DOJ Seal

Health Care Fraud Report

Fiscal Year 1997




Since 1993, fighting fraud and abuse in the health care industry has been one of the Justice Department's top priorities. Health care fraud siphons billions of dollars away from federal health care programs - particularly Medicare and Medicaid - that provide essential health care services to millions of elderly, low-income, and disabled Americans. But the impact of health care fraud and abuse cannot be measured in terms of dollars alone. Increasingly, health care schemes that fraudulently deny medically necessary services pose a direct threat to the health and safety of individual patients.

The Department has developed a balanced and responsible program to fight health care fraud and abuse. The first component of the Department's program focuses on enforcement efforts, including the use of criminal and civil tools. The second component emphasizes prevention and deterrence, through compliance initiatives for the health care industry and through public education to empower individual patients to be vigilant in identifying and reporting potential health care fraud schemes.

The Department's enforcement actions have resulted in returning fraudulently obtained funds to the government, and in curtailing participation in federally sponsored programs. In FY 1997, $1.2 billion was awarded or negotiated as a result of criminal fines, civil settlements, and judgments in health care fraud matters. More than $500 million of this amount resulted from settlements in three cases involving clinical laboratory billing practices.

$695 million of the funds collected were returned to the Medicare Trust Fund to support future beneficiary payments. Additionally, 363 defendants in 217 criminal cases were convicted, and over 1000 individuals and businesses were excluded from participating in federal health programs due to criminal convictions.

The Department also works to prevent fraud in a number of ways: by encouraging providers to police their own activities through compliance programs; and by sponsoring consumer outreach initiatives, such as the consumer fraud hotlines, to involve patients with first-hand knowledge in the detection of fraudulent practices. Settlement agreements with providers also stress future prevention. Settlements in FY 1997 included 84 corporate integrity agreements, where providers committed to change their operations so as to prevent fraud from recurring in the future.

The Health Insurance Portability and Accountability Act of 1996 provided an additional $29 million in FY 1997 Department of Justice funding directed towards health care fraud, which represents a 48% increase over base funding levels. This funding is essential to continue to combat the challenges faced in several areas - home health care, durable medical equipment, and pharmacy services, to name a few. In addition, the pace of legislative and industry change is altering the landscape of health care delivery and payment, presenting new challenges that must be planned for, both in prevention and enforcement efforts.

Protecting against fraud in managed care is a major future challenge, since the percentage of beneficiaries participating in federally-funded managed care plans continues to grow. In managed care arrangements, the fraud prevention and detection effort is primarily concerned with ensuring that the full quality of care and range of services that providers contract to provide are actually delivered. Proper contracting provisions, quality assurance mechanisms, and post-care audits are required to ensure that providers comply with the care requirements and are accountable for their activities.

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The Severity of the Problem

Fraud in the United States' health care system is a serious problem that has an impact on all health care payers, and affects every person in this country. Health care fraud cheats taxpayers out of billions of dollars every year. Tax dollars alone, however, do not tell the full story about the impact of health care fraud on the American people. Beneficiaries must pay the price for health care fraud in their copayments and contributions. Fraudulent billing practices may also disguise inadequate or improper treatment for patients, posing a threat to the health and safety of countless Americans, including many of the most vulnerable members of our society.

Fraudulent schemes are changing and growing more sophisticated. Unscrupulous persons and companies can be found in every health care profession and industry, and fraudulent schemes targeting health care patients, providers, and plans have occurred in every part of the country and involve a wide array of medical services and products.

While the vast majority of health care providers are law-abiding, some providers are taking advantage of federal health benefits programs. The Inspector General of the Department of Health and Human Services recently found that in FY 97, the Medicare program alone overpaid hospitals, doctors, and other health care providers more than $20 billion, or 11% of Medicare payments to providers. While not all of this involves outright fraud, we are losing billions of taxpayer dollars each year to fraud and abuse. In 1997, U.S. taxpayers lost the equivalent of more than $500 in improper payments for every one of the 38.5 million Medicare beneficiaries.

Who Commits Health Care Fraud?

Every type of provider commits health care fraud. Fraud has been perpetrated by individual physicians and large publicly traded companies, medical equipment dealers, ambulance companies, laboratories, hospitals, nursing homes, and home health care agencies. Individual scam artists who provide no health care at all prey upon the nation's health care programs, as well. Fraudulent schemes put billions of dollars in the pockets of individuals and providers who cheat the system, while we struggle to pay for life-saving drugs to fight AIDS or provide more frequent screening to detect and prevent cancer and other life-threatening illnesses.

How Do Perpetrators Commit Health Care Fraud?

Health care fraud schemes are diverse and vary in complexity, with unscrupulous providers targeting both public and private health insurance plans. Such schemes include:

  • billing for services not rendered

  • billing for services not medically necessary

  • double billing for services provided

  • upcoding (e.g. billing for a more highly reimbursed service or product than the one provided)

  • unbundling ( e.g. billing separately for groups of laboratory tests performed together in order to get a higher reimbursement)

  • fraudulent cost reporting by institutional providers

Kickbacks in return for referring patients or influencing the provision of health care are another common scheme. The anti-kickback statute prohibits the payment of kickbacks for the purpose of inducing the referral of services which are paid for by federal health care programs. Kickbacks corrupt medical providers' decision making, placing profit above patient welfare. They can lead to grossly inappropriate medical care, including unnecessary hospitalization, surgery, tests, and equipment.

Other types of schemes include providing services by untrained personnel, failing to supervise unlicensed personnel, distributing unapproved devices or drugs, and creating phony health insurance companies or employee benefit plans.

Where Does Health Care Fraud Take Place?

Health care fraud schemes have been investigated and prosecuted in every part of the country, in urban and rural areas, and in rich and poor areas. As health care options and the reach of federal programs have expanded, so have the boundaries of health care fraud. New arenas for fraud are being seen in home health care and hospice services which have become eligible for reimbursement under federal programs. Strong control programs for reimbursement and vigilant enforcement efforts are required in these areas to prevent fraud from growing.

What Are the Consequences of Health Care Fraud?

Health care fraud exacts a price from everyone. A San Diego ophthalmologist defrauded Medicare by performing medically unnecessary surgeries. This doctor often saw more than 150 patients a day, performed 45 surgeries on some days, and gave each patient six separate procedures unrelated to any medical need. In Oklahoma, a psychiatric facility for children kept its costs low and profits high by understaffing the facility and keeping children in an unsafe environment, and then billed this "psychiatric treatment" to Medicaid. There are multiple examples of nursing homes that pocketed Medicare funds instead of providing residents adequate care. In a shocking example of this kind of misconduct, five patients died as a result of the inadequate provision of nutrition, wound care, and diabetes management by three Pennsylvania nursing homes; one death occurred when a patient, who was unable to speak, was placed in a scalding tub of 138-degree water.

Eliminating and deterring health care fraud schemes of all types are among the Department's highest priorities. We are committed to addressing the scope and variety of schemes in our efforts to successfully investigate and prosecute fraud.

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A Fair and Balanced Approach

The Department of Justice (DOJ) takes a balanced approach to combating health care fraud. The Department's strategy consists of two components: a strong civil and criminal enforcement program, recently strengthened under the Health Insurance Portability and Accountability Act of 1996 (HIPAA); and prevention efforts, which encourage providers to adopt compliance programs and accept responsibility for policing their own activities. We want to prevent fraud when we can and pursue civil and criminal remedies when we cannot. We are committed to tough but fair enforcement of federal civil and criminal laws, as well as to strong partnerships with health care providers to promote compliance within the industry. We believe that this approach -- of enforcing the laws and promoting compliance and prevention -- is the best way to strengthen the health care system in this country.

Direction under the HIPAA

Enacted in August of 1996, the HIPAA marks the beginning of a new stage in federal law enforcement efforts to combat health care fraud. HIPAA provides the focus necessary to aggressively confront the growing scope and complexity of health care fraud and to produce significant results. This focus coordinates the administrative approach, provides significant directed funding, and strengthens criminal laws and administrative powers related to health care fraud.

HIPAA required the Attorney General and the Secretary of the Department of Health and Human Services (HHS) to establish a Health Care Fraud and Abuse Control Program (HCFAC), providing a coordinated national framework for federal, state, and local law enforcement agencies, the private sector, and the public to fight health care fraud. The Program seeks to achieve the following objectives:

  • To punish wrongdoing

  • To deter others from committing fraud and abuse

  • To protect patients against abuse and neglect

  • To protect the integrity of the Medicare Trust Fund, and other Federal health care programs

  • To educate patients and providers about the need to prevent health care fraud and to foster compliance within the industry

HIPAA also strengthened enforcement authority under several new or revised provisions, including:

  • Created new criminal offense for health care fraud, theft or embezzlement in connection with health care offense, false statements relating to health care offense, and obstruction of criminal investigations of health care offenses;

  • Added a Federal health care offense to the money laundering statute

  • Extended injunctive relief relating to health care offenses ( includes freezing of assets);

  • Provided the AG with subpoena authority in criminal health care fraud investigations;

  • Established criminal forfeitures for Federal health care offenses;

  • Expanded anti-kickback statute to cover Federal health care programs, not just Medicare and State health care programs;

  • Strengthened exclusions for health care convictions

Significant progress was achieved in FY 1997 towards getting the program up and running. Under HIPAA, HHS and DOJ became jointly accountable to coordinate health care fraud prevention and enforcement activities nationwide. The Attorney General and the Secretary of HHS each year, must determine and certify discretionary funding requirements, which in FY 1997 was $104 million. In addition, the FBI receives mandatory funding under HIPAA, which in FY 1997 was $46 million. In 1997, the initial program structure and tracking mechanisms were established; resources were authorized to augment staffing in HHS and DOJ to deal with increasing caseloads; specific widespread types of frauds were addressed under a national project structure; several initiatives were developed to help providers understand and comply with the law aimed at preventing health care fraud; outreach programs for the public and specialized fraud training programs for DOJ staff were developed; and criminal, civil, and administrative sanctions were imposed with damages and penalties collected and restored to the Hospital Insurance Trust Fund, other federal health programs, and other statutory recipients.

Enforcement Vehicles - Criminal and Civil

During FY 1997, the Department's caseload grew significantly. Federal prosecutors and attorneys filed 282 criminal indictments in health care fraud cases, opened 4,010 civil health care fraud matters, and filed 89 new civil fraud cases. These numbers represent a 15% increase in criminal prosecutions and a 61% increase in civil matters opened over FY 1996. Since FY 1992, both criminal health care fraud prosecutions and convictions have more than tripled.

The use of civil laws is a critical component of our enforcement policy. Most civil health care fraud matters involve the False Claims Act (FCA), under which DOJ may bring civil enforcement actions and seek damages and penalties against providers who knew that false or fraudulent bills were submitted to Medicare, Medicaid, or other federal health programs.(1)

The Department has recovered $1.8 billion in matters involving alleged fraud against HHS since 1986, when Congress amended the FCA to strengthen this important remedy, and noted in doing so that the Act is intended to address fraud against the Medicare and Medicaid programs. Congress intended for all providers to take responsibility for ensuring the accuracy of the bills they submit for reimbursement. Mere negligence, mistakes, and inadvertence, however, do not amount to false claims, and DOJ does not and will not bring FCA actions against doctors and hospitals for honest billing errors. The purpose of the law is to single out those providers who recklessly or with deliberate indifference allow fraudulent billing practices to occur or continue.

In civil cases, the Department receives referrals from private whistle-blowers bringing qui tam actions, other informants, and federal and state agencies. The Department carefully examines each referral to properly assess the liability of the health care provider and encourages providers to brief the responsible government attorney on any factors which may have bearing on a case. The Civil Division also maintains staff with expertise in health care fraud, and may work in conjunction with the USAOs or independently to handle large, national, or precedent-setting cases.

Qui tam, or whistle-blower suits have dramatically increased detection of and monetary recoveries for health care fraud. Under the FCA, in certain circumstances private individuals can file an action on behalf of the United States, and obtain part of any recovery by the government in the action. The qui tam statute provides strong financial incentives to expose fraudulent activities. Over half of the $1.2 billion the Department was awarded in health care fraud cases in FY 1997, involved judgments or settlements related partially or completely to allegations in qui tam cases. Over one half of all qui tam suits involve allegations of fraud against HHS.

Qui tam suits are very important because they can serve to detect fraud that might otherwise go undetected. In a qui tam action, the government may choose to intervene and take over the case, or may decline yet collect part of any recovery in the case. Qui tam plaintiffs often work with DOJ to build a strong chain of evidence that can be used during settlement discussions or at trial.

Overall, the FCA has powerful and far reaching effects. First, it has been the vehicle for recovering hundreds of millions of dollars of fraudulently obtained funds each year. Second, the statute encourages providers to take responsibility for the accuracy of their claims - because they may be liable under FCA if they are reckless or deliberately ignorant of wrongdoing by employees. Finally, the statute helps to deter providers from committing fraud, because of its damage and penalty provisions. One recent study, "The 1986 False Claims Act Amendments: An Assessment of Economic Impact" by W. Stringer, estimates the deterrent effect of the FCA over the last ten years to be $148 billion.

New tools and training are also being developed to aid litigation efforts:

  • In 1997, the Executive Office for the United States Attorneys' (EOUSA) Office of Legal Education (OLE) conducted a number of both basic and advanced courses for Department attorneys, auditors, investigators and paralegals. This curriculum included two conferences entitled Basic Health Care Prosecution Team Training, largely for new Department personnel. This specialized training was very successful, and has been repeated and expanded in 1998.

  • The funding made available through HIPAA also made possible four Regional Training Conferences for FBI agents assigned to health care fraud investigations. These one-week training sessions sponsored by the Health Care Financing Administration provided in-depth training on the Medicare Program to almost 300 agents. Training was also provided on Pharmacy Diversion and Cost Report issues.

Civil Rights of Institutionalized Persons Act

In addition to the Department's civil and criminal health care fraud prosecutions, the Civil Rights Division has played an important role in protecting the rights of individuals in health care facilities and improving their conditions of confinement. During FY 1997, the Civil Rights Division continued its vigorous enforcement program under the Civil Rights of Institutionalized Persons Act (CRIPA) to remedy egregious conditions in public residential health care facilities. Under CRIPA, the Attorney General has authority to investigate conditions in public, residential institutions, including nursing homes and mental health and mental retardation facilities, and to take appropriate action where there is a pattern or practice of unlawful actions that deprive persons confined in the facilities of their constitutional or federal statutory rights. As a result of the Department's efforts since CRIPA was enacted in 1980, tens of thousands of institutionalized persons who were living in dire, often life-threatening, conditions now receive adequate care and services.

In FY1997, the Department was active in CRIPA matters and cases involving 43 health care facilities in 20 states, the District of Columbia, the Commonwealth of Puerto Rico, and the Territory of Guam. The Department initiated CRIPA investigations of 13 health care facilities, continued its investigations of nine additional health care facilities, and monitored the implementation of consent decrees involving 14 health care facilities. In addition, the Attorney General filed CRIPA suits involving seven health care facilities, all of which were resolved by settlement agreements entered as federal court orders during the fiscal year. The Department's efforts in these facilities focused on protecting residents from abuse and neglect and undue restraint, providing adequate medical and nursing care and rehabilitation, and ensuring that residents are served in the most integrated setting appropriate to meet their needs as required by the Americans with Disabilities Act.

National Projects

Increasingly health care fraud is becoming a widespread and sophisticated activity involving large computerized payment systems and a myriad of claims. Detecting fraudulent billing schemes often involves doing extensive computer analysis on claims. To provide for consistent treatment of fraudulent schemes national projects have been initiated to address similar types of wrongdoing by a given class of providers.

For each national project, the Department establishes a working group to provide "best practices" guidance, and oversee compliance with Department policies, while simultaneously giving USAOs the flexibility they need to address each matter fairly and on an individual basis. The working groups are comprised of Assistant United States Attorneys and Civil Division attorneys with particular expertise in health care fraud. For each project, the working group develops an appropriate, initial factual and legal predicate, a set of best practices on the investigative steps each district should take before proceeding against individual providers, sample contact letters, settlement agreements, and other pleadings. In addition, each working group is responsible for coordinating efforts with the investigative and program agencies. Working groups aim to ensure that the legal process and standards used are consistent across cases and afford proper notice and opportunities for response to providers.

A major national project undertaken that yielded significant results was the 72 Hour Window Project, which detected and sought recoveries for double billings that occurred when hospitals billed Medicare for outpatient services rendered within 72 hours prior to hospital admission. The costs for these services were to be reimbursed as part of the standard Diagnosis Related Group (DRG) reimbursement amount, and should not have been billed separately. Over

$46 million was returned to the government by October 1, 1997.

Prevention Efforts

Outreach efforts are crucial to winning the fight against health care fraud. The Department wants to encourage corporate citizenship and affirm the importance of strong compliance programs. This emphasis on compliance plans represents a fundamentally different approach from traditional law enforcement. Rather than the FBI and the Inspector General policing corporations, corporations would police themselves. Rather than an adversarial relationship between law enforcement and the private sector, there would be a relationship of cooperation and mutual support. Providers also benefit because a successful compliance program helps them to avoid potential civil and criminal liability.

Under a compliance program providers become knowledgeable about when, where, and how fraud can occur, as well as about what the law and regulations require. They then develop control procedures and reporting for vulnerable aspects of their operations to prevent common types of fraud. They also develop reporting and audits that can detect fraud, and a way to deal with problems when they are found. If problems are found, they should be disclosed to the appropriate agencies and authorities to limit potential liability.

HHS and the Department are trying to encourage responsible provider action by providing model compliance guidance, and by providing interpretations of the law to guide providers in assessing their activities. The program in FY 1997 included many diverse initiatives to promote prevention through effective compliance. An advisory opinion process, through which HHS can provide guidance on whether specific transactions violate the anti-kickback or civil monetary penalty statute, was established, and four advisory opinions were issued.

HHS-OIG has developed model compliance plans for clinical laboratories and, recently, for hospitals. HHS-OIG will continue to develop these plans as well as voluntary disclosure programs. In addition, HHS is canvassing the industry for suggestions on where safe harbors under the anti-kickback statute and special fraud alerts are needed.

Outreach efforts will also focus on beneficiary populations, educating them on how to recognize and report suspected fraud and abuse. Consumers of health care should be the first line of defense against fraud. The Department places a high priority on this kind of outreach and intends to increase its efforts to enhance public awareness of health care fraud.

During FY1997, the Civil Rights Division also engaged in active outreach efforts to educate consumers, advocates, and the public about its CRIPA activities. The Division created a Nursing Home Working Group with representatives from its Criminal, Disability Rights, Housing, and Special Litigation Sections, to coordinate and enhance its civil rights enforcement efforts in nursing homes. As required by CRIPA, where federal financial, technical, or other assistance was available to help state and local jurisdictions correct deficiencies, the Division advised responsible public officials of the availability of such aid and arranged for assistance, where appropriate.

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A Record of Success

The Department of Justice reached unprecedented levels of success in its fight against health care fraud in FY 1997. United States Attorneys' Offices (USAO), the Civil Division, the Criminal Division, the Federal Bureau of Investigation (FBI), and the Justice Management Division (JMD) have utilized the increased resources provided by HIPAA, to prosecute and win record numbers of cases and recover larger amounts in fines and settlement payments than ever before. Statistical enforcement accomplishments in both civil and criminal cases are presented below, followed by synopses of key cases. Descriptions of a variety of FY 1997 cases appears at the end of this report.

In FY 1997, enforcement efforts resulted in $1.2 billion in civil settlements and judgments won or negotiated. $517 million of these judgments were from three cases against independent laboratories for similar types of false billing.

The DOJ collected $785 million in FY 1997. Of the monies collected, $665 million was returned to the Medicare Trust Fund, $31 million was recovered as the federal share of Medicaid, $55 million was restored to other Federal agencies, and $33 million was paid to plaintiffs involved in qui tam suits.

Criminal and Civil Enforcement Statistics

Both criminal and civil investigations and cases filed for health care fraud rose again in FY 1997. Criminal matters investigated increased 13% in FY 1997, and prosecutions increased 15%. Criminal health care fraud cases are referred to USAOs by the FBI,

HHS-OIG, or other enforcement agencies and opened as matters pending in individual districts. A case remains a "matter" until an indictment is filed or the case is declined for prosecution. As the number of matters referred to USAOs has increased, the number of criminal health care fraud prosecutions filed has correspondingly increased.

Health care fraud convictions include both guilty pleas and guilty verdicts. The Department has seen a tremendous increase in the number of convictions. In FY 1997, criminal convictions reached a record high of 217 cases, which was a 22% increase over FY 1996.


















282 531


246 450




1997 217 363
1996 177 307
1995 158 255

Civil health care fraud cases may be handled by a USAO itself or by the Civil Division in conjunction with a USAO. USAOs handle most matters in which the alleged single damages are less than $1 million. Civil health care fraud matters are referred by federal or state investigative agencies or by private persons known as "relators". Relators file suits on behalf of the federal government under the 1986 qui tam amendments to the FCA, and may be entitled to share in the recoveries resulting from these lawsuits. When a case is referred to a USAO it becomes a matter pending in the district. The United States may file a civil complaint or intervene in a qui tam complaint in U.S. District Court.

1997 4,010
1996 2,488
1995 1,406
1997 89
1996 90
1995 60

In conjunction with the USAO's, the Civil Division also pursues civil remedies in health care fraud matters, working closely with the FBI, HHS-OIG, and other federal law enforcement agencies. The Civil Division initiated a record number of 243 new health care fraud matters in FY 1997, which is double the number initiated in FY 1996.

Civil Division judgments and settlements in health care fraud matters rose from $274 million in FY 1996 to $989.7 million in FY 1997, an increase of 261%. This number includes judgments awarded and settlements negotiated, in that fiscal year, from cases involving the Civil Division working with USAO's, and excludes civil cases handled exclusively by USAOs and criminal cases.

Qui tam actions continue to provide support for a major portion of civil cases and recoveries, as shown below.

Qui Tam Cases Filed 361 534
Qui Tam Cases Filed Alleging Health Care Fraud 200 289
Health Care Fraud Judgments/settlements in Matters with Qui tam Claims $135.5 mm $618.1
Total Health Care Fraud Judgments/settlements $274.1 mm $989.7

In addition to acting on referrals of fraud allegations, the Affirmative Civil Enforcement (ACE) program was initiated to encourage the USAOs to take a proactive approach to the use of available civil remedies to address health care and other fraud. The ACE program provides dedicated resources to supplement those of various enforcement agencies on specific projects, and also to investigate potential fraudulent practices where no specific referral is involved.

Significant Cases

In one of the two largest FCA settlements ever reached, SmithKline Beecham Clinical Laboratories, headquartered in Philadelphia, paid $325 million to resolve federal and state fraud claims alleging overcharges to the Medicare, Medicaid, Federal Employees Health Benefits, Railroad Retirement, and the Department of Defense Tricare (formerly known as CHAMPUS) health care programs. Allegations of a wide range of fraud schemes include billing for tests not provided, not requested by the referring physician, or not medically necessary; and paying various forms of kickbacks to referring physicians. SmithKline was also alleged to have obtained payment from Medicare by inserting false "diagnosis" codes on claims, and to have double billed for tests for kidney dialysis patients. The settlement involved three qui tam actions filed against SmithKline while the government's wide-reaching investigation into the billing practices of clinical laboratories (Operation LABSCAM) was underway.

Two other very large settlements, that were also an outgrowth of the LABSCAM investigation, were with Damon Clinical Laboratories, Inc. for $83.7 million, and Laboratory Corporation of America (LabCorp) for $182 million. Both of these cases involved the laboratories making it difficult for physicians to order individual tests, in effect forcing multiple tests to be ordered, and then billing Medicare separately for the unbundled tests. Both of these suits involved qui tam lawsuits, and the qui tam plaintiffs involved received $22.5 million of the settlement amounts.

In the home health area, the nation's largest home health provider, First American Health Care of Georgia, Inc., and its purchaser, Integrated Health Services, Inc., agreed to reimburse the federal government approximately $252 million for overbilled and/or fraudulent Medicare claims submitted by the company. First American, which operated 425 facilities in more than 30 states, billed Medicare for personal expenses of First American's senior management, and marketing and lobbying expenses. First American filed for bankruptcy protection last year in Georgia and its purchaser in bankruptcy agreed to pay the government on First American's behalf.

Smaller but significant settlements were reached in relation to carrier fraud and kickback schemes. Blue Shield of California paid $12 million to settle allegations that it altered or destroyed documents to obstruct HCFA's Medicare contract performance review. In September 1997, Baptist Medical Center agreed to pay $17.5 million to resolve claims concerning $1 million in kickbacks it allegedly paid, as well as fraudulent Medicare claims. Apria Healthcare Group Inc, a leading supplier of durable medical equipment, for $1.65 million, settled allegations of kickbacks for referral of patients requiring oxygen equipment. OrNda Healthcorp settled for $12.6 million to resolve claims that it paid physicians for Medicare patient referrals to its hospitals, and that it had prohibited financial relationships with these physicians.

Traditionally the FCA has been used to make claims for fraudulent billing, but has not been used to address cases where inadequate care is provided under federally funded programs. In a District Court decision, U.S. ex.rel. Aranda v. Community Psychiatric Centers of Oklahoma, Inc., Civ-94-608-A (W.D. Okla.), the Court held that a claim for inadequate quality of care could in fact be the basis for a claim brought under the FCA. This decision, while at a lower court level, begins to address the legal issues that will be faced as the use of capitated payment arrangements, such as HMOs, expands in the Medicare and Medicaid programs.

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Passage of the HIPAA in FY 1996 greatly increased the resource levels devoted to health care fraud activities in FY 1997 and beyond. In FY 1997 the Department of Justice received

$22.2 million of the $104 million appropriation certified by the Secretary of HHS and the Attorney General, as necessary to execute the HCFAC Program. The funding breakdown within the Department is shown in the chart below. Separately, the FBI received $47 million ($39 of which was base funding which transferred to HIPAA) for related enforcement activities.

Expenditures in FY 1997 totaled $91.5 million, with $50.6 million for the FBI and $40.9 million for USAOs, Criminal and Civil Division. HIPAA funds allowed resources devoted to health care fraud to increase by 48% over base funding levels, from $61.7 million in FY 1996.

Discretionary funding under HIPAA will increase by 15% annually until FY 2003, and FBI enforcement funding will reach $114 million by FY 2003. The continued funding growth will fuel DOJ and HHS to sustain a record of successful enforcement under increasing caseloads.



(Dollars in thousands)

Department of Justice

United States Attorneys

Civil Division

Federal Bureau of Investigation

Criminal Division

Justice Management Division








Department of Health and Human Services $80,246
Other Agencies (Federal, State, and Local) $1,554
Total $104,000

In the last four years, Department staffing for health care fraud has grown rapidly. Department prosecutorial and FBI agent work years devoted to health care fraud matters have tripled since FY 1993. Additionally, staff in the Civil and Criminal Divisions support the effort in litigating individual cases. The following chart shows the trend in attorney and agent work years devoted to health care fraud. The 51% growth in manpower (Department attorney and FBI agent work years) from FY 1996 to FY 1997 corresponds to the increased workload in civil and criminal matters handled of 44% and cases filed of 10%.

Fiscal Year USAO
Civil Division

Criminal Division

FBI Agents Total

1997 132 17 7 395 551
1996 93 11 4 256 364
1995 85 13 4 261 363
1994 71 10 4 225 310
1993 43 6 4 147 200

The HIPAA funding supported 285 new Department health care fraud positions. Additions included 60 criminal Assistant United States Attorneys (AUSAs); 30 civil AUSAs;

23 paralegals; 30 auditor/investigators; 23 support positions, and a Health Care Fraud coordinator in the EOUSA's Legal Programs section. The Civil Division received an additional 33 positions, the Criminal Division an additional 4 positions, and JMD an additional 4 positions. The FBI also received additional funding for 46 agent and 31 support positions. This places a total of 370 agents at year-end FY 1997 devoted to health care fraud, as compared to 112 in FY 1992. The full impact of these new positions will be realized in future years as new staff is hired, trained, and become more productive.

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Although the Department of Justice has achieved significant results in its health care fraud program over the past year, many new challenges lie ahead. In an ever changing economic and regulatory environment, the Department's enforcement activities must continually evolve to remain as effective as possible.

As a result of legislative and regulatory action, Medicare and Medicaid payment mechanisms have been changed, eliminating some systemic vulnerabilities, while creating new opportunities for fraud and abuse. The Department will not merely react to these changes; but will be ever vigilant to new schemes and will adapt enforcement practices accordingly. The Department also will continue to devote its attention to efforts to prevent fraud, through stepped-up compliance efforts and consumer and patient education.

The Department will also continue to hold itself accountable for its enforcement efforts, ensuring that, in all respects, investigative and prosecutive activities are both tough and fair. Moreover, we will enlist the assistance and input of the public, consumers and providers alike, in this effort.

Although all significant health care fraud schemes warrant the Department's attention, we will be especially cognizant of the adverse impact of some providers' fraudulent actions on the health of the patients for whom they care. The denial of medically necessary services, threats to the health of the nation's elderly, and the underservice of populations in managed care plans will receive the Department's special attention.

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Ambulance Services
  • On January 22, 1997, in the District of Arizona, six members of the Baker family, owners and operators of Professional Medical Transport, Inc., of Phoenix, Arizona, were charged, in a 68-count indictment, with submitting $1.3 million in fraudulent Medicare billings, along with witness tampering and making illegal campaign contributions. The indictment charges that PMT overcharged Medicare by billing for full ambulance services when those services were not medically necessary.

  • In the Northern District of California, the Goldstar Ambulance Company was found liable under the FCA for submitting false claims to Medicare for routine, round-trip transports of dialysis patients. In an opinion issued on April 8, 1997, the judge concluded that the defendants were reckless in failing to verify to actual condition of the patients before submitting the request for payment. The court found defendants liable for treble damages and $5,000 penalties for 49 of the 100 dialysis claims submitted into evidence. The district court's decision has been affirmed on appeal by the United States Court of Appeals for the Fifth Circuit.

  • On May 22, 1997, five defendants were sentenced in cases relating to Medicaid fraud by two ambulance companies in the Southern District of West Virginia. One rescue squad captain and emergency medical technician (EMT) were sentenced to 24 months in prison and ordered to pay $15,000 in restitution. One former ambulance driver was sentenced to 12 months in prison and ordered to pay $8,000 in restitution. Another EMT was sentenced to 18 months in prison and ordered to pay $8,000 in restitution. The last defendant was sentenced to 24 month in prison and ordered to pay $125,000 in restitution for submitting bills to Medicaid based on fraudulent squad records, and his ambulance service was ordered to serve five years' probation and pay $175,000 in restitution.

  • On May 29, 1997, St Joseph's Medical Center, a Baltimore area hospital, in the District of Maryland, agreed to pay the United States $564,000 to settle FCA allegations that it improperly billed the Medicare program for ambulance transportation of patients. From 1992 to 1995, Medicare paid St. Joseph's $188,000 for 159 claims for ambulance transportation of patients who were actually transported by hospital gurney for diagnostic services to offices located within or near the hospital complex. St Joseph also entered into a compliance agreement with the HHS-OIG.

  • On June 27, 1997, American Ambulance & Oxygen, in the District of Maryland, agreed to pay the United States $1.45 million to resolve allegations it violated the False Claims Act (FCA) in transporting Medicare patients for routine medical office visits. The medicare beneficiaries were ambulatory and did not qualify for ambulance transportation.

False Claims Submitted Through Billing Firms

  • On April 21, 1997, Metzinger Associates, a New Jersey Medicare billing consulting company, agreed to pay $60,000 in fines, provide 250 hours of consulting services to the U.S. Attorney's Office to help the government detect Medicare and Medicaid billing and coding fraud, and to be excluded from Medicare and Medicaid for three years to settle FCA violations. The USAO for the Eastern District of Pennsylvania brought suit against Metzinger and a number of hospitals in 1994 alleging, among other things, FCA violations for using improper coding methods such as upcoding, unbundling, and rebundling to maximize Medicare reimbursement.

  • On May 21, 1997, in the Western District of Oklahoma, EmCare, Inc., of Dallas, Texas, one of the nation's largest physician staffing companies, agreed to pay more than $7.75 million to settle allegations that it overcharged Medicare, Medicaid, the Federal Employees Health Benefits Program, and CHAMPUS, by submitting false claims through an Oklahoma City billing company, Emergency Physicians Billing Services. The claims reflected more expensive medical procedures than were actually performed and billed for services more extensive than those actually provided by EmCare physicians. The case was brought through a qui tam suit in 1994; the relator has since died, but her estate will receive $1.5 million.
  • On June 5, 1997, Coastal Emergency Physicians Group of Texas (Coastal), in the Western District of Oklahoma, agreed to pay the federal government and the state of Texas $268,460 to settle allegations that a billing service, acting on behalf of a company owned by Coastal (Medicus Medical Group), submitted false claims to Medicare, Medicaid, and CHAMPUS. The United States alleges that Emergency Physicians Billing Services (EPBS) upcoded codes on claims submitted to agencies, and billed for services more extensive than those provided by Medicus' physicians. The agreement with Coastal settles an action originally brought as a qui tam case. The government is continuing to pursue matters against EPBS.


  • On March 6, 1997, in the Northern District of Texas, a medical clinic owner and operator was sentenced to 84 months in prison for conspiracy to commit health care fraud. His clinics advertised "free" weight-loss treatment, which is not covered by insurance companies, and then subjected patients to extensive and expensive testing and billed various insurance companies for the tests and office visits. The clinics disguised the claims by indicating that the weight loss treatments pertained to covered medical conditions.

  • In the Northern District of Texas, on March 27, 1997, two diet clinic operators were sentenced for submitting false claims to CHAMPUS, private insurance companies, and self-insured companies through U.S. mail. They conspired with three medical doctors in offering a "free" medically supervised weight loss program, and instead their clinics ran patients through extensive standard testing and then billed the patients' insurance companies between $600 and $750 per set of tests. On the claims forms, they concealed the weight loss treatment and diagnosis of obesity, which are not covered by medical insurance.

  • On April 30, 1997, Rogue Valley Serenity Lane, in the District of Oregon, an alcohol and drug treatment facility near Portland, Oregon, agreed to pay the government $400,000 to settle claims that the facility fraudulently billed Medicare for services not covered and not properly documented. The government alleged that Rogue Valley had bundled the costs of non-covered room and board into its charges for group psychotherapy at its outpatient residential facility. The government also alleged that Rogue Valley had failed to document that Medicare patients received the therapy sessions for which Medicare was billed.

Defective Pricing and Buy America Act Violations: Drugs and Supplies

  • In December 1996, Horizon/CMS Healthcare Corporation, in the District of New Mexico, agreed to pay $5.7 million to settle FCA allegations that in 1994 the company submitted false reimbursement claims for supplies to Medicare Part B and Medicaid. Horizon, after acquiring the Greenery Rehabilitation Group of skilled nursing facilities located in Connecticut, North Carolina, Louisiana, and Massachusetts engaged in a "retro-active billing program" for medical supplies. Because Horizon misused and misinterpreted Greenery Group records, it billed for multiple supplies which obviously had not, and could not have been supplied to patients. This matter was settled prior to litigation. Horizon has agreed to adopt a corporate integrity program to identify problems and prevent improper billing practices.

  • On February 4, 1997, Apria Healthcare Group, Inc., in the Northern District of Georgia, one of the nation's largest suppliers of Durable Medical Equipment (DME) and three health care providers agreed to pay more than $2 million to settle allegations, brought in a qui tam suit, that they defrauded Medicare by using sham contracts and paying kickbacks. Under the terms of the settlement, Apria has paid $1.65 million, Georgia Lung Associates has paid $346,000, and two other providers, the Paso del Norte Health Foundation and Physicians Pharmacy, Inc., have paid a total of $24,000. The relator in the qui tam suit alleged that Apria, which provided pulmonary equipment and oxygen to Medicare beneficiaries, submitted false claims for patients whose referrals it received through a kickback scheme it operated by entering into sham contracts with one provider and compensating another provider for referrals. In a separate agreement with the HHS-OIG, Apria also entered into a corporate integrity agreement in which it agreed to ensure future compliance with Medicare laws and regulations, including a voluntary disclosure program for employees to report inappropriate practices.

  • On May 7, 1997, in the Northern District of Texas, a dentist, an attorney, and a businessman were charged in an 88-count indictment with defrauding Medicare by devising a scheme to sell inexpensive wheelchair cushions to elderly nursing home residents and then billing Medicare and Medicaid as if they had provided medically necessary, custom-fitted body jackets. They called their product "Lumbar Sacral Support Systems." The dentist allegedly marketed the cushions to nursing homes and then billed over $1,200 for each wheelchair cushion which cost him approximately $75 to produce. The attorney allegedly joined the scheme and help solicit investors and partners, as well as helping to form companies to promote and sell the cushions. The third defendant first invested in one of the companies created to market the cushion and later took over the running of the company.

  • On June 13, 1997, Orem Medical Corporation, in the District of Maryland, and its corporate principals entered into a civil fraud judgment under the FCA for $3 million. In the judgment, the Defendants acknowledged the submission of false claims for medical supplies to over 170 veterans hospitals. Orem failed to properly invoice the discount contract price for medical supplies under a Department of Veterans' Affairs contract. The judgment also requires permanent debarment from government programs.

Durable Medical Equipment Suppliers

  • On March 17, 1997, in the Southern District of New York, two former attending physicians at Lincoln Medical and Mental Health Center of the New York City Health and Hospitals Corporation (Lincoln Hospital) were charged in a 151-count indictment with conspiracy, mail fraud, and submitting false claims to Medicare and Medicaid for durable medical equipment (DME), which included wheelchairs, hospital beds, canes, walkers, and bedside commodes. The indictment charges that the defendants engaged in the preparation of false medical prescriptions for DME by obtaining names and Medicare/Medicaid identification numbers of beneficiaries and billing for equipment items authorized by examinations and diagnoses they did not perform.

  • On March 21, 1997, in the Southern District of Florida, a Miami resident who established two totally fraudulent medical equipment supply companies was sentenced to 54 months in prison, three years of supervised release, and a $15,000 fine for defrauding Medicare of $2.6 million. The companies existed only on paper; no patients were ever seen and no medical equipment was ever delivered. The defendant used the names of licensed physicians and patients' Medicare numbers without their consent. He pleaded guilty to a conspiracy to filing false claims.

  • On March 27, 1997, in the Southern District of Florida, a Miami man who served time in federal prison for drug smuggling and tax evasion pleaded guilty to defrauding Medicaid and received 10 years in prison. The defendant created 28 phony companies to file over $3 million in claims to Medicaid for supplying oxygen equipment to poor and elderly Dade County residents, but did not supply them anything. He received approximately $1.5 million in cash from this scheme.

  • On May 29, 1997, in the Southern District of California, the CEO of Motion Medical Inc., and the corporation itself, pleaded guilty to one count each of mail fraud. Motion engaged in a number of fraudulent schemes to submit false billings to CHAMPUS, FEHBP, and private health insurance programs by billing for wheelchairs when only three-wheeled scooters were provided and for hospital beds when adjustable leisure beds were provided.

  • On May 2, 1997, in the Eastern District of Michigan, a father and daughter team from the Detroit area were sentenced each to 57 months in prison for defrauding Medicare out of more the $25 million. The indictment alleged that the defendants ran an enterprise through a pattern of racketeering activity for approximately five years. They fraudulently obtained more than $25 million from the Medicare program through a scheme to defraud which included receiving reimbursement for unneeded supplies provided to elderly patients residing in nursing homes, receiving reimbursement for medical supplies which they did not provide, misrepresenting the quantities of supplies actually provided, and engaging in deceptive billing practices. As part of a global settlement of criminal and civil allegations, they agreed to forfeit rights to $9 million in cash and property. In addition, to resolve FCA allegations arising from the same transactions, two other relatives agreed to pay $125,000, and two associates agreed to pay $250,000.

  • On July 20, 1997, in the Middle District of Florida, the owner of several durable medical equipment supply companies in the Tampa, Florida, area was sentenced to four years in prison and ordered to pay $10 million in restitution for running a multi-state Medicare fraud scheme. The three defendants operated companies that supplied equipment to Medicare beneficiaries, and allegedly submitted fake bills to Medicare, using the names of deceased persons. The companies' owner pleaded guilty to one count each of conspiracy to commit mail fraud, wire fraud, and money laundering.

Group Homes

  • On May 6, 1997, in the Southern District of Ohio, a federal jury in Columbus, Ohio, convicted a manager of group homes for the mentally retarded of 44 counts of theft and money laundering. The indictment alleges that the manager submitted false cost reports to the Ohio Department of Human Services through a phony company he created for the sole purpose of diverting funds for his personal use. As a result of the fraud, he received $210,000 from Medicaid for the fictitious expenses he reported.

  • On July 9, 1997, in the District of Massachusetts, man was sentenced to two and a half years in prison for defrauding the government out of more than $2.5 million by using phony management contracts. Along with co-conspirators, the defendant formed a fictitious management company to provide contract services to group homes for the mentally ill. He received payments from the Medicare and Medicaid programs for services not rendered.

Home Health Services

  • In October 1996, in the Northern District of Georgia, First American Health Care of Georgia, Inc., the nation's largest home health provider, and its new owner, Integrated Health Services, Inc. (IHS), agreed to pay the government $255 million to settle allegations that the company overbilled and submitted false Medicare claims by billing for costs unrelated to the care of patients in their homes, including personal expenses of senior management, marketing and lobbying expenses. In a related criminal action, the company's two major principals were found guilty of defrauding Medicare and are currently serving prison terms. They are also excluded from further participation in Medicare, and a company compliance program will be implemented.

  • On March 12, 1997, the owner and administrator of two home health care services in Missouri was sentenced to 15 months in prison and three years supervised release, in the Southern District of Iowa, and ordered to pay almost $65,000 in restitution to Medicare IASD, an intermediary Medicare claims processor in Des Moines, Iowa. The owner submitted inflated annual cost reports to HHS for one of the agencies to obtain expenses associated with the non-Medicare certified business, receiving $113,000 in improper payments from Medicare.

  • On March 25, 1997, Premier Nursing Services, Inc., a home health agency formerly located in Tarentum, Pennsylvania, and its owner/administrator, Kathleen Ann Diana, were convicted by a federal jury in Federal District Court for the Western District of Pennsylvania of all 15 counts of an indictment charging mail fraud in which the Medicare and Medicaid programs were defrauded of approximately $1.1 million over a 5 year period. The nature of the scheme was that these programs were billed for home health services provided to approximately 200 unqualified patients. The patients were falsely described as being confined to their homes (homebound) and therefore eligible for home health services, when in fact they were substantially mobile.

  • On April 24, 1997, in the Western District of Missouri, the former owner of a company that provided residence health care and care for homebound persons in Missouri was convicted in a $2 million Medicare fraud case. The government alleged that the owner defrauded Medicare by falsifying performance documents and files that determined the company's eligibility to participate in Medicare, failed to furnish accurate cost information relating to Medicare payments, and directed employees to create false expense receipts and records.

Pharmaceuticals and Pharmaceutical Services

  • In January 1997, in the Southern District of Florida, Cueto's Pharmacy and two related Cueto medical supply companies located in Hialeah, Florida, were sued by the government for defrauding Medicare by watering down medication for 1,800 patients suffering from asthma, emphysema, and other breathing problems over a two-year period. Fortunately, most of the purported patients were phony and did not require the medication. The cost to the Medicare program, however, was $25 to $50 million during those two years through the network of medical outfits that tested patients, filled prescriptions, and delivered the medication.

  • Nine defendants were indicted in March, 1997, in the Southern District of California, on Racketeer Influenced and Corrupt Organizations Act charges in a case involving a number of Southeast Asian pharmacies and clinics that defrauded the Medi-Cal program of more than $1 million. The clinics were alleged to have paid kickbacks to drivers to bring Medi-Cal beneficiaries to the clinic for unnecessary examinations. The "patients" would then be given prescriptions for unnecessary medications, which would be filled by pharmacies that would pay kickbacks to both the clinics and the patients.
  • On May 30, 1997, in the Southern District of Illinois, the owner of Budde's Prescription Shoppe, Inc., was sentenced to 21 months in prison and ordered to pay $8,000 in criminal fines and $40,000 in restitution to PCS, an insurance broker. The defendant wrote false prescriptions and fraudulently billed PCS for services not rendered. He was ordered to forfeit his pharmacy or a payment in lieu of forfeiture of $85,000. The corporation was sentenced to five years probation and ordered to pay a $100,000 corporate fine.

Physicians and Other Practitioners

  • On September 19, 1997, in the Eastern District of New York, Leon Cantor, 58-year-old physician who practiced medicine in Queens and on Long Island for more than 20 years, was sentenced to 10 months in prison to be followed by a three year term of supervised release with a condition of 1000 hours of community service.

    Dr. Cantor engaged in a massive health care fraud scheme in which he billed for medical services he had not performed over a nine-year period, resulting in losses of approximately $1.4 million to 11 private insurance companies and the Medicare program. As a condition of his plea agreement, Cantor will make full restitution to the defrauded insurance companies and Medicare.

  • In October 1996, a federal court in the Eastern District of Missouri ordered Dr. Marlou Davis to pay $4.1 million in an FCA suit alleging that he improperly solicited prospective patients at nursing homes, supermarkets, shopping malls, and drug stores. Dr. Davis lured patients to "health fairs" at which he solicited them to come to his office for a "free" screening, informing the Medicare patients that this would assist them in avoiding heart disease and strokes. The services rendered in reality were not free and the average bill Dr. Davis submitted for patients was approximately $1,400. Marketing representatives, who solicited patients on behalf of the doctor, were compensated on a percentage basis, which depended on the dollar amount of the services rendered. He also did not require his patients to pay the 20% copayment and misrepresented the actual charges for his services, causing overpayment of his claims by the government.

  • On February 7, 1997, in the Southern District of Ohio, a podiatrist located in Columbus, Ohio, pleaded guilty to one count of money laundering from a previous indictment. The defendant systematically billed CHAMPUS and other health care programs for a complex surgical procedure when a lesser procedure was actually performed and received substantially more money. As part of his plea agreement, the defendant will make fraud awareness presentations to audiences including his peer group and students studying to be licensed podiatrists.

  • On February 10, 1997, in the Eastern District of Pennsylvania, a Huntington Valley osteopath was found guilty of four counts of mail fraud for his participation in a scheme to defraud insurance companies of $3.5 million by inflating claims of people injured in accidents, and by fabricating medical records.

  • On February 12, 1997, in the District of Kansas, four physicians, five dentists, one medical corporation, and one pharmacy located in Kansas agreed to pay $190,000 in fines to settle allegations of failing to maintain complete and accurate records of controlled substances between 1994 and 1996. The civil charges were brought under the Comprehensive Drug Abuse Prevention Control Act.

  • The Ninth Circuit affirmed 106 counts of conviction, reversed 25 counts, vacated the order of forfeiture, and remanded for resentencing in the case of a San Diego ophthalmologist convicted in 1995 of running a "Medicare Mill" whereby elderly patients were falsely diagnosed with cataracts and eyelid problems and subjected to unnecessary surgery. Following the remand, the parties stipulated to a sentence whereby the defendant agreed to serve 60 months in custody and settle allegations under the civil FCA for $6.6 million. This case was originally brought in the Southern District of California.

  • A father and son, both dentists, were sentenced to 21 months and 27 months imprisonment, respectively, for a scheme to defraud Medicaid by submitting false claim forms through U.S. Mail, in the Northern District of Texas. On the forms, the defendants falsely inflated the amount of dental work needed, performed unnecessary procedures, and billed for more work than had been performed on some patients.

  • On April 23, 1997, in the District of Massachusetts, a chiropractor pleaded not guilty to charges of insurance fraud, larceny, and conspiracy. Along with five other defendants, the chiropractor was charged with submitting false claims derived from staged accident and injury schemes to insurance companies. Prosecutors allege that they deliberately neglected to inform insurance carriers of previous accidents, similar injuries, and prior treatments. Seven insurance companies were allegedly defrauded out of more than $78,000.

  • On April 25, 1997, in the Northern District of Texas, a chiropractor was sentenced to 21 months in prison and ordered to pay $37,891 in restitution for defrauding two insurance companies. The defendant, with the help of a patient, falsified patient records, submitted false insurance claims for treatments not received, and split the proceeds. Both men pleaded guilty to one count of mail fraud, and the doctor agreed never to practice medicine again.

  • On May 9, 1997, in the District of Minnesota, a provider of orthotic devices such as braces and splints to nursing home patients was charged with defrauding Medicare of an estimated $130,000. The defendant allegedly forged physicians' signatures on Certificates of Medical Necessity (CMN) forms and never delivered equipment ordered, as well as allegedly ordered $18,600 in equipment for patients that were deceased at the time of order.

  • On May 27, 1997, Toronto police arrested a fugitive doctor who fled the United States after being convicted 11 years ago in Chicago, of one of the costliest Medicaid billing schemes in U.S. history. From 1981 to 1983, the defendant and a group of 35 co-conspirators acquired approximately $20 million from the submission of fraudulent Medicaid claims. They operated a chain of pharmacies and clinics that filled prescriptions for a combination of medications that would mimic the effects of heroin. The addicts would then sign documents stating that they had received legal prescription drugs for which Medicaid was billed. The defendant fled to Toronto in 1986 after he was convicted of conspiracy, racketeering, unlawful distribution of controlled substances, and mail fraud. The original case was tried in the Northern District of Illinois.

  • On June 17, 1997, in the District of Maryland, a physician and his associated companies agreed to pay $3.1 million to resolve allegations of improper claims to Medicare for physical therapy services rendered at seven nursing homes in Maryland, the District of Columbia, and Virginia, from 1991 to 1995. The defendant violated the Medicare billing provisions under "incident to" physician supervision regulations by billing physical therapy in nursing homes where no physician was present. He disputes the charge that the Medicare claims were improper. As part of the settlement, all of his companies are permanently excluded from the Medicare and Medicaid programs.

Psychiatrists, Psychiatric Hospitals, and Mental Health Services

  • On October 11, 1996, Innovative Healthcare Systems, Inc. (IHS), of Birmingham, Alabama, was sentenced in the Western District of Missouri (Kansas City) following its plea of guilty to one count of wire fraud on December 6, 1995. IHS, which owned and operated Oakwood Psychiatric Hospital of Windsor, Missouri, submitted false claims to CHAMPUS, seeking and obtaining funds for services provided by unlicensed, uncredentialed and unqualified providers, which was contrary to CHAMPUS regulations and requirements. IHS paid $698,005 in restitution to CHAMPUS and $83,568 to Medicare for reimbursement of the funds received as a result of the services.

  • On February 27, 1997, the former managing director of Two Rivers Psychiatric Hospital, Inc., in Kansas City, Missouri, pleaded guilty to a 2-count Information filed in Kansas City U.S. District Court. The Information charged the director with knowingly and willfully authorizing the write-off of two CHAMPUS beneficiaries' cost shares, thereby obtaining from CHAMPUS funds to which it was not entitled and converting these funds to its own use. The director had been indicted previously in 1995 on a kickbacks charge for paying a physician $41,500 in exchange for referrals of CHAMPUS patients to his facility; the charges in this indictment were dismissed at the time of his sentencing. In 1996, Two Rivers entered a plea of no contest to a one-count Information charging it with mail fraud for the kickback payment. Two Rivers paid $63,159 in restitution to CHAMPUS for the reimbursements it received as a result of these referrals.

  • On February 11, 1997, in the Western District of Oklahoma, Community Psychiatric Center of Oklahoma, d/b/a Community Psychiatric Center Southwind Hospital, agreed to pay a $750,000 civil settlement to the government to resolve a qui tam suit alleging that the company billed Medicaid and CHAMPUS for reimbursement for care it provided to many children, despite its failure to provide a safe environment for the children in violation of the FCA. The psychiatric hospital ignored reports by its staff of unsafe conditions, while it continued to admit more children and submit more false claims. The settlement followed the court's refusal to dismiss the charges brought in a complaint under the FCA, holding that the charges were actionable under the FCA. United States ex rel. Aranda v. Community Psychiatric Center of Oklahoma, 945 F. Supp. 1485 (W.D. Okla. 1996.)

  • On March 27, 1997, in the Northern District of Georgia, the founder of a counseling center for the homeless and her associate pleaded guilty to a single count of conspiracy to defraud Medicaid. They defrauded Medicaid of almost $1 million by providing group therapy for mothers and children, but billing Medicaid for second-opinion consultations with physicians. The center's founder prepared and submitted the overbillings and the associate "cooked" the books when they feared an audit in the summer of 1995.

  • On March 19, 1997, a Georgia psychiatrist and his associates were charged with conspiracy, mail fraud, wire fraud, dispensation of controlled substances, and money laundering, in the Southern District of Georgia. The defendants conspired to defraud CHAMPUS, Medicare, and Medicaid by employing unlicensed and unqualified therapists to provide mental health services to Georgia and Florida beneficiaries and then billed the government programs as if the psychiatrist had provided the services himself.

  • On April 10, 1997, in the Eastern District of New York, an elderly Brooklyn psychologist was convicted of 14 counts of mail fraud and health care fraud for falsely billing Medicare for at least $1 million of services not rendered between 1991 and 1996. The defendant rarely saw patients or left her home, and she spent most of her time watching television, while submitting bills for thousands of hours of therapy sessions, including sessions on Christmas and New Year's Day 1996, and on the day she was arrested and in custody in the federal courthouse.

  • On May 13, 1997, a doctor and his psychiatric practice, Adult and Adolescent Psychiatry PC (AAP), were charged in the District of Connecticut in an indictment with 33 counts of mail fraud and 87 counts of unlawful dispensing of controlled substances. The indictment charges that beginning in January 1994, the defendants devised a scheme to defraud CHAMPUS, Medicare, and Medicaid through billing for services not performed or not performed in the manner represented.

  • On April 24,1997, in the District of Massachusetts, River Valley Counseling Center, Inc., a Holyoke, Massachusetts health care company, agreed to pay $608,000 to settle claims that it falsely inflated claims it submitted to Medicare for reimbursement for mental health services provided to elderly beneficiaries at local area nursing homes. River Valley inflated the claims by billing for services not rendered, and billing services at higher-than-allowed rates. River Valley also billed for psychotherapy treatment provided to patients who could not benefit from such treatment.

  • On June 10, 1997, the Department filed a CRIPA complaint together with a settlement agreement and remedial plan in United States v. Virginia (E.D. Va.), involving conditions at the Northern Virginia Mental Health Institute, a psychiatric hospital in Fairfax County. On the same date, the court approved the settlement and dismissed the action pursuant to Rule 41(a)(2) of the Federal Rules of Procedure. The court specifically retained jurisdiction, however, to enforce the State's compliance with the settlement agreement and the remedial plan. Under the terms of the settlement, Virginia has agreed to provide patients with adequate assessment, diagnosis, mental health treatment, medical care, discharge planning and aftercare services, and to maintain a sufficient number of qualified professional and direct care staff at the facility to carry out these requirements. The United States agreed to provide technical assistance through its experts during the early remedial phases to ensure that Virginia achieves compliance with the settlement. The settlement agreement requires Virginia to implement the remedial plan by January 1999.

Staged Automobile Accidents/ Workers Compensation Fund

  • On April 11, 1997, in the Northern District of California, the owner and administrator of a chiropractic and physical therapy clinic pleaded guilty to a 2-count indictment charging him with mail fraud in connection with an insurance fraud scheme. The indictment charged that the defendant submitted fraudulent medical bills, including charges for service that had never been rendered. The case was the result of a major FBI sting operation in the San Francisco region. The sting operation uncovered schemes by attorneys and medical providers who defrauded insurance companies through the systematic submission of false and fraudulently inflated medical bills for individuals claiming injuries from automobile accidents.


  • On July 24, 1997, in the Central District of California, OrNda Healthcorp, recently acquired by Tenet Healthcare Corporation, agreed to pay the United States 12.6 million to resolve claims that OrNda hospitals paid physicians for referrals of Medicare patients and that the hospitals received referrals from physicians with whom they had prohibited financial relationships under applicable law. The United States claimed that the hospitals, which OrNda acquired as a result of a merger with Summit Healthcare Ltd. in 1994, entered into sham directorship contracts with numerous physicians and provided other inducements, such as reduced lease payments and loans which were later forgiven, so the doctors would refer Medicare patients to the hospitals. The agreement settles a dispute originally brought as a qui tam case, the relator will receive $2.3 million of the recovery.

  • On April 14, 1997, in District of Massachusetts, St. Luke's Hospital of New Bedford, Massachusetts, agreed to pay $1.3 million to settle claims that it defrauded Medicare by billing for x-rays and ultrasound tests, which were actually performed and also billed by a Brockton medical lab. In a related case, the government filed a complaint accusing the hospital's subcontractor, Medicalab, Inc., and its owners, of submitting false claims for mileage, emergency charges and radiology charges to Medicare.

  • On April 28, 1997, in the Northern District of Indiana, Horizon Group Enterprises, Inc., formerly known as St. Joseph's Horizon, of South Bend, Indiana, agreed to plead guilty to violating the Medicare and Medicaid anti-kickback statute. Horizon leased medical facility space at an inflated price, provided a $350,000 loan guarantee and monthly "practice enhancements" of approximately $250,000 over a four-year period, to two area doctors in exchange for referrals to St. Joseph's Medical Center, an affiliated 295-bed hospital. (The hospital is one of only two principal hospitals serving the South Bend area.) St. Joseph's Medical Center, Horizon Group Enterprises, Inc., and St. Joseph's Care Group, Inc., are all subsidiaries of their corporate parent, the non-profit Holy Cross Health Systems Corp. In exchange for Horizon's plea, all affiliated entities are being given a one-year period to negotiate their continued participation in Medicare and Medicaid with HHS, and their tax-exempt status with the IRS. The two doctors were also convicted of soliciting and receiving kickbacks. One was sentenced to 37 months in prison, the other to 24 months in prison.

  • Baptist Medical Center (Baptist), a hospital located in Kansas City, Missouri, agreed to pay the United States $17.5 million to settle allegations that it violated the FCA by submitting cost reports that passed on a portion of more than $1 million in kickbacks that Baptist paid to a local medical group to induce referrals of Medicare-eligible patients, and claims that improperly reflected charges for patients referred pursuant to this kickback scheme. The United States Attorney's Office for the Western District of Missouri claimed that Baptist entered into sham consulting contracts with the Blue Valley Medical Group (Blue Valley) in order to pay the kickbacks, and then included the improper payments on cost reports submitted to HCFA. Baptist received in excess of $42 million in Medicare reimbursement for services provided to patients that Blue Valley referred pursuant to this scheme. The agreement also settles claims that Baptist violated the Stark I statute by submitting clinical laboratory claims for Medicare patients referred by Blue Valley, with which the hospital had a financial relationship as a result of the kickbacks.

Institutional and Community Services for Persons with Mental Retardation

  • On November 15, 1996, the Department filed a CRIPA complaint and settlement agreement in United States v. Tennessee (M.D. Tenn.) to remedy unlawful conditions of care in four institutions for persons with mental retardation: Clover Bottom Developmental Center and Harold Jordan Center in Nashville; Greene Valley Developmental Center in Greeneville; and Nat T. Winston Developmental Center in Bolivar. The major elements of the settlement include requiring the State to: provide adequate and appropriate care and services (e.g., protection from harm, adequate medical and psychiatric care, behavioral treatment, and training) in the institutions and in the community; assess the needs of each institutionalized person, including the appropriateness of community placement, and provide adequate community services to individuals whom professionals determine are better served in the community; establish an adequate system of supports and services in the community, including emergency respite care and access to health care specialists, as well as a system of informing and involving family members and relevant community organizations; adhere to the requirements of the Individuals with Disabilities Education Act and the Americans with Disabilities Act; protect the First Amendment rights of individuals covered by the agreement; establish an office of investigations to investigate allegations of neglect and abuse in the institutions and in the community; and establish a program for monitoring and enforcement of the settlement, including: (1) an independent panel of experts to review and report on compliance at least every six months and to review each individual placement into the community; (2) periodic reporting by the State; and (3) quarterly status conferences before the magistrate judge who mediated the settlement. Together with an earlier CRIPA case involving Arlington Developmental Center in Arlington, Tennessee, the Department has served as the catalyst for statewide relief in all five publicly operated mental retardation facilities in Tennessee.
  • On April 4, 1997, the Department filed a CRIPA complaint and settlement agreement in United States v. Wisconsin (W.D. Wisc.) to remedy deficiencies in care and treatment of mentally retarded residents at the Southern Wisconsin Center for the Developmentally Disabled in Union Grove and the Central Wisconsin Center for the Developmentally Disabled in Madison. Among other things, the settlement agreement requires the State to: provide adequate care and services (e.g., protection from harm, adequate medical and psychiatric care, behavioral treatment, and training) in the institutions; ensure that the institutions employ adequate numbers of qualified professional and non-professional staff to meet the needs of the residents; assess the needs of each institutionalized person, including the appropriateness of community placement, and provide adequate community services to individuals whom professionals determine should be served in the community; and adhere to the requirements of the Individuals with Disabilities Education Act and the Americans with Disabilities Act. The settlement agreement also establishes a panel of three experts (a physician, psychiatrist and psychologist), agreed upon by the parties, to evaluate the State's compliance with the agreement.
  • On July 14, 1997, the district court appointed a Special Master in United States v. Connecticut (D. Conn.) to evaluate conditions and suggest ways to correct continuing deficiencies at the Southbury Training School, a mental retardation facility in Southbury, Connecticut, with approximately 800 residents. The court's order followed the Second Circuit's affirmance of the district court's ruling a year earlier that Connecticut was in contempt of CRIPA orders to remedy unlawful conditions at the facility.

Insurance Companies

  • On May 2, 1997, in the Northern District of California, Blue Shield of California agreed to pay $12 million to settle allegations that it filed false claims for payment under its contract with the government to process and pay Medicare claims. The agreement resolves claims that the San Francisco-based Blue Shield covered up claims processing errors discovered by HCFA auditors in order to obtain more favorable scores under an agency program for grading the Medicare carrier's claims processing capabilities. A qui tam suit was filed by former Blue Shield employees in the Medicare division in Chico, and these relators will receive 18% of the settlement amount. This false claims settlement follows a May 1996 criminal conviction of Blue Shield for conspiracy and obstructing federal audits to evaluate the company's performance in the Medicare processing contract. Blue Shield paid a criminal fine of $1.5 million when it entered its guilty plea. Blue Shield ceased being a Medicare contractor in September 1996.

Laboratory Services

  • In one of the two largest FCA settlements ever reached, on February 24, 1997, SmithKline Beecham Clinical Laboratories, headquartered in Philadelphia, paid $325 million to resolve federal and state fraud claims alleging overcharges to the Medicare, Medicaid, Federal Employees Health Benefits, Railroad Retirement, and the Department of Defense Tricare (formerly known as CHAMPUS) health care programs, in the Eastern District of Pennsylvania. Allegations of a wide range of fraud schemes include routine billing for tests packaged with the automated series of tests, billing for tests not provided, not requested by the referring physician, or not medically necessary; and paying various forms of kickbacks to referring physicians. SmithKline was also alleged to have obtained payment from Medicare by inserting false "diagnosis" codes on claims, and to have double billed for tests for kidney dialysis patients. The settlement involved three qui tam actions filed against SmithKline while Operation LABSCAM was underway.

  • In October 1996, in the District of Massachusetts, Damon Clinical Laboratories, Inc. agreed to pay the government $83.7 million to settle allegations that Damon falsely billed Medicare for medically unnecessary serum ferritin and serum iron tests which it had bundled with a basic blood chemistry panel, and an apolipoprotein test it bundled with a coronary risk profile test, all in an effort to offset an across-the-board fee reduction Medicare announced in 1988 and 1989 for laboratory blood testing services. The settlement involved two qui tam actions filed against Damon while Operation Labscam was underway. Damon also agreed to plead guilty to a one-count criminal Information charging it with conspiracy to defraud the government. In connection with this plea, Damon agreed to pay a $35.3 million criminal fine, which represents the largest criminal fine ever recovered in a health care fraud prosecution. Damon has also been barred from participating in Medicare and certain other government health care programs.

  • In November 1996, Laboratory Corporation of America Holdings (LabCorp), the world's largest clinical laboratory company, agreed to pay the government $182 million to settle allegations that it submitted false claims for medically unnecessary laboratory tests to Medicare, Medicaid, CHAMPUS, the Railroad Retirement Board, and the Federal Employees Health Benefits Program, by improperly marketing certain cholesterol and other "add-on" tests that doctors did not need for the treatment of patients. In a related criminal matter, the San Diego Regional Laboratory of Allied Clinical Laboratories, Inc., a LabCorp subsidiary, pleaded guilty to submitting a false claim to Medicare and the California Medicaid program, was fined $5 million and excluded from the participating in the programs because of its misconduct. This settlement also resolved many qui tam suits filed during the course of the LABSCAM investigation. LabCorp also has entered into a corporate integrity agreement with HHS. The settlement concluded a nationwide investigation conducted by the Southern District of California, the District of New Mexico, the Southern District of New York, the Middle District of North Carolina, the Middle District of Pennsylvania, the Eastern District of Virginia, the FBI, HHS, and the Defense Criminal Investigative Service.

  • In December 1996, in the Northern District of California, Spectra Laboratories, Inc., a California clinical laboratory specializing in end stage renal disease (ESRD) testing, agreed to pay the government $10.1 million to settle a qui tam suit alleging that it improperly billed Medicare, the Railroad Retirement Board, CHAMPUS, and the Federal Employees Health Benefits Program for lab tests on patients suffering from severe kidney failure, including tests it had already been reimbursed for under a "composite rate" for standard ESRD services. Spectra entered into a corporate integrity agreement which requires that it establish a procedure designed to promote the ordering of medically necessary tests on a patient-specific basis.

  • The owners and managers of a Little Rock, Arkansas testing laboratory were charged with violations of the FCA for filing more than 168,000 false claims with the Medicare and Medicaid programs, in the Eastern District of Arkansas. The false claims involved the unbundling of tests performed with a multichannel analyzer, i.e., billing for both the multiple tests and the individual components of the tests. On April 30, 1997, the consultants to the laboratory settled for $17,190. The individual physician owners settled for $825,000 to the United States and $50,000 to the State of Arkansas.

  • In the Northern District of California, on February 12, 1997, Meris Laboratories, Inc., of San Jose, California, agreed to pay $5.2 million to settle a qui tam suit brought by two relators which alleged that the lab defrauded Medicare and Medicaid by billing the programs for medically unnecessary laboratory tests, including cholesterol and blood serum iron tests, from 1992 until 1997. Meris also engaged in billing for "additional indices" in complete blood count tests. These indices were generated automatically from existing tests at no extra cost to Meris, were not ordered by doctors, and are rarely medically necessary. As part of the settlement, Meris agreed to enter into a corporate compliance agreement which included a code of ethics, a written billing policy manual, annual training of employees on corporate compliance, and establishment of a "hotline" where employees can anonymously report suspected misconduct.

  • On March 19, 1997, in the Northern District of Ohio, a 7-count indictment was returned, charging Lab I, Inc., of Ravenna, Ohio, and its owner with defrauding Medicare of approximately $50,000 and violating the anti-kickback statute. The defendants were charged in three counts with making false claims to the government by billing for glucose blood stick tests which it did not perform but which were instead performed by nursing home staff. They were further charged in four counts with paying or offering to pay kickbacks to individuals in a position to refer Medicare and Medicaid patients to Lab I. The kickbacks consisted of glucometers, test strips, lancets, and related services provided free of charge to the nursing homes to induce them to sign contracts with Lab I for laboratory work. The defendant, Lab I, Inc. pleaded guilty to all counts and co-defendant, William Allen Neill pleaded guilty to four counts of violating the Anti-kickback statute. On January 16, 1998, both defendants were ordered to make restitution, joint and several, in the amount of $100,000 to HHS.

  • On April 24, 1997, a clinical laboratory in Miami, Florida, agreed to pay the government $4.9 million to settle Medicare fraud charges, in the Southern District of Florida. The Government alleged that Franklin Laboratories, Inc. submitted claims to Medicare for blood and urine tests that were either not performed or not medically necessary. As part of the settlement, the two owner/operators of the lab are now permanently banned from participating in any publicly funded health care program.

  • On July 25, 1997, the owner and former president of Clinitec Laboratory in Ohio were each convicted of defrauding Medicare and Medicaid out of more than $1.7 million over a four-year period, and of paying kickbacks, in the Northern District of Ohio. Between 1989 and 1993, the two defendants billed Medicare and Medicaid for glucose blood stick tests which were not performed. Clinitec had contracts with nursing homes to perform the tests, but they were actually performed by the homes' nursing staff. Also, the defendants paid kickbacks to the nursing homes in exchange for Medicare and Medicaid referrals.

Lymphedema Pumps

  • On April 17, 1997, in the Southern District of California, a grand jury indicted two San Diego businessmen on charges that they defrauded Medicare and Medi-Cal out of more than $200,000 through fraudulent claims submitted to those programs for lymphedema pumps that were not medically necessary. The indictment alleged that the defendants, an owner and salesman for M&A Medical, falsely billed Medicare for equipment that was not provided, and forged doctors' signatures on certificates of medical necessity.
  • On May 23, 1997, Jalopy Shoppe, Inc., of Sherman Texas, operating as Breathco/Mediserv, Inc., and its president, agreed to pay $1.35 million to settle a qui tam suit brought under the FCA, alleging that they submitted claims in which they misrepresented the quality of the lymphedema pumps they were selling to obtain an inflated reimbursement amount from Medicare, in the Northern District of Texas.

Nursing Homes

  • On March 10, 1997, a Kissimmee, Florida, man who supplied diapers to nursing home patients and then billed Medicare for prosthetic devices was sentenced in the District of Kansas to 10 years in federal prison for receiving more than $47 million in Medicare reimbursements for false claims he submitted. The case was investigated jointly in the District of Kansas and the Middle District of Florida. In Kansas, the Medicare carrier discovered that Ben Carroll, who operated under various business names (Bulldog Medical, MLC Geriatrics), had received over $2.3 million by submitting false claims. In order to deceive Medicare carriers, Carroll instructed employees to refer to and bill the unreimbursable diapers as "Urinary Collection Devices", a reimbursable catheter. Carroll obtained the diapers for 30-40 cents each, then billed Medicare for the catheter product, which Medicare reimbursed at $7-$8.45 each. After the Kansas Medicare carrier stopped paying his claims, Carroll continued his scheme in Florida, where he conspired with a nursing home chain by entering into an agreement whereby the nursing home chain would receive a "packaging" fee for packaging incontinence products, including the unreimbursable diaper. The packaging fee was, in actuality, a kickback Carroll paid for the purpose of insuring that the nursing home chain would distribute the incontinence products to its homes, thus allowing Carroll to continue his false billing scheme. On September 18, 1996, Carroll pled guilty to mail fraud one week before trail was to begin in the Kansas case, and agreed to plead guilty to Florida charges which, at that time, had not been filed. Carroll pled guilty to one count of conspiracy to commit mail fraud on November 18, 1996, in the Middle District of Florida. For purposes of sentencing, the Florida case was transferred to the District of Kansas. In addition to serving a ten year sentence, he agreed to forfeit $32 million in funds derived from his scheme to defraud Medicare.

Research Grant Fraud

  • On April 7, 1997, in the Southern District of New York, New York University Medical Center (NYU Medical Center) agreed to pay $15.5 million to resolve civil liabilities arising from charges that it submitted false information to the government, resulting in the over-recovery of federal funds for indirect costs associated with NYU Medical Center's federally sponsored organized research grants, contracts, and other agreements for the fiscal years 1984 through 1993, and with its indirect cost rate for fiscal years 1994 through 1997. This settlement is unique because it combines a multiple damage recovery under the FCA, with a rate negotiation that typically is handled by the HHS' Division of Cost Allocation for a separate period of time. The qui tam suit was filed in December 1993 by a former NYU Medical Center employee, who will receive $1.5 million of the settlement proceeds.

DRG Project

On May 21, 1997, 102 hospitals in Connecticut, Maine, New Hampshire, Rhode Island, and Vermont jointly announced that they had agreed to pay more than $3.4 million to settle allegations that they had violated the FCA. The USAOs in five districts worked jointly with the HHS-OIG to coordinate simultaneous data development, prepare demand letters, and create settlement formulas and agreements. This effort is known as the DRG Project, modeled after previous projects in the Middle District of Pennsylvania and in Massachusetts.

Unapproved Drugs

On May 28, 1997, in the District of Massachusetts, Copley Pharmaceuticals, Inc., of Canton, Massachusetts, agreed to pay a $10.65 million criminal penalty to the government for conspiring to defraud the Food and Drug Administration. This penalty would be the largest ever paid by a generic drug manufacturer. Prosecutors charged Copley with fraud for changing manufacturing methods from those approved by the agency for several drugs, manufacturing batch records to cover up the deviations, and submitting false annual reports that did not disclose the manufacturing changes, between 1991 and 1994.

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1/Under the FCA, a person who knowingly submits a false claim to the United States may be liable for a civil penalty of between $5,000 and $10,000, plus up to three times the amount of damages sustained. The FCA defines "knowingly" to mean that the claimant (1) has actual knowledge of the information; (2) acts in deliberate ignorance of the truth or falsity of the information; or, (3) acts in reckless disregard of the truth or falsity of the information.

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