of the health care market, dividing it into six layers.It placed participants according to their role in the delivery of health care. More importantly, thediagram developed serves as a guide of how the $116 billion are channeled through.With so much money flowing through the system, somebody is bound to find a way to stealsome. The General Accounting Office estimates that nationally $1 of every $10 in health care islost to fraud. The 1992 Resolution on Health Care Fraud adopted by National Association ofAttorneys General estimated the health care fraud in government and private insurance programsto be $80 to $100 billion each year.If the GAO’s estimate of the cost of fraud, namely $1 of every $10, holds true for the privatehealth care sector in California, the cost to private payors could be over $4 billion. TheCalifornia Department of Insurance (CDI) estimates it could be higher. Over the past five years,CDI has received about 8,000 reports of health insurance suspected fraudulent claims fromdisability health insurers alone. CDI also notes that significant percentages of the suspectedfraudulent claims reported in auto insurance and workers’ com­pen­sa­tion deal with suspectedfraud by health care providers, drug suppliers, or claimants receiving some form of health carepaid through the auto insurance or workers’ com­pen­sa­tion coverage.What forms is fraud likely to take? This section will address this issue in the following fourways:1. First it will define fraud and abuse;2. Then it will list some of the various forms fraud is likely to take;3. It will also give case exam­ples; and4. Lastly, it will give two reasons why capitation is not a wonder drug for health care fraud.Defining Fraud and AbuseFraud and abuse can occur at any of the six layers depicted earlier. It could be??the original purchaser supplying false information;??an employee in a purchasing cooperative being bribed;??an executive of a health plan submitting false documentation on the number of physicianscontracted to serve a given patient base;??several indi­vid­uals setting up a phony provider company to get capitated payments for a fewmonths and then disappear;??a particular provider that falsifies utilization or cost data to receive a higher share of the riskfunds set aside by the health plan; or??a beneficiary that goes to two or three different providers to get prescription drugs at adiscount and then turns around and sells them for a profit.8 California Research Bureau, California State LibraryAs the exam­ples above show, fraud can occur in a wide range of environments. Unfortunately,most of the dis­cus­sion of fraud centers around a very narrow definition of fraud, namely claimsfraud. Fraud in health care is seen by many as a provider or a medical facility submitting a falseclaim, resulting in payment for services not rendered.How one defines fraud is very important because it ultimately determines what activities arefraudulent and thereby reportable. Needed is a definition that can encompass the different typesof fraud that can occur within the six layers of the market. Following are definitions of fraud andabuse that can potentially meet such a need.Fraud occurs when somebody intentionally “attempts to obtain something of value that theparty is not entitled to under the statutory, regulatory, or contractual rules that govern therelationship.”9 This definition, although a long one, is general enough to encompass fraudschemes throughout the health care system, including those in managed care.The definition of abuse is very similar to the one for fraud. Abuse occurs when somebodyrecklessly or negligently “attempts to obtain something of value that the party is not entitled tounder the statutory, regulatory, or contractual rules that govern the relationship.”10 In practice,it is difficult to distinguish fraud from abuse, but the main difference lies in that fraud requires“intent,” while abuse does not.The words “statutory” and “regulatory” are very important in the definitions above. Theyencompass state and federal laws regarding theft, false statements, false claims, mail fraud,breach of fiduciary relationship, and conspiracy to defraud the government.It is important to also note that the above definitions allude to the “contractual rules that governsthe relationship.” Inclusion of such a phrase is especially important within a managed careenvironment that makes heavy use of contracts.Types of Fraud and Abuse:Despite the fact that fraud can take on various forms and sometimes occurs under uniqueconditions, various efforts have been made to categorize it by types. Unfortunately, thesecategories are not consistent from one source to another in their labeling or in how they definecategories of fraud. Moreover, these categories are usual­ly in the context of the more limiteddefinition of fraud that looks only at providers and beneficiaries.Needed are categories of fraud that can encompass fraudulent schemes occuring in any of the sixlayers of the market. Following is an attempt to create more universal categories of fraud.California Research Bureau, California State Library 91. False StatementThe first universal category of fraud is perhaps the most common and it occurs when somebodysupplies false information for a personal or collective gain. This can happen in any of the sixmarket layers. It could be when??an individual lies in the application to get better rates;??an employee in a purchasing cooperative misrepresents information about thedifferent plans to channel business in one direction or another;??the sales person of a health insurance company promises benefits that he or sheknows that the plan does not provide;??the director of a provider group misrepresents its utilization data;??a physician bills for services not rendered; or??a patient lies about his medical condition to get costly prescription drugs to sell on theblack market.One type of false statement fraud, claims fraud, gets a lot of media attention. A false claim canbe submitted in a variety of ways and the dis­cus­sion usual­ly centers around providers, providergroups, and medical facilities. Following are three different types of false claims fraud:??UnbundlingThis occurs when a provider submits separate claims for a service that normallyrequires only one. The provider makes more money by billing for the procedure inparts.??UpcodingUpcoding happens when a provider submits a claim for a procedure that is moreexpensive than the one performed.??Billing for Services not ProvidedA provider can submit a claim for a service he or she did not perform.There are many other types of false statements, but they are not as well known. Following is apartial list of such cases??Exclusion of Covered BenefitsExclusion of covered benefits occurs when a provider tells the patient that themedical procedure is not covered by the insurance, when in fact it is. The providerthen offers to perform the medical services at a discount. If the provider receives amonthly capitation payment for that person, then the provider is in essence chargingtwice, to the insurer and to the patient.??False CoverageFalse coverage happens when an individual or employer buys health insurance from a“fly-by-night” insurance company. Operators of these schemes take the premium, butthen fail to pay the claims when they are due.??Credentials Falsification10 California Research Bureau, California State LibraryCredentials falsification happens when either a medical facility or providermisrepresents their credentials and renders services that they are not qualified toperform.2. Bribery & Self-ReferralsBribery and self-referrals requires the involvement of two or more parties. Bribery usual­ly takesone of two forms. In the first form, the first party, for a fee, passes on valuable information thatwill help the second party negotiate a better contract. In the second form, fraud occurs becauseone party channels business in the direction of the second party for a specified fee or a“kickback.” Such patient referral activities are also referred to as “capping” or “steering.” “Selfreferral”occurs when the first party refers a patient to another medical facility partly owned bythe first party.3. UnderutilizationAnother form of fraud and abuse comes in the form of repeated poor quality of care. This isperhaps the hardest form of fraud to prove since it requires that the diagnostic and treatmentsrendered be evaluated in light of current medical practices. Underutilization refers not to onemedical mishap, but to a systematic pattern of substandard medical treatment.Case ExamplesFalse Statements: The Case Against Columbia/HCA Healthcare CorporationIn July of 1997, FBI agents raided 35 Columbia facilities and indicted three executives ofColumbia/HCA Healthcare Corporation. The indi­vid­uals indicted were a reimbursementexecutive at the company’s corporate headquarters in Nashville, Tennessee, a chiefexecutive officer of Columbia’s Southwest Florida division, and a chief financial officerof the division in Jacksonville, Florida. Each is charged with conspiracy and four countsof false statements—the equivalent of submitting false or inflated claims. Thegovernment is looking for possible Medicare violations in Columbia’s blood-lab testing,home health care, and hospital billings. So far the facilities in California do not seem tobe part of the invest­i­ga­tion.Bribery & Self-Referral: United Home Health Agency of CaliforniaJohn Watts and Gene Woods, owners of United Home Health Agency, plead guilty in1995 of defrauding Medicare of up to $2.5 million dollars. In addition to submitting falseclaims and falsifying medical records, they were charged with paying kickbacks for thereferral of Medicare patients.Underutilization: The Case of Western Dental Services of CaliforniaWestern Dental, with some 115 dental centers serving 350,000 Californians, was accusedearly in 1997 by the Department of Corporations of being in violation of the Knox-KeeneAct (body of laws governing the licensure and operation of health plans in California). Inaddition, Western Dental is being investigated by the FBI for alleged insurance fraud11.California Research Bureau, California State Library 11Medical audits conducted by the Department of Corporations revealed a repeated patternof undertilization. Procedures that normally would take two or three visits, such asmultiple root canals, were done in one sitting. Poor quality materials were also used. Atthe core of the problem seems to be Western Dental’s method of compensating managingdentists at the different centers. The Department of Corporation notes that quarterlybonuses ranged from $0 to $36,00012.Two Reasons Why Fraud Will Continue Despite CapitationCurrently, it is well accepted that fraud exists in a fee-for-service environment. Not as wellaccepted is that fraud can occur in a capitated arrangement. Some argue that fraud is notpossible under capitation since the provider no longer has to file a claim, and medical servicesare prepaid according to the contract.Yet, following are two important reasons why fraud is likely to continue, despite capitation.1. There is a lot of money flowing through managed careThe first reason why fraud is likely to still exist in a capitated environment is simply becausethere is a lot of money flowing through the managed care system. It is estimated that theDepartment of Corporations is overseeing an industry worth more than $30 billion.2. Capitation passes the function of insurance to invidual providersThe other reason why capitation will not stop fraud is more subtle in nature, but it givesproviders the incentive to reduce the quality of care. What many people do not realize is thatcapitation passes on the insurance function, namely the risk, to the person or entity whoreceives the capitation and provides the medical service. Take the analogy of the employerwho pays a monthly premium to an insurance company for providing health care services toits employees. If a certain employee becomes ill, spends two days in the hospital, and the billcomes to $4,000, the insurance pays the bill, not the employer. The insurance takes the risk.The same happens to a provider being capitated. The capitated provider bears the risk forproviding certain medical services to a patient. Like the insurance company, the provider canspread the risk by having a large patient base. This then becomes a double-edged sword. Onone side, the provider can bear the risk the larger the patient base. Yet the more patients, theless time and resources the provider can dedicate to them. On the other side, if the providerdoes not have a large patient base, then he or she bears a high amount of risk anytime a verysick patient walks in. Either way, the provider is put in a difficult situation. Fraud can thenoccur when a provider attempts to make money by cutting corners in the delivery of medicalcare.12 California Research Bureau, California State LibraryHealth Care and Fraud Control Units inCaliforniaThe previous chapter defined fraud and organized it into three very general categories. Fraud,thus, can occur through a false statement, a kickback or self-referral, and repeatedunderutilization. Moreover, fraudulent activities can take place in any of the six layers of thehealth care market presented in chapter one.This chapter hopes to further contribute to the dis­cus­sion by describing the fraud control units inCalifornia. More than that, however, it hopes to find the gaps or sections of the market wherefraud control units are almost non-existent.To this end, we constructed the following diagram to show the involvement of the different fraudcontrol units by segments of the market. The left side divides the market according to itsdemand. Of the approximately 32.5 million persons in California, 26% are enrolled in publicprograms, 5% in private indemnity insurance, 45% in private managed care, 6% in purely selfinsuredprograms, and about 18% are uninsured13.The right side of the diagram shows the fraud control units operating in each segment of themarket. In the “Public Programs” market, for instance, there are at least four different fraudcontrol units operating in California. The “Private Indemnity” side has at least two, the “PrivateManaged Care” one, and the “Privately Self-Insured” has one.Note that in the diagram we do not list the FBI, U.S. Attorney General, and District Attorneys.These agencies play an important role in investigating and prosecuting fraud. Their mandate isvery broad, however, and not spe­ci­fic to any one segment.The significance of this diagram is that the segment of the market that has the biggest number ofenrollees, the managed care segment, gets the least amount of attention with respect to fraud.California Research Bureau, California State Library 13The Demand for Health Care and Fraud ControlUnits in California, 199614Demand for Health Care(32.2 million persons)Fraud Control Units1. U.S.DHHS: Inspector General/HCFA2. CA.DHS: Audits & Investigations3. CA.DOJ: Bureau of Medi-Cal Fraud4. Insurers: Special Investigative Units1. CA.DOI: Bureau of Fraudulent Claims2. Insurers: Special Investigative Units(mandatory)1. Health Plans: Special InvestigativeUnits (optional)1. U.S.DOL: Pension & Welfare BenefitsPrivate Indemnity(1 million persons) 3%Self-InsuredSelf-Administered(.7 million persons)2%Uninsured(6 million persons)19%Public Programs(9.2 million persons) 29%PrivateManaged Care/PPO(15.3 million persons) 47%U.S.DHHS = United States Department of Health & Human ServicesCA.DHS = California Department of Health ServicesCA.DOJ = California Department of JusticeCA.DOI = California Department of InsuranceU.S.DOL = United States Department of Labor14 California Research Bureau, California State LibraryWhat follows is a brief description of the different fraud control units.Fed­er­al UnitsAt the federal level, efforts to curb health care fraud have been underway for a considerableperiod. In 1995, California was one of four states chosen to pilot Operation Restore Trust (ORT)to examine the nature and extent of fraud in Medicare. The Health Insurance Portability andAccountability Act (HIPAA) was passed in 1996 and went further by making fraud in healthcare, both public and private, a federal crime and by increasing civil and monetary penalties.HIPAA also increased the resources of various federal depart­ments to deter, investigate, andprosecute fraud in health care. Moreover, it directed the Department of Health and HumanServices (DHHS) to coordinate federal, state, and local anti-fraud efforts and to set up a nationalhealth care data bank.In California, there are at least five federal agencies actively fighting fraud.??Department of Justice--U.S. AttorneyThe U.S. Attorney in California has four offices, two in the south and two in the north.Although they have jurisdiction to prosecute private payor health care fraud, they focusmostly on cases related to federal sponsored programs, such as Medicare. In prosecutingMedicare fraud cases, they work closely with investigators of the Office of the InspectorGeneral (OIG) and the Fed­er­al Bureau of Investigation.??Department of Justice--Fed­er­al Bureau of Investigation (FBI)The Fed­er­al Bureau of Investigation is one of the few agencies that can take cases fromany segment of the market, private or public. They sometimes help the Office of theInspector General with their cases.??Department of Health and Human Services--Office of Inspector General (OIG)The Office of Inspector General, with the passing of HIPAA, has a broad jurisdiction inthe cases they can take on. Because of limited resources, however, they take only casesinvolving Medicare fraud.??Department of Health and Human Services--Health Care Financing Administration(HCFA)The Health Care Financing Administration administers Medicare and oversees Medi-Calstate agencies. They design policies to make the programs of Medi-Cal and Medicareless subject to fraud and abuse. In California, they are the lead coordinators of OperationRestore Trust.??Department of Labor—Pension and Welfare Benefits (PWB)Fraud within ERISA (Employee Retirement Income Security Act) type plans can bereported to the Pension and Welfare Benefits office of the Department of Labor. TheDepartment of Labor has two offices in California, one in the north and one in the south.In cases where fraud is apparent, PWB opens an invest­i­ga­tion and can imposeadministrative and civil sanctions.California Research Bureau, California State Library 15State UnitsUnlike their federal counterparts, state efforts to combat fraud in health care have not been ascomprehensive. For instance, there is no California equivalent of the Health InsurancePortability and Accountability Act, both in terms in the augmentation of resources and itsdirective.Nevertheless, following is a description of the state operated fraud control units.??California Department of Justice--Bureau of Medi-Cal Fraud (Attorney General)The Bureau of Medi-Cal Fraud, with a staff of 132, both investigates and prosecutesproviders that defraud the Medi-Cal program.??Department of Health Services--Audits and InvestigationsThe aim of the Audits and Investigations agency within the Department of HealthServices is to curb losses in Medi-Cal. To this end, and to assure that the health plans arein compliance, they conduct financial and medical audits.The branch also investigates beneficiary fraud through its Investigations Branch (IB).It has 174 staff in 17 field offices throughout California.??Department of Insurance—Bureau of Fraudulent Claims (Fraud Branch)The Insurance Commissioner is mandated to pursue all lines of insurance fraud, includingfraud committed in disability health insurance. Basic funding for the invest­i­ga­tion andprosecution of insurance fraud is derived from a $1,000 per-carrier assessment. Thefunding supports a law enforce­ment effort staffed by police officers who investigate thefraud and file cases with district attorneys.To the extent of available resources, the Department has investigated health insurancefraud cases. During the past 5 years, the Department has investigated 435 health carefraud cases, resulting in the arrest of 56 indi­vid­uals. As noted above, the Department hasalso pursued health care fraud in auto insurance and workers’ com­pen­sa­tion cases.Local Government UnitsLocal law enforce­ment in Los Angeles has been active in pursuing insurance fraud, includinghealth care fraud. The Los Angeles Police Department has a unit that investigates insurancefraud. Their investigations have uncovered health care fraud connections with organized crime.Local district attorneys have prosecuted health care fraud cases filed with them. Like theDepartment of Insurance, a significant number of local prosecutions of health care fraud havebeen as part of auto insurance or workers’ com­pen­sa­tion fraud cases. The 1991 health insurancefraud legis­la­tion discussed above also included a component for district attorney prosecution thatwas never implemented.16 California Research Bureau, California State LibraryPrivate Sector Fraud Control UnitsThe first line of defense against health care fraud lies with the insurer or health service plan. Inrecognition of the key role of the insurer in this effort, the Legislature mandated all insurers toset up anti-fraud units by July 1992. These units are called Special Investigative Units or SIUs.These units are required to work with claims examiners to detect fraud, to investigate possiblefraud, and report suspected fraud to the California Department of Insurance. The Department ofInsurance oversees the insurer SIUs and works with SIUs in the invest­i­ga­tion of fraud. SIUs alsowork with local district attorneys in the prosecution of health insurance fraud.Many Managed Care Organizations (MCO) also maintain anti-fraud units, however there is norequirement to establish an SIU. Since they do not report suspected fraud to the CaliforniaDepartment of Insurance, they work directly with local law enforce­ment and prosecutors if theyfind fraud.California Research Bureau, California State Library 17BibliographyData Sources:California Association of Health Maintenance Organizations (1997), California HealthMaintenance Organizations: 1997 Profile.California Department of Consumer Affairs, The Consumer: Our Purpose, Our Priority, AnnualReport 1995-1996.California Department of Health Services (1996), Health Data Summaries for CaliforniaCounties, 1996, Planning and Data Analysis Section.Cohen & King (1996), California Health Care Fact Book, Office of Statewide Health Planningand Development.Jerry Turem (1995), Small Group Risk Rates Results: The First Year of AB 1672, CaliforniaDepartment of Insurance.Penny Havlicek (1996), Medical Groups in the US: A Survey of Practice Characteristics,American Medical Association, Division of Survey and Data Resources.Schauffler, Brown, & Rice (1997), The State of Health Insurance in California, 1996, UCLACenter for Health Policy Research.Health Care Fraud Material:Alan Bloom, Fraud in Managed Care—New Games by Old Players, Maxicare Health Plans,Inc..Bodenheimer and Grumbach (1996), Capitation or Decapitation: Keeping Your Head inChanging Times, JAMA, October 2, Vol 276, No. 13, pp. 1025-1031.California Department of Corporations (1997), Report of Dental Survey Western DentalServices, Inc., June 27, 1997.California Department of Health Services (1996), Audits and Investigations: Annual Report,Fiscal Year 1995-96, Audits and Investigations Branch.California Department of Insurance (1997), Worker’s Compensation Program Report, FiscalYear 1995-96, Fraud Division.California Department of Insurance (1995), The Investigator, Fraud Division, Winter 1995.18 California Research Bureau, California State LibraryDavies and Jost (1997), Managed Care: Placebo or Wonder Drug for Health Care Fraud andAbuse?, Georgia Law Review, Vol. 31: 373-417.General Accounting Office (1996), Health Care Fraud: Information-Sharing Proposals toImprove Enforcement Efforts.General Accounting Office (1995), Medicare: Antifraud Technology Offers SignificantOpportunity to Reduce Health Care Fraud.General Accounting Office (1992), Health Insurance: Vulnerable Payers Lose Billions to Fraudand Abuse.Health Care Financing Administration (1997), Medicare-Medicaid Fraud Buster, U.S.Department of Health and Human Services.Kirk J. Nahra (1997), Fighting Fraud in a Managed Care Environment, Wiley, Reing &Fielding. Taken from the internet at “www.wrf.com/pub/fighting.html”.Kirk J. Nahra (1997), The Anti-Fraud Elements of the Kennedy-Kassebaum Legislation, Wiley,Reing & Fielding. Taken from the internet at “www.wrf.com/pub/kennedy.html”.National Association of Medicaid Fraud Control Units (1996), Model Criminal EnforcementStatutes for Managed Care.National Association of Medicaid Fraud Control Units (1993), Health Care Provider Fraud:The State Medicaid Fraud Control Unit Experience.NHCAA Task Force on Fraud in Managed Care (1994), Fraud in Managed Health CareDelivery and Payment, Report to the National Health Care Anti-Fraud Association Board ofGovernors.Rummonds et al. (1997), California Physician’s Legal Handbook, California MedicalAssociation.Senator William S. Cohen (1994), Gaming the Health Care System: Billions of Dollars Lost toFraud and Abuse Each Year, U.S. Senate Special Committee on Aging.California Research Bureau, California State Library 19Endnotes1 California Health Care Fact Book, Summer 1996, p. 9.2 Retail sales taken from the California Statistical Abstract, 1996, p. 189.3 California Health Care Fact Book, 1994, p. 9.4 The State of Health Insurance in California, 1996, p. 62.5 Jerry Turem, “Small Group Risk Rates Results: The First Year of AB 1672,” California Department of Insurance.6 Medical Groups in the US, 1996.7 Department of Health Services, Licensing and Certification Program, 1997.8 Current Population Survey, March Supplement, 1997.9 Davies & Jost (1997), Managed Care: Placebo or Wonder Drug for Health Care Fraud and Abuse?, Georgia LawReview, p. 374.10 Davies & Jost (1997), Managed Care: Placebo or Wonder Drug for Health Care Fraud and Abuse?, GeorgiaLaw Review, p. 374.11 Los Angeles Times, Sept. 16, 1997.12 Department of Corporations, Report of Dental Survey: Western Dental Services, Inc., June 27, 1997, p. 16.13 Public programs offer both indemnity and managed care type of coverage. Enrollees covered through publicprograms are not included in the private sector side. The numbers presented are the best estimates available.14 The enrollment figures by health insurance coverage were developed as follows:Total California PopulationEstimates from the 1996 Current Population Survey put the total number of persons in California to about 32.2million.Public Programs??Medicare HCFA, San Francisco Office 3.8 million, Dec. 1996??Medi-Cal CA DHS, Medical Care Statistics 5.4 million, 1996Private Managed Care/PPOPrivate Managed Care/PPO refers to those covered through a Health Plan or Preffered Provider Organizationregulated through the Department of Corporations. It excludes managed care enrollees covered through PublicPrograms above. For March 1996, the Department of Corporations reported 17.9 enrollees. Of these, wesubtracted out 2.6 million managed care enrollees getting coverage through Medicare or Medi-Cal.UninsuredEstimates from the Current Population Survey put the number of uninsured to about 6 million.Self-Insured, Self-Administered20 California Research Bureau, California State LibraryAccording to the Hay/Huggins Benefits Report, 1996, 9% of employers offer Self-Insured (Self-Administered)plans in the Mountain and Western area of the United States. These figures are based on a survey of 126employers. If we are looking at all the employers in California, the percentage will likely go down. We offer aconservative estimate of 4.5%.Employers in California provide health care benefits to about 50 percent of the population. This amounts toabout 16 million indi­vid­uals (employees and their dependents). Four percent of 16 million is therefore 0.7million.Private Indemnity InsuranceEnrollment for indemnity health insurers is the left-over portion. This amounts to about 1 million persons. Thisis probably a good estimate, especially with the health care market shifting to managed care coverage. A studyconducted by the Department of Insurance estimated that indemnity health insurers covered about 1.5 millionpersons in 1994. (See Jerry Turem, “Small Group Risk Rates Results: The First Year of AB 1672,” CaliforniaDepartment of Insurance.)

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