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.
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