Interim Report: Fraud and Error in

Virginia’s Medicaid Program

Commission Briefing
October 12, 2010
 Study Mandate
HJR 127 (2010 Session)
• JLARC to study & describe nature & extent of
fraud, waste, abuse, & inefficiency in Medicaid
• Identify programs in Virginia & other states that have
reduced these activities
• Compare nature & scope of these activities in Virginia
with other states

JLARC 2
 Research Activities

• Interviews
• State agency staff

• Literature and document reviews

• Data analysis
• Final report scheduled for October 2011

JLARC 3
 In Brief

Although State & local agencies have had some

success identifying fraud & error, there appear to
be several areas in which additional efforts could
further reduce improper Medicaid payments.

JLARC 4
 In This Presentation

Background
Improper Payments & Blocked Claims
Recipient Eligibility Determinations
Recipient Fraud
Provider Enrollment
Improper Payments Detection
Provider Fraud
Potential Opportunities

JLARC 5
 Medicaid Is Virginia’s
Fastest Growing Program
• Medicaid accounted for 27% of Virginia’s entire
budget growth from FY 2001 - 2010
• Second largest program in Virginia’s budget
• $4.8 billion in FY 09

• Even small amounts of fraud & error can be

costly

JLARC 6
 Medicaid Is a Joint
Federal-State Program
• States have some flexibility within broad federal
guidelines
• Department of Medical Assistance Services (DMAS)
can set eligibility standards, service provision,
payment rates
• Federal Centers for Medicare & Medicaid
Services (CMS) typically pays 50% of cost
• Recently, federal share has been 61%

JLARC 7
 Expenses Vary by Type of Recipient

• Average annual expenditure is $5,639

• $2,320 for children
• $14,766 for Virginians who are blind & disabled

JLARC 8
 Fee-for-Service Recipients Are
Typically More Costly
• Recipients enroll in fee-for-service program or
managed care organization (MCO)
• Fee-for-service represents 70% of cost but only 35%
of all recipients
• Payments & enrollment are shifting toward MCOs

JLARC 9
 Waste, Inefficiency, Fraud & Abuse Are
Examples of Improper Payments
• Fraud & abuse are both intentional
• But in cases of abuse, services were actually provided

• Inadvertent errors can be made by providers,

agencies, & applicants
• Waste is extravagant & unnecessary
expenditures
• Inefficiency defined in mandate as regulatory
barriers that increase expenditures
JLARC 10
 Five Types of Improper Payments
Occur Most Frequently in Medicaid
• Using incorrect medical codes
• Failing to bill a third party, such as Medicare
• Billing for
• item or service without adequate documentation
• medically unnecessary services
• costs or services Medicaid will not reimburse

JLARC 11
 Program Integrity Process Is Designed to
Reduce Improper Payments

Before provider payment is made:

1. Eligibility of recipients & providers is determined
2. Pre-payment reviews ensure payment for the correct
amount, service, & person
To recover funds already paid:
3. Post-payment reviews of recipients & providers
4. Administrative or legal (civil or criminal) processes

JLARC 12
 Several Agencies Are Involved in
Program Integrity
• DMAS enrolls providers, reviews claims, & audits
providers & recipients
• State & local Dept. of Social Services (DSS)
enroll recipients & investigate recipient fraud
• Potential fraud is referred to
• Providers: Attorney General’s Medicaid Fraud Control
Unit (MFCU)
• Recipients: Commonwealth’s Attorney

JLARC 13
 Program Integrity Responsibilities Are
Dispersed Among Several Agencies
U.S. OIG CMS
Attorneys

Attorney Sec of Health

General & Human
Resources

VDH
MFCU DMAS DSS DHP
DBHDS
Common-
wealth’s
Contractors Attorneys
Local DSS
MCOs
Circuit or
District
Courts
JLARC 14
 Federal Legislation Has Added New
Program Integrity Responsibilities

• Deficit Reduction Act of 2005

• Strengthened standards for citizenship & eligibility
requirements for long-term care
• CMS must contract with auditors to review Medicaid
claims (“Medicaid integrity contractors”)

JLARC 15
 Federal Legislation Has Added New
Program Integrity Responsibilities

• Federal Health Care Reform

• New requirements for provider enrollment
• DMAS must contract with additional auditors to review
Medicaid claims (“recovery audit contractors”)

JLARC 16
 In This Presentation

Background
Improper Payments & Blocked Claims
Recipient Eligibility Determinations
Recipient Fraud
Provider Enrollment
Improper Payments Detection
Provider Fraud
Potential Opportunities

JLARC 17
 Finding

In FY 2009, Virginia had known improper Medicaid

payments of $39 M & blocked claims of $48 M.

JLARC 18
 52% of Improper Payments
Resulted From Fraud

Error
$18,817,492

Fraud
$20,220,016

FY 2009 Data
JLARC 19
 87% of Non-Fraudulent Improper Payments
Came From Provider Claim Errors

Recipient Error
$2,384,906
(13%)

Provider Error
$16,326,433
(87%)

FY 2009 Data
JLARC 20
 Avoided Costs Exceed Overpayments
Resulting From Fraud & Error

Identified Fraud
$20,220,016

Avoided Costs
$47,897,103
Identified Error
$18,711,339

FY 2009 Data
JLARC 21
 In This Presentation

Background
Improper Payments & Blocked Claims
Recipient Eligibility Determinations
Recipient Fraud
Provider Enrollment
Improper Payments Detection
Provider Fraud
Potential Opportunities
JLARC 22
 Number of Recipients Increased 10%
(FY 2005-09)

• 857,662 Virginians were Medicaid “recipients”

(FY 09)
• Total of 947,762 Virginians eligible for Medicaid

• 681,805 applications for Medicaid enrollment or

re-enrollment (FY 2005-09)

JLARC 23
 Local DSS Offices Determine
Medicaid Eligibility
• Applicants provide most information
• DSS workers verify information & determine
eligibility using electronic & manual processes
• DSS must rely on other organizations, which maintain
most databases
• Eligibility determination process is very complex

JLARC 24
 Manual Process Used by Local DSS
Offices Can Lead to Errors

JLARC 25
 DSS’s Central & Regional Offices
Oversee & Guide Local Staff
• Rules & processes used by local DSS offices are
in Medicaid manual maintained by State DSS
• Regional DSS offices review local compliance
with program rules & assess performance

JLARC 26
 Finding

Error in eligibility determinations leads to some

improper payments.

JLARC 27
 Federal Review Found Caseworker
Error Leads to Improper Payments
• Payment Error Rate Measurement program
• Review of 17 other states shows eligibility error results
from caseworker error
• 22% of all improper payments (federal FY 2008)

• Virginia was recently reviewed

• Report due next year

JLARC 28
 Virginia Reviews Suggest Eligibility
Error Poses Financial Risk
• Federal Medicaid Eligibility Quality Control
(MEQC) reviews
• Conducted by DSS & DMAS

• Reviews conducted in 2007 & 2008 found

Virginia eligibility error rates of 3 to 17%
• Most errors involve verification of income & resources

JLARC 29
 MEQC Reviews Should Assess
Performance of Local DSS Offices
• Number & type of errors may vary by locality
• But samples are too small to calculate local error rates

• DSS & DMAS should use larger samples

• Recommended by federal inspector general in 1988
• APA has noted lack of ongoing process for evaluating
eligibility decisions of local DSS offices

JLARC 30
 Recommendation

DSS & DMAS should use a sample of cases of

sufficient size to identify error rates for local
departments of social services. This process
should begin with a pilot study & conclude with a
report by October 1, 2011.

JLARC 31
 Untimely Eligibility Redeterminations
Likely Cause Some Improper Payments
• Each recipient’s Medicaid eligibility must be
redetermined annually
• In FY 2009, 94.5% were on time statewide

• However, local variation is substantial

• No local DSS met 100% requirement in every month
(CY 2007-09)
• Only 13 met 97% target in each month

JLARC 32
 Recommendation

DSS should ensure all local DSS offices comply

with federal redetermination requirements & report
on an annual basis those local DSS offices that do
not comply.

JLARC 33
 In This Presentation

Background
Improper Payments & Blocked Claims
Recipient Eligibility Determinations
Recipient Fraud
Provider Enrollment
Improper Payments Detection
Provider Fraud
Potential Opportunities

JLARC 34
 Interagency Agreement Defines Which
Cases Are Investigated by DMAS & DSS

• Some Medicaid fraud cases are referred to

DMAS, which conducts the investigation
• “Medicaid-only” cases

• Other cases involving Medicaid fraud are

investigated by local DSS offices
• “Joint cases” involving Medicaid & other programs

JLARC 35
 Extent of Local & State Support May
Affect Extent of Fraud Control
• Local support & emphasis varies
• 13 local DSS offices did not submit fraud control plans

• State general fund support eliminated in FY 09

• Replaced with locally generated funds

• Use of Fraud Recovery Special Fund means

successful local DSS offices subsidize others

JLARC 36
 Finding

Some local DSS offices may not adequately

investigate fraud.

JLARC 37
 Fraud Control Efforts Vary Among the
120 Local DSS Offices (FY 2009)
• 103 local DSS offices referred cases to DMAS
• 83 local DSS offices also investigated cases
• 23 offices then referred cases to Commonwealth’s
Attorneys

JLARC 38
 Potential Increases in Fraud Control if All
Local DSS Offices Were Equally Active

Number of Cases

Actual (FY 09) Potential

Cases referred to DMAS 1,040 1,306

Local DSS investigations 2,276 3,555
Local investigations referred to 78 653
Commonwealth’s Attorneys

JLARC 39
 Financial Incentive to Investigate
Fraud in SNAP but Not Medicaid
• Local DSS offices can keep 25-35% of funds
recovered from SNAP fraud

JLARC 40
 Number of Medicaid Cases Investigated
Is Disproportionally Low (FY 2009)

Enrollment Cases
SNAP 976,430 9,921

Medicaid 901,055 3,994

Ratio 1.1 : 1 2.5 : 1

JLARC 41
 Recommendation

The General Assembly may wish to amend the

Code of Virginia to allow local DSS offices to
recover a portion of the funds recovered as a
result of Medicaid fraud they investigate or refer.

JLARC 42
 Finding

DMAS appears to lack necessary resources to

fully pursue Medicaid recipient fraud.

JLARC 43
 DMAS Fraud Investigators Use Defined
Process but Report Limited Resources
• 7,339 referrals in FY 09
• 68% from local DSS offices

• Instead of prosecuting fraud, administrative

recovery often used
• Evidence may not exist in some cases
• DMAS also lacks “resources to take all criminal cases
around the state forward for prosecution” (Manual)

JLARC 44
 Less Than 2% of Referrals to DMAS
Led to Conviction of Recipient Fraud
• From FY 2005-09, DMAS forwarded 172 cases to
Commonwealth’s Attorneys
• 124 were accepted for prosecution
• 100 led to a conviction

• Most common convictions were unreported

income (34) & prescription drug fraud (30)

JLARC 45
 Finding

At least $12.4 million in recipient fraud & error

identified (FY 2005-FY 2009).

JLARC 46
 Most Improper Payments Were
Addressed Administratively
• $10.5 M sought by DMAS via administrative
recovery
• Up to $1.9 M in fraud prosecuted by
Commonwealth’s Attorneys
• Awards of $568,398 from DMAS referrals
• Potential awards of $1.3 M from local DSS referrals

• Actual amounts recovered not presently known

JLARC 47
 In This Presentation

Background
Improper Payments & Blocked Claims
Recipient Eligibility Determinations
Recipient Fraud
Provider Enrollment
Improper Payments Detection
Provider Fraud
Potential Opportunities

JLARC 48
 Number of Providers Increased 27%
(FY 2005-09)

• 69,519 “billing” providers enrolled in fee-for-

service program (FY 2009)
• 56% were physicians

• Excludes providers enrolled by managed care

organizations (MCO)

JLARC 49
 Finding

DMAS’s provider enrollment process relies on self-

disclosure & actions of other organizations to
ensure only eligible providers are enrolled in
Medicaid.

JLARC 50
 Most Providers in Fee-for-Service Program
Meet Medicaid Enrollment Criteria

• If providers meet 3 key criteria, DMAS reports

lacking authority to deny enrollment
• Meet certification or licensure requirements
• No Medicaid- or Medicare-related felonies
• No patient abuse convictions

• In contrast, MCOs select which providers to

enroll

JLARC 51
 DMAS Relies on Other Entities to
Perform Provider Enrollment Activities
• Licensing & certification handled by State
agencies & other entities
• Contractor performs most provider enrollment
activities
• Handles 240 applications a week, on average
(FY 2008-10)
• Reviews self-reported information plus State & federal
databases

JLARC 52
 Federal Database Lists 1,080 Virginia
Providers Banned From Medicaid
• List of Excluded Individuals/Entities database
• 71% banned because of suspended or revoked
medical license

JLARC 53
 Example: One Virginia Provider
Banned From Medicaid for 25 Years
A rehab facility billed Medicaid for ineligible
recipients. The owner was ordered to pay $2.6 M
in restitution & sentenced to 13 years’
imprisonment.

JLARC 54
 Several Aspects of Provider Enrollment
Process Merit Further Review
• DMAS does not verify physical presence
• Only checks mailing address

• DMAS does not do criminal background checks

• HB 733 (2010) requires DMAS to report on this &
related activities by Dec. 2010
• Not all “servicing” providers are licensed by a
State agency or enrolled by DMAS

JLARC 55
 In This Presentation

Background
Improper Payments & Blocked Claims
Recipient Eligibility Determinations
Recipient Fraud
Provider Enrollment
Improper Payments Detection
Provider Fraud
Potential Opportunities

JLARC 56
 DMAS Processed 35 Million Claims
in FY 2009
• Total Cost Was $5.04 Billion
• Grew 24% since FY 2005
• 12% of Virginia’s State budget

JLARC 57
 Claims Are Submitted by Providers &
Managed Care Organizations (MCOs)

% of Claims % of Cost

MCOs
MCOs
(21%)
(27%)

Fee-for-Service Fee-for-Service
Providers Providers
(79%) (72%)

JLARC 58
 Prior Authorization Prevents
Inappropriate Fee-for-Service Claims
• Reviews intended to ensure services are
medically necessary
• Only certain services are reviewed
• DMAS uses contractors & other State agencies to
perform most reviews

JLARC 59
 Provider Claims Processed to Ensure
Compliance With Regulations & Policy

• DMAS uses automated pre-payment controls to

review fee-for-service claims
• “Edits” in Medicaid Management Information System
maintained by a contractor
• Claims that received prior authorization approval
must still navigate all edits

JLARC 60
 Change to Virginia Public Procurement Act
Would Allow More Pre-Payment Reviews

• Act directs all agencies to pay for goods or

services within 30 days
• DMAS states this limits pre-payment reviews
• Fraud or error may be suspected
• Claim must be paid absent evidence it is invalid

JLARC 61
 More Pre-Payment Reviews Could
Lead to More Avoided Costs
• Indiana’s use of pre-payment reviews reportedly
avoided costs of $4.5 million (FY 2005-07)
• Triggered if earlier audits indicated fraud or error

JLARC 62
 Recommendation

The General Assembly may wish to consider

amending the Virginia Public Procurement Act to
exempt DMAS from the 30-day payment
requirement if there is a reasonable basis to
suspect that payment of a claim could be improper.

JLARC 63
 Post-payment Reviews Intended
to Identify Improper Payments
• Provider audits examine sample of paid fee-for-
service claims
• Audit plan based on assessing risk posed by different
provider types
• Data analysis then finds “outliers” for review
• Fee-for-service claims data are reviewed to find
providers with irregular claims

JLARC 64
 Improper Payments Detection Could Be
Improved if MCO Encounter Data Were Used

• MCOs submit incomplete “encounter” data on

services provided & associated costs
• Some MCOs exceeded 5% limit on amount of flawed
& missing data (FY 09)
• DMAS’s effort to improve data began in FY 04
• Use of consulting auditor ended in FY 07 because of
cost

JLARC 65
 Finding

In FY 2009, DMAS blocked claims equaling up to

$38M & also identified improper payments of $8M.

JLARC 66
 Pre-payment Reviews Avoided Costs
of $38 Million in FY 2009
• Prior authorization avoided $26 M (FY 09)
• Total avoided costs of $133 M (FY 2008-10)

• Pre-payment edits avoided $12 M (FY 09)

• Total avoided costs from other years is not tracked

JLARC 67
 Provider Audits Identified $7.7 Million
in Overpayments in FY 2009
• Total overpayments of $34 M (FY 2005-09)
• $20,000 in identified overpayments per audit

• Most common provider errors were missing or

incomplete medical record, or billing too much
• Entire claim can be denied if records are erroneous,
even if reasonable service was provided

JLARC 68
 Findings

DMAS’s claims review process may need to be

improved.
DMAS program integrity efforts have positive
return.

JLARC 69
 Federal Review Suggests Some
Sampled Claims Were Paid in Error
• Payment Error Rate Measurement review
• Sampled federal FY 2006 claims
• Suggests DMAS does not find all error & fraud

• Samples were too small to calculate error rate

• Review of federal FY 2009 claims, due next year,
should allow cost estimate

JLARC 70
 Return on Investment Suggests New
Resources Would Be Beneficial
• Audits by Program Integrity Division staff
identified $2.62 for every $1 spent (FY 09)
• Contract auditors had average return of $1.76 for
every $1 spent
• Does not reflect actual recoveries or collections
of improper payments
• Like other State agencies, DMAS does not regularly
track its collections rate

JLARC 71
 In This Presentation

Background
Improper Payments & Blocked Claims
Recipient Eligibility Determinations
Recipient Fraud
Provider Enrollment
Improper Payments Detection
Provider Fraud
Potential Opportunities
JLARC 72
 Medicaid Fraud Control Unit
Investigates Potential Fraud & Abuse
• Statute directs MFCU to “conduct audits and
investigations of providers”
• Created in 1982
• Funded through federal & special funds

• 90% of investigations involve potential fraud

• Others involve elder abuse

JLARC 73
 85 Convictions Resulted From Cases in
Which MFCU Participated (FY 2005-09)
• Most common convictions are home health
(28%) & pharmaceutical manufacturers (21%)
• 71% of cases tried in federal courts

• Most referrals come from corporate

whistleblowers (63%) & DMAS (22%)
• MFCU concerned DMAS referrals may be low

JLARC 74
 Finding

Not all recoveries reported in MFCU’s annual

report result from Virginia Medicaid fraud.

JLARC 75
 MFCU Reports $706 Million Recovered
From Its Cases (FY 2005-09)

• $706 M includes all court-ordered awards

• MFCU reports only $167 M recovered by Virginia
• $49 M received by DMAS
• Some DMAS funds must be sent to federal
government

JLARC 76
 Purdue OxyContin Case Accounts for
90% of All Recoveries (FY 2005-09)
• $634 M awarded to federal & state governments
and private parties
State Police $ 44 M
MFCU $ 40 M
DHP $ 20 M
DMAS $ 1 M (VA share of Medicaid fraud)
Total to Virginia $105 M

JLARC 77
 In This Presentation

Background
Improper Payments & Blocked Claims
Recipient Eligibility Determinations
Recipient Fraud
Provider Enrollment
Improper Payments Detection
Provider Fraud
Potential Opportunities
JLARC 78
 Potential Opportunities to Further
Reduce Fraud and Error
• Additional review needed of new & previously
noted issues
• New issues include
• Improved coordination between agencies
• DMAS’s oversight of MCOs & other contractors
• Use of additional program integrity activities from
other states
• Potential creation of Medicaid Inspector General

JLARC 79
 Key Findings

• In FY 2009, Virginia had known improper Medicaid

payments & blocked claims of $87 M
• Error in eligibility determinations leads to some
improper payments
• Some local DSS may not adequately investigate fraud
& DMAS appears to lack resources
• DMAS claims processing errors may need to be
addressed
• DMAS program integrity efforts have positive return

JLARC 80
 JLARC Staff for This Report

Hal Greer, Deputy Director

Ashley Colvin, Team Leader
Brad Marsh
David Reynolds

For More Information

http://jlarc.virginia.gov (804) 786-1258

JLARC 81