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HHS 13
Strengthen Efforts to Reduce Medicaid Fraud and Overpayment


Texas has three divisions in two separate state agencies that investigate Medicaid fraud and abuse and overpayments. The Texas Health and Human Services Commission’s Office of Investigations and Enforcement (OIE) investigates complaints of Medicaid fraud and abuse. The Office of the Attorney General’s (OAG’s) Medicaid Fraud Control Unit conducts criminal investigations into allegations of fraud, physical abuse and criminal neglect by Medicaid providers, while its Civil Medicaid Fraud Section investigates civil Medicaid fraud. These entities work well together, but cannot investigate many cases due to limited resources, which costs the Medicaid program and taxpayers additional money. Texas should allocate more resources toward these entities to help improve and increase its efforts to identify, reconcile and prevent Medicaid fraud and abuse.


The 1997 Legislature strengthened Medicaid fraud prevention functions by creating the Texas Health and Human Services Commission’s (HHSC’s) Office of Investigations and Enforcement (OIE), which works closely with the Office of the Attorney General’s (OAG’s) Medicaid Fraud Control Unit (MFCU) and Elder Law and Public Health Division. HHSC-OIE and OAG have a memorandum of understanding that outlines both agencies’ roles in detecting and preventing Medicaid fraud, waste and abuse and prosecuting civil Medicaid fraud cases.

HHSC functions include “third-party” recovery (TPR)—the pursuit of insurance coverage that may be liable for certain costs of Medicaid clients—and recipient utilization assessment—the identification of Medicaid recipients who may be overusing the program’s services and actions taken to control such overuse by limiting physician and pharmacy choice. Recoveries and cost avoidance resulting from these functions equaled about 5 percent of Medicaid’s acute care and vendor drug reimbursements in fiscal 2001.[1]

HHSC’s role in fraud and overpayment prevention was further strengthened in fiscal 2002, when it assumed fraud-related functions and related staffing previously held by the Texas Department of Health (TDH) and Texas Department of Human Services (DHS). This consolidation was intended to create a more comprehensive and coordinated approach to fraud and overpayment recovery.

OIE legal issues

HHSC-OIE performs its investigations and enforcement activities under both state and federal law and administrative regulations. Federal regulations require HHSC-OIE to investigate fraud and abuse; state law directs it to reduce fraud in the Medicaid program, but does not specifically address the investigation of other abuses that do not necessarily constitute fraud.[2] Unless the language is clarified, the state could be at risk for future challenges.

In addition to its partnership with OAG, HHSC-OIE works with other agencies such as the Texas Department of Insurance and the Texas Department of Public Safety, as well as local prosecutors, police and sheriffs’ offices, the Federal Bureau of Investigation and the U.S. Attorney General’s Office. The office and its personnel do not have formal law enforcement status, however, which prevents law enforcement agencies from sharing certain information that could be important to OIE investigations.

Fraud and civil cases

Created in 1979, OAG’s Medicaid Fraud Control Unit conducts criminal investigations into allegations of fraud, physical abuse and criminal neglect by Medicaid providers. MFCU investigates fraudulent filings, misappropriations of patient trust funds, illegal sales of prescription drugs and assaults on and criminal neglect of patients in Medicaid-funded facilities, particularly nursing homes. MFCU presents its cases to state and federal prosecutors; penalties can include imprisonment, fines and exclusion from the Medicaid program. MFCU also works with the federal government and other states to develop cases with providers that deliver services across multiple states.

MFCU’s staffing has varied with its appropriations, from a 1988 high of 49 positions to its present level of 35. Over this period, however, Medicaid fraud cases became larger and more numerous. Fifteen to 20 years ago, many cases involved less than $10,000; an overpayment case was considered large if it involved as much as $50,000. Since 1999, however, the MFCU has completed 10 cases involving overpayments of between $1 million and $2.5 million, as well as many others exceeding $50,000.

MFCU receives referrals from HHSC-OIE, health care providers and their employees, members of the public, Medicare and other federal and state agencies. Since it receives more complaints than its resources allow it to investigate, the unit prioritizes cases, attempting to investigate a blend of cases representative of all Medicaid provider types.

In the first half of fiscal 2002, MFCU opened 72 cases and closed 75. It presented 31 cases for prosecution, obtained criminal charges in 19 cases and achieved convictions in 17. The unit identified about $13.3 million in overpayments and misappropriations during this period. About 300 cases were pending in the MFCU as of February 2002. From the beginning of fiscal 1999 through June 2002, MFCU participated in 86 state and 30 federal prosecutions resulting in convictions and 168 state and 65 federal investigations that were presented to prosecutors. About 667 cases were opened during the period.

MFCU handles its investigations until a local prosecutor takes the case. Investigations often take two or three years to complete. Unsurprisingly, the investigation itself tends to discourage overbilling and criminal activity during the investigative period.[3] HHSC-OIE pursues collection of overpayments that the MCFU identifies.

MFCU’s staffing is much lower than those of equivalent offices in other large states. Similar units in California, New York and Florida have 200, 296 and 143 employees respectively. Illinois, Ohio, Georgia, Michigan, Pennsylvania and Tennessee all have units with staffing levels exceeding that of Texas.

In fiscal 1999, Texas recovered about $6 million in Medicaid funds at a cost of $2.5 million. This represented the third-largest recovery amount in the nation in that year; New York’s unit, with a budget 10 times higher than MCFU’s and four times as many staff members, produced only twice as much in recoveries. California’s unit, with a budget three times larger than MFCU’s, recovered less than half of Texas’ amount.

In fiscal 2002, MFCU could only fund 35 of the 41 positions allowed by the federally authorized budget. The unit has found it difficult to recruit and retain employees due to low salaries and difficult working conditions, such as extensive travel around the state. Travel and training expenditure limits keep MFCU from sending staff to important out-of-state training sessions. High turnover among employees has prevented the unit from developing and referring more cases for prosecution; many cases, especially those with relatively low potential recoveries, are deferred or not worked at all.

In 1999, OAG created the Civil Medicaid Fraud Section within its Elder Law and Public Health Division. This unit has four attorneys and two assistants and a budget of about $409,000 per year. Prior to the creation of this unit, OAG conducted relatively few investigations and pursued no lawsuits concerning civil Medicaid fraud. This unit also intervenes in “qui tam” lawsuits (lawsuits filed by individuals on behalf of the state).[4] In the second quarter of fiscal 2002, recoveries from these cases totaled about $2 million.[5]

The unit also is pursuing civil actions against certain pharmaceutical companies; its workload statistics for the first half of fiscal 2002 included 12 cases on docket, three open cases, one closed case and seven investigations under way, with four opened and none closed during this period. As with the MFCU, staffing shortages have limited the Civil Medicaid Fraud Section’s caseload. HHSC-OIE reports that it referred five cases to federal prosecutors in fiscal 2002 because the section’s workload would not permit them to address the cases quickly enough.

HHSC-OIE also develops certain fraud case information before turning it over to OAG. Any increase in the number of cases worked by MFCU and the Civil Medicaid Fraud Section will require more HHSC-OIE staff to handle information requests and investigative work.

In fiscal 2001, HHSC-OIE identified about $6.3 million and achieved about $5.1 million in savings and cost avoidance. It also collected about $66,000 in civil monetary penalties. Its operating budget was about $1.1 million, resulting in a return on investment of about $11.50 for every dollar spent for investigations and enforcement.[6]

MFCU cannot cover all the cases OIE identifies. The office cannot take independent action on such cases, however, because it does not have the authority to work directly with local or federal prosecutors. In addition, the prosecution of cases referred by MFCU depends upon the interest and availability of local prosecutors, since OAG does not have the authority to prosecute these cases itself when a local or federal prosecutor refuses to take action in a reasonable period of time.

Third-party billing subcontractors

Federal auditors have reported that California, Florida, Louisiana, Maryland and Texas lack adequate safeguards to guard against fraudulent and abusive electronic claims filed by billing subcontractors. Billing subcontractors are private firms that file claims on behalf of health care providers. The state has little information on these vendors and cannot substantiate provider authorization for the bills the subcontractors present.

Most states including Texas do not attempt to identify the party submitting the claim or its location. Texas does not require third-party billing firms to complete Medicaid provider agreements or to report the providers using their services.

A recent joint HHSC-OIE and federal investigation of a Houston therapist who also acted as a third-party billing company for other Medicaid providers identified illegal claims for more than $9 million. The other providers who were using the biller’s services did not know of the fraudulent claims being made on their behalf.[7]

Florida is reengineering its claims processing system to identify the party submitting the claim and to log and verify the identity of the computer used to produce the claim and the telephone line tied to that computer terminal. It also logs and verifies user passwords and provider numbers.[8] Florida also surveys its physicians to verify their clinic affiliations; a 1999 federal report noted that the state had terminated more than 100 clinics for irregular billing practices for a savings of more than $15 million.[9]

Some states inform providers of billings made under their name and identification numbers through remittance notices. These are sent directly to the provider, not the third-party billing subcontractor; they provide specific data on the claims submitted and payments and decisions made on claims filed on the provider’s behalf.[10] This information allows providers to review all billings made under their provider number for accuracy and to be held accountable for such billings.

Asset seizure

While the Houston case discussed above found a substantial number of fraudulent claims, most of the cash assets involved had been spent before state investigative and legal actions were complete. Federal investigators and law enforcement were able to seize some assets, including a luxury car, to recover some funds on this case. HHSC-OIE does not have the authority to make seizures and can recover seized assets only when federal authorities become involved. This puts HHSC-OIE at a disadvantage in dealing with unscrupulous people who spend the proceeds of their unlawful acts quickly.

Prepayment review and post payment hold

Although Texas Medicaid can “flag” problem providers for prepayment review, it rarely does so. These “problems” can range from excessive services to possible instances of fraud.

Some states use prepayment review systems that can withhold provider payments for a period of not more than five working days to allow for investigations of payment errors. Louisiana, for instance, reviews suspect providers by examining a multitude of factors such as diagnostic codes, procedure codes, patient visits and prescriptions. Florida, Illinois and Louisiana also investigate providers with dramatic claims volume increases over relatively short periods of time.

States appear reluctant to withhold payment until the investigation is completed, however, due to the staff time involved, the delays in the claims payment process produced and the possibility of litigation.[11] HHSC-OIE usually pursues Medicaid overpayments after a problem has been discovered and the Medicaid provider has received payment.

Federal law allows states to review and hold payments without cause.[12] In Texas, however, the Medicaid program cannot hold payments unless it provides immediate notice. HHSC-OIE could use payment-hold techniques more effectively if it were authorized to withhold payments upon receipt of reliable evidence of fraud or willful misrepresentation. Federal law allows states to provide notice of such holds within five days, while Texas law requires immediate notification. The preparation of documents for such payment holds can delay the hold and unnecessarily place more state dollars at risk.

Administrative subpoenas

Federal authorities investigating Medicaid and Medicare fraud and abuse can use administrative subpoenas to secure billing documentation and other pertinent evidence. HHSC-OIE does not have this authority.

Civil penalties and provider exclusion

Current state law requires Medicaid to exclude providers from the program for a minimum of three years if they receive civil monetary penalties.[13] In certain cases, the ability to assess civil monetary penalties through administrative action without excluding the provider could be desirable. Some providers, for example, may be over-billing or billing for unnecessary procedures through ignorance of Medicaid policies and procedures rather than any intent to defraud. In such cases, education and civil monetary penalties might be a more appropriate sanction than exclusion from the program. This is particularly true in remote areas where providers are few and far between. In addition, providers are more likely to appeal exclusions than civil monetary penalties.

Penalties for offers of inducements

Some unscrupulous providers offer inducements to recipients to change Medicaid providers, or to provider employees to encourage them to divert patients to other providers. HHSC-OIE has uncovered cases in which unscrupulous providers offer Medicaid recipients cash payments or gifts such as lottery or sporting event tickets to induce them to participate in unnecessary screenings and treatments.[14] Although this practice obviously is unethical, no state law forbids this practice.

Additional requirements for problem providers

Some states use surety bonds to protect the state against provider fraud. Florida and Louisiana require high-risk providers to post such bonds in amounts as high as $50,000. Florida identifies certain providers, such as new providers of medical equipment and supplies, private transportation companies, clinics not owned by physicians, independent laboratories and home health agencies, as well as all providers in Dade and Broward counties.[15]

Such bonds may be useful in the TDH’s Medical Transportation Program, which experienced recent problems with contractors who fail to provide services upon the contract’s startup date. HHSC has considered the use of bonds in the past but has not adopted the practice due to concerns over the ability of small providers to provide such bonds.[16] Targeting the use of bonds to providers suspected of fraud or abuse would allow HHSC-OIE to protect the state without unnecessarily burdening small providers.

Nursing homes and transportation costs

DHS regulations state that non-emergency transportation costs are to be covered in the rates paid for Medicaid nursing home patients. HHSC has not used these costs as a factor in its rate analysis for nursing homes, however. Yet TDH’s transportation program does not provide medically necessary non-emergency transportation for clients in nursing homes due to the stipulation in state regulations calling for these services to be included in the nursing home rate.[17]

Consequently, many nursing homes use ambulance services to transport their clients even when they do not need special transportation. Costs for ambulance service are considerably higher than those of the Medical Transportation Program.

Birth certificates

Birth certificates can be used to establish identity and gain access to certain state and federal benefits. These documents are the responsibility of state vital statistics registrars and numerous local entities. Nationwide studies have identified problems with false identification and the misuse of birth certificates.[18] One major issue involved is the number and security of sites issuing birth and death records. Many states—including Texas—rely on local offices over which they have little control.

TDH’s Bureau of Vital Statistics is the state’s registrar. Texas also has county registrars who can issue certified copies of birth and death records. Since all birth and death records are sent to the local registrar first and then sent to the state Bureau of Vital Statistics, the local registrar has birth or death certificates for recent events immediately. Each local registry has its own hours of operation, fees and procedures for requests. According to a 2000 federal report, Texas had 866 of the nation’s 6,422 entities issuing birth certificates.[19]

Other issues involving birth certificates involve proof of identification when requesting copies; the detection of fraudulent records; the physical security of blank certificates; and the prosecution of persons holding fraudulent documents. TDH’s steps to strengthen its own security recently uncovered the production of fake birth certificate records by an employee.[20]

Texas’ provision that allows birth records to become available to the public on the 50th anniversary of the date of the birth is outdated, given the increase in average life spans. This leaves a large window of opportunity for unscrupulous individuals to gain access to legitimate birth documents to create false identities and commit fraud. TDH has recommended that this provision be changed to the 75th anniversary of the date of birth.[21]

The use of birth certificate records as “breeder” documents for the creation of false identities is an issue that affects a number of programs. It points to the larger issue of eligibility verification and the interrelationship among the many programs that clients may access.

TDH is not a member of the Medicaid and Public Assistance Fraud Oversight Task Force, a legislatively mandated interagency work group on fraud and overpayments led by the Comptroller’s office, but could benefit from and add valuable information to this group.


A. State law should be amended to clarify the authority of the Health and Human Services Commission’s (HHSC’s) Office of Investigation and Enforcement (OIE) to cover fraud and abuse, and to provide the OIE with law enforcement status.

Clarifying HHSC-OIE’s authority to cover both fraud and abuse in the Medicaid program would bring it in line with federal regulation and help avoid legal challenges. Law enforcement status would allow HHSC-OIE to develop more cases with information from federal and state law enforcement agencies. This should reduce the amount of time spent in developing information on cases of provider fraud and overpayments.

B. Texas should increase the size of the Office of the Attorney General’s (OAG’s) Medicaid Fraud Control Unit and Civil Medicaid Fraud Section to allow them to pursue more cases. Texas should increase the size of HHSC-OIE to ensure that all investigative and research work can be done in a timely manner for the additional cases pursued by OAG and to increase collections on overpayments.

OAG should be required to report on November 1 of each year on expenditures related to these units, the workloads of each unit, the length of time taken to complete each case through each phase, the recoveries and penalties, any difficulties in operations and other relevant information to the operations of these units.

C. State law should be amended to authorize HHSC to present cases directly to prosecutors under conditions established through a memorandum of understanding with OAG to ensure that all viable cases of fraud are prosecuted in a timely manner.

Allowing HHSC to move cases directly to prosecutors would enhance the deterrent effect of Texas’ anti-fraud efforts.

D. State law should be amended to require Medicaid third-party billing vendors to sign contracts as providers for the Medicaid program.

HHSC should require third-party billing vendors to provide documentation of provider authorization to bill and to send remittance notifications directly to providers, with statements requesting an active review for errors. HHSC should ensure that the party submitting a claim can be identified and verified by the computer and telephone line used and user passwords and provider numbers. This would allow HHSC to make use of state-of-the-art fraud and overpayments techniques.State law should be amended to authorize HHSC-OIE to seize assets in investigations in which fraud and abuse are indicated. This would give HHSC-OIE another tool for recovering overpayments from unscrupulous providers.

E. State law should be amended to authorize HHSC-OIE to perform prepayment reviews of claims and hold payments for up to five working days without notice while the claims are being reviewed.

F. State law should be amended to authorize HHSC-OIE to increase its use of post-payment holds upon receipt of reliable evidence of fraud or willful misrepresentation; notice of such action should be provided within five working days.

G. State law should be amended to authorize HHSC-OIE to use administrative subpoenas in its investigation of fraud and abuse, and to assess civil monetary penalties as an administrative action without excluding the provider in certain cases.

All of these techniques would allow HHSC to avoid making payments to problem providers until claims are reviewed and to investigate and enforce fraud and abuse statutes in a cost-effective way.

H. State law should be amended to prohibit the offering of inducements to recipients and providers or their employees designed to encourage recipients to change Medicaid providers, divert them to specific providers or induce patients or staff to order or receive any item or service from a Medicaid provider.

I. HHSC should require surety bonds for problem providers in the Medicaid program.

This would provide a mechanism for ensuring that problem providers offer financial guarantees for any future irregularities.

J. Rules should be changed to allow the use of Medical Transportation Program funds for nursing-home clients to reduce the cost of providing such services.

This would provide cost-effective transportation for nursing home clients.

K. State law should be amended to make birth records available to the public on and after the 75th anniversary of the date of birth, and to require that the Medicaid and Public Assistance Fraud Oversight Task Force, Texas Department of Health’s Bureau of Vital Statistics and other agencies as designated by the Comptroller’s office study and make recommendations to the Legislature on ways to strengthen the processes and documentation related to identification of people applying for state benefits.

The Comptroller’s office, as chair of the Medicaid and Public Assistance Fraud Oversight Task Force, should lead this group. The Texas Department of Health should join the Medicaid and Public Assistance Fraud Oversight Task Force.This recommendation would strengthen Texas’ identification and documentation processes for all health and human services programs.

Fiscal Impact

An increase in fraud and abuse staffing in the OAG’s Civil Medicaid Fraud Unit and Medicaid Fraud Control Unit and the HHSC’s Office of Investigation and Enforcement would allow the state to aggressively pursue fraud and abuse in Medicaid. The other recommendations would strengthen the tools needed to pursue unscrupulous providers and make collections of overpayments and penalties easier.

Fiscal Year Savings to General Revenue Savings to Federal Funds (Cost) to General Revenue (Cost) to Federal Funds Net Savings to General Revenue Net Savings to Federal Funds Change in FTEs
2004 $ 7,882,000 $11,823,000 ($2,518,000) ($1,689,000) $ 5,364,000 $10,134,000 +29
2005 $15,764,000 $23,646,000 ($2,518,000) ($1,689,000) $13,246,000 $21,957,000 +29
2006 $16,391,000 $24,587,000 ($2,563,000) ($1,756,000) $13,828,000 $22,831,000 +29
2007 $16,391,000 $24,587,000 ($2,563,000) ($1,756,000) $13,828,000 $22,831,000 +29
2008 $16,870,000 $25,305,000 ($2,597,000) ($1,807,000) $14,273,000 $23,498,000 +29


[1 ]Texas Health and Human Services Commission, Office of Investigation and Enforcement, Creation of the Office of Investigations and Enforcement (Austin, Texas, May 2002), pp. 1-2.

[2 ]42 C.F.R. Chapter IV, Section 455.14-15; and Texas Hum. Res. Code Ann. Chapter 32.032.

[3]Office of the Attorney General, Medicaid Fraud Control Unit, “Revenue Producing Information,” Austin, Texas, 2000, p. 1.

[4]Office of the Attorney General, Medicaid Fraud Control Unit, “Revenue Producing Information,” pp. 2-3.

[5]E-mail communication from Aurora LeBrun, associate commissioner, Texas Health and Human Services Commission, Office of Investigations and Enforcement, July 19, 2002.

[6]E-mail communication from Aurora LeBrun, associate commissioner, Texas Health and Human Services Commission, Office of Investigations and Enforcement, August 19, 2002.

[7]Interview with Aurora LeBrun and Sharon Thompson, Texas Health and Human Services, Office of Investigation and Enforcement, Austin, Texas, August 16, 2002.

[8]U.S. Department of Health and Human Services, Office of Inspector General, Medicaid Claims Processing Safeguards (Washington, D.C., July 2000), pp. 6-7.

[9]U.S. Department of Health and Human Services, Office of the Inspector General, Medicaid Post Payment Safeguards (Washington, D.C., July 2000), p. 6.

[10]U.S. Department of Health and Human Services, Office of the Inspector General, Medicaid Post Payment Safeguards (Washington, D.C., July 2000), pp. 5-6.

[11]U.S. Department of Health and Human Services, Office of Inspector General, Medicaid Claims Processing Safeguards (Washington, D.C., July 2000), p. 9.

[12]42 C.F.R. Chapter IV, Section 455.16-17.

[13]Tex. S.B. 30, 75th Leg., R.S. (1997).

[14]Interview with Aurora LeBrun and Sharon Thompson.

[15] U.S. Department of Health and Human Services, Offices of the Inspector General, Medicaid Proactive Safeguards, Washington, D.C., July 2000, pp. 8-9.

[16] Texas State Auditor’s Office, An Audit Report on the Medical Transportation Program at the Department of Health (Austin, Texas, April 2002), p. 1.

[17] E-mail communication from Charles Hafer, Medicaid fraud unit, Office of the Attorney General, to Cindy Alexander, Texas Comptroller of Public Accounts, April 2, 2002.

[18]U.S. Department of Health and Human Services, Office of Inspector General, Birth Certificate Fraud (Washington, D.C., September 2000), pp. 2-4.

[19]U.S. Department of Health and Human Services, Office of Inspector General, Birth Certificate Fraud, pp. 8 and 24.

[20]Claire Osborn, “State Statistics Clerk is Accused of Creating Phony Birth Records,” Austin American-Statesman (August 9, 2002), pp. B1 and B7.

[21]Memorandum from Debra f. Owens, state registrar and chief, Texas Department of Health, to vital statistics partners/stakeholders, September 3, 2002.