Section I. Medicaid Fee-for-Service (FFS) Study
Medicaid Fraud and Abuse Detection Activities
Medicaid Fraud and Abuse Control Units
Fraud and abuse in the Medicaid programs across the nation became a problem as soon as Title XIX was implemented. As the program expanded in scope over its first 10 years, estimates showed losses of at least $653 million a year.  In 1977, the U.S. Congress enacted the federal Medicare/Medicaid Anti-Fraud and Abuse Act, which provided federal funding to states that established Medicaid fraud and abuse control units (MFCU).  In federal fiscal 2003, the MFCUs recovered $268 million in court order restitutions, fines, civil settlements and penalties, and were instrumental in obtaining 1,096 fraud convictions. 
State MFCUs receive 75 percent of their funding from the federal government through the Omnibus Reconciliation Act of 1980. In 1976, the Office of Inspector General (OIG) was established by congress as oversight for the state MFCUs. The OIG uses 12 performance standards as guidelines to assess each state's unit. 
The federal government enacted several laws to assist OIG and the MFCUs efforts to combat Medicaid health care fraud and abuse. These are:
- the Civil Monetary Penalties Law of 1981, which provides OIG the authority to impose a civil penalty of up to $10,000 per improper item or service claimed, to impose an assessment of up to three times that amount, and to exclude individuals and entities from participation in the Medicare and Medicaid programs; and
- the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which established a National Health Care Fraud and Abuse Control Program under the joint direction of the Attorney General and the Secretary of HHS, acting through OIG. This program was designed to coordinate federal, state and local law enforcement activities with respect to health care fraud and abuse by promoting information sharing and collaboration. 
The Texas MFCU was created in 1979 by legislation as a division of the Office of the Attorney General with three principal responsibilities:
- investigating criminal fraud by Medicaid providers;
- investigating physical abuse and criminal neglect of patients in health care facilities licensed by the Medicaid program, including nursing homes and Texas Department of Mental health/Mental Retardation homes; and
- assisting local and federal authorities with prosecution. 
Surveillance and Utilization Review Systems
Each state maintains a Medicaid Management Information System (MMIS) that stores the claims payments and information. The MMIS includes a subsystem called the Surveillance and Utilization Review Systems (SURS) to address provider fraud and abuse. SURS staff members compare specific provider claims data with the normal procedure coding patterns for that type of provider to identify errors and evidence of possible fraud or abuse. HHSC sends referrals of potential fraudulent providers to the Texas MFCU.
Texas HHSC Office of Inspector General
In 1997, Texas' ability to combat Medicaid fraud and abuse improved when the 75th Texas Legislature enacted Senate Bill 30, which funded the implementation of fraud detection technology, additional monitoring of service providers and instituted administrative penalties, civil remedies and criminal sanctions for fraud and abuse. This bill led to the creation of the HHSC's Office of Investigation and Enforcement (OIE), which monitored fraud control for the Medicaid program. The OIE was responsible for detecting, investigating and preventing fraud, abuse or waste in the provision of health and human services, including enforcing state law in relation to these provisions.
The recent reorganization of HHSC converted the OIE into the Office of Inspector General (OIG) and expanded the OIG's responsibilities. The OIG is responsible for the OIE's former duties, as well as enforcing state laws relating to health and human services. The Legislature consolidated the following responsibilities into the OIG:
- the Office of Investigator General of the Texas Department of Human
- the Criminal Investigation Division of the Texas Department of Health; and
- investigation responsibilities at the Texas Rehabilitation Commission, the Texas Department of Mental Health and Mental Retardation, and the Texas Department of Protective and Regulatory Services.
The Legislature also gave the OIG expanded power and jurisdiction to enhance its ability to investigate fraud and abuse. The OIG has the authority to impose administrative actions and sanctions. Administrative sanctions may include any one or a combination of the following: recoupment of overpayments, payment hold, contract cancellation, exclusion from participation in the Medicaid program and civil monetary penalties. 
In addition to identifying and investigating fraud and abuse, the OIG also works to reduce errors in the billing, payment and adjudication of claims for Medicaid services. These measures include providing fraud and abuse training to Medicaid providers, HMOs, the staff of the claims administrator and provider organizations. Other measures taken by the OIG include workshops with major provider associations, increased use of professional medical consultants and a number of pilot projects designed to improve provider communication and education. 
Each year, OIG reports the results of the various areas it investigates. In fiscal 2004, OIG recovered $349.5 million and avoided additional costs of $389.5 million. Table I-1 summarizes the main areas of OIG's fraud and abuse activities and how much was spent on them in fiscal 2004. 
Table I-1: Fraud and Abuse Activities for HHSC/OIG
Office of Inspector General Total Fiscal 2004 Medicaid Program Integrity $ 23,358,098 Civil Monetary Penalties $ 14,184,150 Utilization Review (Hospitals paid by Diagnosis Related Grouping) $ 22,137,349 Tax Equity and Fiscal Responsibility Act Claims - Children's Summary $ 2,601 Tax Equity and Fiscal Responsibility Act Claims - Psychiatric $ 4,575 Case Mix Review (Nursing Homes) $ 8,240,785 Third-Party Resources $252,519,205 Surveillance and Utilization Review Subsystems $ 1,529,597 Medicaid Fraud and Abuse Detection System $ 2,470,200 General Investigations $ 22,617,280 Women, Infants and Children Monitoring and Investigation $ 27,447 Audits $ 2,501,961 Total $349,593,248
HHSC Medicaid Fraud and Abuse Detection System
One of the tools OIG uses to identify fraud and abuse in the Medicaid program is the Medicaid Fraud and Abuse Detection System (MFADS). This system is programmed to detect relationships and trends in providers claim billing that indicates potential fraud. It assists the OIG staff with compliance monitoring, provider referrals and utilization review. MFADS provides additional research on potential fraud and abuse; receives and has access to licensing board data for comparisons with provider data; helps find abusive or fraudulent practices using target queries on procedure or diagnosis codes, and tracks the progress of individual cases, including case hours, investigative cost and travel expenses related to the Medicaid program.
Texas HHSC Office of Eligibility Services
The Office of Eligibility Services (OES) was created by the 78th Legislature, Regular Session, through H.B. 2292 (2003). The OES is responsible for managing eligibility determination for all health and human services programs in Texas in the most efficient and effective manner. The OES is also responsible for maintaining integrity in the delivery of medical, financial and nutritional assistance to needy Texans. 
The OES is conducting several pilot projects mandated by H.B. 2292: the Medicaid Integrity Pilot and a client eligibility review.
Medicaid Integrity Pilot Project
The objective of the pilot is to evaluate the effectiveness of biometric and smart card technologies used to eliminate Medicaid fraud related to:
- "phantom services" or billing for services not rendered;
- client card swapping; and
- delivery of services to unauthorized persons.
The HHSC OES contracted with four vendors to conduct the pilot project in six counties and with an independent evaluator to assess the pilot's effectiveness. The vendors are Maximus (Harris and Dallas counties), Electronic Data Systems Corporation (Hidalgo and Cameron counties), eMedicalFiles, Inc. (Travis County) and Atos Origin (Tarrant County). The project includes smart cards for all Medicaid clients in participating counties, and smart card and biometric readers in the offices of participating providers (physicians, emergency rooms and outpatient clinics). Participation is voluntary.
The nine-month pilot involved the voluntary participation of 1,215 Medicaid providers, 228,131 Medicaid clients, and the installation of 954 front-end authentication devices. This level of participation allowed the collection of data from 60,196 client visits and 122,233 transactions.
The major findings from this study were:
- A Front-End Authentication and Fraud Prevention System incorporating smart card and biometric technology can be successfully integrated into the Medicaid benefit delivery process.
- Medicaid providers are interested in new benefit delivery and electronic eligibility determination solutions to simplify the Medicaid process.
- Clients and providers will accept the use of technology
- The piloted solution established the feasibility of implementing a process that can significantly deter specific areas of fraud believed to be prevalent in the Medicaid program.
- To clearly determine the fraud deterrent impact of front-end authentication, statewide system implementation requires mandatory participation by providers and clients and development of specific business rules and policies. 
Federal Fraud and Abuse Projects
Centers for Medicare and Medicaid Services
The Centers for Medicare and Medicaid Services (CMS) provides technical assistance, guidance and oversight in policing for fraud and abuse in the Medicaid program. Since fraud schemes often cross state lines, CMS developed a partnership of state and federal agencies known as the Medicaid Alliance for Program Safeguards to fight fraud and abuse. Some of the partners are the state Medicaid programs, state program integrity units, the Department for Health and Human Services' Office of Inspector General, the FBI and U.S. Department of Justice. 
The Alliance is based in CMS's central office in Baltimore with a network of coordinators who represent all 10 of the CMS's regional offices. The regional office coordinators and the central office team enable CMS to perform oversight through a series of program integrity reviews.  The Alliance produced guidance manuals and reports, such as the "Resource Guide of State Fraud and Abuse Systems," that discuss Medicaid fraud and abuse detection and prevention. The reports are available on the Internet at http://cms.hhs.gov/states/fraud/reports.asp. CMS' National Program Integrity Review reports on the state Medicaid programs are also available at this site. 
CMS Medicaid Fraud and Abuse Measurement Projects
From 2001 to 2004, as part of its effort to identify Medicaid fraud and abuse, CMS initiated a set of three demonstration projects known as the Payment Accuracy Measurement (PAM) Demonstration Pilot Project to develop a standardized measurement tool. These projects provided funding over the three-year period to participating states to develop and test a measurement methodology.
Texas participated during all three years. Texas used the enhanced methodology and tools of the Health Care Claims Study as the model for the first year of the PAM project and tested the methodologies that evolved from the first year over the second and third years. The final methodology consisted of randomly selected samples of paid health care services based on paid dollar proportions of the acute care fee-for-service programs and the managed care capitated premiums. Texas verified the payment of these services through reviews of the claim system process, medical records and client eligibility. Texas calculated an accuracy rate from the payment amounts deemed in error.
During the second year of the PAM project, the U.S. Congress passed the Improper Payments Information Act of 2002. The Office of Management and Budget provides the guidance for implementing the requirements of this law. This law directs federal agencies to measure and report error estimates to Congress in their annual budget requests. The implementation of this law added new criteria to the PAM projects, including in-depth client eligibility reviews used to verify the determination of clients' Medicaid eligibility and efforts to identify underpayments during PAM medical record reviews.
The PAM project was expanded into the Payment Error Rate Measurement (PERM) program. This program will be a federally mandated measurement study for all state Medicaid programs. Proposed PERM regulations were published in the Federal Register in August 2004 in preparation for implementation on October 1, 2005. The proposed regulations differ significantly from the PAM methodology tested by states over the 2001, 2002 and 2003 studies ― in both sampling plan and services sampled. One difference is the addition of Medicare crossover payments and denied claims. To test the proposed PERM regulations, CMS is funding another pilot project from October 2004 to September 2005. Texas is one of 32 states participating in this project.
The impending federal mandate for the PERM program means Texas must analyze the value of performing two measurement studies, state and federal, to identify overpayments to the same Medicaid program. In 2004, HHSC and the Comptroller's office conducted parallel measurement studies to validate and compare both the methodologies and error rates of the PAM and Texas Health Care Claims studies. The methodologies are different though the percentage error rates are only 3 percent apart. Texas must determine if there is any advantage to funding and performing concurrent studies that measure the same program. Since the PERM methodology is different from the previous PAM studies, Texas will again conduct the Medicaid Health Care Claims study along with the new PERM study in 2005.
In this report, the Texas methodology and results for the Medicaid FFS (including the prescription drugs) are compared with the second year of the PAM method and its results. The Medicaid Managed Care Capitation Payment study methodology and results are from the PAM study.
 U.S. Department of Health and Human Services, Office of Inspector General, Annual Report, State Medicaid Fraud Control Units: Fiscal Year 2001 (Washington, D.C., Fiscal 2001), p. 1, http://oig.hhs.gov/publications/mfcu.html#1. (Last visited January 14, 2005).
 U.S. Department of Health and Human Services, Office of Inspector General, Annual Report, State Medicaid Fraud Control Units: Fiscal Year 2003 (Washington, D.C., Fiscal 2003), p. 1, http://oig.hhs.gov/publications/mfcu.html#1/. (Last visited January 14, 2005).
 U.S. Department of Health and Human Services, Office of Inspector General, State Medicaid Fraud Control Units, Annual Report, Fiscal Year 2003 (Washington, D.C., Fiscal 2003), summary, http://oig.hhs.gov/publications/mfcu.html#1/. (Last visited January 14, 2005).
 U.S. Department of Health and Human Services, Office of Inspector General, State Medicaid Fraud Control Units, Annual Report, Fiscal Year 2003 (Washington, D.C., Fiscal Year 2003), p. 1, http://oig.hhs.gov/publications/mfcu.html#1/. (Last visited January 14, 2005).
 US Department of Health and Human Services, Office of Inspector General, State Medicaid Fraud Control Units, Annual Report, Fiscal Year 2003 (Washington, D.C., Fiscal 2003), p. 3-4, http://oig.hhs.gov/publications/mfcu.html#1/. (Last visited January 14, 2005).
 Office of the Attorney General, "Medicaid Fraud Control Unit" (Austin, Texas), http://www.oag.state.tx.us/consumer/brochure/mfcu.shtml. (Last visited January 14, 2005).
 Texas Health and Human Services Commission, Texas Medicaid in Perspective, Fifth Edition. (Austin, Texas, June 2004), p. 3-16, http://www.hhsc.state.tx.us/medicaid/reports/PB5/PinkBookTOC.html. (Last visited January 14, 2005).
 Texas Health and Human Services, Office of Inspector General (OIG), Semi-Annual Report (Austin, Texas, September 2004), p. 4, http://www.hhs.state.tx.us/OIG/Reports/FY04_Semi_Annual_Report.shtml (Last visited January 14, 2005).
 Texas Health and Human Services, Office of Inspector General (OIG), Semi-Annual Report (Austin, Texas, September 2004), http://www.hhs.state.tx.us/OIG/Reports/FY04_Semi_Annual_Report.shtml (Last visited January 14, 2005).
 E-mail from Aurora LeBrun, Associate Commissioner of the Office of Eligibility Services, Health and Human Services Commission, December 13, 2004.
 Texas Health and Human Services Commission, Medicaid Integrity Pilot Program Front End Authentication and Fraud Prevention System Report and Recommendations to the Legislature (Austin, Texas), p.2, http://www.hhsc.state.tx.us/OIE/MIP/MIP_Updates.html. (Last visited February 16, 2005)
 Centers for Medicare and Medicaid Services, "Medicaid Alliance for Program Safeguards - Background," (Baltimore, Maryland, September 2004), http://cms.hhs.gov/states/fraud/backgrnd.asp. (Last visited January 14, 2005).
 Centers for Medicare and Medicaid Services, "Medicaid Fraud and Guidance Reports", (Baltimore, Maryland, September 2004), http://www.cms.hhs.gov/states/fraud/reports.asp, (Last visited January 16, 2003).