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Combating Health Care Fraud and Abuse in Medicare: Legislative Action and New Programs

In 1992, the General Accounting Office (GAO) estimated that about ten percent of all health care dollars spent in America, both in the private and public sectors, is lost each year to fraud and abuse. Since the GAO report was issued, concern about the problem of health care fraud and abuse has grown steadily, both in government and amongst the public.

Concerns were heightened in July 1997 when results of the first annual Medicare payment audit were announced in Congressional testimony by the Inspector General (IG), Department of Health and Human Services (DHHS). The audit found that approximately 14 percent of Medicare payments (about $23.2 billion) made in fiscal year 1996 were "improper"  (It should be noted that the audit did not measure fraud and abuse, only improper payments. The largest share of these improper payments were made in cases where providers failed to produce documentation required by the Health Care Financing Administration (HCFA).)

Opinion surveys show that a high percentage of Americans perceive fraud and abuse as one of the most serious problems in the health care system. A 1996 survey found that more than eight in 10 respondents believed (incorrectly) that the elimination of fraud and abuse from Medicare would solve that program's financial problems.

Actions Taken to Fight Fraud and Abuse

The issue of fraud and abuse has been particularly prominent in discussions about how to improve the Medicare program's financial health. Both the legislative and executive branches of the federal government have come to realize that it is essential to fight fraud and abuse in Medicare more effectively.

This fact sheet provides an overview of recent legislative action and other initiatives intended to combat fraud and abuse in health care, particularly in Medicare and other federally funded programs. Congress has passed and the President has signed two recent pieces of legislation that address the problem of fraud and abuse: the Health Insurance Portability and Accountability Act of 1996 (HIPAA), and the Balanced Budget Act of 1997 (BBA). Each act contains significant new anti-fraud and abuse provisions that increase penalties and provide additional financial resources for fighting fraud.

In addition, Operation Restore Trust (ORT), a demonstration project designed to target known problem areas (home health care, nursing homes, and durable medical equipment) in the five states with the largest populations of Medicare beneficiaries, was begun in 1995. That year HCFA also initiated steps to require providers and suppliers to use a unique billing identification number with all claims submitted to Medicare.

Legislation: the HIPAA

The most important anti-fraud and abuse provisions of the HIPAA are summarized below.

With respect to all health plans, both those that receive federal funds and those that do not, the Act:

  1. Creates a new national health care fraud and abuse program to coordinate federal, state, and local law enforcement efforts. In the past, a number of agencies held investigatory and prosecutorial powers and duties, sometimes with overlapping and unclear jurisdictions.
  2. Creates a federal criminal statute specific to fraud and abuse, making successful prosecutions more likely. This removes an obstacle to the efficient prosecution of fraud and abuse. In the past, prosecutors could apply wire and money-laundering statutes only to health care fraud and abuse cases, making it difficult to prosecute some offenders.
  3. Establishes a health care fraud and abuse fund to ensure consistent and adequate funding for this program.
  4. Institutes a fraud and abuse data collection program. Each government agency and health plan is required to report all final adverse actions against providers.
  5. Adds to the range of penalties available for fraud and abuse offenses.
    • Offenders may be required to repay what they stole; may be forced to pay additional amounts in fines; and may, in some cases, be sent to prison.
    • Those convicted of felony criminalfraud, in addition to the above penalties, are barred from participating in federally-funded health care programs for a minimum of five years; those convicted of misdemeanor criminal fraud are barred from participation for three years, although it is within the court's discretion to extend the period to five years.
    • Where appropriate, a civil action may be filed or the case may be settled. Typically, the amount of money stolen, plus additional amounts in the form of penalties and fines are exacted. In addition, an individual may be barred from billing a federally-funded health care program for a number of years.

A number of provisions in HIPAA apply specifically to the Medicare program. With respect to Medicare, the Act:

  1. Establishes a new Medicare Integrity Program under which the DHHS Secretary will contract with "eligible private entities" to review the activities of providers to determine whether payments should be made, and to detect fraudulent and abusive practices. In the past, Medicare carriers handled these functions.
  2. Requires the DHHS Secretary, in consultation with the attorney general, to issue binding advisory opinions to providers who request them. These advisory opinions permit providers to determine whether or not a proposed business arrangement is consistent with the law.
  3. Creates a beneficiary incentive plan that is intended to encourage beneficiaries to report suspected fraud or abuse by providing a monetary award for information that leads to the collection of at least $100.

Legislation: the BBA

The BBA adds a number of important provisions that should strengthen the anti-fraud and abuse effort in the Medicare program. The BBA:

  1. Establishes a toll-free fraud and abuse hotline for individuals who suspect that fraud or abuse have occurred in the Medicare program.
  2. Allows beneficiaries who request an itemized bill to obtain it within 30 days. Medicare carriers or intermediaries must review the bill if a beneficiary requests them to do so.
  3. Requires the posting of a $50,000 surety bond by durable medical equipment (DME) suppliers, home health agencies, comprehensive outpatient rehabilitation facilities, and rehabilitation agencies. DME suppliers are required to provide certain information about persons who own or have an interest in the business.
  4. Requires the DHHS Secretary, upon request, to issue binding written advisory opinions regarding the legality of physician referrals.
  5. Changes the definition of "reasonable costs" that may be reimbursed to exclude such items as entertainment and gifts.
  6. Replaces "reasonable charges" with fee schedules for several categories of medical supplies, DME, and other items reimbursed under Medicare Part B.
  7. Creates several new sanction provisions, including:
    • A "three strikes, you're out" rule, whereby an individual or entity, upon conviction of a second health care-related crime, will be excluded from federally-funded health care programs for 10 years, and upon conviction of a third health care-related crime will be excluded for life.
    • Authorization for the DHHS Secretary to terminate an agreement, refuse to renew, or not to enter into, an agreement with a provider who has been convicted of any felony.
    • Authorization to exclude an entity when ownership or controlling interest of the entity is transferred to a member of the immediate family or a member of the household of an excluded provider.
    • Establishment of new civil monetary penalties for (1) individuals who knowingly contract with excluded providers, and (2) "kickbacks."

Operation Restore Trust

The DHHS instituted a new program, "Operation Restore Trust (ORT)," in 1995. The program was originally a demonstration project designed to look at certain problem areas in health care in the five states with the largest Medicare beneficiary populations. ORT focused on some of the most rapidly expanding areas in health care: home health care services, nursing homes, and DME.

ORT uncovered substantial amounts of fraud, particularly in home health care. In its first two years, ORT identified nearly $188 million in improper payments made by Medicare.

Due to its success, the DHHS Secretary has announced that ORT will be expanded nationwide.

The National Provider Identifier

In the past, providers were able to obtain multiple Medicare billing numbers, which made tracking providers engaging in fraud and abuse extremely difficult. To remedy this, HCFA began issuing unique billing identification numbers in 1996 that will follow providers for life, regardless of changes in their residence or even in their area of medical practice. All providers and suppliers are required to use these numbers on all bills submitted to Medicare beginning in February 1998.

Results of the Anti-Fraud and Abuse Program

Many changes enacted by the HIPAA and the BBA are consistent with those recommended by experts on the issue of health care fraud. It is still too early, however, to judge the degree of success the new anti-fraud and abuse laws and programs will achieve. Although recoveries (fines, penalties, forfeitures, etc.) increased dramatically in fiscal year 1997, it is inappropriate to regard that increase as a measure of success for the reformed program. Some cases that were settled in 1997 were started years earlier, before the new laws and programs were in effect. It is also important to note that more than 63 percent of the $999 million dollars recovered from cases involving fraud and abuse in the Medicare and Medicaid programs came from three very large judgments.  It should be remembered that one very large settlement in 1994  caused the anti-fraud and abuse program recoveries to rise to $449 million that year, the largest sum to that date. In the two years following that settlement, total recoveries declined significantly.  It will be necessary to monitor the level of recoveries in the coming years to determine the actual impact of the new laws and programs on the anti-fraud and abuse program.


  1. Health Insurance: Vulnerable Payers Lose Billions to Fraud and Abuse. GAO-HRD-92-69 (1992).
  2. Department of Health and Human Services, Office of the Inspector General. Semiannual Report, April 1, 1997-September 30, 1997, p.2.
  3. Ibid.
  4. In a 1996 survey, 87 percent of adults polled held that view. Social Security and Medicare Anniversary Research: A Study of Public Values and Attitudes. 1996 Update and Comparisons to 1995. DYG Inc. and Survey Design and Analysis Department, Research Division, AARP (October 1996).
  5. Health Insurance Portability and Accountability Act of 1996. P.L.104-191 (Title II).
  6. Balanced Budget Act of 1997. P.L. 105-33 (Title IV, Subtitle D).
  7. Department of Health and Human Services Office of the Inspector General. "Operation Restore Trust Accomplishments" (May 1997).
  8. U.S. Congress. House. Appropriations Subcommittee on Labor, HHS, Education, and Related Agencies, "HHS's FY 1998 Budget," Department of Health and Human Services, Secretary Donna Shalala. (February 11, 1997).
  9. Department of Health and Human Services, Office of the Inspector General. Semiannual Report, April 1, 1997-September 30,1997.
  10. Those recoveries included SmithKline, Beecham ($325 million); Damon Laboratories ($119 million); and Laboratory Corporation of America ($182 million, plus an additional $5 million from its subsidiary, Allied Clinical Laboratories). See "DOJ and HHS Highlight Latest Efforts to Fight Fraud by Clinical Laboratories," DHHS Press Release (February 27, 1997).
  11. National Medical Enterprises agreed to a settlement for approximately $379 million. See "Remarks of James S. Gorelick, Deputy Attorney General of the United States," Corporate Conduct Quarterly 5(1).
  12. Department of Health and Human Services, Office of the Inspector General. Semiannual Report, April 1, 1995-September 30, 1995, p.64 and Semiannual Report, April 1, 1996-September 30,1996, p.54

Written by Drew Smith, AARP Public Policy Institute
April 1998
©1998 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes
Public Policy Institute, AARP, 601 E Street, NW, Washington, DC 20049

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