American Academy of Emergency Medicine

Testimony of Lewis Morris, Assistant Inspector General for Legal Affairs, OIG, before the House Committee on Commerce, Subcommittee on Oversight and Investigations, regarding Medicare and Third-Party Billing Companies

From http://www.hhs.gov/oig/testimony/00406fin.htm

Role of Third-Party Billing Companies
OIG Efforts To Promote Integrity among Third-Party Billers
Investigations of Third-Party Billing Companies
Insights Gained from these Investigations
Suggestions for Reform

Before the House Committee on Commerce,
Subcommittee on Oversight and Investigations

Medicare: Third-Party Billing Companies

Statement of
Lewis Morris
Assistant Inspector General for Legal Affairs

April 6, 2000

Office of Inspector General
U.S. Department of Health and Human Services

Good Morning, Mr. Chairman and Members of the Committee. I am Lewis Morris, Assistant Inspector General for Legal Affairs in the Office of Inspector General (OIG), U.S. Department of Health and Human Services (HHS). I am accompanied by Special Agent Steve Lack from our San Francisco Regional Office who is familiar with many of the issues and cases I will describe today.

The mission of the OIG is to identify ways to improve HHS programs and operations and protect them against fraud, waste and abuse. We do this by conducting independent and objective audits, evaluations, and investigations, which provide timely, useful, and reliable information and advice to Department officials, the Administration, the Congress, and the public. In carrying out our mission, we work with the Department and its operating divisions, the Department of Justice (DOJ), other Federal and State agencies, and the Congress to bring about systemic improvements in HHS programs and operations, and to prosecute and/or recover funds from those who defraud the Government.

I appreciate the opportunity to testify before you today and provide the Committee with the OIG's perspective on the issues presented by the role of third-party billing companies in the Federal health care programs. My testimony will provide:

  • an overview of the role played by third-party billing companies;
  • a description of OIG efforts to promote integrity among third-party billers;
  • a look at some specific fraud investigations involving third-party billing companies;
  • the insights the OIG has gained from these cases; and
  • some suggestions for programmatic reforms.

Role of Third-Party Billing Companies

Billing companies are becoming a vital segment of the health care industry. Increasingly, health care providers rely on billing companies to assist them in processing claims in accordance with applicable statutes and regulations. Additionally, health care providers consult with billing companies for advice regarding reimbursement matters, as well as overall business decision- making.

Billing companies provide a variety of types of services. For example, some billing companies only process bills that have already been coded by the provider, while others take on the added responsibility of assigning billing codes based on the client's medical documentation. In addition to claims preparation, some billing companies also offer a spectrum of management services, including accounts receivable management and bad debt collections. Other third-party billing companies specialize in a particular sector of the health care industry, such as physician services provided in emergency rooms.

In fiscal year 1998, the Medicare program processed over 700 million Part B claims and 149 million Part A claims, the vast majority of which under both categories were electronic. Even with its enhanced program integrity functions, the Health Care Financing Administration is able to conduct payment reviews on only 10 percent of these claims. The system must rely on the honesty and good faith of health care providers, as well as those who process and submit claims on their behalf. Third-party billing companies that operate ethically can provide a great service to providers and the Federal health care programs. These companies can offer expertise in program reimbursement requirements, help ensure that claims are accurately prepared, and free physicians and other practitioners to devote their energies to the care of their patients.

OIG Efforts To Promote Integrity among Third-Party Billers

In order to assist honest billers establish internal controls that promote adherence to Federal health care program requirements, the OIG has taken proactive steps to promote integrity among the third-party billing industry.

Compliance Guidance. The primary method by which the OIG has reached out to the billing industry is through the release of the "Compliance Program Guidance for Third-Party Medical Billing Companies," in November 1998. Consistent with other OIG compliance guidance, the Third-Party Billing Compliance Guidance sets forth the benefits of a compliance program, describes the essential elements of a compliance program, discusses general compliance principles and counsels companies on how they might use the Guidance. Most importantly, the OIG formulated the Guidance with the input of the third-party billing industry, as well as other interested parties.

The Third-Party Billing Compliance Guidance also identifies the specific risk areas that should be addressed by all billing companies. Such areas include billing for items or services not actually documented; unbundling and upcoding of claims; computer software programs that encourage billing personnel to enter data in fields indicating services were rendered though not actually performed or documented; knowing misuse of provider identification numbers which results in improper billing in violation of rules governing reassignment of benefits; billing company incentives that violate the anti-kickback statute; and percentage billing arrangements.

In addition , the Guidance describes the risk areas for companies that provide coding services in addition to billing services, including "assumption" coding (the coding of a diagnosis or procedure without supporting clinical documentation); alteration of the documentation; coding without proper documentation of all physician and other professional services; and billing for services provided by unqualified or unlicenced clinical personnel.

The OIG hopes that providing information and recommendations such as contained in the Guidance will help lead third-party billing companies to voluntarily embrace corporate compliance programs that fit their individual needs, and thus, help reduce the level of fraud, waste and abuse in Medicare and Medicaid reimbursement.

Corporate Integrity Agreements (CIAs). Another manner in which the OIG seeks to promote compliance in the third-party billing industry is through the imposition of CIAs on certain billing companies involved in fraud schemes. These agreements are imposed in global settlements in lieu of exclusion from participation in Federal health care programs. CIAs are imposed on companies to help reorient a corporate culture that may have previously been prone to fraud and abuse. In this way, the OIG attempts to directly affect change in third-party billing entities. Such CIAs may also serve as admonitory examples for others within the industry.

CIAs set forth specific requirements that a provider must meet in establishing a compliance program or in maintaining an existing compliance program. For instance, the CIAs imposed on third-party billing companies require them to establish and maintain a compliance officer function, a code of conduct, specific policies and procedures addressing billing and coding issues, a training program, and annual audits and reviews. Moreover, the companies must make annual reports to the OIG on their efforts to comply with the CIAs.

Investigations of Third-Party Billing Companies

Unfortunately, there are system vulnerabilities that an unethical billing company can take advantage of and exploit for its financial gain. The problems associated with dishonest third- party billing companies are as old as the Medicare program itself. As early as 1972, the Congress took action to stop "factoring" arrangements, the practice of physicians and other providers reassigning their Medicare and Medicaid receivables to a collection agency for a percentage of their face value. The agency in turn prepared and submitted the claims to the health care programs and received payment in its name. These reassignments were a significant source of incorrect and inflated claims. Cases of fraudulent billings by collections agencies and payment of substantial overpayments to these "factoring" agencies were also found. In response, Congress prohibited, with limited exceptions, payment for covered services to anyone other than the patient or the person who provided the service.

Despite the effort to stop factoring of Medicare and Medicaid bills, some individuals and billing companies circumvented the intent of the law by the use of a power of attorney, allowing the billing company to receive Federal health care payments in the name of the provider, thus continuing the abuses associated with reassignment of claims. In 1977, the Congress responded by precluding the use of a power of attorney as a device for reassignment of benefits. However, a billing agency could continue collecting Medicare or Medicaid payments on behalf of a health care provider, provided that the agency does so pursuant to an agreement under which the compensation paid to the agency for its services is unrelated to the dollar amount of the billings or payments, and is not dependent upon the actual collection of any such payments.

These Congressional efforts to curb program abuses continue to be thwarted by unethical billing companies. While the OIG cannot discuss any ongoing investigations, the following cases show how easily a dishonest third-party billing company can establish a scheme that generates millions in fraudulent claims.

Physicians on Call. During the 1980's, the OIG investigated allegations that a billing company called "Physicians on Call" used recent medical school graduates to perpetrate a fraudulent billing scheme. The company hired doctors, obtained Medicare providers numbers in their names, and then contracted with nursing homes for the provision of monthly physician visits to perform examinations of the residents. Although these monthly examinations generally were brief, the billing company upcoded the physician's visits to reflect extensive, and more highly reimbursed, services. This fraudulent upcoding was done without the knowledge of the doctors, who received payment from the company based on the services actually rendered. The scheme was uncovered by the Medicare contractor during a routine review of claims for physician services. As the named providers of service on the Medicare claims, the physicians were assessed overpayments. They were not able to seek relief from Physicians on Call because it had gone out of business.

Handle With Care, Inc. A criminal investigation from the early 1990's provides another example of how vulnerable the Federal health care programs are to the schemes of dishonest billing companies. In this case, two sisters, Kristina Brambila and Wendy Desalvo, set up a third- party billing company known as Handle With Care, Inc. (HWC) to perform "lost charge" audits for nursing homes. The two sisters persuaded at least 70 nursing homes in 8 states that they would review residents' medical records and accounts for services that had not been billed to Medicare. Using "tricks of the trade" known only to HWC, the company billed Medicare on behalf of the nursing home for these overlooked charges and kept 50 percent of the proceeds. In actuality, HWC billed for surgical dressings for nursing home patients who had not had surgery and fraudulently caused Medicare to pay approximately $7.4 million for nonrendered services.

Because the billing company submitted the fraudulent claims under the nursing home's provider number, it took OIG investigators a great deal of time and resources to tie what appeared to be unrelated improper billings by different nursing homes back to a single third-party billing company. At the conclusion of the investigation, the two sisters were convicted of Medicare fraud and received prison sentences. Additionally, the Government reached False Claims Act (FCA) settlements with 15 of the involved nursing homes and recovered over $5 million cumulatively.

Medaphis Corporation. While some third-party billing schemes involve a small group of individuals, they can also involve some of the largest billing agencies. For example, in 1998, the United States investigated allegations brought by a whistle blower that the national third-party medical billing companies, Medaphis and Medaphis Physician Services (Medaphis), was submitting duplicate claims and using incorrect codes on claims submitted on behalf of a client. During the period of 1992 through 1996, a Medaphis subsidiary was alleged to have improperly submitted multiple claims for payment for the same service to the same patient on the same date of service; used incorrect or inapplicable diagnosis codes in resubmitting claims which had been denied based on the diagnosis originally stated; and submitted other improper radiology and cardiology-related claims. Medaphis agreed to pay $1.5 million to resolve its civil liability and entered into an extensive five year corporate integrity agreement (CIA) that covers its activities throughout the nation.

Gottlieb Financial Services, Inc. In 1999, the United States resolved allegations against another wholly-owned subsidiary of Medaphis Physician Services, Gottlieb Financial Services, Inc. (GFS), that provided emergency department physician billing services. When preparing claims for evaluation and management services, GFS allegedly used an automated coding software system that routinely upcoded emergency room visits. In this instance, based on an inability to pay more, Medaphis agreed to pay $15 million to settle its liability, $2.4 million of which went to the whistleblower who brought the case under the qui tam provisions of the FCA. Moreover, the Medaphis CIA imposed as part of the earlier settlement was made part of this new settlement, given that GFS's conducted pre-dated the execution of the prior CIA.

Professional Medical Billers d/b/a Professional Radiology Billers. Yet another example of the Medicare program's vulnerability to third-party billing fraud can be found in a recently prosecuted criminal case. Professional Medical Billers d/b/a Professional Radiology Billers (PRB) provided third-party billing services primarily to physicians. From 1994 through 1996, PRB added fabricated services to the physician claims and then submitted the claims to Federal health care programs under the physicians' provider number. PRB would reimburse the physicians for the legitimate claims (less PRB's percentage for providing billing services) and keep all the payments for the fabricated services. The scheme was uncovered when one of the company's clients learned that his year-to-date earning from Medicare were double the amount that had been deposited into his bank account by the billing service.

Nancy Thetford and Tracey Huff, co-owners of PRB, pled guilty to criminal charges and acknowledged that the scheme cost Medicare and Medicaid over $1 million. Thetford was sentenced to 5 years supervised probation and was excluded from Federal health care programs for 10 years. Huff was sentenced to 21 months imprisonment and is also subject to mandatory exclusion. The company ceased to operate in the course of the investigation and is now defunct.

Emergency Physician Billing Services, Inc. Perhaps the most alarming example of the systematic abuse of the Federal health care programs by a third-party billing company can be found in the recent case of Emergency Physician Billing Services, Inc. (EPBS). At the time of the investigation, EPBS provided coding, billing, and collections services for emergency physician groups in over 100 emergency departments in as many as 33 states. Based upon allegations presented by a qui tam relator, the United States charged that EPBS and its principle owner, Dr. J.D. McKean, routinely billed Federal and state health care programs for higher level of treatment than was provided or supported by medical record documentation.

EPBS was paid based on a percentage of revenues either billed or recovered, depending on the client. EPBS coders received a base pay with bonuses based on the number of charts processed and were required to process 40 emergency room medical charts per hour, or the equivalent of a chart every 90 seconds. By contrast, a competitor of EPBS requires 120 charts per day. The EPBS coders were able to meet these quotas by taking short-cuts and disregarding information in the chart. As the trial court noted, no coder at EPBS ever attended training or any other informational meeting regarding emergency department coding other than in-house EPBS training and no coder ever contacted a physician with questions regarding a chart.

After a trial in which the United States District Court for the Western District of Oklahoma found EPBS and Dr. McKean liable under the FCA, the defendants agreed to pay $15.5 million to resolve their civil and administrative monetary liabilities. In addition, Dr. McKean agreed to be excluded from participation in the Federal health care programs for 15 years and EPBS entered into a comprehensive CIA. Currently, the Government is pursuing physician groups that benefitted from EPBS's fraudulent practices.

Insights Gained from these Investigations

These investigations, as well as program evaluations by the OIG and GAO, highlight the Federal health care program's potential vulnerability to fraud by unscrupulous third-party billing companies. The insights gained from the investigations include:

  • payment incentives such as percentage compensation arrangements can encourage abuse;
  • there is a loophole in the prohibition on reassignment rule;
  • training of billers and coders may be inadequate;
  • the ability to identify and track third-party billers is limited at best; and
  • standards for participation (certifications, qualifications or conditions) to act as billing agents for Federal health care programs are non-existent.

Payment incentives can encourage abuse. There can be little doubt that payment arrangements where billing companies are reimbursed on a percentage basis create an environment ripe for abuse. The temptation to upcode or fabricate additional services may be irresistible when the billing company's compensation depends upon the amount of revenue generated or claims submitted. For instance, EPBS was paid by its physician clients based on a percentage of revenues, and in turn EPBS paid its coders a base salary with bonuses based on the number of charts coded. Such payment incentives discouraged coders from paying close attention to the adequacy of documentation in charts to support the claim to Medicare.

Improper incentives appear to have been a factor in several of the cases discussed above. Although we are not certain of the pervasiveness of these types of arrangements, our suspicion is that it characterizes many third-party billing arrangements.

Loophole in prohibition on reassignment rules. Although not addressed specifically by the court in the EPBS case, the Government determined that the manner in which EPBS was compensated by its clients undermined Medicare policy on reassignment. As a general matter, Medicare prohibits the reassignment of the right to payment to persons other than the provider or supplier who delivered the service. However, as an exception to this general rule, payment may be made to an agent who furnishes billing and collection services to the health care provider if certain conditions are satisfied. Among the conditions to be eligible for the reassignment, the agent's compensation may not be related to the dollar amounts billed or collected. In other words, Medicare will only pay a third party biller on behalf of its clients when the agent has no financial interest in how much is billed or collected.

Unfortunately, it appears that some billing companies have constructed payment arrangements that circumvent the intent of the Medicare rule. Rather than comply with the prohibition on incentive payments, billing companies arrange for the Medicare payments to be made to the client for deposit in a bank account in the client's name, usually at the same financial institution where the billing company maintains an account. The money is typically held in the client's account for twenty-four hours or less, after which the Medicare funds from the individual provider client account are swept into the billing company's general bank account. There often is an agreement between the client and the biller that the former will not remove any funds during the initial twenty-four hour period. Then the billing company remits to the client's account the reimbursement to which the client is entitled, minus its percentage-based billing fee. And in the case of dishonest billing companies, they also withhold the proceeds from fabricated, upcoded or other improper claims submitted in the name of the client. Under this "lockbox" arrangement, as it is often called, the prohibition on reassignment of claims to an incentive compensated billing agent does not apply because the payment is made directly to the physician and not the agent.

Training may be inadequate. The OIG is not aware of any studies examining the quality and extent of training provided by billing companies to their personnel. However, certain facts are clear. First, the Medicare program does not mandate that billing companies ensure that their personnel meet minimal training requirements. While there are certain private organizations that train and certify coders and Medicare contractors can provide certain coding and billing training, such certifications and outside training are not required by Medicare. Moreover, it is the OIG's understanding that to the extent that Medicare contractors issue educational guidance on billing and coding issues, such guidance is only sent to providers and not to billing companies.

Third-party billing companies that choose to abuse the Medicare program can take advantage of these system weaknesses. For example, EPBS did not send its coders to any training or any other informational meeting regarding emergency department coding other than in-house EPBS training. Such in-house training was highly problematic as it was based on an internal coding manual created by Dr. McKean and did not incorporate the CPT manual, the primary tool used by Medicare to determine appropriate billing codes.

Ability to Identify third-party billers is limited. There are approximately 5,000 third-party billers in the United States. However, the OIG has just issued a report(1) on computerized billing systems that incidently raised the issue that HCFA's ability to identify these companies is limited. Likewise, it is unknown how many of the approximately 700 million claims per year processed by Medicare are submitted by third-party billers. One reason for this uncertainty is that many billing agencies submit claims to Medicare using billing and submitter numbers (unique numbers assigned to billers and providers by HCFA for electronic claim submission) of the providers for whom they bill. As the case of Handled with Care, Inc. demonstrates, a scam artist can hide behind the identification numbers of a legitimate health care provider and evade detection. Even if the billing company uses its own submitter number, the electronic claims often are passed through clearinghouses that reformat the claims and then submit them to Medicare. Under this situation, the initial third-party billing number may no longer appear on the claim.

Standards for participation are non-existent. Given the inability to adequately identify who is doing third-party billing, assessing the qualifications of these companies or their personnel is almost impossible. Currently, the Medicare program lacks any standards or eligibility criteria for allowing third-party billing companies to prepare and submit claims to the program.

The magnitude of this vulnerability is highlighted by a recent advertisement for a "step-by-step" business guide for medical claims processing services found in a complementary airline magazine. For a mere $69 dollars, "How to Start a Medical Claims Processing Service" promises that your "prescription for a healthy income" involves no more than owning a computer, printer, modem and claims processing software. As the ad also notes: "There's no training needed and . . . with health care reform, the need for processors (and the profits to be made) will only increase." In short, without any type of certification process or minimal standards for third-party billers, Federal health care programs shall remain vulnerable.

Suggestions for Reform

Based on its experience to date with third-party billing in the Federal health care programs, the OIG has formulated some tentative suggestions for reform measures.

First, those who administer the Federal health care programs need an effective mechanism to identify third-party billers when they participate in Federal health care programs. This identification system should allow the programs to track billing companies' overall billing patterns, to link specific claims with particular billers, and to require claims be submitted only from authorized sites. This may involve registering third-party billers and clearinghouses so as to provide an audit trail and ensure that claims enter the Medicare system from authorized sources.

Second, Congress should consider measures to expressly prohibit the use of payment incentives in third-party billing contracts, no matter how the arrangement is structured. In other words, the "lockbox loophole" should be closed.

Third, mandated minimal training as part of qualification standards may be a way to discourage unscrupulous and ill-informed billers from gaining access to Federal health care programs and to ensure high quality participation by honest billers who do participate. In the interim, we believe contractor education efforts should be provided directly to billing companies rather than indirectly through providers.


I appreciate the opportunity to share the views of the Office of Inspector General on this important subject. Special Agent Steve Lack and I welcome your questions.


1. Medical Billing Software and Processes Used to Prepare Claims, March 2000 (OEI-05-99-00100).