Why Medicare Can't Catch the Fraudsters

(Corrects the Hewlett-Packard ticker in the sixth paragraph.)

Six days a week, the elderly patients came in vans for mental-health group therapy sessions. They filed into outpatient clinics located mostly along South Florida's busy commercial corridors and in strip malls. The seven offices, operated by American Therapeutic, looked legitimate: Medical symbols adorned the windows and signs pronounced each "A Center of Excellence."

The operation, however, was a scam that bilked Medicare, the federal health program for the elderly and disabled, out of $83 million over eight years, according to a 13-count federal indictment in October of two companies and four individuals. Patients were plied with cigarettes and lunch, and some received $35 to sit in a clinic all day, prosecutors say.

Court papers name as the fraud's masterminds Lawrence S. Duran and Marianella Valera, the owners and managers of Miami-based American Therapeutic and another company, Medlink Professional Management Group, that handled the finances. They used the money to pay for a luxury condo on Biscayne Bay, jewelry, private school tuition, and a Maserati, the court documents say. Duran and Valera pleaded not guilty and their lawyers, Lawrence R. Metsch and Arthur Tifford, declined to comment.

Alleged scams like this are not new to the $500 billion Medicare program. What makes these accusations stand out is that officials at the Centers for Medicare & Medicaid Services (CMS), part of the Health and Human Services Dept., say they knew for years that something was amiss. The eight years it took to stop the alleged ring shows how difficult it will be for President Barack Obama to cut costs by reducing Medicare fraud, one goal of the health-care overhaul he signed in March 2010. "The system is broken," says Malcolm K. Sparrow, a professor at Harvard University's John F. Kennedy School of Government. "It wasn't designed with these types of criminal attacks in mind, and it can't cope with them."

In the three and a half years ending in June, Medicare paid $525 million to South Florida outpatient mental-health providers, almost 800 times the amount for New York and 78 times the amount paid in California. It didn't determine the reason for the imbalance because it was busy pursuing other fraud cases, says spokesman Peter Ashkenaz. Instead, Medicare kept paying the bills.

Outpatient mental-health care was supposed to save money by keeping Medicare patients out of hospitals. But the program is vulnerable to schemes that take advantage of regional claims processors that don't routinely compare notes—and miss upticks in billing. In this case, even after an antifraud contractor, SafeGuard Services, a unit of Hewlett-Packard (HPQ), says it detected anomalies, officials didn't crack down.

A probe might have found what prosecutors later described in court documents: Some American Therapeutic patients being treated for mental health problems were so affected by dementia or Alzheimer's that they didn't know where they were. The company recruited patients by bribing managers at halfway houses and assisted-living facilities, according to court papers. From 2003 until October 2010, the clinics submitted almost $200 million worth of claims, of which about 42 percent were paid, according to the indictment.

There are no reliable figures for how much Medicare loses to fraud annually. Senator Tom Coburn (R-Okla.) estimates the loss from fraud, waste, and abuse at $60 billion, based on various studies. Peter Budetti, the agency's deputy administrator for program integrity, says only that there is "a lot" of Medicare fraud, and the more officials look, the more they find. Other Florida providers for years billed for intravenous drugs to treat HIV and AIDS patients, even though the services were not medically necessary or ever provided, a 2007 report by the HHS inspector general says.

The Government Accountability Office, the investigative arm of Congress, in 2009 reported that a spike in bills from several states for home health care was due in part to "fraudulent and abusive practices." The problem, says Senator Charles Grassley (R-Iowa), a frequent Medicare critic, is that the agency "is only geared to be a check-writing machine" and not a fraud fighter.

A Medicare strike force launched in 2007 by the Justice Dept. and HHS provides a sense of the scale of the problem: It has obtained indictments of more than 825 people who prosecutors say falsely billed Medicare for about $2 billion. The strike force repeatedly has been able to "detect fraud that Medicare has failed to notice," says Kirk Ogrosky, who until March 2010 was a federal prosecutor coordinating Medicare fraud cases and is now a partner at Arnold & Porter, a Washington law firm. "It is a phenomenon that is rarely seen in law enforcement—that the police call the victim to let them know that a crime occurred."

That's what happened in South Florida with outpatient mental health, say law enforcement officials who faulted Medicare for failing to act sooner. The officials, who requested anonymity because they weren't authorized to speak publicly, say the Justice Dept. requested claims data and saw the suspicious pattern. The investigation began after a whistleblower filed a lawsuit that remains under court seal, the law enforcement officials say. Investigations of clinics beyond American Therapeutic have begun, and more prosecutions may follow, they say.

Cecilia Franco, head of the Medicare office in Miami, says her agency told Justice about the payment imbalance in South Florida years ago. The law enforcement officials say they aren't aware of any such reports. Laura Sweeney, a Justice Dept. spokeswoman, declined to comment. CMS spokesman Ashkenaz says the agency wants to avoid pointing fingers and would not say who at Justice was told, or when.

Detecting abnormal patterns is hard because Medicare's antifraud contractors serve specific regions and don't keep databases that allow for national comparisons. Medicare until recently lacked the money to create a nationwide database and do real-time analysis, says Kimberly Brandt, an attorney at Washington law firm Alston + Bird who directed a CMS fraud detection and prevention unit until June.

Medicare is now buying software to help it flag suspicious claims before they're paid, says spokesman Ashkenaz. Under the health-reform law, Medicare also has more power to screen providers, and in September proposed subjecting some to site checks and fingerprinting. The law makes it easier for Medicare to withhold payments when fraud is suspected, deputy administrator Budetti says. "While it is an easy thing to say what they should or could have done in the past," says Brandt, "the real key is what they are doing now that they have resources and authority" to address.

Those changes will help, says Joseph Antos, a health policy analyst at the American Enterprise Institute for Public Policy Research, but they won't "get at the fundamental problems" of paying claims first and asking questions later, when the money is long gone.

The bottom line: Attempts to curb Medicare fraud are hampered by the inability of claims processors and other contractors to compare notes.

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