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The Department of Health and Human Services
The Department of Justice
Health Care Fraud and Abuse Control Program
Annual Report For FY 2004



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All years are fiscal years unless
otherwise noted in the text.


The Health Insurance Portability and Accountability Act of 1996 (HIPAA) established a national Health Care Fraud and Abuse Control Program (HCFAC or the Program), under the joint direction of the Attorney General and the Secretary of the Department of Health and Human Services (HHS) 1, acting through the Department’s Inspector General (HHS/OIG), designed to coordinate federal, state and local law enforcement activities with respect to health care fraud and abuse. In its eighth year of operation, the Program’s continued success again confirmed the soundness of a collaborative approach to identify and prosecute the most egregious instances of health care fraud, to prevent future fraud or abuse, and to protect program beneficiaries.

Monetary Results

During 2004, the Federal Government won or negotiated approximately $605 million in judgments and settlements, and it attained additional administrative impositions in health care fraud cases and proceedings. The Medicare Trust Fund received transfers of more than $1.51 billion during this period as a result of these efforts, as well as those of preceding years, and an additional $99 million in federal Medicaid money was similarly transferred to the Centers for Medicare and Medicaid Services (CMS) as a result of these efforts. The HCFAC account has returned over $7.3 billion to the Medicare Trust Fund since the inception of the program in 1997.

Enforcement Actions

In FY 2004, U.S. Attorneys' Offices opened 1,002 new criminal health care fraud investigations involving 1,685 potential defendants. Federal prosecutors had 1,626 health care fraud criminal investigations pending, involving 2,361 potential defendants, and filed criminal charges in 395 cases involving 646 defendants. A total of 459 defendants were convicted for health care fraud-related crimes during the year. Also in FY 2004, the Department of Justice opened 868 new civil health care fraud investigations, and had 1,362 open civil health care fraud investigations. The Department of Justice filed complaints or intervened in 269 civil health care cases in 2004.



As Required by
Section 1817(k)(5) of the Social Security Act


The Social Security Act section 1128C(a), as established by the Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191, HIPAA or the Act), created the Health Care Fraud and Abuse Control Program, a far-reaching program to combat fraud and abuse in health care, including both public and private health plans.

The Act requires that an amount equaling recoveries from health care investigations -- including criminal fines, forfeitures, civil settlements and judgments, and administrative penalties, but excluding restitution, compensation to the victim agency, and relators’ shares -- be deposited in the Medicare Trust Fund.2 All funds deposited in the Trust Fund as a result of the Act are available for the operations of the Trust Fund.

The Act appropriates monies from the Medicare Trust Fund to an expenditure account, called the Health Care Fraud and Abuse Control Account (the Account), in amounts that the Secretary and Attorney General jointly certify as necessary to finance anti-fraud activities. The maximum amounts available for certification are specified in the Act. Certain of these sums are to be used only for activities of HHS/OIG, with respect to Medicare and Medicaid programs. In 2004, the Secretary and the Attorney General certified $240.558 million for appropriation to the Account. A detailed breakdown of the allocation of these funds is set forth later in this report. These resources generally supplement the direct appropriations of HHS and the Department of Justice (DOJ) that are devoted to health care fraud enforcement, though they provide the sole source of funding for Medicare and Medicaid enforcement by HHS/OIG. (Separately, the Federal Bureau of Investigation (FBI) received $114 million from HIPAA which is discussed in the Appendix.)

Under the joint direction of the Attorney General and the Secretary, the Program’s goals are:

(1)       to coordinate federal, state and local law enforcement efforts relating to health care fraud and abuse with respect to health plans;

(2)       to conduct investigations, audits, inspections, and evaluations relating to the delivery of and payment for health care in the United States;

(3)       to facilitate enforcement of all applicable remedies for such fraud;

(4)       to provide guidance to the health care industry regarding fraudulent practices; and

(5)       to establish a national data bank to receive and report final adverse actions against health care providers, and suppliers.

The Act requires the Attorney General and the Secretary to submit a joint annual report to the Congress which identifies both:

(1)       the amounts appropriated to the Trust Fund for the previous fiscal year under various categories and the source of such amounts; and

(2)       the amounts appropriated from the Trust Fund for such year for use by the Attorney General and the Secretary and the justification for the expenditure of such amounts.

This annual report fulfills the above statutory requirements.


As required by the Act, HHS and DOJ must detail in this Annual Report the amounts deposited and appropriated to the Medicare Trust Fund, and the source of such deposits. In 2004, $1.76 billion was deposited with the Department of the Treasury and the Centers for Medicare and Medicaid Services (CMS), transferred to other federal agencies administering health care programs, or paid to private persons during the fiscal year. The following chart provides a breakdown of the transfers/deposits: 

Total Transfers/Deposits by Recipient FY 2004

Department of the Treasury
    HIPAA Deposits to the Medicare Trust Fund
            Gifts and Bequests
            Amount Equal to Criminal Fines
            Civil Monetary Penalties
            Asset Forfeiture *
            Penalties and Multiple Damages

Centers for Medicare and Medicaid Services
    OIG Audit Disallowances - Recovered
    Restitution/Compensatory Damages





Restitution/Compensatory Damages to Federal Agencies
Office of Personnel Management
Veterans Administration
Administration for Children and Families
HHS/OIG Investigative Costs
Bureau of Primary Health Care
Other Agencies




Relators’ Payments**


       TOTAL ***


*This includes only forfeitures under 18 U.S.C. § 1347, a Federal health care fraud offense that became effective on August 21, 1996. Not included are forfeitures obtained in numerous health care fraud cases prosecuted under Federal mail and wire fraud and other offenses.
**These are funds awarded to private persons who file suits on behalf of the Federal Government under the qui tam provisions of the False Claims Act, 31 U.S.C. § 3730(b).
***Funds are also collected on behalf of state Medicaid programs and private insurance companies; these funds are not represented here.                

The above transfers include certain collections, or amounts equal to certain collections, required by HIPAA to be deposited directly into the Medicare Trust Fund. These amounts include:

(1)       Gifts and bequests made unconditionally to the Trust Fund, for the benefit of the Account or any activity financed through the Account;

(2)       Criminal fines recovered in cases involving a Federal health care offense, including collections under section 24 (a) of title 18, United States Code (relating to health care fraud);

(3)       Civil monetary penalties in cases involving a Federal health care offense;

(4)       Amounts resulting from the forfeiture of property by reason of a Federal health care offense, including collections under section 982(a)(6) of title 18, United States Code; and

(5)       Penalties and damages obtained and otherwise creditable to miscellaneous receipts of the general fund of the Treasury obtained under sections 3729 through 3733 title 31 of United States Code (known as the False Claims Act, or FCA), in cases involving claims related to the provision of health care items and services (other than funds awarded to a relator, for restitution or otherwise authorized by law).



In the eighth year of operation, the Secretary and the Attorney General certified $240.558 million as necessary for the Program. The following chart gives the allocation by recipient:

(Dollars in thousands)



Department of Health and Human Services
   Office of Inspector General3
   Office of the General Counsel
   Administration on Aging
   Centers for Medicare and Medicaid Services
   Health Resources and Services Administration (HRSA)


Department of Justice
    United States Attorneys
    Civil Division
    Criminal Division
    Civil Rights Division
    Nursing Home Initiative





 Overall Recoveries

During this fiscal year, the Federal Government won or negotiated approximately $605 million in judgments and settlements, and it attained additional administrative impositions in health care fraud cases and proceedings. The Medicare Trust Fund received transfers of more than $1.51 billion during this period as a result of these efforts, as well as those of preceding years, and an additional $99 million in federal Medicaid money was similarly transferred to CMS as a result of these efforts. Note that some of the judgments, settlements, and administrative actions that occurred in 2004 will result in transfers in future years, just as some of the transfers in 2004 are attributable to actions from prior years.

In addition to these enforcement actions, numerous audits, evaluations and other coordinated efforts yielded recoveries of overpaid funds, and prompted changes in Federal health care programs that reduce vulnerability to fraud. HHS agreed in FY 2004 to recover more than $601 million in OIG recommended refunds – the largest amount in the past 10 years.

Program Accomplishments

Working together, HHS/OIG, DOJ and their law enforcement partners have brought to successful conclusion the investigation and prosecution of numerous health care fraud schemes. In addition to these, numerous audits, evaluations and other coordinated oversight efforts yielded recoveries of overpaid funds, and prompted changes in Federal health care programs that reduce vulnerability to fraud. During FY 2004, the many significant HCFAC Program accomplishments included the following:

Fraud Issues

Pharmaceutical Companies Fraud

In the late 1990s, Claritin was Schering’s best-selling drug. Claritin was substantially  more expensive, however, than its biggest competitor, Allegra. When one of Schering’s best customers demanded a price reduction in Claritin -- because it cost the HMO millions of additional dollars a year to purchase Claritin instead of Allegra -- Schering refused, in part, because it knew that it then would have to lower the Claritin price for the Medicaid programs. Under the Medicaid Drug Rebate Statute, drug manufacturers are required to report their “best prices” to the Federal Government and to pay quarterly rebates to Medicaid to ensure that the nation’s insurance program for the poor receives the benefit of favorable drug prices offered to other large purchasers of drugs. As a participant in the Medicaid Rebate Program, Schering was required to report its “best price” for and to pay rebates on Claritin. Similarly, under the provisions of the PHS drug pricing program, Schering was required to charge PHS entities such as AIDS drug programs and community health centers a discounted price, based in part on the Medicaid price.

After the HMO removed Claritin from its formulary, Schering offered to make up the difference in price between Claritin and Allegra by offering the HMO a $10 million package of added value, in lieu of an actual price reduction on Claritin. The United States alleged that, as part of this “value added” package, Schering offered to provide $3 million worth of deeply discounted Claritin Reditabs, health management services at far below fair market value, and an interest free loan in the form of prepaid rebates. Schering also offered to pay an annual fee of 2% of the annual gross sales of Schering drugs to the HMO, or approximately $2.4 million, disguised as a “data fee” in order to give the appearance that the fee was a fair market value transaction rather than a hidden inducement to the HMO to keep Claritin on its formulary.

Schering also provided, to another HMO, a risk share arrangement in which Schering covered a portion of the managed care customer’s respiratory drug costs, provided deep discounts on other Schering products, provided payment and services for Internet development, and provided an interest free loan in the form of prepaid rebates. Because of Schering’s failure to account for these discounts in its reported best price for Claritin, the Medicaid program and PHS entities paid far more for Claritin from 1998-2002 than Schering’s two managed care customers.

In an unrelated matter, Schering-Plough Corporation, Schering Corporation, and Warrick Pharmaceuticals paid the United States and the state of Texas $27 million to settle allegations that Warrick, a division of Schering-Plough, submitted false pricing information for its generic line of allergy and respiratory drugs. The government alleged that Warrick's manipulation of wholesale acquisition costs resulted in inflated claims for Federal and Texas Medicaid funds.

Misbranded Pharmaceutical Fraud

Pharmaceutical Distribution Fraud

False Prescriptions

Durable Medical Equipment Fraud

Physician Fraud

Home Health Care Fraud

Clinical Laboratory Fraud

Ambulance Services Fraud

Physical Therapy Fraud

Medicare Contractor Fraud

Teaching Hospital Physicians’ Fraud

Nursing Home Registry Fraud

Podiatry Fraud

Medicare Cost Report Fraud

Quality of Care Issues

Another area in which collaboration among the Federal authorities responsible for health oversight has proved most effective has been in enforcement and oversight of issues relating to quality of care, as demonstrated by the following:

The achievements discussed above and throughout this report reflect the culmination of investigations that have been ongoing for several years. A more detailed description of other accomplishments of the major Federal participants in the coordinated effort established under HIPAA follows. While information in this report is presented in the context of a single agency, most of the accomplishments described herein reflect the combined efforts of HHS, DOJ and federal, state, local, and private insurance partners in the anti-fraud efforts.


Office of Inspector General

Certain of the funds appropriated under HIPAA are, by law, set aside for Medicare and Medicaid activities of HHS/OIG. In 2004, The Secretary and the Attorney General jointly allotted $160 million to the HHS/OIG which is the statutory maximum permitted under HIPPA. This is equal to the amount allotted to the HHS/OIG in 2003. This represents approximately 80 percent of OIG’s overall funding.

HHS/OIG conducted or participated in 801 prosecutions or settlements in 2004, of which 592 or 75 percent were health care cases. A number of these are highlighted in the Accomplishments section. During FY 2004, the HHS/OIG also excluded a total of 3,293 individuals and entities, barring them from participating in Medicare, Medicaid, and other Federal and state health care programs. In addition, the Department of Health and Human Services collected $141.4 million in disallowances of improperly paid health care funds, based on HHS/OIG recommendations.

Program Savings

Frequently, investigations, audits and evaluations reveal vulnerabilities or incentives for questionable or fraudulent financial practices in agency programs or administrative processes. As required by the Inspector General Act, the HHS/OIG makes recommendations to agency managers to address these vulnerabilities. In turn, agency managers recommend legislative proposals or other corrective actions that, when enacted or implemented, close loopholes and reduce improper payments or conduct. The net savings from these joint efforts toward program improvements can be substantial. During 2004, HHS/OIG estimates that such corrective actions resulted in health care savings (i.e., funds put to better use as a result of implemented legislative or other program initiatives) of approximately $ 27.3 billion -- more than $21.4 billion in Medicare savings, and more than $5.8 billion in savings to the Medicaid program. Additional information about savings achieved through such policy and procedural changes may be found at Appendix A to the HHS/OIG Semiannual Report, on-line at

Medicare Prescription Drug, Improvement, and Modernization Act

It is noteworthy that in late 2003, the President signed the Medicare Prescription Drug, Improvement, and Modernization Act (MMA), a measure that will bring fundamental changes to Medicare reimbursement and coverage. MMA creates a voluntary outpatient prescription drug benefit and offers additional prescription drug benefits to Medicare beneficiaries. It authorizes health savings accounts and amends some of the HHS regulatory processes. In addition, MMA makes broad changes to Medicare’s fee-for-service payment practices.

Most of MMA’s changes will be phased in over the coming years; however, some savings were realized almost immediately. For example, sections 303-305 of the MMA revised the payment methodology for certain drugs and biologicals covered under Medicare Part B. Under these provisions, beginning in 2004, reimbursement for these drugs was reduced by approximately 15 percent below their 2003 average wholesale prices. According to Congressional Budget Office analysis, the changes to the Part B payment methodology will result in a reduction of $15.2 billion in direct spending over 10 years. Savings for FY 2004 are estimated at $200 million.As another example of cost savings from legislative changes recommended in OIG reports, section 628 of the MMA froze annual updates for clinical diagnostic laboratory test fees for the period FY 2004-2008. Savings from these and similar MMA provisions totaled an estimated $980 million for FY 2004.


One important mechanism for safeguarding the care provided to program beneficiaries is through exclusion of providers and suppliers who have engaged in patient abuse or neglect or fraud. During 2004, the HHS/OIG excluded a total of 3,293 individuals and entities, many as a result of criminal convictions for crimes related to Medicare or Medicaid (584), or to other health care programs (165); for patient abuse or neglect (250); or as a result of licensure revocations (1,868). Among those excluded by the HHS/OIG were the following:

Studies, Audits, and Evaluations

The HHS/OIG continues to conduct studies, audits and evaluations of the Medicare and Medicaid programs for a variety of fraudulent or abusive activities. Among these are the following:

Drug Pricing


Rate Payment

Duplicate Billings by Skilled Nursing Facilities

Intergovernmental Transfers

An audit of a county nursing home in New York State disclosed that the facility received ample Medicaid payments to cover its operating costs; however, state and county intergovernmental transfer policies required the home to return a portion of those payments and left the home without adequate funding. Over a 3-year period, the home was allowed to keep less than half of its payments, a full $20 million less than its operating costs. As a result, the nursing home was seriously understaffed. This may have reduced the quality of patient care to the point that the home received a rating from the state indicating that the home’s residents were in immediate jeopardy.

HCFAC has been successful in building up a much-needed capacity to confront health care fraud involving the Medicaid program. This is critical because Medicaid is undergoing significant growth and its total budget (state and federal) now exceeds that of Medicare.

Industry Outreach and Guidance

Centers for Medicare & Medicaid Services

In 2004, the Centers for Medicare and Medicaid Services (CMS) was allocated $22.75 million to fund a variety of projects related to fraud, waste, and abuse in the Medicare and Medicaid programs. Of this amount, approximately $18 million was specifically dedicated to combat fraud in the State Children’s Health Insurance Program (SCHIP) and Medicaid program. CMS has increased its efforts to use advanced technology to detect and prevent fraud and abuse and to ensure that CMS pays the right providers the right amount, for the right service on behalf of the right beneficiary. CMS fraud, waste, and abuse projects are described below:

Payment Error Rate Measurement (PERM) and SCHIP Pilot Project

In response to an all-state solicitation, CMS awarded grants to pilot test the PERM (Payment Error Rate Measurement) methodology. The District of Columbia and 30 states participating in this project are: Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Minnesota, Missouri, Nevada, New Mexico, New York, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

Medicaid/SCHIP Financial Management Project

Financial Management Data Redesign Project

Medicare-Medicaid Data Matching Project

Data Extract Project

Medicare + Choice Steerage and Discrimination Project

Medicaid Audits

Office of the General Counsel

The Office of the General Counsel (OGC) was allocated $4.67 million in HCFAC funding for 2004 to support program integrity activities. These funds were used primarily for litigation activity, both administrative and judicial.

OGC accomplishments in 2004 include the following:




Legal Guidance and Education

MMA Clarifications

Administration on Aging


In 2004, the Administration on Aging (AoA) was allocated $3.28 million in HCFAC funds to develop and disseminate consumer education information to older Americans, with a particular focus on persons with low health literacy, individuals from culturally diverse backgrounds, persons living in rural areas, and other vulnerable populations. AoA and its nationwide network of agencies supported community education activities designed to assist older Americans and their families to recognize and report potential errors or fraudulent situations in the Medicare and Medicaid programs.

Senior Medicare Patrol (SMP) Projects recruit retired professionals to educate and assist Medicare beneficiaries to detect and report health care fraud, error, and abuse in Medicare and Medicaid programs. According to the last performance information from the Assistant Inspector General for Evaluation and Inspections, over the 12-month period, ending June 30, 2004, the 57 SMP project volunteers educated over 440,000 beneficiaries in group and one-on-one sessions. As a result of educating beneficiaries, the projects received over 7,600 complaints, of which 1,700 were referred to Medicare contractors for follow-up. Over 800 of these complaints resulted in money recouped to the Medicare program or another action taken by the Medicare contractor or investigative agency. In total, SMP projects documented close to $194,000 recouped to the Medicare program during this period. The projects also reported $200,000 in savings to the Medicaid program, and savings of approximately $467,000 to beneficiaries.

While it is not possible to directly track all of the cases reported and dollars recovered through SMP community education activities, or quantify the “sentinel effect” in fraud costs avoided due to increased consumer awareness, a total of nearly $104 million has been reported as savings attributable to the program since its inception.

Health Resources and Services Administration

In FY 2004, $450,000 in HCFAC funds was allocated to the Health Resource and Services Administration, or HRSA, to support the overall operations and maintenance of the Healthcare Integrity and Protection Data Bank (HIPDB) program. The primary focus of the HIPDB is to prevent or reduce fraud and abuse in the medical system and to enhance quality health care by serving as a repository for collecting, maintaining, and reporting on final adverse actions taken against health care providers, suppliers, and practitioners. This information helps prevent practitioners, providers, and suppliers with problem backgrounds from moving from state to state unnoticed by licensing, government, and health plan officials, thus improving health care quality. It also assists law enforcement officials in their efforts against health care fraud and abuse.


United States Attorneys

In 2004, the United States Attorney’s Offices (USAOs) were allocated $30.4 million dollars in HCFAC program funds to support civil and criminal health care fraud and abuse litigation as exemplified in the Program Accomplishment's section. The USAOs dedicated substantial resources to combating health care fraud and abuse in FY 2004. HCFAC allocations have supplemented those resources by providing dedicated positions for attorneys, paralegals, auditors and investigators, as well as funds for litigation of resource-intensive health care fraud cases.

The 93 United States Attorneys and their assistants, or AUSAs, are the nation’s principal prosecutors of Federal crimes, including crimes committed by health care providers. Civil attorneys in the USAOs are responsible for bringing affirmative civil cases to recover funds that Federal health care programs have paid as a result of fraud, waste, and abuse, with support in those cases designated by the Civil Division for joint handling. USAOs also handle most criminal and civil appeals at the Federal appellate level.

In addition to the staff positions funded by HCFAC, EOUSA’s Office of Legal Education (OLE) uses HCFAC funds to train AUSAs and other Department attorneys, as well as paralegals, investigators, and auditors in the investigation and prosecution of health care fraud. In 2004, OLE conducted courses and presentations on health care fraud, including the Health Care Fraud Coordinator’s Conference for Civil and Criminal AUSAs and Health Care Fraud for New AUSAs.

Criminal Prosecutions

In 2004, the USAOs received 1,002 new criminal matters involving 1,685 defendants, and had 1,626 health care fraud criminal matters pending,4 involving 2,361 defendants. The USAOs filed criminal charges in 395 cases involving 646 defendants, and obtained 459 Federal health care related convictions. USAOs receive referrals of criminal health care fraud cases from a wide variety of sources, including the FBI, the HHS/OIG, state Medicaid Fraud Control Units, and other federal, state, and local law enforcement agencies.

Civil Matters

The USAOs use affirmative civil enforcement litigation to recover monies wrongfully taken from the Medicare Trust Fund and other taxpayer-funded health care systems, and to ensure that the Federal health care programs are fully compensated for the losses and damages resulting from such thefts. The FCA is one of the most important tools the USAOs use for these purposes. The FCA subjects those who knowingly present false claims for payment to the government, including health care providers who submit claims to Federal health care programs, to treble damages and civil penalties.

USAOs receive civil health care fraud referrals from a variety of sources, including from the Federal investigative agencies that refer criminal cases, and by means of qui tam complaints. Under the FCA, a qui tam plaintiff (known as a “relator”) must file his or her complaint under seal in a United States District Court, and serve a copy of the complaint upon the USAO for that judicial district, as well as the Attorney General. USAOs routinely assign civil AUSAs to every qui tam case filed in their districts, as well as all matters referred by a law enforcement agency. In 2004, the USAOs opened 868 new civil health care fraud matters (including qui tam actions and matters referred by agencies) and had 1,362 civil health care fraud matters and cases pending. In order to maximize resources, Civil Division attorneys may become actively involved and participate with the USAOs in those qui tam cases that involve more than one district and potential recoveries substantially over one million dollars. In addition to these joint cases, USAOs are responsible in all other qui tam cases for investigating the relator’s allegations and, where appropriate, litigating and/or settling the case. In 2004, USAOs filed or intervened in 269 civil health care fraud cases.

Civil Division

In 2004, the Civil Division was allocated $14.46 million in HCFAC funds to support civil health care fraud litigation, and an additional $1 million to administer the Nursing Home Initiative. Civil Division attorneys pursue civil remedies in health care fraud matters, working closely with the USAOs, the FBI,

the Inspectors General, CMS, and other federal and state law enforcement agencies. Cases involve providers of health care services, supplies and equipment, as well as carriers and fiscal intermediaries, that defraud Medicare, Medicaid, TRICARE, FEHBP, and other government health care programs.

In FY 2004, the Division opened or filed a total of 303 health care fraud cases or matters. In addition to these new efforts, the Division pursued 514 existing cases or matters that remained open at the end of FY 2003. Division attorneys were actively involved in the recoveries described in the consolidated case recovery overview. In addition, the Division provided in-depth, multi-day, training to AUSAs nationwide on the FCA, including issues relating to the investigation and litigation of qui tam cases, and continued to provide training to DOJ and HHS components on a regular basis.

Civil Division attorneys litigate a wide range of health care fraud matters, including cases involving allegations of overcharging by hospitals, and other Medicare Part A institutional providers; similar claims against suppliers of DME and other supplies under Part B of Medicare; claims that doctors and others have been paid kickbacks or other remuneration to induce referrals of Medicare or Medicaid patients, in violation of the Anti-Kickback Act and Stark laws; claims of overpricing and illegal marketing of pharmaceuticals by drug companies and related entities; and allegations that nursing homes have failed to provide necessary care to the elderly. Among these are multi-district cases involving large health providers and suppliers that typically require coordination among affected Federal agencies, USAOs, state Medicaid Fraud Control Units and other state agencies, and various investigative organizations.

The Civil Division continues to staff and provide a critical coordination function in the FCA investigations alleging pharmaceutical pricing fraud against government health care programs. These matters involve hundreds of manufacturers and related entities, span multiple districts and present myriad legal and factual issues. Civil Division attorneys have spearheaded substantial efforts to share information and evidence, as appropriate, with the USAOs and other components of DOJ, as well as HHS components including the FDA. In addition, close communication with state Medicaid Fraud Control Units and Attorneys General is ongoing to ensure that federal and state investigations and litigation are coordinated.

In addition, Civil Division attorneys, working with attorneys in the Criminal Division and the USAOs, have played a critical role in coordinating and presenting the views of DOJ to the CMS as that agency drafts implementing regulations for the new Medicare prescription drug benefit passed as part of MMA. Civil Division attorneys also played a role in coordinating and presenting DOJ’s views to the HHS/OIG as it interpreted and applied the Anti-kickback Statute and Stark laws (prohibiting physician self-referral). In addition, the Division worked with other components of DOJ to provide views on the Hospital Compliance Program Guide published by the HHS/OIG.

The Department’s Nursing Home and Elder Justice Initiative is coordinated by the Civil Division. The Nursing Home and Elder Justice Initiative, among other things, supports enhanced prosecution and coordination at federal, state and local levels to fight abuse, neglect, and financial exploitation of the nation’s senior and infirm population. Through this initiative, DOJ also makes grants to promote prevention, detection, intervention, investigation, and prosecution of elder abuse and neglect, and to improve the scarce forensic knowledge in the field. DOJ additionally is pursuing a growing number of cases under the FCA involving providers’ egregious “failures of care.”

Civil Division attorneys continue to provide guidance and training to government attorneys in numerous subject matters, including to assure the Department's continued compliance with the HIPAA privacy rule. Also, the Civil Division continues to co-chair, with the Criminal Division, the National Level Health Care Fraud Working Group to coordinate the health care fraud enforcement activities of all concerned federal and state agencies.

Criminal Division

In FY 2004, the Criminal Division was allocated $1.58 million in HCFAC funds to support criminal health care fraud litigation. The Fraud Section of the Criminal Division develops and implements white collar crime policy and provides support for the Federal white collar enforcement community. The Fraud Section supports the USAOs with legal and investigative guidance and, in certain instances, provides trial attorneys to prosecute criminal fraud cases. For several years, a major focus of the Fraud Section has been to investigate and prosecute fraud in Federal health care programs.

The Fraud Section has provided guidance to FBI agents, AUSAs and Criminal Division attorneys on criminal, civil and administrative tools to combat health care fraud, and worked on an interagency level through: coordinating large scale multi-district health care fraud investigations; providing frequent advice and written materials on confidentiality and disclosure issues arising in the course of investigations and legal proceedings regarding medical records; monitoring and coordinating Departmental responses to major regulatory initiatives, legislative proposals, and enforcement policy matters; reviewing and commenting on numerous requests for advisory opinions submitted by health care providers to the HHS/OIG, and consulting with the HHS/OIG on draft advisory opinions per the requirements of HIPAA; working with CMS officials to promote more effective use of technologies and high-tech approaches for combating health care fraud and abuse, and working with USAOs and CMS to improve Medicare contractors’ fraud detection and case development work; preparing and distributing to all USAOs and FBI field offices periodic updates on major issues, interagency initiatives, and significant activities of DOJ’s health care fraud component organizations as well as periodic summaries of recent cases; and organizing and overseeing, in conjunction with the Civil Division, the National Level Health Care Fraud Working Group to address fraud in health care and managed care, as well as other interagency working groups formed to address specific cases and initiatives.

The Fraud Section has responsibility for handling and coordinating complex health care fraud litigation nationwide. In FY 2004, the Fraud Section handled or was involved in investigations of hospitals, medical equipment suppliers, and vocational rehabilitation and healthcare management services, as well as other health care providers. Examples of successful Fraud Section health care fraud prosecutions in 2004 follow:

Civil Rights Division

In FY 2004, the Civil Rights Division was allocated $1.98 million in HCFAC funds to support Civil Rights Division litigation activities related to health care fraud. The Civil Rights Division pursues relief affecting public, residential health care facilities. The Division has also established an initiative to carry out the Department’s goals to eliminate abuse and grossly substandard care in Medicare and Medicaid funded nursing homes and other long-term care facilities.

The Division plays a critical role in the HCFAC program. The Special Litigation Section of the Civil Rights Division is the sole Department section responsible for the Civil Rights of Institutionalized Persons Act, 42 U.S.C. § 1997 (CRIPA). CRIPA authorizes investigation of conditions of confinement at state and local residential institutions (including facilities for persons with developmental disabilities or mental illness, and nursing homes) and initiation of civil action for injunctive relief to remedy a pattern or practice of violations of the constitution or Federal statutory rights. The review of conditions in facilities for

persons who have mental illness and for persons with developmental disabilities, and nursing homes comprises a significant portion of the program. The Special Litigation Section works collaboratively with the USAOs and HHS.

As part of the Department’s Institutional Health Care Abuse and Neglect Initiative, and as an enhancement to the Department’s ongoing CRIPA enforcement efforts, this year the Civil Rights Division initiated six investigations of public health care facilities, made findings of unconstitutional conditions regarding ten health care facilities, and secured consent decrees and settlement agreements involving seven health care facilities. A few examples of the Civil Rights Division’s achievements include:


Federal Bureau of Investigation
Mandatory Funding

“There are hereby approspriated from the general fund of the United States Treasury and hereby appropriated to the Account for transfer to the Federal Bureau of Investigation to carry out the purpose described in subparagraph (C), to be available without further appropriation - (I) for fiscal year 2004, $114,000,000.”

In FY 2004, the FBI was allocated $114 million in HCFAC funds for health care fraud enforcement. This yearly appropriation was used to support 825 positions (479 Agent/346 Support) in FY 2004, a decrease of 53 positions from the positions supported in FY 2003 (28 Agent, 25 Support). The

FY 2004 funding did not allow for cost of living increases, necessitating reductions in funded staffing levels. The number of pending investigations has shown steady increase from 591 cases in 1992 to 2,468 cases through 2004. FBI-led investigations resulted in 564 criminal health care fraud convictions and 693 indictments and informations being filed in state and Federal courts in FY 2004. 

The FBI is the primary investigative agency involved in the fight against health care fraud that has jurisdiction over both the Federal and private insurance programs. With health care expenditures rising at three times the rate of inflation, it is especially important to coordinate all investigative efforts to combat fraud within the health care system. Nearly $1 trillion is spent in the private sector on health care and its related services and the FBI's efforts are crucial to the overall success of the program. The FBI leverages its resources in both the private and public arenas through investigative partnerships with agencies such as the HHS/OIG, the FDA, the Drug Enforcement Administration (DEA), the Defense Criminal Investigative Service, the Office of Personnel Management, the Internal Revenue Service and various state and local agencies. On the private side, the FBI is actively involved with national groups, such as the National Health Care Anti-Fraud Association (NHCAA), the Blue Cross and Blue Shield Association and the Coalition Against Insurance Fraud, as well as many other professional and fundamental efforts to expose and investigate fraud within the system.

Health care fraud investigations are the number three priority within the FBI’s White Collar Crime Program. In addition to being a partner in the majority of investigations listed in the body of this report, the FBI continued the Outpatient Surgery Initiative to combat the growing problem of fraudulent surgeries performed at certain outpatient facilities in Southern California. This nationwide scheme has drawn participants from 48 of the 50 states who have traveled to California to have unnecessary surgery in exchange for a cash kickback, and has resulted in billings to the insurance companies in excess of

$750 million. The FBI partnered with the NHCAA to collect intelligence on the problem, and launched a nationwide investigation. To date over 90 subjects have been identified which involves the participation of 21 FBI Field Offices.

The majority of funding received by the FBI is used to pay personnel costs associated with the 825 funded positions. Funds not used directly for personnel matters are used to provide operational support for major health care fraud investigations and national initiatives currently focusing on pharmaceutical fraud and outpatient surgery centers. Further, the FBI continues to support individual investigative needs such as the purchase of specialized equipment and expert witness testimony on an as-needed basis.

Glossary Of Terms

                The Account - The Health Care Fraud and Abuse Control Account

                ACE - Affirmative Civil Enforcement

                AoA - Department of Health and Human Services, Administration on Aging

                ASBTF - Department of Health and Human Services, Assistant Secretary for Budget, Technology and Finance

                ASC - Ambulatory Surgical Centers

                AUSA - Assistant United States Attorneys

                CIA - Corporate Integrity Agreement

                CLIA - Clinical Laboratory Improvement Amendments

                CMP - Civil Monetary Penalties

                CMS - Department of Health and Human Services, Centers for Medicare & Medicaid Services

                CMSO - Center for Medicaid and State Operations

                CNA - Certified Nurse Aide

                CRIPA - Civil Rights of Institutionalized Persons Act

                DAB - Departmental Appeals Board

                DME - Durable Medical Equipment

                DOJ - The Department of Justice

                DRG - Diagnosis Related Group

                DSH - Disproportionate Share Hospital

                DPAP - Division of Program Accountability and Payment+

                EKG - Transtelephonic Electrocardiogram

                ESRD - End Stage Renal Disease

                FBI - Federal Bureau of Investigation

                FCA - False Claims Act

                FDA - Food and Drug Administration

                FEHBP - Federal Employees Health Benefits Program

                FMDRP - Financial Management Data Redesign Project

                GSK - GlaxoSmith Kline

                GAO - General Accounting Office

                HCFAC - -Health Care Fraud and Abuse Control Program

                HHS - The Department of Health and Human Services

                HI - Hospital Insurance Trust Fund

                HIPAA, or the Act - The Health Insurance Portability and Accountability Act of 1996, P.L. 104-191

                HMO - Health Maintenance Organization

                IV - Intravenous

                M+C - Medicare + Choice

MMA - Medicare Prescription Drug, Improvement and Modernization Act of 2003

                MSN - Medicare Summary Notices

                MSP - Medicare Secondary Payer

                NHCAA - National Health Care Anti-Fraud Association

                OGC - The Department of Health and Human Services, Office of the General Counsel

                OIG - The Department of Health and Human Services, Office of Inspector General

                OLE - Office of Legal Education, located within the Executive Office for the United States Attorneys

                OPD - Outpatient Departments

                PAM - Payment Accuracy Measurement

                PERM - Program Error Rate Measurement

                PPS - Prospective Payment System

                The Program - The Health Care Fraud and Abuse Control Program

                Secretary - The Secretary of the Department of Health and Human Services

                SCHIP - State Children’s Health Insurance Plan

                SMP - Senior Medicare Patrol

                TAG - Technical Advisory Group

                TENS - Transcutaneous Electrical Nerve Stimulation

                TIPS - Transactions, Information Inquiry, and Program Performance System

                USAO - United States Attorney’s Office

                UPIN-Unique Physician Identity Number

                WMSD - Waiver Management System Database

1 Hereafter, referred to as the Secretary.

2 Also known as the Hospital Insurance (HI) Trust Fund. All further references to the Medicare Trust Fund refer to the HI Trust Fund.

3 In addition, HHS/OIG obligated $1.71 million in funds received as "reimbursement for the costs of conducting investigations and audits and for monitoring compliance plans" as authorized by section 1128C(b) of the Social Security Act, 42 U.S.C. § 1320a-7c(b).

4 When a USAO accepts a criminal referral for consideration, the office opens it as a matter pending in the district. A referral remains a matter until an indictment or information is filed or it is declined for prosecution.