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Press Room
Congressional Statements


Testimony of Thomas T. Kubic, Deputy Assistant Director, Criminal Investigative Division, FBI
Before the Subcommittee on Oversight and Investigations, House Commerce Committee
July 18, 2000

"Health Care Fraud"

Good morning. I am Thomas T. Kubic of the FBI. I want to thank the Chairman and the entire subcommittee for allowing me to appear this morning. I'd like to discuss the serious nature of health care fraud and to brief you on innovative techniques that the FBI is currently utilizing to address the crime problem. Specifically, I am going to brief you on our efforts in California and the significant legislative changes that have occurred due, in part, to the efforts of the health care fraud task force in Sacramento, California.

As the subcommittee is well aware, in 1996, congress enacted comprehensive legislation to combat the health care fraud problem which continues to rob our health insurance programs of billions of dollars annually. The Health Insurance Portability and Accountability Act of 1996 (HIPPA), gave the FBI increased funding and new legal tools to address this very crime problem. We at the FBI interpreted this as a message that Congress wanted the FBI to step up our efforts. We responded. I and other senior management officials have used this increased funding to hire, equip, and train additional Agents and Professional Support employees assigned to health care fraud matters. In 1992 the FBI had 112 Special Agents investigating 591 cases. Today, thanks to the funding received through the HIPPA legislation, we now have 493 Agents investigating over 3,000 pending health care fraud cases. Criminal health care fraud indictments have also dramatically increased by 50% from 409 in 1992 to 615 in 1999. Despite the large number of criminal investigations and convictions of the most egregious instances of health care fraud, the FBI does not measure its successes solely on the number of convictions obtained. Rather, the effectiveness of the federal government's response to health care fraud can also be measured in the prevention of health care fraud and abuse.

The FBI, as the principal investigative agency of the Department of Justice, plays a significant role in combating health care fraud. As demonstrated throughout our investigations, no segment of the health care system is immune from fraud, certainly not the medicaid program. In 1998, approximately $170 billion was expended nationally by medicaid programs. Because the rules and regulations vary from state to state, and since each state administers its own medicaid program, I believe that the medicaid program is just as susceptible, if not more so, to fraud than its sister program, medicare. The medi-cal program, California's version of medicaid, realized expenditures over $18 billion in 1998, the second highest in the United States. In 1998, medi-cal provided health care for over 4.8 million recipients. In California, the medi-cal program is administered by the California Department of Health Services. Given the magnitude of the medi-cal program, the Sacramento Division of the FBI, in conjunction with the California State Comptroller's Office, identified a potential crime problem involving health care fraud.

The California State Comptroller's Office began auditing and referring all suspect pharmacies, and then later suppliers of durable medical equipment (DME), throughout California to our Sacramento Division for investigation. Through these referrals, FBI Sacramento began to identify and develop evidence of medicaid fraud. Sacramento's health care fraud task force was formed to address this particular crime problem.

The newly created health care fraud task force includes members from the Sacramento Division of the FBI, the California State Comptroller's Office, the California Attorney General's Office, the California Department of Health Services, and the United States Attorney's Office. In 1998, the Sacramento task force initiated its "phony pharm" and, then later, "unwholesum" initiatives to investigate and prosecute individuals suspected of orchestrating the most egregious fraud against the medi-cal program. The "phony pharm" initiative addresses pharmacies and DME suppliers that submit fraudulent claims to medi-cal. To date, investigators have focused primarily upon pharmacies and suppliers of DME (ie: leg braces, back supports, and other durable medical goods) that engage in fraudulent billing practices. Under this initiative, the Sacramento task force has received numerous referrals from the State Comptroller's Office identifying providers with insufficient inventories or purchase records to substantiate the volume of business indicated by their medi-cal claims. Investigation has also revealed that many illegitimate pharmacies and suppliers often set up shell companies or make use of a "store front" to set up their "business," quickly obtain provider numbers, bill medi-cal for high amounts in a short period of time, and then shut down. Many times these business operators will re-open in a few months under a new business name.

Approximately six months after the onset of the "phony pharm" initiative, the Sacramento task force realized that certain of these pharmacies and DME suppliers have been aided by unscrupulous wholesalers willing to create and sell fictitious invoices for pharmaceuticals or DME supplies. Pharmacies and DME suppliers involved in fraud schemes then use these fictitious invoices to substantiate their medi-cal claims to auditors and law enforcement officers. Under the "unwholesum" initiative, the Sacramento task force addresses wholesale companies suspected of supplying fictitious invoices.

As a result of this state-federal partnership, 115 medi-cal providers have been charged by federal prosecutors with health care fraud offenses. Collectively, these providers have been charged with defrauding the medi-cal program of more than $58 million. To date, based on the strength of the investigative efforts, 69 of the defendants have pleaded guilty. These individuals are serving a minimum of one year incarceration, and have been ordered to pay, collectively, more than $20 million in court ordered restitution and fines. To date, the Sacramento task force has identified more than 300 medical providers, including wholesalers, who are suspected of defrauding more than $250 million in medi-cal funds.

A major component in the success of the Sacramento task force is the prosecutive support that the investigators receive. The eastern district of California has a long standing reputation for pursuing health care fraud vigorously and effectively. The steady stream of referrals from our state partners and the investigative approach followed by the task force investigators, when combined with this vigorous prosecutive support, equates to a very effective and efficient approach to this identified crime problem.

One of the most flagrant examples of the type of fraud perpetrated against the medi-cal program is the Heravi case. The Heravis, suppliers of leg braces, back supports, and other DME, were charged with defrauding medi-cal out of more than $9 million. The Heravis submitted thousands of fraudulent claims for DME supplies that were never delivered to patients. In October 1999, the Heravis entered guilty pleas in the federal health care fraud case brought against them by the United States Attorney's Office in Sacramento. Additionally, the Heravis agreed to a civil forfeiture recovery totaling $4.74 million, the largest in the history of the eastern district of California.

In addition to the Heravi case, other significant accomplishments attributed to the Sacramento task force include: in June, 1999, Zaruti Ovesepyan and business associates were charged with federal health care fraud violations in a scheme totaling $5.94 million; and in July, 1999, Razmik Ovasapian was charged with federal health care fraud violations involving in excess of $1.18 million. These case examples and the vast majority of the task force's caseload demonstrates the ease with which individuals, whose primary goal is to defraud the medi-cal program, can obtain provider numbers allowing them to bill medi-cal.

A recent bill enacted in California recognized the need to attack fraud more effectively. On July 29, 1999, Governor Gray Davis signed legislation which provided $3.5 million for the creation of a new Fraud Prevention Bureau, aimed at providers of DME, transportation, laboratory, and pharmacy companies. This Fraud Prevention Bureau is the first of its kind in the nation. It is the result of a joint effort between the Sacramento health care fraud task force and the state medi-cal program. The Fraud Prevention Bureau is a new program of the California Department of Health Services. It includes a more comprehensive provider application and certification process, provider agreements, and an enrollment term of only four years for the specified category of providers.

The Department now conducts regular field audits to determine whether the volume of medi-cal claims submitted to the state are consistent with the amount of business that providers conduct. The Department is also conducting on-site visits to almost all medi-cal providers and has a moratorium on the issuance of new medi-cal provider numbers. These efforts have prevented fraudulent providers from shutting down and opening again in several weeks or months using a new provider number.

I would specifically like to emphasize the provider application and certification process. We have seen in California, as well as other jurisdictions, unscrupulous individuals enter the health care industry with one goal in mind, to steal from health insurers. The best defense we have against these individuals is to strengthen the provider enrollment and certification process and to keep these individuals out of our health care programs in the first place. The recognition of this health care fraud crime problem by the task force has, in part, led to these legislative changes.

Based on our experience in California, it certainly would facilitate law enforcement's efforts if other states would tighten their respective provider enrollment process and certification process. We have included presentations on the Sacramento operation at all of our recent health care fraud training programs, as well as past and future manager's conferences, and we look forward to the franchising of this investigative approach in other states.

That concludes my prepared remarks and at this time I would be pleased to answer any questions that you may have.