Rumors of fraud - and real budget cuts.

This is a story of crime, misinformation, and truly awful timing.

For the past year, the health care industry has been trying to convince Congress and the Clinton Administration that government plans for slowing Medicaid spending depend too much on wringing reductions from provider reimbursements. Providers already have limited their average annual cost increases to less than the rate of inflation. Even Federal estimates of future Medicaid costs have been dropping without the government imposing any new restrictions.

The politicians' stock answer has been that the Federal government spends billions of dollars each year on fraudulent claims by clinicians, hospitals, nursing homes and other medical services. The White House press office has even issued statements to the effect that the combination of managed care and the elimination of fraud could save enough to cut the growth of Medicaid and Medicare without harming the income of honest health care providers.

The notion that the Federal budget can be balanced by an attack on fraudulent Medicaid and Medicare claims surfaced in a report issued last year by the House Committee on Government Reform and Oversight. The report's lengthy title, "Fraud and Abuse in Medicare and Medicaid: Stronger Enforcement and Better Management Could Save Billions," suggested that committee staff has uncovered piratical nursing home operators and doctors fleecing incredible amounts of money. The text of the report, however, told a different story.

The committee report attacked HCFA for failing to require contractors to use software that would highlight inappropriate medical services. The report also stated that HCFA's development of an automated Medicare Transaction System "is vulnerable to cost overruns and delays." In effect, the "better management" in the title of the report refers to HCFA's operation of computer systems.

Other sections of the committee report deal specifically with fraud. The committee staff objected to HCFA's reliance on the Inspector General of the Department of Health and Human Services (HHS) for pursuing fraud, and criticized the government for allowing laboratories and hospitals who reached settlements for fraudulent billing to remain as Medicare and Medicaid providers. The committee also noted that government agencies involved in detecting and prosecuting Medicaid and Medicare fraud often operate without effective coordination. According to Sarah Jagger, director of the General Accounting Office Health Financing Division, "It is not unusual for a prescription drug fraud to involve five or more state, local and Federal agencies in its investigation, prosecution and resolution."

The GAO, as the investigating agency for Congress, provided the committee with several other good quotes - but no smoking gun. A 1994 GAO study entitled "Medicaid: A Program Highly Vulnerable to Fraud," did not actually cite any evidence that massive fraud exists in Medicaid, but noted that the "size, structure, and target coverage" of Medicaid makes it possible for fraud to occur. 1995 testimony by Sarah Jagger recommended that HCFA explore "opportunities to improve case management in settings such as nursing homes where fraud and abuse have been a recurring problem." Jagger did not offer evidence of the recurring problem, nor did she explain how or why case management would reduce the problem.

In the end, the only hard numbers that the Committee on Government Reform and Oversight could offer were derived from a 1992 GAO study of private health insurance scams. The report stated that "up to 10% of all health insurance payments are lost to fraud and wasteful provider claims." Government spokesmen have used this 10% "worst case" figure to estimate billions of dollars of fraud in Federally - financed health care, even though the 1992 GAO study was based on statistics from the private sector. The numbers that Federal officials like to quote concerning the money that could be saved from eliminating waste and abuse are not based on any attempt to seriously calculate the amount of fraud in Medicare itself.

This spring, however, the Federal government finally uncovered evidence of a rumor of fraud based in fact. Since May 1995, the Department of Justice has conducted a multi-agency investigation in concert with the HHS Inspector General, the FBI, and the U.S. Attorneys in five states. Known as Operation Restore Trust, the investigation achieved its first major breakthrough only a few weeks after President Clinton announced his proposal to limit Medicaid spending. On March 19, 1997, Federal agents raided the offices of Columbia HCA in El Paso, seizing documents indicating that the hospital chain's CEO, Richard L. Scott, had approved a payment of $150,000 to an El Paso cancer specialist for phantom services.

Unlike the individual clinical rogues uncovered in most earlier investigations, Columbia HCA's alleged involvement in fraudulent practices could have a significant impact on the Federal budget. The company owns 350 hospitals and receives 30% of its revenue from Medicare reimbursements. A set of 14 subpoenas issued by the HHS Inspector General in July generated document hunts in 35 more corporate offices of Columbia HCA, covering issues ranging from excessive billing for home health care to "upcoding" the severity of hospital patients' conditions. Ironically the investigations came at the moment when Columbia HCA was discussing merger with its largest rival, Tenet Healthcare Corp. Tenet's CEO, Jeffrey C. Barbakow, had previously been called upon by Tenet (in its previous corporate incarnation as National Medical Enterprises) to preside over the return of $380 million to the Federal treasury in settlement of, another health care fraud case.

Operation Restore Trust delivered a second major blow to the health care industry on July 28, when Deputy HHS Inspector General George F. Grob testified before the Senate Special Committee on Aging that audits in four states had found extensive inappropriate Medicare billings for home health services. The Senate hearings were publicized as more evidence of fraud, although Grob stated that most of the problems uncovered might be due to the inexperience of small for-profit agencies who rushed into the home health care market without a background in delivering medical services. The most common "deficit" found in the audit was the failure to provide physician review of the appropriateness on home health care services every 62 days.

Nursing home payments have not been targeted as a major focus of the Operation Restore Trust investigation, but the allegations of fraud are likely to affect the nursing home industry. At Columbia HCA, Scott has been replaced as CEO by Thomas Frist, Jr., a founder of HCA and elder brother of U.S. Senator Bill Frist of Tennessee. Meanwhile, Senator Charles Grassley, chair of the Special Committee on Aging, quickly absolved the home health care industry of failing to police itself. Not surprisingly, Senators Frist and Grassley, as well as other critics of Medicaid, are now depicting the results of Operation Restore Trust as proof of government laxity in supervising all publicly-funded health care and a justification for the cuts in Medicaid provider payments included in the White House budget deal with Congress.