How Medicare Paperwork Abuses Doctors and Harms Patients

Report Health Care Reform

How Medicare Paperwork Abuses Doctors and Harms Patients

May 11, 2000 About an hour read

Authors: Grace Arnett, Jonathan Emord, Laurence Huntoon and Robert Charrow

It is my pleasure to welcome you to the first in a series of Heritage programs assessing how the Medicare program is serving Medicare patients today and how well it is prepared to face the serious challenges offered by 77 million baby boomers tomorrow. Beyond its financial problem, the Medicare program has many more problems. These are rooted in a little-understood aspect of the program--the huge regulatory morass that governs Medicare. The prestigious Mayo Foundation has estimated that the number of pages of federal regulations and related paperwork that doctors and hospitals must comply with in order to treat Medicare and Medicaid patients totals more than 132,000 pages--almost 111,000 of which govern Medicare alone. This is roughly six times the size of the impossibly complex Internal Revenue Service code and its federal tax regulations.

Nationally prominent health policy experts on the Medicare program are recognizing the problem. On August 10, 1998, Dr. Robert Waller, president emeritus of the Mayo Foundation, told the National Bipartisan Commission on the Future of Medicare:

The public has been led to believe that the [Medicare] program is riddled with fraud, when, in reality, complexity is the root of the problem. This has contributed to the continuing erosion in public confidence in our health care system. We must all have zero tolerance for real fraud, but differences in interpretation and honest mistakes are not fraud.

Likewise, Professor Uwe Reinhardt, James Madison Professor of Political Economy at Princeton University and one of the nation's top health care economists, penned an important piece on the complexity of Medicare rules published in the January 21 edition of The Wall Street Journal. Professor Reinhardt observed:

The IRS code ... has the capacity to criminalize the behavior of perfectly decent citizens who would never willfully break the rules, if they understood them. Over the years, the statutes and rules governing Medicare have evolved the same way. They now run the risk of becoming themselves a form of waste, fraud and abuse.

Today, we have three outstanding experts who will address this largely neglected aspect of the Medicare program.

Grace-Marie Arnett is the president of the Galen Institute, a public policy research institute that focuses on health care reform.


The Medicare bureaucracy is threatening the quality of medical care for American seniors. It is reducing care for these patients to the lowest common denominator. It is also driving solo and small group practices out of existence in favor of large managed care groups and hospitals.

Although there are numerous perverse effects that result from Medicare regulation, I will focus on five particularly pernicious results.

The Medicare bureaucracy is inducing one-size-fits-all, substandard care for all Medicare beneficiaries.

When physicians bill Medicare, they are mindful of the fact that the Medicare insurance carrier will scrutinize every billing entry, questioning its medical necessity and reasonableness. They are also mindful of the fact that the Medicare fee schedule places caps on billing amounts for services and is uniformly below market rates. In addition, they know that the costs of complying with Medicare record-keeping requirements often equal or exceed the fee amounts Medicare pays.

Consequently, if Medicare subjects a physician to any inquiry, investigation, or audit, those acts carry with them costs--taxes, in effect--that can cause service to Medicare beneficiaries to result in a net loss for the practice. Many physicians now experience that net loss and must depend upon higher-than-market rates for services to patients not in Medicare to compensate for the losses.

The Medicare carriers, the entities contracting with HCFA, employ sophisticated computer programs that flag billing "outliers" and trigger automatic inquiries upon repeat occurrence of atypical billing patterns. Those inquiries can lead to Medicare inquiries, audits of a physician's patient files, and investigations by federal and state authorities, including the United States Attorney's office, the HHS Office of Inspector General, the Federal Bureau of Investigation, and local law enforcement. Indeed, Medicare inquiries, audits, and investigations are frequently the prelude to either a reimbursement demand or legal action for Medicare fraud or abuse.

Obtaining legal counsel to explain the physician's rights, Medicare procedures, and defenses can cost tens of thousands of dollars. Indeed, a single erroneous bill for less than $100 not infrequently ends up causing the physician to spend tens of thousands, if not hundreds of thousands, of dollars to pay legal fees and to satisfy ultimate reimbursement demands made by Medicare.

Thus, all physicians, the vast majority of whom are honest and conscientious, greatly fear the Medicare bureaucracy and hope to get by without its notice. They know that the bureaucrats can rob them not only of their precious time, but also of their money, their reputations, and--indeed--their ability to practice medicine.

To avoid the risks associated with Medicare inquiries, investigations, and audits, physicians frequently select common billing and service-level codes. They thus choose what they perceive to be the path of least resistance, the one likely to make them least visible to the Medicare carrier's billing review staff. Although Medicare considers it an abuse for physicians to use common billing and service-level codes when the medically reasonable and necessary service provided would more accurately be reflected by an uncommon billing and a higher service code, physicians seek in the first instance to avoid any inquiry from Medicare.

In short, they loathe legal trouble and seek to minimize their risks as much as possible, recognizing that the complex array of regulations imposed by Medicare makes it likely that, if an investigation or audit occurs, invariably at least something they have done may be viewed as improper by the Medicare carrier.

The modern practice of medicine is so complex that virtually every election made by a doctor in the course of treatment can be called into question if examined later in microscopic detail, either based on insufficient documentation of decisions, perceived overutilization, perceived underutilization, improper coding, billing for a service that is ancillary to a non-covered service, or some other among a myriad of regulatory issues. That is particularly so when Medicare limits the scope of its examination to physician patient records and considers the absence of written detailed justifications for treatment evidence of inadequate treatment and the need for reimbursement of Medicare fees.

As a consequence, physicians not only tend to bill Medicare for common services at common levels, but also tend to provide Medicare beneficiaries common services--even when the best patient care would require different or more intensive service. They are forced to balance their desire to help the patient with their fear that doing so in a manner not generally accepted by Medicare may result in substantial costs and penalties down the road.

As a result, Medicare patients do not reliably receive the best medical care in America. Rather, they usually receive the lowest common denominator. That lowest common denominator is a result of the intense scrutiny and second-guessing Medicare uses to restrict and control the exercise of a physician's professional judgment.

Medicare patients do not always get the care their physicians think best for them. They receive the care that their physicians think Medicare wants for them. All too often, the difference between those two is profound--and profoundly negative for the long-term health care interests of Medicare beneficiaries.

The Medicare bureaucracy is causing patients to become federal agents at war with their physicians.

In its zeal to recover from physicians an estimated $3.2 billion in improper claims payments, Congress--under the Health Insurance Portability and Accountability Act of 1996--has established the Medicare Incentive Reward Program for Fraud and Abuse. HCFA began the program in July 1998. It is designed to give a financial reward to patients who complain against their physicians when those complaints lead to a recovery of Medicare funds from the physicians.

The program encourages patients to complain against their physicians whenever they suspect that the physician might have billed them improperly, treated them improperly, or otherwise violated HCFA regulations. A "Medicare fraud hotline" has been established to permit complaints by phone. Upon receipt of a complaint, the Medicare bureaucracy will investigate it. The investigation alone may cost the physician thousands of dollars in legal defense costs, even if the complaint proves false. There is no penalty for false complaints, and there is no limit to the number of complaints any Medicare beneficiary may make.

HCFA has not only encouraged patients to complain against their doctors; it has also contracted with over a dozen private associations, charging them with the duty of being HCFA's "eyes and ears," to quote HHS Secretary Donna Shalala, to watch physicians and report all suspicious moves to the government. The American Association of Retired Persons (AARP), for example, is under contract with HCFA to perform this investigatory service.

As a result, doctors now harbor fear and suspicion not only of HCFA, but also of their Medicare patients. They must now look upon each Medicare patient as a potential government agent with a financial incentive to subject their every move to scrutiny and to complain in search of profit.

They wonder whether a patient who is upset about a physical or mental condition, who is impatient with the progress of treatment, or who is inconvenienced in some other minor way will resort to the complaint process in retaliation. They wonder whether the financial award (up to $1,000 per complaint) is so great, particularly for indigent patients, that patients will be tempted to abuse the process and file false complaints in an effort to reap the economic benefits. They know that every complaint will be investigated and that the cost of defending against each investigation will tax their already overtaxed practices, perhaps to the breaking point.

Most important, they lament that the very people to whom they have devoted their lives--their patients--are now being enlisted by the Medicare bureaucracy into a fraud and abuse army, charged under federal law with waging a war in which they are the targets.

The Medicare bureaucracy is forcing solo and small group medical practices to increase time spent on Medicare compliance and to reduce time spent on patient care.

When a doctor submits a bill to the Medicare bureaucracy, he frequently is paid an amount prescribed under the Medicare fee schedule, but that is the start, not the end, of the Medicare bureaucracy's dealings with the physician. Years after a bill has been submitted and paid for, the Medicare bureaucracy can conduct a post-payment review leading to inquiries, investigations, and audits. Years after the service has been provided and the physician has been paid, it can question the reasonableness and necessity of the service, the billing code used for the service, the sufficiency of medical records documenting the service, and the extent to which the service is covered or non-covered, among many other bases for Medicare reimbursement demands.

If the Medicare bureaucracy finds a billing irregularity, it can compel the physician to produce a random sample of Medicare patient files. The Medicare contractor will review those files and determine which contain errors. It then mathematically extrapolates from the sample to the entire universe of Medicare patients served by the physician. Relying on the error ratio in the sample, the Medicare bureaucracy routinely presumes (without examining any other files) that the error rate occurs with equal regularity in the entire universe of patients served.

Accordingly, if the Medicare bureaucracy finds that $10,000 in Medicare payments should be reimbursed based on a sample of one hundred files, it may employ its mathematical formula to force the physician to reimburse it several hundred thousand dollars based on its mathematical formula. Physicians are effectively presumed guilty until proven innocent. They frequently must pay the demanded amount within a few weeks of receiving notice or be charged exorbitant interest rates, compounded monthly on the unpaid portion of the demand.

To make matters worse, billing Medicare is frequently a guessing game. The Medicare bureaucracy has no master list of covered and non-covered services. While Medicare publishes its conclusions that certain services are non-covered (or are covered with certain limitations), it does not publish an all-inclusive list. Indeed, HCFA encourages its over 60 Medicare insurance carriers to make their own additional coverage determinations on a case-by-case basis.

Thus, at any one time, it is impossible to discern all services that are covered and non-covered, necessarily resulting in a guessing game for physicians. Doctors who guess wrongly are the subject of inquiries, investigations, and audits and may be charged with Medicare fraud or abuse.

Moreover, the Medicare bureaucracy demands copious record-keeping to justify all billings. Full justifications are required to be written in the patient file for every material decision affecting billing. The absence of adequate record-keeping is the basis for a reimbursement demand or, in extreme cases, a fraud or abuse charge. Even if the actual service provided is wholly proper and reimbursable, the lack of contemporaneous documentation in the medical file is, in the minds of the Medicare bureaucrats, a basis for demanding repayment of fees.

Doctors therefore view their medical records for Medicare patients more as correspondence with Medicare bureaucrats than as places to explain treatment modalities and the rationale for their exercise of independent professional judgment. Doctors are mindful that their every word can be scrutinized later to determine whether their treatment was medically reasonable and necessary. They thus stick to common billing justifications and avoid inclusion of written information that, while therapeutically helpful, may nevertheless be misconstrued by the Medicare bureaucrats and used as a basis to demand reimbursement.

To reduce these and other risks requires counsel from lawyers, accountants, and risk managers who dedicate their professional careers to parsing and evaluating the more than 100,000 pages of Medicare regulations, the thousands of Medicare carrier notices, the decisions of carriers and Social Security administrative law judges (ALJs), and the decisions of the courts governing physician practices.

For solo and small group practitioners, the current burden is tremendous. Most solo and small group medical practices that I represent spend between 25 and 50 percent of their time on compliance issues. That time goes uncompensated. It is a high tax that they must bear to practice medicine in the United States.

Were these doctors in a large group practice or a hospital practice, they would spend less time, relying on a cadre of lawyers, accountants, and risk managers employed by the institution to serve all physicians. The March 1998 edition of Physicians Management reported that one group practice of 284 physicians pays between $130,000 and $195,000 per month for dictation and transcription costs associated with preparation of patient files to comply with Medicare record-keeping requirements. Those figures do not take into account the costs associated with all other compliance activities performed by the group.

The effect of the regulatory burden is to force solo and small group practitioners to devote substantially less time to patient care as they work to comprehend and comply with the myriad regulations HCFA and its Medicare carriers impose upon them. That tax is destroying solo and small group practices all across the United States. Doctors incapable of affording the lawyers, accountants, and risk managers now needed just to avoid high risks of adverse government action are electing to close shop and go to work for large managed care groups and hospitals.

HCFA is thus reorganizing the health care marketplace, forcing solo and small group practices out of existence in favor of large managed care groups and hospitals. For those patients who have come to appreciate the privacy, intimacy, and responsiveness of the local family practice, the new regulatory world increasingly deprives them of that option and forces them to choose the large urban group practice or hospital as their only recourse.

The Medicare bureaucracy is taxing medical practice with hidden costs not reimbursed by Medicare.

The American people are largely unaware of the extraordinary costs the federal government has imposed on the practice of medicine. No solo or small group practice in the United States can comprehend the full extent of their legal obligations under Medicare without consulting with lawyers, and few can fulfill their legal obligations properly without consulting with accountants and risk managers. There are literally thousands of rules covering every aspect of a physician's practice, from renting office space to giving and receiving referrals to determining whether each particular service is covered under Medicare or is covered only if "bundled," attendant to a Medicare "covered" service, or necessary for emergency care.

To minimize risks--elimination of risks is not possible, because the law is forever changing--requires personnel on staff trained in billing, coding, risk management, and compliance; counsel from lawyers expert in the field; counsel from accountants; and counsel from risk managers. Those costs are borne by the physician and must be paid for, ultimately, by the patients. Because Medicare law prohibits billing Medicare patients for covered services beyond a fee-limited amount, the costs are invariably borne by the patients not enrolled in Medicare.

Every time the Medicare bureaucracy conducts an inquiry, investigation, or audit, and every time it sends a reimbursement demand, a doctor must pay for legal and accounting advice. The risks of being wrongly accused are so high that no doctor can protect his or her own best interests without the aid of a plethora of professionals. The costs are taxing solo and small group medical practices to death. Their time, romantically portrayed in television serials such as Gunsmoke and Marcus Welby M.D., is about to become a relic of a bygone era, not due to market forces but due to HCFA regulation.

The Medicare bureaucracy is violating patient privacy rights.

Every Medicare patient today must sign a waiver of his or her privacy rights as a condition precedent to accepting the benefit. The waiver of rights authorizes Medicare officials to inspect his or her medical records at any time without requesting permission from the patient. The waiver makes it impossible for the doctor to refuse to turn the files over to Medicare. Indeed, doing so can result in severe regulatory sanctions against the doctor.

Under the Health Insurance Portability and Accountability Act, Congress has vastly expanded federal funding for Medicare investigations, audits, and prosecutions. It has involved the Department of Justice, the Department of Health and Human Services, the HHS Office of Inspector General, the Federal Bureau of Investigation, and state and local law enforcement in a massive combined federal and state campaign to ferret out all perceived waste, fraud, and abuse in the Medicare system.

Over $1 billion is being spent between 1996 and 2004 on this effort. Funds recouped are deposited in a trust fund and are earmarked for use to fund more enforcement, creating a self-perpetuating prosecutorial machine. With this vast expansion will come greater inquiry into patient files.

On the slightest suspicion of wrongdoing or billing impropriety, Medicare officials can order a doctor to turn over a Medicare patient's files. Those files can be reviewed by the Medicare carriers and by federal and state authorities, exposing to a large number of people the most intimate details of a Medicare patient's life and health. Over the next several years, greater and greater numbers of patient files will be examined by the carriers and the authorities in their zealous attempt to uncover every possible basis for demanding reimbursement or charging providers with waste, fraud, and abuse.

Based on 1998 statistics, HHS believes that physicians wrongfully hold $3.2 billion in Medicare payments. Of that sum, Medicare officials believe that 12.3 percent was paid for services lacking medical necessity; 47.1 percent was paid for incorrect coding; 12.3 percent was paid despite inadequate documentation; 17.3 percent was paid despite the absence of documentation; and 11.1 percent was paid for non-covered services.

HCFA has called for a substantial increase in "medical review and post payment data analysis" to recoup all $3.2 billion from the marketplace. Along the way, many an innocent physician will be harmed, and many an innocent patient will be the unwitting victim of a privacy rights violation as medical records from across the country come under greater Medicare carrier and federal and state government scrutiny.

So long as Congress maintains the current bureaucratic system as a third-party payer of patient bills, there is little likelihood that regulation will lessen or that quality medical care will survive. The over $200 billion Medicare system grows in cost annually. Congress's favored political remedy to the mushrooming budget is to demand that HCFA recoup from those it has paid more and more of the funds Congress has allocated for the system.

The result is our current--and worsening--draconian system of payments followed by law enforcement recoupment. That system labels physicians who lack any moral culpability for wrongdoing as cheats and frauds. It depends upon vilification of the doctor. Increasingly, the option of a career in medicine is losing its luster for America's best and brightest.

Ultimately, we will not escape this bureaucratic morass until the current Medicare system is replaced with market-based mechanisms that leave the patient in charge of choosing his or her own medical care and the doctor with the freedom to exercise independent professional judgment in the provision of that care.

Jonathan Emord is a Washington attorney who practices constitutional and administrative law with his firm, Emord & Associates, and represents a range of health sector clients on issues of regulatory compliance, regulatory reform, medical practice, and compliance investigations. He is a former attorney with the Federal Communications Commission and is the author of Freedom, Technology, and the First Amendment.


The complex system for Medicare reimbursement for physicians is based on over 7,000 medical treatment codes. You know we're in big trouble in medicine today when there's a code not only for flatulence, but one for the guy standing downwind as well.

I'm not making this up. If you look in the ICD-9 diagnosis coding book that Medicare requires physicians to use, you'll find a code for almost everything that can happen to a person. There's a code for injury due to legal intervention by gas, a code for injury that occurs while riding an animal that collides with another animal, a code for injury from being pecked by a bird, a code for injury from prolonged weightlessness, and a code for injury due to a fall from a spacecraft, flagpole, or commode.

There's even a code for a person who has been sucked into a jet engine. Think about that. Why would you need a code for a person who has been sucked into a jet engine? Yes, there is a code for almost everything.

A serious crisis affects both Medicare patients and their physicians. It's the crisis created by the Health Care Financing Administration and the Medicare bureaucracy. This abusive bureaucracy is a Frankenstein monster with an insatiable appetite for physician time. It obstructs, impedes, and interferes with every aspect of the practice of medicine today.

If you have any doubt about this, consider the fact that there are only about 17,000 pages of IRS regulations, whereas there are over 111,000 pages of Medicare regulations. As a solo physician in private practice, I now spend well over 50 percent of my time fighting this HCFA-Medicare bureaucracy.

The Monster
In our office, we have Frankenstein's son. We call him "Little Frank." Little Frank stands 6 feet 10 inches tall and weighs 168 pounds. Little Frank consists of approximately 20,000 pages of correspondence that I have had with the HCFA-Medicare bureaucracy regarding problems created by the bureaucracy.

It scares me sometimes to think that I actually have more pages of correspondence with this HCFA-Medicare bureaucracy than there are IRS regulations. And this mass of correspondence keeps growing every week, as do the costs associated with maintaining it. Little Frank eats a lot of my time, money, and energy. The contradictory, illogical, and incomprehensible nature of Medicare's regulations is truly mind-boggling.

Since 1965, the Health Care Financing Administration has been transformed into an ugly and uncontrollable beast that should more appropriately be called the Health Care Controlling Administration. Consider how far the Medicare program has strayed from the original intent as stated in Section 1801 of the act that created Medicare--the act which forbids any federal interference in the practice of medicine, which forbids "any federal officer or employee to exercise any supervision or control over the practice of medicine or the manner in which medical services are provided, or over the selection, tenure, or compensation of any officer or employee of any institution, agency, or person providing health services."

So what does all of this burdensome bureaucracy have to do with patient care? The HCFA-Medicare industrial complex is forcing physicians to be "bureaucratically correct." This has widespread and deleterious effects on patient care.

Most of these effects, however, remain well-hidden from the American public. Price controls and excessive regulation predictably lead to increased costs, decreased access, and the rationing of medical care, and HCFA has excelled in putting physicians in the unwanted role of being the ones who are essentially forced to carry out this rationing scheme. It is rationing by inconvenience, it is rationing by transferred costs, and it is rationing by bureaucratic schemes designed to deny payment to physicians for services rendered.

Getting What You Pay For
Some people still don't seem to get the simple concept that what isn't paid for, they can't get. For example, if you are a stroke victim and a Medicare patient and aren't sure if you can go back home and live independently after discharge from the hospital, you can forget about getting good physical therapy, speech therapy, and occupational therapy in an inpatient rehabilitation facility. The bureaucracy has determined that such patients "aren't worth it."

If you are going to a nursing home following discharge from the hospital, HCFA considers you to be a second- or third-class citizen who will just have to make the best of whatever third-rate physical therapy the nursing home provides. What's worse is that you can't even pay for inpatient rehab out of your own pocket if you want to, because the HCFA bureaucracy has determined that it isn't "medically necessary" and private contracting on a case-by-case basis is illegal.

Restricting Personal Freedom
The HCFA-Medicare bureaucracy has a long history of preventing patients over the age of 65 from spending their own money on their own health care when and as they choose. Most elderly patients are unaware that they have lost this freedom and express great shock and disbelief when I tell them that this is the way the Medicare system today really operates.

The huge number of ever-changing Medicare regulations, including many that are either secret or well-concealed from practicing physicians, also clearly distracts physicians from patient care. When physicians must focus nearly all of their energy, efforts, and attention on making sure that they are bureaucratically correct and complying with every little bullet point in some idiotic quantitative guideline that HCFA has promulgated, it's dangerously easy to get distracted from the purpose of why you are providing the service to the patient in the first place.

HCFA, in effect, has placed so many bureaucratic trees in front of practicing physicians that many physicians may truly no longer see the forest through the trees. This is a serious problem. Left untreated, it inevitably leads to a dangerous deterioration in the quality of medical care.

Stupid Rules
The Medicare bureaucracy has also perverted the medical record. It really is no longer a clinically useful medical record--it's a billing record. It has to be a billing record; otherwise, the physician will not be paid for his or her services.

The bureaucracy also forces physicians to think only in terms of black and white when making a medical diagnosis. The fact of the matter is, however, that medicine has many shades of gray. We don't always know what the diagnosis is after the first encounter with the patient.

Because Medicare does not recognize "rule out" diagnoses, however, and requires physicians to code everything down to the fifth significant digit, it often forces physicians to enter erroneous diagnosis codes because the diagnosis isn't yet known and the available codes for symptoms don't fit the patient's situation. The Medicare bureaucracy thus promotes medical inaccuracy by encouraging the coding of erroneous diagnoses.

The Medicare bureaucracy has also bastardized the CPT coding system physicians are required to use to code for the services that are provided to patients. HCFA agreed with the American Medical Association (AMA) back in 1983 to create a coding system containing separate codes for separate services; but now, under HCFA's so-called correct coding initiative--correct according to HCFA--Medicare is combining separate and distinct services into a single code for payment purposes, thus cheating the physician out of proper payment for actual services provided.

HCFA calls this "bundling." Physicians call it fraud. One must ask: What is the purpose of developing a procedure and services coding system with separate codes for separate services when HCFA simply ignores it? And what happens to these bundled services that are no longer reimbursed? It's very simple: Patients don't get them.

An Abuse of Power
Last but not least, consider the current fraud and abuse situation. The masters of the old Soviet KGB had a slogan that the Medicare fraud and abuse cops seem to have fully embraced: "Show me the man, and I'll show you his crime." HCFA now operates a system that is so complex and has so many regulations that any physician in this country could be singled out at any time and found to be in violation of some Medicare rule, regulation, or guideline. Let me be specific.

In August 1999, Dr. Robert Gervais, a cataract surgeon practicing in Arizona, was invited to a public meeting on a HCFA project. Federal agents were hiding behind a one-way mirror at this public meeting to see which doctors were making negative comments about HCFA and the project. Dr. Gervais was critical. A little more than a month later, Dr. Gervais' clinic was subjected to a "surprise" inspection, where federal authorities found "deficiencies" in his documentation. Dr. Gervais' plans to remedy the "deficiencies" in the time HCFA required were deemed unacceptable, and his clinic was then "de-listed" by Medicare. Criticize the Medicare bureaucracy and its programs, and a doctor can be targeted for "hits"--a "hit" being defined as a bureaucratic action designed to kill the practice.

In another case, in February of 1999, 37 armed, flak-jacketed agents carried out a Medicare raid on East Tennessee Woods Memorial Hospital, a little 72-bed hospital in Eastern Tennessee. Can you imagine being a patient in that little hospital and seeing this invading army stomping into the hospital, trampling through sterile areas, forcing employees into a small room and holding them?

In yet another case, at Dr. Danny Westmoreland's office in West Virginia, three armed federal agents invaded and held everyone at gunpoint, including the physician, his wife, patients, and children. Is this sort of thing necessary to conduct a Medicare investigation?

Lest we forget, this is the United States of America, not Communist China. Most people today have no idea that this is the way that the federal government is treating physicians. If you are a physician, you can count on the HCFA-Medicare bureaucracy to treat you as guilty until proven innocent. In this respect, even accused murderers and rapists are treated better than physicians; at least if you are accused of the crimes of murder or rape, you are entitled to the official presumption of being innocent until proven guilty.

But the Medicare bureaucracy goes even farther and uses this guilty-until-proven-innocent mode of operation to extract money from physicians, hospitals, and medical schools. Because HCFA officials consider a physician to be guilty until proven innocent, and because the cost of defending oneself from charges of health care fraud and abuse is at least a six-figure sum, HCFA frequently offers to settle for double damages in return for not pursuing treble damages and prison time for the physician.

When the mob does it, it's called extortion. When HCFA does it, it's called "Operation Restore Trust" or some other euphemistic name. And, remarkably, this is done on a "bounty" system whereby the recovering agency gets to keep a share of the loot.

Deliberate Downcoding
Some physicians today are deliberately downcoding or undercoding for their services out of fear that they will be accused of fraud if they bill for any high-level service. The higher service codes almost guarantee a Medicare audit or request for further documentation to support the level of service billed. This undercoding, in turn, leads to further exposure for those physicians who accurately code higher-level services, because the latter now become "outliers," and their outlier status will likely subject them to further costly encounters with the Medicare bureaucracy.

Even if a physician is merely accused of fraud, which the bureaucracy encourages patients to do, it frequently destroys the precious trust between patient and physician, even if the physician is ultimately cleared of committing any crime. When the bureaucracy destroys the trust that patients place in their physicians, it is destroying the very heart of medical practice in America.

Dr. Lawrence Huntoon is the president of the Association of American Physicians and Surgeons (AAPS) and is a neurologist in private practice in Jamestown, New York. He writes and speaks extensively on the increasing intrusion into medicine by third parties, including government bureaucracies.


Judging by government press releases, congressional speeches, and the profusion of criminal and civil statutes and regulations, the most dishonest and least competent person in the world is the American physician. The bureaucrats constantly tell us that they have been unearthing fraud, waste, and abuse in our medical system with uncanny skill.

The HHS Inspector General and the Attorney General reported to Congress in January that in 1999, their offices collected $490 million in "judgments, settlements, and administrative impositions," of which $369 million was returned to the Medicare Trust fund. Moreover, the report noted that 371 indictments had been filed and that over 2,000 civil matters were being pursued.1

Just two days ago, the administrator of HCFA, Nancy-Ann DeParle, noted that her office had reduced the amounts of improper payments to health care providers from $23 billion in 1996 to $12.6 billion last year. But in a memo to the Medicare intermediaries--claims processing companies--she emphasized that that error rate "is still too high."2 Indeed, both candidates for the Democratic presidential nomination tell us that they will finance much of the cost of their lavish health care programs through savings obtained by curtailing "fraud, waste, and abuse."

I question the fundamental propositions underlying much of the proscriptive regulation of health care. First, I question whether fraud, waste, and abuse are as rampant as many in both parties would have us believe. Or, rather, is it more a function of a regulatory system that imposes unrealistic and untested rules on those who practice medicine? Second, I question the cost-effectiveness of the unusually broad panoply of anti-abuse statutes and regulations. And finally, I question the constitutionality of many of these provisions.

Staggering Red Tape
The American physician and American hospital are each subject to more regulation than those who design and manufacture manned spacecraft, passenger cars, and even childhood vaccines. The layering of proscriptive rules is staggering and is in fact eroding the quality of care as physicians direct more of their resources to filling out government forms and coding sheets and meeting with their lawyers than they do to seeing patients. There are thousands of pages of laws, rules, guidelines, transmittal letters, forms, explanations, coverage criteria, administrative decisions, and the like, and a cadre of government auditors, investigators, and prosecutors who are too eager to find mistakes in the paperwork.

Some of the rules are understandable. For example, physicians who participate in federal health care programs--e.g., Medicare, Medicaid, CHIP, CHAMPUS--are subject to the Federal False Claims Act (FCA).3 These laws apply to everyone who receives or seeks to receive federal funds, and on their face they make sense. These laws permit the government to seek treble damages plus additional penalties if someone files a false claim with the government.

Thus, a physician would be subject to the FCA if he sought payment for medical services that he in fact never provided. The government, for instance, vigorously pursued a psychiatrist who billed Medicaid for 27-hour days. Congress, however, was not satisfied, so in 1986 it amended the False Claims Act to add a so-called qui tam provision which permits whistleblowers to bring a suit in the name of the United States and, if successful, collect a reward of up to 30 percent of the recovery. It is called whistle-blowing for fun and profit, and today there are more "qui tam millionaires" than there are Regis Philbin millionaires. The False Claims Act and the qui tam provisions apply equally to everyone and give everyone their day in court.

Special Rules for Doctors
Congress, however, was still not satisfied, so it enacted a special false claims law just for federal health care programs and, further, permitted the inspector general to seek civil money penalties without providing the physician with his or her day in court.4

Let's take the case of Dr. Frank P. Silver, a Nevada Ob/Gyn who ran afoul of the inspector general.5 Silver was charged with having submitted 418 Medicaid claims for laboratory tests, primarily urinalyses, that were not provided as claimed. Silver received less than $3,000 for those 418 tests. Under the Civil Money Penalty Law (CMPL), at that time, the IG could seek treble damages plus $2,000 for each false claim. Thus, the inspector general sought more than $800,000 in penalties and also sought to exclude Silver from the Medicare and Medicaid programs for 10 years.

Silver's only recourse was to appeal to an administrative law judge within HHS. The ALJ sided with the IG and imposed penalties of $232,000, assessments of $9,237.59, and suspended Silver from participating in the Medicaid and Medicare programs for a period of 10 years. In his ruling, the ALJ concluded that although the Silver did not intend to defraud or otherwise cheat the Medicaid program, he nevertheless was grossly negligent in not more carefully supervising the activities of his billing clerk, and thus he "should have known" that the billings being submitted to Medicaid by his billing clerk were erroneous.

In short, Silver was being punished not for his own wrongdoing, but rather for the negligence or wrongdoing of his billing clerk. He appealed that decision to the Deputy Under Secretary, who reversed the decision holding that the CMP law could not be used to punish Silver for the misconduct of someone else.

Since the Silver decision, two things have occurred. First, the Deputy Under Secretary is no longer a reviewing official. Instead, reviews of ALJ decisions are conducted by a panel of three ALJs. And second, the IG went to Congress and got the CMP law changed so that a doctor can now be held criminally liable for the mistakes of his or her billing staff.6

The Special Anti-Kickback Law
As troubling as the Civil Money Penalty Law may be, it pales in comparison to the so-called anti-kickback law. Everyone agrees that kickbacks are bad--they promote overpayment and overutilization and inappropriately interject financial considerations into medical decision-making.

The anti-kickback law that governs federal health care programs, though, is far broader and procedurally distinct from the one that applies to the other sectors of the government. In fact, these laws are so expansive that they prohibit conduct that is perfectly legitimate in other settings. Under the anti-kickback statute as written, for example, it is illegal for a physician to sell his practice if the sale includes "goodwill." No arrangement--whether it is a complex merger, acquisition, joint venture, or a simple purchase of hospital or medical office equipment--can be seriously considered without evaluating its anti-kickback implications.

Moreover, the health care anti-kickback laws vest extraordinary discretion in the Office of Inspector General to modify, to interpret, and to apply these already broad laws. The law effectively has transferred significant health care policy decision-making from the Congress and the political appointees at HHS to career OIG attorneys with no formal training in medicine and little in developing or testing cogent policy.

Congressional Fuzziness
How did such a mess develop? The answer is simple--Congress's inability to write clearly. As originally enacted in 1965, neither the Medicare nor Medicaid law contained an anti-kickback provision.7 These omissions are surprising, especially given the charge-based and cost-based methods by which physicians, hospitals, and ancillary providers (e.g., clinical laboratories, ambulance services, and durable medical equipment suppliers) were reimbursed.

For example, under the original Medicare system, hospitals were reimbursed based on the costs they incurred to treat Medicare patients. The longer the stays, the more procedures performed, and the greater amount of medications dispensed, the greater the costs and, thus, the greater the reimbursement. Similarly, clinical laboratories were originally reimbursed based on the "prevailing charge" in the community for a given service. Kickbacks and other hidden expenses could needlessly increase the cost of services to Medicare.

Moreover, kickbacks could also increase costs to Medicare by increasing utilization. For example, if a physician received a payment from a clinical laboratory each time the physician sent a set of specimens to that laboratory, the physician would have an incentive not only to use that laboratory, but also to have more tests performed on patients than might be medically indicated.

Defective Law
In 1972, Congress amended the Social Security Act to prohibit kickbacks and bribes in both the Medicare and Medicaid programs.8 Specifically, with respect to Medicare, the 1972 amendments added a new Section 1877, which provided in pertinent part as follows:

(b) Whoever furnishes items or services to an individual for which payment is or may be made under this title and who solicits, offers, or receives any--

(1) kickback or bribe in connection with the furnishing of such items or services or the making or receipt of such payment, or

(2) rebate of any fee or charge for referring any such individual to another person for the furnishing of such items or services,

shall be guilty of a misdemeanor and upon conviction thereof shall be fined not more than $10,000 or imprisoned for not more than one year, or both.9

The 1972 version of the anti-kickback laws ran into problems almost immediately. In United States v. Zacher,10 the Court of Appeals reversed a series of Medicaid anti-kickback convictions. At issue in Zacher was a scheme by the defendant nursing homes under which the families of Medicaid patients were asked to pay the per diem difference between the Medicaid rate ($25 per day) and the rate charged the private patients ($29 per day). The defendants were convicting of receiving bribes in connection with the provision of Medicaid services under Section 1909(b) of the law as amended in 1972.

In reversing the convictions, the Second Circuit opined that the term "bribe" has a specialized meaning and necessarily involves some form of corrupt payment to an official or the breach of some duty. The court went on to conclude that the defendants owed no special duty to the government and, further, that "the payments to them did not increase the cost to the government of patient care, decrease the quality involve the misapplication of government funds."11 Other courts also narrowly construed the 1972 version.12

More Defective Law
Interestingly, the linguistic shortcomings of the 1972 version highlighted by the Second and Fifth Circuits had been recognized by many from the outset. As a result, Congress in 1977 amended the law to greatly broaden its scope.13 In lieu of the phrase "kickback or bribe," the amended version banned "any remuneration (including any kickback, bribe or rebate) directly or indirectly, overtly or covertly, in cash or in kind" to induce a referral.14

The language of the new provision was extremely broad, but it was further broadened by a bevy of court cases which established the so-called one-purpose test. Under that test, if one purpose of a transaction, albeit a minor purpose, is to induce referrals, the entire transaction is violative of the law.15 Thus, under a logical reading of the law, a physician commits a felony if he or she sells his practice. This is so because part of the purchase price of any "practice" is "goodwill," which necessarily implies that the purchaser is acquiring the seller's patients. Indeed, under a logical reading of the 1977 law, virtually all forms of legitimate transactions would be outlawed.

Crafting Legal Exceptions
In 1987, Congress addressed these problems in an unusual way. Rather than modifying the language of the anti-kickback law itself, it authorized the Secretary of Health and Human Services to create so-called safe harbors--i.e., transactions which would otherwise be illegal but which the Secretary has decided have no negative implications for the program and therefore should not be subject to sanction.16

The Secretary issued the first 10 safe harbors on July 29, 1991,17 and since then has clarified existing safe harbors and added 11 new ones.18 Thus, by way of example, there is a safe harbor for the sale of one's medical practice, for rental of office space, for discounts, and for warranties on products.

Special Advisory Opinions
By and large, the safe harbors are remarkably narrow and needlessly complex and usually provide little solace for those who hope to develop innovative business arrangements. Recognizing that the inspector general was not overly enthusiastic about issuing new safe harbors, Congress, as part of the Health Insurance Portability and Accountability Act of 1995 (HIPAA), established a process for issuing additional safe harbors and spelled out the criteria to be used in developing those safe harbors.19

More significantly, HIPAA required the inspector general to issue advisory opinions in which she would advise the writer whether a proposed business arrangement which might not qualify for safe harbor protection would be prosecuted or not. The submitter would be entitled to rely on the advisory opinion. However, the process for obtaining an advisory opinion is onerous--you must submit all of your contracts and other aspects of the proposed deal to the IG for review.

In essence, the anti-kickback law, especially when coupled with the Stark20 anti-self-referral law at Section 1877 of the Social Security Act, empowers the Secretary to pass on the propriety of virtually every complex business arrangement that might not otherwise satisfy one of the narrow safe harbors. Even though there are relatively few criminal prosecutions and administrative actions, proceeding where there is a risk of violating the anti-kickback law can have profound adverse ramifications. First, some courts have declined to enforce contracts that are deemed to be in violation of the anti-kickback law.21 Second, there is a risk that violating the anti-kickback law can expose an entity to a qui tam action under the False Claims Act.

In short, there is ample reason to proceed with caution and, where possible, to seek an advisory opinion before acting. As a result, the inspector general's attorney, who is charged with preparing the advisory opinions, has extraordinary influence over the types of business arrangements that will be permitted and how those arrangements ought to be structured.

The Lack of Empirical Evidence
The anti-kickback law and the myriad other civil and criminal provisions of the Social Security Act raise serious policy issues. First, is there sufficient "fraud" to justify the complex and onerous legal system? Second, is the system cost justified? Third, does it make sense to entrust health care policy and health care economics to an inspector general and her lawyers? And fourth, is the system's reliance on civil money penalties constitutional?

Merely because we are constantly being told that there is a significant amount of fraud in our health care system does not mean that there is. Repeating an otherwise unverified statement innumerable times does not magically transform it into the truth.

I am not saying that the system is pristine: There are significant cases of fraud, some perpetrated by large companies and others by solo practitioners. What I am saying is that there is no evidence that the "fraud" in our health care system is any more pervasive than is fraud in the defense industry. If that is the case, then there is certainly no justification for applying more draconian laws to health care providers than to defense contractors.

In fact, few actually claim that the system is awash in fraud. Instead, the advocates of extreme regulation claim that there is significant "fraud, waste, and abuse." Fraud is easy to measure; it is a legal term with a precise definition. Waste and abuse, on the other hand, are not legal concepts; they can mean anything to anyone at any time. Indeed, abuse normally means that someone has found a legal way to do something that the speaker finds objectionable. Waste is in the eye of the beholder. It could mean anything from mistakenly coding an office visit to seeing a patient more frequently than the bean counters believe is justified.

In the end, there is no evidence to indicate significant fraud. Indeed, the evidence indicates that the system is and has always been remarkably free of true fraud. The fact that the inspector general recovered only half a billion dollars in 1999 in programs with expenditures of about $400 billion indicates that the system is relatively honest. The fact that HCFA points to $12.6 billion lost due to honest errors (e.g., miscoding and the like) is a meaningless statistic. Where the errors are honest, some will benefit the system and others will not. Only the "net" amount of errors ought to be of interest. Here there is nothing to indicate that the inspector general "netted out" the errors.

Furthermore, many of the so-called errors actually involve honest differences of opinion regarding how medicine ought to be practiced--i.e., what is "medically necessary." It is ironic that, with respect to private insurance, the Clinton Administration wants to permit a patient's physician to make the call when it comes to determining what is medically necessary. In Medicare, however, the Clinton Administration believes that HCFA, and not the patient's physician, should make that decision.

Moreover, the system feeds on itself. As the laws become more complex and the paperwork requirements more onerous, the likelihood that a physician, a physician's billing clerk, or even the carrier or intermediary will err increases. Such an increase would be viewed as an increase in fraud, waste, and abuse.

In short, the very laws designed to curb fraud may be contributing to an artificial increase in fraud, waste, and abuse. This phenomenon needs to be studied; it has not been.

Weak Evidence of Cost-Effectiveness
The current regulatory regime, with its reliance on complex regulations, case-by-case determinations, and onerous penalties for negligent missteps, has imposed enormous transaction costs and, further, has dissuaded many from developing innovative programs that might expand medical coverage at reduced costs. Remarkably, no one has produced any evidence to indicate that these "regulatory" costs--both in terms of transaction costs and the costs associated with lost opportunity--are justified.

We know that many of the restrictions imposed by the anti-kickback law and its ancillary glosses are simply not cost-justified. For example, the most efficient method that small manufacturers have for distributing their products to hospitals is through independent sales representatives who are paid on commission. However, under the anti-kickback law, it is illegal to use independent sales representatives. The IG has taken the position that a commission is "remuneration" paid for referring business (i.e., making a sale to a hospital). Only sales representatives who are bona fide employees are permitted to receive commissions. The distinction makes no logical or economic sense.

Furthermore, every arrangement, no matter how innocuous, must be reviewed by an attorney who understands the nuances of the anti-kickback law. While the law has contributed to the financial health of the Washington bar, it has contributed little to the physical health of the nation. Many of the law's requirements make little commercial sense and force parties to legitimate commercial transactions to use artificial terms in their contracts so as to conform to the narrow safe harbors. Thus, office rentals, equipment leases, and management services contracts must be for at least one year.

The biggest cost, in my view, associated with anti-kickback law is the cost associated with lost opportunity. The law essentially dissuades those with innovative business ideas from applying them in the health care sector. Correspondingly, many venture capitalists are reluctant to invest in an industry which is governed by a bizarre set of rules and where violating a rule can have tremendous economic consequences.

In short, the IG's hidden message is simply: Invest in the Internet and not in health care.

While the costs of complying with the anti-kickback law are high, there is every reason to believe that the benefits are meager. This is so because the statute itself was designed to rein in abuses in a cost-based system; that system, however, basically no longer exists. In view of these changes, the anti-kickback law in its current form ought to be moderated until someone can demonstrate that a more onerous version is necessary and is cost-justified.

The Growing Power of Career Bureaucrats
My biggest concern with the explosion in antifraud legislation is that it delegates essentially legislative responsibility to bureaucrats--in some cases political appointees, in other cases not. Whether the delegation of such broad authority is constitutional is open to question.

What is not open to question is that such broad delegation is unwise; it tends to centralize decision-making and chills innovation. Rather than correcting the flawed 1977 legislation by authorizing the issuance of, first, "safe harbors" and then advisory opinions, Congress should rewrite the law to correct its flaws. The anti-kickback law should not be accorded the same deference as the Bible, where gloss after gloss is often considered good.

Questionable Constitutionality
The final issue that needs to be addressed is the constitutionality of the entire CMPL system. Under current law, civil money penalties can be imposed for everything from false claims to violating the anti-kickback law. The problem with the CMPL, though, is that the accused is denied the opportunity to have the dispute resolved in federal court by a federal jury. Instead, a non-independent ALJ, appointed by the Secretary, makes the decision. Review in federal court is limited.22

Such a system raises fundamental questions, not the least of which is, is it consistent with the Fifth and Seventh Amendments? The Supreme Court has yet to address the issue in the context of the Medicare CMPL.

We have little patience for those who cling to ideas that are inconsistent with scientific thought. Correspondingly, society treats with scorn those who posit technical or scientific truths that either have not been tested or are inconsistent with empirical evidence.23 A government that formulates policy that dramatically affects the expenditure of nearly $400 billion annually with neither an empirical basis nor the curiosity to obtain the necessary data is at its peril. After all, those who believe in the Loch Ness monster and alien visitations are not generally held in high esteem.

--Robert Charrow specializes in health care law in Washington, D.C., and is a member of the firm Crowell & Moring. Before joining the firm, he was principal deputy general counsel for the U.S. Department of Health and Human Services, where he supervised the chief counsels for agencies within HHS, including the Health Care Financing Administration.

Q & A

Q: All of you really personalized the problem with the current Medicare system. Have you thought of proposals to change the current system comprehensively? What are your thoughts on how that could eliminate or at least minimize some of the problems that doctors face?

MR. CHARROW: I've given a lot of thought to it, because I think the system is overly complex. Yesterday, the Supreme Court issued an opinion in Shalala v. Illinois Council that made it virtually impossible for health care providers to challenge HCFA rules.

The system that I would propose is a rather radical one, but I think it's the only one that could really work: Set a national budget for Medicare each year and then issue scrip and allow the scrip to be a security which floats with the market. That way, health care providers can charge whatever they want. If health care providers engage in overutilization, the value of the scrip decreases. If they provide the right amount of care, they get dollar for dollar.

But there's no government regulation, because there is no need to regulate. The market regulates. It's a very simple system: minimum transaction costs. You wouldn't need a HCFA.

MR. EMORD: I think this is a question of whether you accept the world of second best and try to tinker with it, or whether you go back to the foundation of whether the existing system of government-run health care is doable and workable.

The perverse incentives in this type of system cannot be engineered out of it. What I would do is give people the option of moving out of the Medicare system in favor of, essentially, a block grant to an individual. The amount of money going into the system would be rebated to the consumers and put in tax-free medical savings accounts or what have you, giving the individual the power once again to determine medical outcomes.

You can always have a needs-based catastrophic care, but for routine medical services, the patient must drive the system in order for the incentives to be right. In that way, the physician would focus on giving the patient the best benefit instead of answering to the bureaucracy; and the patient would control the care rather than the third-party payer.

One other measure that would help tremendously is the Kyl Amendment. It would allow a Medicare patient to say, "I want to pay for this service on my own in this instance. I don't want my medical record in this instance to be made public."

The system needs to be modified so that a patient who wishes to pay privately when they want to, and for whatever reason they want to, can opt out on a case-by-case basis instead of requiring the physician to opt out for every other patient for a period of two years; the current law is designed in such a way that virtually no physician will.

MS. ARNETT: I'd like to weigh in also. A lot of the people in the policy community, especially those who work with the Galen Institute and the Heritage Foundation, insist that direct control of the dollars is the key issue: Whoever controls the money controls the choices.

In that respect, the approach being developed by Senators Breaux, Frist, Kerry, and Hagel is the right way to go. It moves control of the resources back to the patient; 39 million seniors are going to be a whole lot smarter in spending $250 billion a year than government bureaucrats and lawyers in Washington.

Q: I wanted to ask Mr. Emord: Studies show that among medical practices around the country, there are certain outliers, certain doctors that favor different techniques. How do we get a handle on that and separate what is legitimate from what is not legitimate?

MR. EMORD: Recognize that physicians, like practitioners of anything, become recognized for techniques, innovative techniques, particularly distinguished physicians. In the instances where there are outliers, usually it's the patient who wants access to that care, because whatever the conventional modality or treatment was, it has not worked in their case. So it's just a market response to a need that's not filled in most instances.

There are, of course, instances of actual fraud. I'm the first one to admit that, and I think everyone here agrees, and none of us would defend those. And there are instances of abuse, but they are not typical. The health care system is not dominated by these factors, or even a significant minority of cases. They are, far and away, the exception. In most circumstances, the current system is precluding innovation and encouraging commonality to the great detriment of everybody.

Q: What about the patient who didn't feel like she got anything out of her doctor's visit if she didn't get a prescription or something in her hand? In some ways, she feels that more care is better care. The doctor is the expert, but sometimes the doctor has the financial incentive to order more tests and be more innovative. Sometimes it's great, but it's more expensive.

DR. HUNTOON: The patients are in a whole lot better position than some HCFA bureaucrat in this kind of decision-making, I'll tell you that. And, again, the relationship is physician and patient, with the physician advising the patient as far as what's best or in the best interest of the patient's care. Yes, there are incentives for overutilization or maybe ordering too many tests, but what we're getting now is worse than that. There's an incentive to limit tests and care.

The trouble is, one of those is transparent; the other is not. By the time the doctor's ordered the fifth CAT scan, you begin to suspect that maybe something is a little wrong here. But now what the patient doesn't know is what they didn't get that they should have gotten, because they don't understand enough medicine to have that kind of knowledge. That's the problem.

Q: I'm Dr. Joseph Marshall, a private physician here in Washington, D.C. I practice office gynecology, and I am menopause consultant, so I see a lot of Medicare patients.

About two weeks ago, I got a check from Medicare. It was a very complex check. It had a lot of patients' names on it and a lot of charges that didn't belong to me. After we went to see how much was owed to me, it was like $2.50. Medicare does not give us an 800 number. We have to call a long-distance phone on our dime to try to talk to a person to reconcile this whole thing. So it finally cost us more time on the phone to reconcile this $2.50 check. By the way, they gave us incorrect information, but I had to clear this up, or else it would have been fraud for me to accept this check. This happens every single day.

Several years ago, my wife became my secretary. I noticed she was spending so much time on the phone. She spends about 15 to 20 minutes an hour with paperwork and just for this junk. But we're the patient's advocate.

Even though I'm a non-participant of Medicare, I still see Medicare patients. They pay me. Several years ago, I realized that she was spending so much time on the phone that we decided that we were not going to charge our Medicare patients. We would see them free of charge. We'd fill out the forms, and that would take care of that.

I called up Medicare just to confirm this. They told me that if I was to do this, I was going to be fined and/or end up in prison. I said, "What?" They said, "You are not allowed to do that." That's the system we have today.

DR. HUNTOON: I would like to add to that if I could. I spent eight months last year arguing with HCFA over a coding dispute. The difference in money was $11.80, and it cost me 207 pages worth of documentation and letters to get that straightened out.

Q: Mr. Charrow, you pointed out that fraud is legally defined. Can you produce any empirical evidence on the extent of fraud, as distinguished from waste and abuse?

MR. CHARROW: The closest we can come to it is by looking at the amount of money that the Department of Justice recovered in fraud claims in 1999. They said it was $490 million, recognizing that a lot of this is treble damages. So it's difficult to actually ascertain the actual amount of fraud, but it's less than $490 million.

At the same time that this report was issued, HCFA indicated that there were $12.6 billion worth of errors in the system, and that I would call waste and abuse. That's how they characterize it. So if you compare the two numbers, you see that the waste and abuse dwarfs the fraud.

Q: Are there other ways of attacking Medicare's paperwork burdens while reducing fraud and abuse?

DR. HUNTOON: Sure. Medical savings accounts would be a good one, because you wouldn't even have to submit any claims. There would be no paperwork up to the deductible.

It would also put accountability for that spending back in the hands of the patient, where it belongs. That would also curb fraud and abuse, because it would be a whole lot more difficult to defraud individual patients, as opposed to an unseen third-party entity like the Medicare program.

MR. EMORD: There's an inherent conflict here. When you have the federal government spending well over $200 billion to fund these services, Congress pressures HCFA to make sure they root out every bit of fraud and abuse and waste wherever they can find it. HCFA officials are complimented and rewarded when they come before Congress and say, "Look, we've got this much money back out of the system." So they are doing everything they possibly can to get the money back out of the system.

The fraud is but a sliver of the problem. Waste and abuse are larger components of the problem. Incorrect coding could be a signal of fraud, although in most instances it's not. Billing for non-covered services could be an indication of fraud. The vast majority of this is simply bureaucratic; few are morally culpable. These are errors. As long as there is this system of massive government expenditure, the pressure on HCFA is to get the money back.

If your goal is to help people who are indigent, help people who have extraordinary circumstances and cannot afford it, there's got to be a better way of getting the money directly to those people in need than have having a whole system interpret the correct coverage and detailed reimbursement levels first, and then divvy it out, and then demand it back. This insane process is hugely wasteful.

MR. CHARROW: I don't blame HCFA. I blame everyone. Congress promises to use the savings to fund Medicare. Presidents and politicians of both parties say that fraud, waste, and abuse in Medicare accounts for a significant percentage of the expenditures, and therefore we can improve the program by ferreting it out. All the pressure comes to bear on both HCFA and the HHS Inspector General, and they respond.

Q: My name is David Sundwall. I'm a physician and president of the American Clinical Laboratory Association. I compliment you all on this much-needed dialogue.

I could give you a long talk about how an entire industry was vilified because of the fraud and abuse of some. It has been extremely costly. The federal government has bragged about reclaiming fraud from the laboratories of almost half a billion dollars. I can guarantee you that only a fraction of that was intent. It was mostly legitimate mistakes.

Indeed, the current situation is even worse than Dr. Huntoon portrayed it. The Medicare carriers now force the doctors to guess the diagnosis of the patient when they submit a claim for reimbursement for lab testing. This process puts the doctors at risk because they are required to give diagnostic codes even before they have the laboratory data on which to base a diagnosis.

It sounds self-serving, but the practice of medicine has been harmed seriously and is being eroded. Unless patients get this message, it's going to be hard to fix the system.

1. See U.S. Department of Health and Human Services and U.S. Department of Justice, Health Care Fraud and Abuse Control Program Annual Report for FY 1999, January 2000.

2. See Stephen Barr, "Medicare Taking Steps to Lower Claims Errors," The Washington Post, February 27, 2000, p. A4.

3. See 31 U.S.C. §§3729 (civil); 18 U.S.C. §287 (criminal).

4. See Section 1128A, Social Security Act, codified at 42 U.S.C. § 1320a-7a.

5. See In Re Frank P. Silver, M.D., DAB Docket No. CR-10, Opinion of Deputy Undersecretary, March 8, 1988.

6. See House Report No. 100-391, 100th Cong., 1st. Sess., Vol. I, 534 (1987) (amending the CMP law in response to first Silver decision).

7. The Medicare and Medicaid programs were enacted in 1965 as Titles XVIII and XIX of the Social Security Act, respectively, and began operation on July 1, 1996. See Title I, Social Security Act Amendments of 1965, Pub. L. 89-97, 79 Stat. 286.

8. The legislative history surrounding the enactment of Section 242 is sparse and largely uninformative. See House Report No. 92-231, 92d Cong., 2d Sess., reprinted in [1972] U.S. Code Cong. & Admin. News, pp. 4989, 5007, 5093, 5308. See Section 242(b), Social Security Amendments of 1972, Pub. L. 92-602, 86 Stat. 1419-1420.

9. Section 1877(b), Social Security Act, 42 U.S.C. §1395nn(b), as added to Title XVIII by Section 242(b), Social Security Amendments of 1972, Pub. L. 92-602, 86 Stat. 1419.

10. See United States v. Zacher, 586 F. 2d 912 (2nd Cir. 1978).

11. Ibid. at 916.

12. See United States v. Porter, 591 F. 2d 1048 (5th Cir. 1979).

13. See Medicare-Medicaid Antifraud and Abuse Amendments of 1977, Pub. L. No. 95-142, §4(a), 91 Stat. 1175, 1179-1181 (1977).

14. See 42 U.S.C. §1396h(b)(1) (1977).

15. See United States v. Greber, 760 F. 2d 68 (3rd Cir. 1985).

16. See Section 14, Medicare and Medicaid Patient and Program Protection Act of 1987, Pub. L. 100-93. The act also authorized the Secretary to exclude from the Medicare and Medicaid programs those providers who had violated the anti-kickback law. This form of sanction would prove useful because the United States Attorneys were frequently not enthusiastic about criminally prosecuting someone under the anti-kickback law.

17. Codified at 42 CFR §1001.952.

18. See 56 Fed. Reg. 35,799 (July 29, 1991); 57 Fed. Reg. 52,723 (Nov. 5, 1992); 59 Fed. Reg. 37,202 (July 21, 1994); 61 Fed. Reg. 2,122, 2,125 (Jan. 25, 1996); 63 Fed. Reg. 46,676 (Sept. 2, 1998); 64 Fed. Reg. 63,503 (Nov. 19, 1999); and 64 Fed. Reg. 63,517 (Nov. 19, 1999).

19. See Section 205, HIPAA, codified at 42 U.S.C. §1320a-7d.

20. The physician self-referral law ("Stark II") bars a physician from referring Medicare or Medicaid patient for designated medical services to an entity in which the physician has a "financial interest." There are certain statutory exceptions to Stark's prohibitions; these exceptions take the place of "safe harbors." Further, HCFA is authorized to issue advisory opinions interpreting Stark II.

21. See Nursing Home Consultants Inc. v. Quantum Health Services, Inc., 926 F. Supp. 835 (E.D. Ark. 1996); Vana v. Vista Hosp. Systems, Inc., 1993 WL 597402 (Cal. Super.).

22. See 5 U.S.C. §706.

23. See Daubert v. Merrell Dow Pharmaceutical, Inc., 509 U.S. 579 (1993).


Grace Arnett

Visiting Fellow

Jonathan Emord

Senior Policy Analyst on International Economics

Laurence Huntoon

Research Assistant

Robert Charrow

Distinguished Fellow