Anatomy of a scandal

Editor's note: Story originally published May 10, 2005 When federal prosecutors heard from seniors that they didn't need and hadn't received new limbs, they investigated and filed a civil suit against the 48 small businesses and the billing agency that had submitted the claims. Medicare fraud cases are nothing new in South Florida, but in this case something unusual happened. A judge looked at the case and asked a question: Why had the government paid out so much for 21,000 sudden amputees in one location? "Common sense dictates this is an impossibility, " U.S. District Judge Cecilia M. Altonaga wrote. The company that paid the bills is Palmetto GBA, a South Carolina firm hired by the government to process Medicare claims. Since Medicare began in the 1960s, the government has contracted with private firms to pay the claims, on the theory that they could do it more efficiently than the bureaucrats. Palmetto GBA, for Government Benefits Administrator, processes more than 110 million Medicare claims a year, which totaled almost $25 billion in 2004. In addition to paying claims, Palmetto acts as the government's watchdog nationwide to make certain that claims for durable medical equipment, such as artificial legs and power wheelchairs, are legitimate. BILLIONS ANNUALLY The stakes are huge: Experts say billions of dollars are lost annually in Medicare fraud, and South Florida has been home to much of it. The government relies on companies such as Palmetto to catch fraud. Many South Florida seniors question Palmetto's vigilance. Muriel Sherman of Tamarac was stunned to receive a notice from Palmetto stating it had paid $3,955.31 for prostheses for her knee, ankle and foot. Sherman had secondary Medicare insurance through United American. Before this private insurer paid its share of Sherman's bill, $988, a representative called her. Sherman said the charges were fraudulent, and the company didn't pay. "The whole thing is ludicrous, " Sherman said. "Why would Palmetto pay without checking?" FOCUS ON PALMETTO Others have asked that question, too, as fraud cases have slipped through the system. In April 2004, a Government Accountability Office report questioned the expenditure of hundreds of millions of dollars for expensive power wheelchairs. Two-thirds of these claims were paid by Palmetto GBA, many of them to operators in Texas. Palmetto - which had launched the initial investigation of wheelchair-claims fraud - and other claims payers complained that the government didn't give them enough money to properly investigate claims. In the South Florida case of the 21,000 artificial limbs, Judge Altonaga focused on Palmetto's role. In her ruling, she wrote: "It is unclear why Palmetto GBA is not a subject of the government's investigation into criminal wrongdoing." Palmetto says it did nothing wrong and actually helped prosecutors detect and investigate the fraud, said company spokeswoman Elizabeth Hammond. "Catching this kind of behavior at four months is early, " she said. But experts wonder why Palmetto didn't notice the problem sooner. "These patterns are not hard to spot, " said Malcolm Sparrow, a Harvard professor and former British police investigator who has written License to Steal: How Fraud Bleeds America's Health Care System. A great deal of software exists to detect unusual billing patterns, such as programs tracking sudden accelerations in claims. The software should have noticed that the billings in the limbs case went from about $2,000 to more than $200,000 a month, Sparrow said. Part of the problem, he says, is that Medicare contractors such as Palmetto have a history of "pay and chase" - sending out checks, then tracking down fraud. Checking before paying "is almost unheard of" with the government claims payers, Sparrow said. "It's such a sensible thing, but it's just not done, " he said. He acknowledged this is because the companies' payments from the government are "ridiculously low." The way the government program is set up, Palmetto gets no incentive pay for catching fraud, and "the cheapest way to process a claim is to pay it without a question, " Sparrow said. But, he added, Palmetto GBA bears a special responsibility, because it not only pays durable-medical-equipment claims but also has the national responsibility for monitoring and analyzing them. NO VERIFICATION Hammond said the federal government doesn't require Palmetto to verify claims before paying. The government "does not fund or require Medicare contractors to perform precertification like private insurance does, " she said. "Medicare relies on postpayment data analysis to spot payment trends. Palmetto GBA reviews and pays claims in line with law and [Medicare] instructions. "Palmetto GBA does not have the authority to suspend payments without [Medicare] permission, " Hammond said. "To obtain that permission, Palmetto has to gather data based on billings records for claims that are already paid." She said Palmetto GBA receives about 1 percent of benefit payments - or about $250 million - to process the claims. That percentage "is far below the amount that private-sector insurance companies spend." Alan Sager, a healthcare economics researcher at Boston University, says Medicare, even including its Washington bureaucratic costs, spends only about 2 percent on administration. "That's very low compared to large insurance companies, which spend 8 to 20 percent. Now, some of that includes extensive marketing and advertising, but they also spend quite a bit more for catching fraud, and so Medicare may not be spending enough, " Sager said. 'MORE VIGILANT' Medicare chief Mark McClellan said in an interview with The Herald that his organization is working to improve the situation. "We are very concerned about fraud, and we know it's a particular problem in South Florida, " McClellan said. "We have opened a specific satellite office there so that we have a faster and more effective way of seeing unusual billing patterns like" in the limbs case. "We're trying to be ever more vigilant than in the past through new approaches to analyze data, " he said. In the artificial-limbs case, prosecutors have not filed criminal charges yet. Prosecutors allege the 48 small durable medical equipment companies, which already had approval to provide goods to Medicare patients, were quietly purchased by others to bilk Medicare. The new owners did not tell the government about the switch, prosecutors say. "Taking over dead or sleepy providers is a technique that's been well known for years, " said Sparrow, the Harvard professor. "In particular, it's been used a lot in Florida." The companies then submitted their claims to Medicare through All-Med Billing, a Miami Lakes firm operated by Abner and Mabel Diaz. FEEL DUPED Most, if not all, of the 48 equipment firms haven't contested the suit, but the Diazes have repeatedly maintained their innocence, saying they were duped by the firms as much as the government was. "Our contention all along is that Palmetto was the entity that should have absolutely caught any problem, " said Jose Quinon, attorney for Mabel Diaz. "How can our clients, a small billing company, detect something when we don't have the software or the resources?" After Judge Altonaga questioned Palmetto's responsibility, the Diazes' attorneys asked that the company be added to the lawsuit. Palmetto attorneys responded that the firm was "statutorily and officially immune from liability, " and the judge agreed, dismissing them from the case. "We are going after new rules and new monitoring systems, " said McClellan, the Medicare director. He vowed to stop "the few bad actors" defrauding Medicare.