During the 103rd Congress, the Subcommittee on Oversight and Investigations initiated several major inquiries and intensified its efforts in a number of important ongoing investigations. Each of these investigations was conducted with the fairness, professionalism, and attention to factual detail that is essential to responsible oversight. Many of these investigations provided, or will provide, the basis for corrective legislation; others have led to significant changes in the Executive Branch's administration of laws. Thirty-seven hearings were held, thirty-six in public and one in Executive Session. Furthermore, one Subcommittee meeting was held to receive a briefing on the Securities and Exchange Commission. In addition, two Subcommittee reports and one staff report were issued as of the writing of this report, and substantial progress was made on additional reports.
Much of the Subcommittee's work in the 103rd Congress grew out of the Subcommittee's jurisdiction over "public health." These investigations included oversight of the Food and Drug Administration (FDA), the Department of Health and Human Services (HHS), and the Environmental Protection Agency (EPA), and examination of some of the industries that these agencies regulate. Major problems were uncovered in a large number of areas into which the Subcommittee inquired, and work was begun on legislative and administrative corrections, as well as industry reforms.
Several Subcommittee investigations resulted in improvements to the public health. The Subcommittee has continued its investigation into the safety of the blood supply and has been instrumental in fostering important reforms at the American Red Cross, and the FDA. The Subcommittee's continuing commitment to improve the generic drug approval process has led to increased vigor in FDA regulation and enforcement. The Subcommittee continued its efforts to uncover and correct problems in food safety, particularly with regard to imported foods. Meanwhile, the Subcommittee's medical device investigations have highlighted both dangerous devices that were permitted to reach the market through lax approval processes, and potentially life-saving devices that have been delayed or kept off the market due to bureaucratic infighting or regulatory ineptitude. These efforts resulted in the release of a major report and in substantial reforms at the FDA.
The Subcommittee's strong commitment to environmental protection oversight continued. The Subcommittee actively pursued its investigation, initiated during the 102nd Congress, of mismanagement and other serious problems within the environmental crimes enforcement program. The Subcommittee's September 10, 1992 hearing on the EPA's criminal enforcement program had exposed repeated instances in which apparently serious environmental violations were not prosecuted at all, or were settled by pleas to questionably reduced charges accompanied by low fines. These decisions to drop prosecutions of individuals, or seriously weaken contemplated prosecutions of large corporations, were made for reasons that did not bear up well under careful scrutiny. During the 103rd Congress, the Subcommittee conducted an active investigation at the Justice Department, notwithstanding much resistance. The Subcommittee's efforts resulted in major improvements in the management, administration, and policies governing the environmental criminal enforcement program.
The Subcommittee continued its long-term investigation of the Medicaid program, the rapidly escalating costs of which are driving many states to the brink of bankruptcy. The lagging implementation of the Clinical Laboratory Improvements Amendments of 1988 was examined. Waste, fraud, and abuse in Federally-funded health care programs were also investigated. Inquiries were made to evaluate the usefulness of the State of Hawaii as a health care model. Efforts were also undertaken to study the high levels of compensation for hospital executives and to deal in a practical way with State efforts to shift costs on to the Federal government.
In addition, the Subcommittee devoted much time and effort to economic and financial issues, including regulation of insurance solvency, financial reporting by insurance companies, various securities issues, and unfair international trading practices. The Subcommittee continued its long-running investigation of fraud, waste, and abuse by major publicly-held government contractors who failed to provide proper disclosures to the Securities and Exchange Commission (SEC) and shareholders, examining, among others, defense contractors who may have paid bribes to foreign officials.
The Subcommittee's investigation of the management practices of the contractors constructing and developing the Superconducting Super Collider (SSC) exposed many millions of dollars in previously unacknowledged cost increases, as well as accounting practices that did not accurately reflect the actual financial situation at the SSC. Similarly, the Subcommittee brought to light questionable billing practices by contractors on the Space Station and by law firms representing Energy Department contractors in litigation. These and other contractor-related investigations have saved taxpayers millions of dollars and forestalled millions more in potential losses.
Scientific misconduct, and the deficiencies in the response of both the scientific community and the relevant government agencies to allegations of misconduct, received considerable attention. Among other things, the Subcommittee was instrumental in bringing to light -- and forcing the National Cancer Institute to confront -- a particularly disturbing episode of fraud in breast cancer research. The Subcommittee's efforts have prodded the scientific community toward a growing recognition of the need to improve standards of scientific conduct, particularly where the taxpayers' money is involved.
The Subcommittee also continued its long-running and highly successful investigation into abuses of the indirect cost components of Federal contracts. In the past year, this investigation has focused on abuses by Department of Energy (DOE) contractors and continued to monitor EPA efforts to reform its management of contractors. While it is extremely difficult to put a precise number on the ultimate benefit to the government, the Subcommittee efforts have led to the identification of millions of dollars in unallowable items.
Finally, a broad range of other issues spanning diverse agencies, such as the Federal Emergency Management Agency (FEMA) and the Federal Trade Commission (FTC), were under review during the 103rd Congress.
Millions of dollars were either directly saved or returned to the Treasury as a result of Subcommittee activities, particularly through the indirect costs investigation and the review of procurement abuses by major EPA, DOE, and defense contractors, and through the Subcommittee's work on hospital financial practices. Millions more have been saved by bringing to light -- and thereby stopping -- practices which serve to waste or siphon off the taxpayers' money. Millions of dollars may also be saved by the Subcommittee's relatively early detection of problems in the insurance industry and continued close scrutiny. Subcommittee efforts have reoriented and revitalized the environmental criminal enforcement program. Moreover, the Subcommittee's extensive activities in the health area have contributed significantly to improving the safety of the blood supply, as well as minimizing further harm from certain dangerous drugs and devices.
In the 104th Congress, control of the House and its Committees will
shift to the Republican Members. As of the time of the writing of this activity report,
the composition and agenda of the Energy and Commerce Committee or its successor Committee
are unknown. This activity report reflects the work conducted by the Members and staff of
the Oversight and Investigations Subcommittee during the 103rd Congress, and the planning
of the Chairman of that Subcommittee.
NORTH AMERICAN FREE TRADE AGREEMENT
AND GENERAL AGREEMENT ON TARIFFS AND TRADE
During the 103rd Congress, the Subcommittee continued to monitor the development and passage of the North American Free Trade Agreement (NAFTA). In 1994, roughly a year after the passage of NAFTA, the Subcommittee requested that the General Accounting Office (GAO) undertake a review of the environmental consequences of NAFTA. The results of this study are expected to become available in mid-to-late 1995. The Subcommittee also has continued to track developments in the long-running negotiations for the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). Numerous questions remain about the soundness of the proposed agreement, its practical enforceability, and the consequences of some of its provisions. The Subcommittee had planned to follow this issue closely.
Textile Fraud
In the 103rd Congress, the Subcommittee continued to monitor enforcement efforts against textile fraud, following up on earlier work. On May 7, 1992, Carol Hallett, the Commissioner of Customs, led a panel of Customs witnesses who described that agency's textile fraud enforcement program. The hearing coincided with the announcement by the United States Attorney for the Southern District of New York of the initial indictments in Operation Q-Tip, the largest investigative effort ever undertaken by the Customs Service.
Witnesses testified that the primary forms of textile fraud are (1) the transshipment of goods from producing countries through one or more other countries so as to disguise the true country of origin and evade quota restrictions, (2) the misdescription of textile or apparel items to evade quota or avoid tariff charges, and (3) the undervaluation of textile shipments to avoid tariff duty. All of these forms of fraud undermine the already depressed U.S. textile industry, throw more Americans out of work, and deprive the Treasury of revenue.
Since September 1991, Customs, with the assistance of the Internal Revenue Service, has executed well over 100 Federal search warrants and dozens of seizure warrants in cities across the United States. According to witnesses, the majority of the fraud involves Chinese goods, although a significant volume of fraudulent transshipments involve goods from Vietnam, Pakistan, and other countries. Companies and persons indicted to date include the China National Textile Import/Export Corporation (a Chinese Government corporation headquartered in Beijing), its Jiangsu provincial office, and various U.S.-based but Chinese-controlled entities, as well as certain of their employees. The Senior U.S. Customs Representative in Hong Kong estimated that the combined loss of revenue to the U.S. Treasury from all types of textile fraud could total $600 million.
Customs is also taking enforcement action against what appears to be massive transshipments of Vietnamese-origin goods through Taiwan. Many details of this investigation were revealed by the Taiwanese Board of Foreign Trade, Ministry of Economic Affairs, in an English language report listing both the alleged Taiwanese transshipper and the U.S. importer. This document highlights the likelihood that many illegal shipments have been made with the knowledge, if not the assistance, of certain U.S. importers or their customers.
In the first phase of Operation Q-Tip, six firms and eleven individuals were charged and over $10 million in cash, real estate and vehicles seized. Operation Q-Tip continues, with indictments being returned and individuals convicted. The Subcommittee has been monitoring the Operation's progress.
Circumvention of Anti-Dumping Laws
In the 103rd Congress, the Subcommittee continued to follow the Jia Farn matter and received an important report on the subject from the Inspector General of the Department of Commerce. The actions of the Commerce Department in a dumping case involving sweaters allegedly produced in Taiwan first drew the Subcommittee's concern during the last Congress. On April 27, 1990, the Department had directed the Customs Service to begin collecting dumping duties from all Taiwanese sweater manufacturers exporting to the U.S. This action was taken because Taiwanese sweater manufacturers have been harming U.S. manufacturers by selling below cost. One small firm, Jia Farn, however, was excepted from the order on the grounds that it had not been selling at a price below cost. Shortly thereafter, the market share enjoyed by Jia Farn began to rise with curious speed. Its share of sweater exports to the U.S. suddenly soared from about one percent to about fifty percent.
The domestic industry was concerned that the new-found prosperity of this heretofore obscure company had more to do with the circumvention of the dumping order than with legitimate business acumen. Efforts by the domestic industry to secure the protection to which it was entitled under the dumping statute were undermined by the Commerce Department. Subcommittee investigation ensued, uncovering an inadequate response by Commerce that was undermining the interests of the domestic industry and the enforcement effort of the U.S. Customs Service.
In a June 3, 1992 letter to then-Secretary of Commerce Barbara Franklin, Chairman Dingell called attention to two administrative decisions by the Department in the Jia Farn case. One problematic decision by Commerce was to treat Jia Farn as a "manufacturer" and to continue so treating it even after being presented with definitive evidence that the company had almost no manufacturing capacity. The second dubious decision was to allow Taiwanese sweater makers to "self select" four volunteers and base dumping calculations on the books of these four volunteer companies.
Jia Farn and its U.S. attorneys had represented to Commerce that the company was a manufacturer, and the Department had relied on these representations. However, upon visiting Jia Farn in the Spring of 1991, representatives of the Customs Service, the U.S. Trade Representative, and the Departments of State and Commerce discovered that the company had virtually no manufacturing capacity. Customs further determined that other Taiwanese companies were shipping their sweaters to the U.S. through Jia Farn in order to avoid the dumping duty, and relayed this information to the Department of Commerce. To its credit, the Customs Service took fast action against Jia Farn. Customs began to cease liquidation of Jia Farn entries to collect duties, which were placed in escrow, in anticipation that these shipments would be made subject to the dumping duties imposed in the original order. Inexplicably, however, Commerce ignored the information about Jia Farn at its disposal and refused to back up Customs' initiative. Commerce continued to treat Jia Farn as a manufacturer, took no enforcement action regarding the illegal transshipment reported by Customs, and ordered Customs to cease collecting dumping duties and resume liquidation of Jia Farn imports.
Like the Customs Service, the Subcommittee was greatly concerned that Taiwanese manufacturers appeared to be using Jia Farn as a front company to evade the anti-dumping duties that would otherwise be assessed. Moreover, there was additional concern about the possibility that at least some of the sweaters shipped under the name of Jia Farn were not manufactured in Taiwan at all, but had been illegally transshipped from still other countries. The loss of revenue to the Treasury from these evasions in the first year of the dumping order (September 1990-91) was calculated by the domestic industry to be about $7 million.
While the decisions to declare Jia Farn a manufacturer and continue treating it as such, even after evidence emerged that it had almost no manufacturing capacity, were troubling enough, the Department of Commerce's second ruling seriously undermined the effectiveness of the dumping penalties themselves.
A dumping margin of 24.02 percent had been calculated for Taiwanese companies whose books had been investigated. Companies that had failed to provide the data necessary to calculate an actual rate, or had not been investigated, were assessed a duty of 21.38 percent. (This is generally referred to as the "all other" rate.)
When Commerce performed its annual review of the dumping order, it chose to investigate only three Taiwanese companies despite a request from the U.S. sweater industry that 24 specific companies be reviewed. At the same time, the Department agreed to audit four Taiwanese companies that had volunteered to have their records be reviewed. The three companies selected by Commerce itself refused to provide any information, so the Department looked only at the four volunteers. These four volunteer companies together accounted for less than one half of one percent of the market, yet the Department proceeded to base its dumping calculations entirely on their data. In effect, the data from these four self-selected companies that have virtually no market share will determine the new dumping rate for all other companies that have not been audited.
By employing this dubious approach to investigation, the Department of Commerce has allowed the Taiwanese industry to determine an unrepresentative, and unrealistically low rate for all future years of the dumping order. If this approach to investigation becomes general, the effective ability of any U.S. firm damaged by predatory pricing from multiple source suppliers in a given country to obtain more than a year of relief under our dumping laws would be seriously undermined. Given the great cost in time and money of obtaining relief, this approach would go a long way toward rendering the dumping laws worthless.
Yet another problem created by the Department's policy decisions is that by allowing the subcontracting of substantial production by so-called manufacturers, Commerce has enormously complicated the Customs Service's task of identifying companies engaged in illegal transshipment. In the past, Customs agents could visit a factory and easily determine if it had the physical capability to produce the products in the quantity that it was shipping. Under the Department's new theory that a manufacturer need only direct the production of a product and control its ultimate price, actual production is not required by the "manufacturer" and the Customs Service would have to visit every subcontractor -- a resource-intensive task that is impractical in most cases -- to detect illegal transshipment.
In the 102nd Congress, the Subcommittee asked the Department of Commerce Inspector General (IG) to conduct a thorough review of the origins and development of the policy changes described above and to specifically review the Jia Farn matter. The IG's investigation discovered, in the files of the Department of Commerce, the May 1991 report by the Customs Service, plus equally specific reports from other agencies indicating that Jia Farn was helping Taiwanese companies evade the dumping order. When this information was forcefully called to the attention of the Assistant Secretary of Commerce, Alan Dunn, in a memorandum of September 2, 1992 from Deputy Inspector General Michael Zimmerman, the Department finally took action. By notice in the Federal Register on September 22, 1992, Assistant Secretary Dunn initiated a changed circumstances review to determine if Jia Farn acted as a reseller or transshipper of Taiwanese sweaters. Customs was also instructed to suspend liquidation of Jia Farn's entries going back to the beginning of the dumping order. However, it may well be too late to reopen the books on many entries that have already been liquidated.
At the Subcommittee's request, the IG pursued an in-depth review of the Commerce Department's handling of alleged violators, using Jia Farn as a case study. The report, completed in 1993, documented massive problems with the enforcement system. The IG, for example, learned that Commerce Department officials typically ask few questions even in cases of blatantly suspicious activity. The IG also learned that even when the Department does attempt some verification of overseas activities, the Department's personnel are woefully ill-equipped to make such verification attempts meaningful. For example, Departmental employees sent to audit a facility in Taiwan often speak no Chinese and have to rely on employees of the company they are inspecting to translate relevant documents.
Controlling Exports of High Technology
In 1993, the Subcommittee's longstanding efforts with regard to the Export Control Automated Support System finally resulted in the signing of a memorandum of understanding (MOU) between the Department of Commerce and the U.S. Customs Service which will at last give Customs needed access to the system.
In the course of an investigation into the diversion of prohibited machinery, components, and technology from Western nations to the regime of Saddam Hussein in Iraq, the Subcommittee discovered that the Commerce Department had failed to comply with a statutory directive that was designed to prevent such unauthorized exports. In 1985, the Congress had amended the Export Administration Act to require that the Secretary of Commerce and the Commissioner of Customs exchange "any licensing and enforcement information with each other which is necessary to facilitate enforcement efforts and effective license decisions."
Despite the plain language of this statute, the Department of Commerce had not granted the Customs Service timely and effective access to export license application data. Instead of free and immediate access to the Bureau of Export Administration's Export Control Automated Support System at all Customs offices in ports across the country, Customs was allowed to access the data base from only one modem at Customs Headquarters. Moreover, even this meager access was limited to some, not all, of the data in the system.
Commerce's unwillingness to cooperate had impeded the ability of Customs inspectors at ports across the country to interdict exports of prohibited items. For example, it was quite possible for an exporter to use the export license number obtained at the time of application to claim that the export had been approved and get the shipment past Customs, whose inspectors had no quick or easy way to determine whether the application associated with an apparently valid license number was pending, approved or denied. In addition, by limiting the access of Customs to its data base, Commerce prevented Customs from developing profiles of the persons who were the most likely to engage in violative behavior and, thus, should be inspected closely.
A joint Commerce-Customs technical working group had developed a simple and cost effective method whereby Customs would gain on-line access to the Commerce data base and share the information with inspectors on a timely basis through existing Customs computer systems. However, this recommendation was not accepted by the Department.
On August 13, 1992, Chairman Dingell sent a letter to Secretary Franklin registering concern about the situation and asking when and how Commerce planned to remedy the situation. This letter was also provided to the appropriate subcommittees of the House and Senate Appropriations Committees. To their great credit, the Appropriations Committees responded promptly by putting language in their respective appropriations bill directing Commerce to implement the joint working group recommendations within 90 days of enactment. Incredibly, notwithstanding this statutory language and further follow-up by the Subcommittee, the Department of Commerce continued to delay, apparently reluctant to allow the Customs Service to share in a resource developed for, and at the expense of, taxpayers. Finally, in 1993, the Department at last entered into the MOU with the Customs Service. The MOU is now in the process of being implemented.
Patent Piracy
The Subcommittee continued its long-standing interest in the harmful consequences to American business, workers, and consumers resulting from the theft of intellectual property, and especially patent piracy. In 1993, the Chairman wrote to the Secretary of Commerce, the Secretary of State, and the U.S. Trade Representative regarding continuing problems with the lack of patent protection afforded to U.S. pharmaceuticals by certain foreign countries, such as Brazil, Hungary, and Turkey.
Follow Up on Fasteners
In 1990, the Congress passed the Fastener Quality Act (P.L. 101-592) as the result of investigations and reports by the Subcommittee showing that millions of substandard, mismarked or counterfeit metal fasteners were being sold in the United States annually.
In the meantime, the criminal behavior that prompted the enactment of the statute has continued, seemingly unabated. The Subcommittee has identified at least one firm that was disseminating defective or substandard fasteners to major users, such as Defense Department installations and nuclear power plants. The firm, moreover, was in bankruptcy and efforts were underway to sell all of its remaining inventory to unsuspecting buyers. As a result of Subcommittee referrals, the sale of the potentially substandard parts was forestalled and the U.S. Customs Service, in cooperation with the Nuclear Regulatory Commission, began an inquiry which is still underway.
Misappropriation of Computer Software at the Department of Commerce
In response to a whistleblower complaint that various common computer software packages, such as Dbase III and WordPerfect 5.1, were being misappropriated en masse by the Import Administration (IA) of the International Trade Administration (ITA) within the Department of Commerce, the Subcommittee requested that the Department of Commerce's Office of Inspector General (OIG) conduct a thorough investigation.
Apart from the obvious impropriety of such misappropriation, the allegation was particularly troubling because ITA is responsible for representing the copyright interests of U.S. software manufacturers abroad and often complains to foreign governments about the intellectual property violations committed by foreign nationals. An initial perfunctory IG review, performed in response to a direct complaint to the OIG from the whistleblower, resulted in the assertion that no problem existed.
At the Subcommittee's request, a more detailed and in-depth review was undertaken. This second review confirmed the whistleblower's allegations in almost every detail and established that the Department of Commerce had purchased a small number of software packages and then unlawfully copied them on to numerous IA computers. The investigation documented approximately $120,000 of misappropriated software. However, the amount of software actually misappropriated is believed to be higher because some had been removed from the computers before the OIG investigation commenced and because the OIG focused only on the IA for its case study, while conceding that a similar situation probably prevailed throughout ITA and possibly in other parts of the Commerce Department as well. Moreover, the ITA had taken no action regarding the illegal software for almost two years after management was officially notified of the problem and even when it did act, its response was inadequate.
As a result of the Subcommittee's inquiry, the Commerce Department's Office of General Counsel contacted the relevant software manufacturers and offered to make restitution. The Commerce Department also undertook to educate Departmental managers and employees about the legal restrictions on the copying of computer software. In addition, the IA committed to developing a documentation system for tracking current IA software licenses and to implementing spot audits to ensure that unauthorized software is not in use on IA computers.
The whistleblower also reported that he had experienced retaliation and harassment as a result of his initial efforts to focus the attention of Commerce Department managers and the OIG on the illegal software problem. The OIG's investigation failed to confirm these allegations; however, the whistleblower reported that the abuses were substantially curtailed after the Subcommittee raised questions about his treatment.
OPENNESS AT THE FEDERAL TRADE COMMISSION
In March 1993, following reports that meetings not open to the press or public had occurred between some Commissioners of the Federal Trade Commission (FTC) and members of the private bar and regulated community, the Subcommittee initiated an inquiry into the possibly unequal access to information, and consequent appearances of impropriety, which may occur when certain private interests seem to have special access to the leaders of the Commission. The Commission has provided one collective response and individual responses from each Commissioner. In addition, FTC counsel has met with Subcommittee staff and promised to address the situation. Commissioners have amended their practices to take greater care to ensure that speeches and other events are placed on the public calendar and that the public and press are afforded freer access to meetings at which they expect to speak.
CONTRACTING QUESTIONS AT THE DEPARTMENT OF TRANSPORTATION
In 1994, troubling allegations came to the Subcommittee's attention regarding the manner in which a government contract to construct a downtown light rail project in the city of Portland, Oregon, had been awarded, and in particular, certain assertions made by the Tri-County Metropolitan Transportation District of Oregon (Tri-Met).
The controversy arose when the U.S. subsidiary of a large Japanese construction firm with a history of unsavory trade practices in Japan won the contract over an American competitor. Comments made by Tri-Met in turning aside a protest by the American second-lowest bidder seemed to indicate that Tri-Met felt that it could ignore the Federal Acquisition Regulation (FAR). Among other things, Tri-Met suggested that it could be excused, on the groups of incapacity, from making findings regarding the responsibility of the prospective contractor -- Kajima -- notwithstanding provisions of the FAR which state that such findings are an affirmative responsibility. Tri-Met's written decision also suggested that in view of the difficulty of determining whether the American subsidiary was responsible, Tri-Met could simply assume the contractor met the standard, whereas the FAR indicated that inability to affirmatively establish responsibility should lead to a finding of non-responsibility.
Tri-Met's decision also suggested that adverse press reports were not a proper basis for raising questions about a contractor's responsibility, notwithstanding a provision of the FAR which suggested that "publications" were among the evidence which the contracting officer ought to consider. Finally, and perhaps most disturbingly, Tri-Met suggested that it could not consider the extensive history of misconduct on the part of the high bidder's closely-related parent company (a history which included repeated criminal charges in Japan for bribery, price-fixing, and bid-rigging) because Tri-Met was, it claimed, only permitted to consider charges brought by Federal, state, and local authorities -- not those of foreign governments.
In a lengthy letter dated June 8, 1994, Chairman Dingell questioned Transportation Secretary Pena closely about these and other issues. Secretary Pena's detailed reply indicated agreement with the Subcommittee's concerns and a rejection of most of Tri-Met's apparent legal theories. While not defending the reasoning, however, Secretary Pena did defend the final outcome -- i.e., the selection of the Japanese company's American subsidiary. Additional work on this matter had been planned.
IMPROPER OVERSEAS ACTIVITIES BY U.S. DEFENSE CONTRACTORS
Overview
In 1991, the Subcommittee initiated an inquiry into the adequacy of compliance by certain defense contractors with both the securities laws and the Foreign Corrupt Practices Act, as well as the impact of certain defense procurement activities on interstate and foreign commerce. The inquiry was prompted by the so-called "Dotan Affair" and subsequent revelations concerning corruption in the administration of foreign military assistance funds given to Israel.
The Dotan Affair involved the illegal diversion of foreign military assistance by an Israeli general acting in concert with certain American defense contractors. General Electric (GE), the Pratt & Whitney Aircraft Engine Division of United Technologies Corporation, National Airmotive Corporation, Textron Lycoming, Allison Engine Distributor, and numerous other small U.S. companies were implicated. To date, General Electric, a General Electric manager, a Pratt & Whitney subcontractor, and the National Airmotive Corporation have pled guilty to crimes related to the Dotan Affair. While pursuing the Dotan inquiry, the Subcommittee received evidence regarding possible U.S. defense contractor misconduct in several foreign locations, including Greece, Turkey, Egypt, and Saudia Arabia. These cases are all being pursued by the Subcommittee, as well as, in some instances, by the Department of Defense (DOD), and the Justice Department. Subcommittee hearings in 1995 relating to these questionable activities had been planned.
The Dotan Affair
The United States provides Israel with about $1.8 billion per year in foreign military assistance funds. The majority of these funds are supposed to be spent in the United States, according to guidelines issued by the Department of Defense's Defense Security Assistance Administration (DSAA), which oversees the military assistance program. As a general matter, the DSAA and the military services directly scrutinize the expenditure of foreign military assistance funds in the United States. In the case of monies provided to Israel, however, the Israeli Ministry of Defense is largely responsible for the oversight function. To that end, the Ministry of Defense operates a mission in New York City with approximately 250 employees. Most of the $1.8 billion per year provided to Israel is spent at the direction of this New York mission with only minimal oversight by American authorities.
In the spring of 1991, Rami Dotan, a brigadier general in the Israeli Air Force (IAF), pled guilty in an Israeli military court to diverting U.S. foreign military assistance funds. General Dotan was sentenced to 13 years in prison and demoted to the rank of private. The former brigadier general confessed to using his position as Chief of the IAF Propulsion Branch to direct contracts to American and Israeli aircraft-engine manufacturing, servicing and provisioning companies in exchange for kickbacks. Mr. Dotan's efforts were part of a complex scheme, involving Israeli subcontractors, European bank accounts, and a Swiss investment banking firm named Ellis, A.G.
On July 23, 1992, GE pled guilty to a number of criminal violations and agreed to pay $69 million to resolve the criminal and civil penalties. On July 29, 1992, the Subcommittee held its first hearing on the Dotan Affair. At the hearing, witnesses testified that, starting in early 1984, General Dotan and Herbert Steindler, a GE manager, had laundered approximately $40 million of U.S. foreign military assistance funds through GE by creating thousands of false vouchers to fund military equipment that was never delivered and by inflating the price of equipment that was delivered. Approximately $35 million of these funds were then funneled through a shell company in New Jersey run by a friend of Mr. Steindler. Most of the laundered funds were transferred to Israel where, according to GE, they were used for projects on Israeli military bases -- projects that were not authorized by the United States government for financing with U.S. foreign military assistance. In addition, more than $11 million in laundered funds was transferred to various European bank accounts where the cash was literally carried -- physically -- from bank to bank in an effort to mask the transactions. Much of the money was ultimately deposited with the Swiss investment banking company Ellis, A.G. (This company is well-known to both the Subcommittee and the Securities and Exchange Commission as a result of its involvement in a long-running insider trading investigation.)
For his role in the above activities, Herbert Steindler has pled guilty to several violations of Title 18, U. S. Code, including wire fraud and money laundering. He has been sentenced to seven years in prison.
On October 27, 1993, the Subcommittee held a hearing that explored the respective roles of the National Airmotive Corporation and the Pratt & Whitney Aircraft Engine Division of the United Technologies Corporation in kickback and money laundering schemes similar to those involving GE. At the hearing, the General Accounting Office (GAO) detailed various Pratt & Whitney sham transactions, undertaken at the direction of Dotan, that funneled over $8.6 million worth of contracts to two New Jersey shell companies owned by an unemployed textile worker. The contracts to provide software for Pratt & Whitney engines, an inventory system, and an engine depot powerpack were grossly overpriced. For example, one contract awarded for $1.4 million turned out to be worth only about $41,000. Another contract for $988,000 was actually worth less than $40,000. The Subcommittee learned that, in contrast to GE, which responded to early evidence of corruption by conducting a substantial investigation to determine the facts and then reporting them to the Justice Department, Pratt & Whitney, which was involved in virtually the same corrupt schemes with Dotan and others, did not investigate the matter thoroughly, choosing instead to accept dubious explanations from employees involved in the diversion. Noting that the Pentagon's suspension and debarment officials are beginning to look at Pratt & Whitney, the Subcommittee questioned the message that might be garnered by contractors if the Pentagon takes no action in the Pratt & Whitney matter. As the 103rd Congress ends, a Federal Grand Jury is looking into the activities of Pratt & Whitney.
At the October 1993 hearing, the President of National Airmotive Corporation testified that Dotan also laundered money through his company. In one scam, the IAF sent junk engine parts to National Airmotive for rework. National Airmotive would clean up and paint the bogus parts and send them back to Israel with fake invoices for tens of thousands of dollars. The Israeli Ministry of Defense would then pay the fake invoices with U.S. foreign military financing to bank accounts in Europe controlled by Harold Katz, an associate of Dotan. In addition, some of the laundered money apparently was used to create a slush fund (known as the Special Projects Fund) at National Airmotive for other IAF uses. In the spring of 1993, National Airmotive pled guilty to 31 felonies and paid criminal fines and penalties.
In 1992, the Department of Justice delayed the signing of the grant agreement with Israel because of Israel's lack of cooperation in providing documents, in making key witnesses, such as former general Dotan and Harold Katz, available to U.S. investigators. As a result, Israel promised full cooperation in the future and the United States signed the agreement in late October 1992. But U.S. investigators still have not been able to interview key witnesses about the full nature and extent of the corruption involving U.S. contractors. In June 1993, Department of Justice investigators, armed with a negotiated protocol as a basis for Israeli cooperation, again went to Israel to interview Israeli witnesses, including Mr. Dotan and Mr. Katz, and again were unable to interview them. Nonetheless, another grant agreement was signed with Israel in late October 1993.
Illegal Commissions and Alleged Bribery of Egyptian Military
Officials By U.S. Defense Contractors
The United States provides Egypt with about $1.3 billion per year in foreign military assistance funds. Egypt spends much of this U.S. taxpayer money on direct purchases from U.S. defense contractors. During the past two years, the Subcommittee has been investigating allegations that several U.S. defense contractors paid illegal commissions to Egyptian business agents or subcontractors. Some of the millions of dollars paid to these agents, moreover, allegedly went to bribe Egyptian military officers to award contracts or to approve acceptance of military equipment purchased by the Egyptian military with funds provided by the U.S. government under the foreign military direct sales program.
In one case, Detroit Armor Corporation pled guilty to paying over $90,000 in illegal commissions to an Egyptian agent in connection with a $950,000 contract to provide a firing range for the Egyptian Army. Allegedly, part of the commission was used to bribe Egyptian military officers to award the company the contract.
In another case that is currently under investigation by the Departments of Defense and Justice, an Egyptian agent, a former high ranking Egyptian military officer, received a $2.75 million subcontract in connection with the award of a $125 million contract to provide air defense radar to Egypt. The allegations under scrutiny include payoffs -- some in cash, other in benefits, such as travel and entertainment -- made to Egyptian military officials.
The Subcommittee has received information indicating that GE's own investigation established that its $2.75 million contract with the Egyptian businessman was not based on services to be provided. Rather, the dollar amount was agreed to prior to any development of work scope and the contract appears to have been, at least in part, a reward for help in obtaining the radar contract for GE. In addition, the Egyptian businessman admitted that he provided money for travel expenses and subsistence -- often in cash -- to Egyptian military personnel in connection with their travel to the United States. Moreover, he was unable to account for thousands of dollars he received from GE. For its part, GE admitted that its employees spent thousands of dollars on meals and entertainment for Egyptian military officials visiting its facilities. The Subcommittee has learned that Martin Marietta, which subsequently purchased the GE division that arranged for the Egyptian contract, is conducting its own investigation of the above allegations. The Subcommittee looks forward to receiving the report's conclusions.
The Subcommittee is also investigating millions of dollars in payments allegedly made by Teledyne, Inc., and Teledyne Electronics to another former Egyptian military officer, who became a business agent or subcontractor, in connection with a $20 million aircraft identification contract with the Egyptian military. It has been alleged that some portion of the contract money was diverted to pay bribes or otherwise benefit Egyptian military officials. The Subcommittee has also received information indicating that Teledyne gave the money to purchase an apartment/office suite in Cairo. The Subcommittee is investigating whether the amount provided was in excess of actual costs.
In still another case which the Subcommittee is exploring, the Lockheed Corporation, several of its subsidiaries, and two of its executives were indicted in June 1994 for Foreign Corrupt Practices Act violations in connection with a $1 million commission paid to a member of the Egyptian Parliament for her help in securing a $79 million contract between Lockheed and the Egyptian military for three C-130 aircraft. The indictment also charges that Lockheed and others attempted to conceal the conspiracy by representing to the Defense Security Assistance Agency (DSAA) that no commissions or contingent fees had been paid in connection with the subject sale.
DSAA Proposes Termination of Direct Commercial Sales to
Foreign Countries from Defense Contractors
In response to the evidence developed by this Subcommittee of widespread fraud in the direct commercial sales from U.S. defense contractors to foreign countries, as well as GAO and DOD Office of Inspector General (OIG) findings regarding the vulnerability of such sales, the DSAA announced in June 1993 that direct commercial sales financed by foreign military assistance funds would be phased out. However, the Government of Israel complained vociferously, and the U.S. Senate included language in the FY 94 Foreign Operations Appropriations Act, P.L. 103-87, requiring the DOD to consult with all affected parties, other Federal government agencies, and the Congress before terminating the program.
After fulfilling the above requirements, the DSAA announced in July 1994 that direct commercial sales would generally not be granted for standard DOD items unless, on a case by case basis, it can be demonstrated that the Foreign Military Sales system cannot satisfy the requirement. Purchasing countries must request exceptions from the DSAA and provide written justification as to why the procurement of standard DOD items should be obtained through a direct commercial sale. Other rule changes include but are not limited to the following:
According to the new rules, direct commercial sales will still be
allowed for major country-unique systems and items that are not standard to DOD subject to
DSAA review and approval, transportation and freight forwarding services, and U.S. vendor
operated in country warehouses. The effectiveness of these new operating procedures will
require close monitoring, and the Subcommittee had planned to do so.
During the First Session of the 103rd Congress, the Subcommittee examined various issues relating to the financial practices of hospitals throughout the country. Public hearings were conducted on March 31, 1993, June 23, 1993, December 7, 1993, and December 8, 1993. The March 1993 hearing concerned the largest not-for-profit hospital in the country, the Methodist Hospital in Houston, Texas. The hearing revealed that Methodist sometimes looks and operates more like a luxury hotel than a hospital, with its valet parking, bellmen, 24-hour concierge service, and an in-house four-star restaurant. While Methodist's staff includes world-renowned specialists, the hospital turns away patients if they do not have insurance, if they belong to an HMO, or if they do not have the requisite $5,000 cash deposit.
These facts prompted the Texas Attorney General's office to sue Methodist for failing to provide what state authorities believe to be sufficient charity care to the many uninsured and underinsured people in the Houston area. The state's investigation concluded that despite Methodist's tax-exempt status as a charitable organization, Methodist provided less charity care than the bulk of the area's other not-for-profit and for-profit hospitals. In the wake of that inquiry, state lawmakers introduced legislation that they hope will increase access to care for hundreds of thousands of Texans without insurance.
The June 1993 hearing addressed changes in the health care industry that many believe have led to uncontrolled costs, diminished access to care, and deteriorating health care quality. The Subcommittee received testimony on the compensation packages for the chief executive officers (CEOs) of 26 major health care companies. These packages range from $700,000 at the low end to a high of nearly $9 million. Moreover, witnesses testified that these staggering sums bear little, if any, relationship to whether the company does well or poorly. Finally, the disparity between the salaries of corporate giants and their "worker bees" -- specifically, nurses, pharmacists, and housekeeping staff -- was addressed.
At this hearing, the Subcommittee also received testimony from the General Accounting Office (GAO) regarding an audit of the Hospital Corporation of America's (HCA) general and administrative (G&A) expenses. According to the GAO, of the $2.6 million of G&A expenses reviewed, $1.1 million was either unallowable, questionable, or insupportable. Moreover, the charges reviewed represented only a small portion of the $114 million in G&A expenses that HCA billed to Medicare in 1991. The dubious charges identified by the GAO included $51,000 in employee social events, over $17,000 in alcoholic beverages, $52,000 in marketing, and $26,000 to counteract negative publicity resulting from a Congressional investigation. The GAO's overall findings were consistent with audits performed on other hospitals by the Inspector General of the Department of Health and Human Services for the Subcommittee in 1992. On December 7, 1993, the Subcommittee held a public hearing on the trends in hospitals' executive compensation packages. Concerns over trends in compensation, and the relative lack of information regarding those trends, prompted the Subcommittee to request that the GAO undertake an analysis of executive compensation packages at for-profit, not-for-profit, and government hospitals. In addition to the GAO's testimony on their survey results, the Subcommittee also heard testimony from the President of the American Hospital Association (AHA) on the growing difficulty of attracting and retaining hospital chief executives.
The GAO's nationwide survey of 429 hospitals participating in the Medicare program revealed that chief executives received an average of $131,000 in compensation for overseeing hospital operations in 1991. The range of actual compensation was from about $31,000 at a 48-bed hospital in Texas to about $848,000 at an 880-bed hospital in New York. Differences in the compensation levels were largely related to differences in hospital characteristics, inpatient data, financial performance, and location.
Further, the GAO reported that the actual amount of compensation received by hospital chief executives is understated because it fails to reflect the amount of income such executives receive for their services to related businesses. (Additional IRS reporting requirements, effective in tax year 1992, will provide more complete information on the total compensation these executives receive.) To illustrate, the GAO reported that two large not-for-profit hospitals volunteered information for the survey that showed that payments from related businesses increased the chief executives' compensation by at least 20 percent at each hospital. In fact, the GAO found that 60 percent of the hospitals surveyed had one or more related businesses, such as foundations, research institutes, medical equipment companies, home health agencies, pharmacies, management consulting firms, diagnostic centers, and property management firms. The GAO issued its final report, Hospital Compensation: Nationally Representative Data on Chief Executives' Compensation, in August 1994.
The President of the American Hospital Association testified that the recruiting of top hospital executives in many instances involves a nationwide search. Despite these efforts, and due to the nature of the job, the average tenure of a hospital CEO is just five years. The turnover rate in 1992-93 was 10 percent; in 1991-92, the turnover rate reached 20 percent. He also testified that CEO compensation today is increasingly being measured by more than the traditional criteria of financial performance and institutional growth. During the 1990s, standards for assessing the CEO's performance include community benefit, progress in meeting community needs, negotiation of collaborative agreements with other providers, successful interaction with other outside entities, and contributions to the overall health of the community.
On December 8, 1993, the Subcommittee held a public hearing which illustrated that organizational relationships are often structured so as to maximize reimbursement from the government. While apparently legal, this "gaming" of the system to maximize taxpayer contributions was of concern to the Subcommittee.
The Subcommittee examined the relationship between the Fort Sanders Regional Medical Center and the Thompson Cancer Survival Center in Knoxville, Tennessee. Testimony from Richard Kusserow, former Inspector General for the Department of Health and Human Services, and John Gunn, Executive Vice-President of the Memorial Sloan-Kettering Cancer Center, indicated that, although the Cancer Center could have obtained a separate provider number for Medicare and Medicaid reimbursement purposes, the Medical Center chose to structure the Center as an outpatient department in order to obtain significantly higher Federal reimbursement for services and capital costs than would be the case if the Cancer Center were free-standing. Moreover, the testimony indicated that such structuring of health care entities to maximize Federal payments is a widespread practice in the industry. The hearing also demonstrated that the Federal government's capital cost reimbursements for Cancer Center construction and equipment have been held for long periods of time in Medical Center accounts without being turned over to the Cancer Center. Moreover, interest earned on this money has been kept by the Medical Center.
The hearing also revealed a curious arrangement between the Cancer Center and a group of local oncologists, which allows the oncologists to bill directly for chemotherapy drugs for the patients they treat in the Cancer Center. This practice, according to Messrs. Kusserow and Gunn, is highly unusual and siphons off a large stream of revenue from the Cancer Center, thus increasing its dependence on Federal payments and charitable contributions. This situation was previously questioned in an audit report, which, according to the Fort Sanders Alliance, was subsequently withdrawn because of factual errors. The audit report mentioned a potential violation of IRS General Counsel Memorandum 39682, under which the sale or surrender of revenue streams is improper for tax-exempt organizations and considered private inurement. The IRS was informed of this report.
UPDATE ON HOSPITAL FINANCIAL PRACTICES
During the Second Session of the 103rd Congress, the Subcommittee continued its investigations into waste, fraud, and abuse by providers and into the adequacy and effectiveness of efforts on the part of the Health Care Financing Administration (HCFA) and its contractors to oversee providers' activities. A February 9, 1994 Subcommittee hearing revealed that despite yeoman's work by the Office of Inspector General (OIG) at the Department of Health and Human Services (HHS), by the General Accounting Office (GAO) and by countless state auditors and investigators, multi-billion dollar abuses are still occurring. The hearing focused on two issues which cost taxpayers hundreds of millions of dollars in double billings, overbillings and bills that end up being paid out of Medicare's "deep pocket" rather than by the primary insurers.
First, although the OIG has an impressive history of identifying millions of dollars in what can only be called hospital "slush funds" -- the technical term is "credit balances" -- the practice continues. Former Inspector General Richard Kusserow testified before the Subcommittee in March 1992 that at least $265 million was resting in hospital coffers as a result of Medicare double billings and overcharges. And even that quarter of a billion dollar figure was significantly understated because that analysis looked at a statistical sampling of only 20 percent of the nation's hospitals -- specifically those with more than 200 beds and whose bills were paid by nine of the 56 fiscal intermediaries (FIs) under contract with HCFA. The results of that hearing indicated that some hospitals simply pocketed these Medicare monies with little more than a stroke of the pen, when regulations and propriety demanded their return to the taxpayer.
Second, nearly a billion dollars has been lost to date by FIs failing to identify private payers responsible for payment and instead billing Medicare. Unfortunately, this fact illustrates not only a disturbing failure by the FIs, but by HCFA as well. It also raises questions about the possible conflicts of interest at work on the part of the insurance companies who act as intermediaries because, as the Subcommittee has learned in previous hearings, the taxpayers -- through HCFA -- pay these intermediaries upwards of two billion dollars each year to process Medicare claims and to oversee the appropriate expenditure of taxpayers' money. Yet the Subcommittee's investigation shows that in too many cases the intermediaries have grossly neglected their oversight responsibilities and have deteriorated into little more than claims processors.
The testimony of the HHS Inspector General June Gibbs Brown described a number of OIG initiatives to identify and recover inappropriate Medicare payments when Medicare should be acting as the secondary payer (MSP) including: (1) an exchange of automated information between the Social Security Administration (SSA), the Internal Revenue Service (IRS), and HCFA; (2) creation of the Medicare and Medicaid coverage data bank to facilitate the identification of other health care insurance coverage; (3) HCFA's upgrading of the common working file information concerning pagers and the modification of the Medicare claim forms to obtain additional MSP information; (4) January 31, 1994 HCFA publication of guidelines for the reporting of Medicare by private third-party payers and modification of the Medicare claim forms to obtain additional data; and (5) a planned audit to determine whether Medicare contractors are sending out questionnaires upon receipt of a beneficiary's first claim and whether replies are correctly sent to the common working file.
The Inspector General discussed several ongoing investigations of Blue Cross plans and recoveries of $27 million dollars from one fiscal intermediary for improper payments to providers, the status of the HCFA data-match program and OIG's ongoing audits of Medicare contractors. The Inspector General made several recommendations for improvements, including acquiring an accurate data base of health insurance coverage; requiring Medicare contractors to match their private-side records with Medicare files; applying the MSP provisions relating to End Stage Renal Disease beneficiaries to employees as long as they are covered by an employer of 20 or more persons; establishing a Voluntary Disclosure and Recovery program to allow identification for repayment with interest; and permitting administrative sanctions of up to treble damages (plus interest) in instances in which Medicare made a primary payment when third party payers were obligated but failed to make the primary payment.
The Inspector General testified that their review of Medicare credit balances at 76 hospitals and nine fiscal intermediaries revealed several causes for these overpayments. According to Ms. Brown, 42 percent ($113 million) were caused by hospitals billing Medicare and a private contractor for the same service, being reimbursed by both and keeping both payments; 37 percent ($98 million) in overpayments were caused by hospitals' duplicate billing for services primarily resulting from the hospitals using different procedure codes or dates of services; 7 percent ($19 million) were caused by hospitals billing for services not performed; 3 percent ($6.6 million) of overpayments were caused by billing for outpatient services that had already been billed as inpatient services; and 11 percent ($29 million) of the overpayments were caused by miscellaneous fiscal intermediary errors, such as errors in calculating the deductibles and co-insurance amounts, incorrect diagnosis codes and payments for non-covered services.
The Inspector General found that hospitals did not review their Medicare accounts to determine if there were credit balances and, in some instances, wrote off the credit balances and kept the overpayment. However, there were also instances in which the intermediaries failed to recover overpayments even when hospitals attempted to refund the money. The Inspector General recommended that HCFA require the intermediaries to review their credit balances during hospital audits and that HCFA review the intermediaries' compliance with this requirement. As a result of HCFA's requiring all fiscal intermediaries to contact all providers and require balance reports on a quarterly basis, $624 million was identified and $584 million was recovered as of September 30, 1993. The anticipated ongoing annual savings are $159 million.
A similar review by the Inspector General of Medicaid credit balances at 64 hospitals in eight states indicated that hospitals have received and retained over $73 million in Medicaid overpayments. These overpayments reflect poor hospital accounting practices and their causes mirror those cited in the case of the Medicare program. The Inspector General recommended that hospitals establish procedures to assure that Medicaid credit balances are reviewed and refunded in a timely manner. The Inspector General also issued reports to the eight Medicaid state agencies recommending that procedures be implemented to monitor credit balances. The OIG was assessing the feasibility of establishing a nationwide credit balance monitoring policy through the Medicaid state agencies. The Inspector General estimated savings of $44 million annually ($25 million Federal share and $19 million State share).
The Subcommittee staff followed up with the staffs of the HCFA, the Department of Justice (DOJ), the Federal Bureau of Investigation (FBI), State Medicaid Fraud Control Units (MFCUs) , and the OIG to assure that the necessary links were established between the agencies dealing with health care fraud, waste, and abuse in order to properly determine the needs of the new HCFA computer systems and data bases which were being planned.
During the 103rd Congress, the Subcommittee also examined health maintenance organizations (HMOs). The Subcommittee focused on the policies and performance of Kaiser Permanente (Kaiser), the country's largest provider of health care services through managed care, at a public hearing on May 27, 1993. Given its prominent role in the evolution of managed care, Kaiser offers a unique historical perspective on the changing dynamics in the managed care arena and the financial and clinical ramifications of them.
Kaiser's contributions to the health care delivery system are considerable. Concerns were raised at the hearing, however, regarding the multi-billion dollar surplus Kaiser has accumulated, particularly in light of charges that Kaiser fails to provide a sufficient level of care to California's many poor people. California state officials have complained that Kaiser serves fewer Medi-Cal patients than most other non-profit and for-profit HMOs and most non-profit and for-profit hospitals -- especially when compared to their overall market share in the state.
Kaiser's refusal to curb its rate increases prompted the California Public Employees' Retirement System (Calpers) to freeze Kaiser enrollment in 1992. Calpers, with its 875,000 members, purchases $1.3 billion worth of health care each year and negotiates with 19 HMOs and, where managed care is not available, with fee-for-service providers. Twenty other insurers, however, did agree to restrict their rate increases to 3.1 percent -- when the state average was 13.2 percent.
During the First Session of the 103rd Congress, the Subcommittee also continued its investigation into the beleaguered Medicaid program with a public hearing on March 19, 1993. The Subcommittee's long-term investigation, begun in the 102nd Congress, highlighted the problems facing states as Medicaid enrollment has skyrocketed, mandates have mushroomed and scarce state and federal dollars have dwindled. Those hearings documented the serious flaws in the existing system and states' herculean efforts to come to grips with them.
As states increasingly have embraced managed care as the cure for what ails the Medicaid program, it has become obvious that too little is known about the effects of those initiatives. Accordingly, the Subcommittee requested that the General Accounting Office (GAO) assess how managed care programs have affected the quality, access and cost of care for millions of poor people. The GAO released the results of that most comprehensive and current nationwide study of Medicaid managed care at the Subcommittee's March 1993 hearing.
The GAO found that managed care can deliver good quality health care, improve access to care and help control costs. According to the GAO, despite some past abuses, many states now run managed care programs that patients and advocacy groups prefer to traditional fee-for-service programs. While states' early efforts targeted poor women and children for their managed care efforts, success has led many states to expand those programs to SSI recipients and the medically needy.
According to the GAO, it is not clear that managed care saves money, although most states project cost savings compared to fee-for-service. Nevertheless, managed care affords states the opportunity to predict more reliably the population they are serving and the types of services they are likely to need, all of which enables the states to budget more realistically. Managed care has also increased the number of providers accepting Medicaid patients, thereby reducing the number of visits to emergency rooms and the resulting higher costs.
The GAO also found that two-thirds of all states already have managed care programs and all but two of the remaining ones expected to have at least one managed care plan in place by the end of 1994. The Subcommittee had planned to continue to evaluate trends in the constantly evolving Medicaid program and the ramifications of them for patients and taxpayers alike.
As part of its ongoing oversight of the Medicaid program, the Subcommittee requested that the General Accounting Office (GAO) assess the status of Medicaid long-term care programs and state efforts to control runaway costs. Long-term care accounts for fully one-third of all Medicaid expenditures -- or some $42 billion in 1993 alone. The GAO issued its report on these matters, Medicaid Long-Term Care: Successful State Efforts to Expand Home Services While Limiting Costs, in August 1994.
GAO pointed out that states increasingly are turning to alternative settings for long-term care, rather than the traditional institutional settings (i.e., nursing homes). Nationwide, nursing facilities comprise 85 percent of Medicaid expenditures for long-term care. States' cost containment efforts, therefore, have focused on less expensive home and community care. GAO chose three states -- Oregon, Washington and Wisconsin -- as case studies for evaluating state experiences in expanding government-funded home and community-based services. Those states were chosen since they were among the first to experiment with alternative settings for long-term care.
The GAO analyzed the ramifications of the three states' initiatives in terms of (1) how far they have progressed in shifting to alternative care, (2) what controls were put in place to limit the growth of those programs and (3) the impact of these alternatives on the ability of states to provide long-term care. The states have relied largely on Medicaid waivers in developing and implementing their long-term care alternatives.
While the three states differ in exactly how they have structured their programs, they have experienced similar results. The states' expansion of home and community-based services have enabled them, "to better serve residents with long-term care needs, while managing expected growth in demand for long-term care and controlling overall long-term care expenditures." The GAO found that the growth and cost of alternative programs largely were restrained by Medicaid waiver requirements that states limit enrollment and expenditures by controls on beneficiary eligibility, and by provider fee caps. The states believe that, "expanding home and community-based care programs has been cost effective because of the savings that result from more stringent controls on the number and use of nursing facility beds."
In Oregon alone, from 1981 to 1991, one study reports a savings of $227 million out of projected direct-service expenditures of $1.35 billion over the period. All three states have succeeded in controlling the number of nursing facility beds in use. The GAO found that, "between 1982 and 1992, the number of licensed nursing facility beds increased 20.5 percent nationally, while the combined number of beds in Oregon, Washington, and Wisconsin declined 1.3 percent."
These home and community-based programs have allowed the states to offer services to more people. Nevertheless, program limits have resulted in waiting lists. In some instances, programs have even been closed for a period of months due to the Medicaid waiver restrictions. Despite streamlining of the Health Care Financing Administration's (HCFA) waiver review and approval process, restrictions contained in the long-term care waivers granted by HCFA have constrained the overall growth of home and community-based long-term care, according to the GAO.
The decade-long experience in Oregon, Washington, and Wisconsin with alternative long-term care programs provides a solid data base upon which to draw broader conclusions regarding the efficacy of such programs. The GAO report pointed out that, "Medicaid specialists indicated that the three states' programs could provide examples of mechanisms for managing program growth." The study's conclusions are particularly significant since virtually all of the health care reform proposals in the 103rd Congress called for substantial increases in home health care programs. The Subcommittee planned to conduct additional investigations into long-term care in both traditional and alternative settings.
Medicaid Financing Mechanisms: Disproportionate Share Hospitals
During the 103rd Congress, the Subcommittee continued its oversight of Medicaid financing mechanisms. The much maligned and chronically underfunded Medicaid program is obviously critical to poor people who must rely on it for health care. However, many problems must be faced. Medicaid's difficulties cannot and will not be overcome by gaming the system or attempting to hide the real costs of the program behind accounting gimmicks. Subcommittee hearings during the 102nd Congress had raised serious questions about schemes used by states to shift the Federal/state funding mix for the program. Congress subsequently passed, with bipartisan support, the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 to curb these same cost-shifting abuses in the Medicaid disproportionate share hospital (DSH) provisions. Additional restrictions were included in the 1993 Omnibus Budget Reconciliation Act (OBRA-93). Despite the new limitations, many states appear to have found further loopholes to continue using the DSH program aggressively to shift more Medicaid costs to the Federal government.
Continuing concern and criticism regarding the states' misuse of DSH and the resulting inability to establish financial accountability under the existing system prompted the Subcommittee to circulate during the First Session of the 103rd Congress a survey to each of the 50 states regarding their DSH programs. That survey solicited information from the states regarding, among other things, the number of DSH programs used, the number of hospitals receiving DSH funds, the uses to which DSH funds were put, the utilization rates at DSHs, the number and type of intergovernmental transfers in use, the uses to which the transferred funds were put, and the costs and revenues of DSHs. The Subcommittee subsequently requested that the Inspector General of the Department of Health and Human Services (HHS) analyze the data reported by the states.
Unfortunately, the Office of Inspector General (OIG) found that the state responses to the survey were neither complete nor consistent. The OIG, therefore, tabulated the states' data to provide a summary of their DSH programs. The states' successful use of DSH resulted in DSH payments more than doubling from fiscal year (FY) 1991 to FY 1992 -- from $8.4 billion to $17.7 billion. The Inspector General reported that states admitted that public hospitals in 10 states transferred funds totaling $516 million in FY 1991. In FY 1992, the number of states in which public hospitals transferring funds rose to 13, with the transfers totaling $1.4 billion. The data reported by the states indicated that, "while uses of these transferred funds varied by State, States generally reported that the funds were used for other health care services, mainly the States' share of Medicaid," according to the OIG.
In order to develop a more detailed understanding of the states' manipulation of the DSH provisions, the Subcommittee requested, in May 1993, that the General Accounting Office (GAO) and the HHS OIG conduct case studies of representative state activities. The OIG released a report in January 1994 while the GAO's report, Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal Government, was released in August 1994.
The GAO concluded that states continue to use financial arrangements that "place an inappropriately large share of the cost of the Medicaid program on the federal government," despite the 1991 and 1993 bipartisan legislation. Medicaid DSH programs in Michigan, Texas and Tennessee were examined. According to the GAO report, in Michigan the state used these creative accounting methods to shift the Federal share of the program's financing from 56 to 68 percent. In Texas and Tennessee, the Federal share grew from 65 to 67 percent and 68 to 71 percent, respectively.
Despite its criticism of these "illusory approaches," the GAO noted that, "without these funds, the states would have had to appropriate additional state funds or, given reduced federal funds, make cuts in their Medicaid program." Nevertheless, the GAO concluded that, "the Medicaid program should not allow states to benefit from illusory arrangements where federal funds purported to be used to benefit providers are given to providers with one hand only to be taken back with the other. Prohibiting such arrangements would direct federal funds intended to cover costs of medical care to those medical facilities that provide the care."
In addition to evaluating the states' responses to the Subcommittee's survey, the OIG examined in detail Louisiana's DSH program. That analysis showed that Louisiana had benefitted substantially from its use of the DSH program. From FY 1991 to FY 1992, "Louisiana hospitals received approximately $532 million and $1.137 billion program payments," the OIG reported. Louisiana's "public DSHs made intergovernmental transfers of about $96 million in FY 1991 and about $314 million in FY 1992 to other facilities or State agencies." The OIG found that, "the state used most of these transferred funds as the State Medicaid match ($81 million in 1991 and $271 million in 1992). The remaining transferred funds were used mainly to provide health care services."
Both the OIG and the GAO concluded that all states were engaged in similar practices of one sort or another. They concluded, further, that in many cases it appeared that payments to providers had little to do with the actual cost of care provided and in some cases actually enhanced the profit margins of some hospitals. And while it appears that the DSH funds were ultimately used to provide health care, it has been virtually impossible to ensure that Federal tax dollars were being spent in an accountable and appropriate manner. Nor, according to the GAO, are recent reforms likely too improve the situation because other major loopholes remain.
The OIG's report noted that OBRA 93 sought to limit DSH payments to no more than the costs of providing inpatient and outpatient services to Medicaid and uninsured patients. Those cost-based restrictions go into effect for public hospitals in FY 1994 and for private hospitals in FY 1995. According to the OIG, "the Congressional Budget Office estimated that these changes to the DSH provisions should result in total savings of $2.2 billion over a 5-year period." It is unclear, however, whether the new requirements will prevent states from developing still other gimmicks to skew the Federal government's contribution to the Medicaid program.
As the Administration, Congress and state governments continue their efforts to control budget deficits and stimulate the economy, health care cost containment will remain critical. It is increasingly important, therefore, that actual state and Federal health care costs be understood. Distorting those costs and blurring accountability for them will unavoidably cause more cost shifting and inflated prices. Equally important, it will obscure what must be done to revamp this system. Ongoing review of the effectiveness of the cost-based restrictions imposed by OBRA 93, and consideration of whether additional regulatory and/or statutory changes are needed will be key to resolving these problems. The Subcommittee had planned further work on this issue.
During 1993, the Subcommittee initiated a major investigation into the high costs, high growth, and increasingly high technology of the $4 billion home health care industry. The Subcommittee focused, in particular, on the home infusion industry. This industry, which is one of the fastest growing segments of the home health care market, was the subject of Subcommittee hearings on May 5, 1993, and September 8, 1993.
Home infusion therapy targets patients with cancer, AIDS, severe digestive disorders, and a number of other serious illnesses. The services and products range from intravenous (I.V.) feeding, to chemotherapy, blood transfusions, the administration of antibiotics and pain killers, and much more. Many of the therapies provided are highly labor-intensive or require ongoing monitoring to assure the well-being of the patient. The patients tend to be highly vulnerable and largely captive.
According to the testimony presented to the Subcommittee by the Office of Technology Assessment (OTA), the home infusion industry is characterized by a great diversity in the size and ownership of the provider, as well as in the scope of infusion and other home services that are offered. The OTA testified that there is little Federal regulation of home infusion providers, and few states directly address the broad range of specific practices involved in infusion therapy. In addition, witnesses testified that there is considerable variation in how charges for home infusion are billed and how they are paid by insurers. Medicare has no explicit benefit that covers home infusion therapy. According to OTA, coverage is fragmented, the amount of Medicare monies spent on home drug infusion therapy is unknown, and the overall quality of the infusion-related services received by Medicare beneficiaries cannot be evaluated or monitored. Lastly, OTA found that the lack of standards by which to judge the quality of the home infusion therapy provided to patients and the lack of guidelines for physicians and other professionals regarding the appropriate course of care for specific subgroups of home infusion patients also hampers any assessment of the therapy's quality.
The Office of the Inspector General (OIG) of the Department of Health and Human Services testified that it had identified a high rate of physician ownership and other physician compensation arrangements in the home infusion industry. The home infusion industry appears to be a favorite investment for many physicians, spawning a plethora of creatively-designed joint ventures and other financial relationships. The financial stake which many doctors have in the industry has, in the OIG's view, skewed the marketplace and contributed to raising costs substantially over time. The OIG officials testified that they could find no integrated framework for regulation of home infusion therapy. They also found Medicare's coverage of home infusion therapy to be fragmented and illogical. The OIG recommended that the Health Care Financing Administration (HCFA) collect data to better track home infusion services, issue clearer coverage guidelines to its carriers, and require stricter application of the current guidelines concerning total parenteral nutrition. The OIG also suggested that HCFA collect information on ownership and compensation arrangements and monitor referral and utilization patterns. The OIG further recommended that HCFA begin referring to the OIG for investigation any cases that appear to fall outside the bounds of propriety.
The National Alliance for Infusion Therapy, a trade association of home infusion therapy manufacturers and providers, expressed its eagerness to work with the Subcommittee to develop a fair and reasonable regulatory structure for infusion therapy, one that will provide health care consumers with assurance that they will be receiving good quality care, one that will enable third party providers to understand what they are paying for when they cover infusion therapy, and one that will set quality standards to guide all infusion therapy providers in the provision of care.
HCFA, in its testimony, informed the Subcommittee that it has undertaken a number of initiatives to monitor utilization and control the costs of durable medical equipment, including that connected with infusion therapy. The most significant component of these initiatives is a reorganization of the system of processing claims for durable medical equipment. HCFA is also developing medical review guidelines to ensure appropriate consistent payment of durable medical equipment claims nationwide. For home infusion therapy, the medical review guidelines provide a detailed listing of treatment situations, equipment, and drugs and define the types of pumps and other infusion equipment covered under Medicare. HCFA's initiatives also call for ongoing statistical analysis of durable medical equipment payments nationwide. HCFA will now seek to ensure that suppliers of home infusion therapy meet accepted business practice standards. Lastly, HCFA also plans to require claims to be paid based on rates tied to where the beneficiary lives and uses the equipment. According to HCFA, this latter measure will reduce duplicate payments, promote efficiency, and facilitate standardization.
The Subcommittee had planned to continue to monitor developments in the home infusion industry and its regulation.
CLINICAL LABORATORY IMPROVEMENT
AMENDMENTS OF 1988 (CLIA 88)
The Subcommittee continued its inquiry into the failure of the Department of Health and Human Services (the Department) to implement the Clinical Laboratory Improvement Amendments of 1988 (CLIA 88 or the Act). The Department's persistent failure to implement CLIA 88 fully has been the subject of ongoing Subcommittee discussions with the Department, the highly diverse laboratory community and state regulators.
The Subcommittee brought its concerns to Secretary Donna Shalala, emphasizing specifically the record compiled by the Subcommittee of Departmental delays and ineffectiveness. Additionally, the Subcommittee raised questions regarding the potential effects of persistent and aggressive lobbying led by physician groups. Those interest groups' all-too-successful efforts led to the development of regulations that are confusing, if not downright contradictory, and that do not protect the public health.
Physician office laboratories (POLs) have become the flash point in the CLIA debate. It appears that another major campaign is underway to, as the American Medical Association's (AMA) news magazine put it on June 28, 1993, "cancel CLIA" for those laboratories. Calling for "physician clinical autonomy," the AMA is once again clamoring for the CLIA's repeal. Indeed, at its annual meeting, AMA delegates voted "that our American Medical Association establish as primary policy the repeal of CLIA '88."
The Subcommittee urged the Secretary to proceed with caution in light of the fact that there are few, if any, safeguards to protect the millions of patients who rely on laboratory tests from potentially deadly mistakes, particularly when the tests are performed in physicians' offices.
HEALTH INSURANCE INVESTIGATION
During the Second Session of the 103rd Congress the Subcommittee initiated an investigation into the health insurance industry. That inquiry focused on the role the industry plays in affecting the access to, quality and cost of health care. The Subcommittee began evaluating trends in the industry regarding financial practices, organizational structure, risk selection, rate setting and loss ratio calculations. Additionally, the changing nature and extent of state and Federal regulation of this evolving multi-billion dollar industry were assessed to determine their ramifications on health care access, quality and cost.
Subcommittee Survey
It was evident early in the Subcommittee's investigation that there was surprisingly little data on the actual practices of health insurance companies. To begin to accumulate the information necessary to evaluate industry policies and the adequacy of efforts to regulate them, the Subcommittee circulated a survey to 26 insurance companies.
The survey questions focused on the industry's practices regarding underwriting, rating, cancellation and non-renewal of policies and overhead. The Subcommittee requested a list and description of all types of health insurance offered by each company and the states in which they are offered for calendar years 1990-1993, as well as the gross premium and net generated during this time period.
Also, the Subcommittee solicited copies of all policy statements, descriptions of practices, and guidelines supplied to company employees and agents, which define the company's procedures and practices for health insurance marketing, sales, rating, underwriting, cancellation, and non-renewal. The Subcommittee also asked whether and to what extent the factors of age, sex, geographic area, smoking, medical history, physical condition, and financial status are considered in determining the insurability or premium rate for new applicants and the cancellation or non-renewal of existing policies.
For each state in which health insurance is written by a company, the Subcommittee sought information on pre-application screening procedures, application screening procedures, the most significant reasons why some prospective customers did not make application and copies of all guidance to agents concerning anything that could be construed to be pre-application screening of prospective customers. The Subcommittee was also interested in whether current rating practices reflected "modified community rating."
The Subcommittee also surveyed the number of rejected applications and the most significant reasons for rejection, the number of cancellations and non-renewals, as well as the most significant reasons for policy cancellation or non-renewal. Also included in this survey was information on whether each company targets customers based on geographic region, classes of risks, economic characteristics, occupation or any other screening criteria. And information was requested on the overhead expenses for each company and whether each company serves as a fiscal intermediary for the Health Care Financing Administration (HCFA).
The information provided by the 26 companies was used in planning the Subcommittee's two 1994 hearings into practices and trends in the health insurance industry. The Subcommittee had anticipated an additional survey, and several hearings, in 1995.
June 29, 1994 Hearing
The Subcommittee's hearing on June 29, 1994 focused on the activities of the Golden Rule Insurance Company, headquartered in Lawrenceville, Illinois and Indianapolis, Indiana. Many believe this company is the largest insurer offering individual health insurance policies in the United States. Golden Rule has been a controversial player and a controversial figure in a number of states. According to various state regulators, Golden Rule routinely engages in intimidation, misinformation and other underhanded practices to secure huge rate increases and preferential policies as well as to thwart health insurance reform.
At the June 29 hearing, the Subcommittee received testimony from Thomas R. Van Cooper, Director, Insurance Regulation, Department of Banking, Insurance, and Securities, State of Vermont; Thomas C. Foley, Actuary, Department of Insurance, Bureau of Life and Health, Forms and Rates, State of Florida; and Salvatore R. Curiale, Superintendent of Insurance, State of New York Insurance Department. These insurance officials testified on insurance reforms within their states, such as community rating, and insurance company policies, such as "cherry-picking." They also spoke to the business practices, if any, of Golden Rule in their states.
Also testifying at this hearing was State Senator C. Jeanne Shaheen of the State of New Hampshire who addressed the issue of small employer health insurance reform in the New Hampshire legislature and "the unsuccessful efforts of the Golden Rule Insurance Company to thwart the political will of the majority of the New Hampshire legislature in order to further its very narrow corporate interests."
In addition, the Subcommittee heard testimony from Stephen J. Hough, a partner in the law firm of Croegaert, Clark and Hough, Ltd., of Olney, Illinois who informed the Subcommittee of Golden Rule's efforts to sue certain policyholders who had filed insurance claims. In these cases, Golden Rule sued its policyholders for alleged misstatements of fact and accused the policyholders of being fraudulent and dishonest in seeking policy benefits that were due them.
Lastly, the Subcommittee received testimony from Kathryn Kristine Groenke, an articulate and discerning witness, who described her ordeal, as a Golden Rule policyholder, in obtaining policy benefits for an illness. When denied benefits by Golden Rule, Ms. Groenke, in desperation, sought the assistance of the State of Maryland Insurance Department which intervened on her behalf and successfully obtained the policy benefits that were due her.
August 3, 1994 Hearing
The Subcommittee held its second health insurance hearing on August 3, 1994. This mammoth industry has an all but unfettered ability to determine who does and who does not get health insurance, how much the fortunate pay for it and what they get for their money. Their decisions can threaten the physical and financial well-being of millions of Americans. In all too many cases, their decisions and corporate practices can and have contributed mightily to drastic economic problems caused by the unchecked escalation in health care costs. And despite their crucial role in orchestrating changing trends in the medical marketplace, they appear to enjoy a surprisingly lax regulatory environment.
The Subcommittee, therefore, continued its efforts to examine closely how the health insurance industry works, how it affects Americans as individuals and as a society, how and to what extent the industry is currently regulated, and what is needed to correct the flaws and close the gaps.
The August 3, 1994 hearing, like that in June, dealt extensively with the activities of the Golden Rule Insurance Company. The testimony at the Subcommittee's first hearing on June 29 suggested that this company -- the largest one still offering individual policies -- richly deserved closer scrutiny. Specifically, regulators, legislators and consumers from six different states testified that Golden Rule: routinely engages in practices designed to intimidate, coerce and frighten; sues regulators who refuse to grant them more and bigger rate increases than their competitors; sues their own policyholders in some cases rather than pay their claims; bullies legislators in an effort to kill health care reforms; spends hundreds of thousands of dollars lobbying against health care reforms; and scares consumers with doomsday predictions shored up by misinformation and threats of canceled policies.
Although testimony has indicated that these alleged actions are probably not illegal, they appear all too often to be geared toward protecting the company's bottom line with little or no regard for the impact on consumers or the national welfare. Witnesses before the Subcommittee further testified that Golden Rule's activities did not make for sound public policy.
Regulators and legislators testified that Golden Rule historically has defended its actions by railing against big government and wrapping itself in the flag, claiming that they are protecting their Constitutional rights. Consumer advocates had equally harsh words for this company, but suggested that many of Golden Rule's practices were common in the health insurance industry. Golden Rule officials also testified regarding their practices.
The first witness, Cathy Hurwit, Director of Legislative Affairs for Citizen Action, the largest consumer organization in the country, spoke of the need to regulate the private health insurance industry. Ms. Hurwit described situations in which companies like Golden Rule get to decide who is covered, what they pay and what treatments will be reimbursed if we continue to allow such a private insurance system to continue. Ms. Hurwit testified that while Golden Rule is a prime example, it is by no means the only example of the problems in the private insurance market. According to Ms. Hurwit, "most health insurance companies today seek to avoid financial risk through 'cherry picking' -- only insuring individuals and groups of individuals who are young and healthy and excluding those who are old or sick."
The second panel was composed of the Honorable Mike N. Coffman, State Representative from the State of Colorado; Ernesto Scorsone, State Representative from the State of Kentucky; and Mr. Daniel Pitts Winegarden, First Deputy Commissioner, Insurance Division, Iowa State Department of Commerce.
Mr. Scorsone described Golden Rule's campaign against the state's health care reform proposal. He explained that their tactics had prompted the chairman of the Kentucky Senate Appropriations Committee to characterize the company in an open meeting as "liars." Mr. Scorsone further described how Kentucky's Human Resources Secretary dubbed the company "Golden Shaft" upon learning that Golden Rule had filed a lawsuit against the bipartisan reform law. Representative Scorsone detailed the company's heavy lobbying campaign against Kentucky's efforts to curtail pre-existing condition clauses, require guaranteed issue, renewability and portability, repeal the loss ratio guarantee provisions, standardize insurance offerings, and provide a modified rate that does not allow disparities based on sex or health status. He described a "disinformation" campaign designed to scare senior citizens with claims of 200-300 percent rate increases or an end to their coverage.
The second witness, Mr. Winegarden, testified that Golden Rule organized an expensive lobbying campaign against the state's health insurance reform proposal. Golden Rule specifically opposed the rate review authority historically exercised by the insurance commissioner and sought instead to push its own proposal to provide a minimum guaranteed loss ratio to prevent the commissioner from regulating rate increases.
Mr. Coffman described Golden Rule's aggressive opposition and lobbying efforts in Colorado against comprehensive small group insurance reforms. Those bipartisan reforms require health insurance carriers to provide guaranteed access for anyone in groups of up to 50 persons, guaranteed issue, basic and standard benefit packages, adjusted community rating allowing only age and geographic differences phasing in over three years, and a regulatory framework to encourage small businesses to band together into voluntary purchasing alliances. Representative Coffman testified that Golden Rule opposed any reform which would affect their "narrowly focused market" with what he called questionable data and studies funded by organizations having financial or other close ties to Golden Rule.
John Whelan, Chief Executive Officer of Golden Rule, testified on behalf of the company. Mr. Whelan testified that, "during the course of our testimony we shall seek with factual evidence to establish to the satisfaction of the Subcommittee that these allegations are totally without merit." In defending his company against charges of massive misinformation campaigns, groundless lawsuits and unconscionable rate increases, Mr. Whelan stated, "we are confident that an objective observer of these proceedings will conclude that Golden Rule is an ethical, well managed health insurance provider, a company that strives always to protect its policyholders' best interests." Mr. Whelan also cited his company's many efforts regarding civil rights and educational choice programs, and their efforts "in making health insurance available to less affluent Americans and their families." In concluding, Mr. Whelan maintained that Golden Rule is, in fact, "an exemplary corporate citizen."
HEALTH CARE REFORM -- THE HAWAII EXPERIENCE
In an effort to assist with efforts to craft health care reform legislation, the Subcommittee provided information on a variety of issues that have been the subject of its investigations. As a result of the Subcommittee's long-term review of the Medicaid program and the aggressive actions of many states to address flaws in the existing system, many inquiries have focused on state initiatives.
With its revision of its Medicaid program, its creation of new public programs for low-income residents, and its health insurance reforms, Hawaii has acquired the closest thing to universal coverage in any state. Hawaii's apparent success has led many to contemplate such an approach as a model for national health care reform. The Subcommittee, therefore, requested during the First Session of the 103rd Congress, that the General Accounting Office (GAO) evaluate Hawaii's experience in providing access to health insurance and health services, the resulting effects on health care costs overall, and the effects of the system on small businesses and health care providers.
The GAO issued its report, Health Care in Hawaii: Implications for National Reform, to the Subcommittee in February 1994. At the outset, the GAO reported that Hawaii is unique in a number of ways. First, Hawaii has a twenty-year history, "as a leader in the effort to achieve universal access to health insurance." Second, "it is the only state that requires employers to provide health insurance for their employees." And third, "it has public programs to provide coverage to residents not insured through the employer mandate." Consequently, Hawaii's experience "might not be replicated throughout the country."
Nevertheless, the GAO also found that Hawaii has the highest level of insurance coverage of any state in the nation. Using 1991 figures, GAO reported that only 3.75 to 7.0 percent of Hawaii's residents lacked insurance -- compared to the 14 percent national average. There are several factors contributing to those figures. Hawaii's employer mandate is just one element. The state's Medicaid program is also more generous than many states regarding eligibility and covered benefits. Additionally, Hawaii created a program to provide health care coverage to the "gap group" of low-income residents in 1989 (the State Health Insurance Program or SHIP). This combination of features and the state's history of commitment to health care as a public policy priority apparently have been critical in enabling the state to move aggressively toward achieving universal coverage.
The GAO observed, however, that neither the employer mandate nor the multiple public programs guarantee coverage for everyone. Further, GAO found that Hawaii's health care costs had risen at the same rate as the rest of the country. Medicaid costs have escalated sharply as SHIP's outreach programs have identified new Medicaid-eligible residents. Indeed, the state experienced a $64 million shortfall in its Medicaid program in fiscal year 1992.
While these ramifications of Hawaii's reforms are problematic, it should also be noted that these programs have resulted in significantly increased access and fewer uninsureds. And while Hawaii's health care costs have not decreased, neither have they exceeded national trends. Hawaii's near-universal coverage has not bankrupted the state, nor its businesses. Hawaii insurance premiums, for example, are lower than those in other states and premiums have risen more slowly over the last decade than those in the rest of the country, according to the GAO. Most small businesses, moreover, "expressed general satisfaction with the Hawaii health insurance system." The GAO concluded that, "we found no evidence that the employer mandate resulted in large disruptions in Hawaii's small business sector." And while business leaders "disliked the inflexibility of the health insurance mandate," with respect to caps on employee contributions and mandated benefits, "the mandates have had little effect on employment practices."
For their part, Hawaii's providers told the GAO that they were "generally satisfied with Hawaii's health care system because the widespread insurance coverage has decreased the amount of uncompensated medical care."
The GAO concluded that the Hawaii experience offers a number of lessons. First, "Hawaii's experience indicates that an employer mandate by itself will not necessarily result in universal access to health care." Other publicly sponsored programs are necessary to reach residents who are not able to obtain health insurance at work or who are unemployed. Second, "Hawaii's system of near-universal access has resulted in lower health insurance premiums, particularly for small businesses." Health care costs, however, have kept pace with national averages.
As part of its general oversight of the Medicare program and that program's implementation by the Health Care Financing Administration (HCFA), the Subcommittee requested that the General Accounting Office (GAO) assess the effectiveness of claims review in controlling spending. The postpayment review performed by HCFA's contractors (the health insurance carriers) is HCFA's primary means for systematically identifying which providers are inappropriately billing the program and why the program spends so much for certain medical services. The GAO concluded in its April 1994 report, Medicare: Inadequate Review of Claims Payments Limits Ability to Control Spending, that both HCFA and its contractors have failed to adequately monitor providers' billing practices. These flaws are significant given the fact that Medicare Part B billing (physician, outpatient, and other health services such as diagnostic test and medical supply claims) accounted for $50.3 billion in 1992.
Specifically, the GAO found that, "HCFA does not pay enough attention to Medicare carriers' analyses of payments made and therefore misses opportunities to identify perhaps millions of dollars in excessive payments." The GAO also determined that, "carriers use inaccurate or incomplete data in compiling statistical reports profiling physicians and other providers; their focused reviews to identify irregular billing patterns and unusual spending trends suffer from HCFA's failure to specify appropriate analysis methods and outcome measures."
Perhaps most disturbing, the GAO concluded that, "shortcomings in carriers' claims review activities exist, in part, because HCFA lacks meaningful requirements for -- and the data needed to measure -- carriers' postpayment review performance. The failures on the part of HCFA and its contractors have too often led to taxpayers paying for unnecessary tests, overbilling, and outright fraud. The GAO recommended expanding guidance and technical assistance to improve carriers' data analysis methods; easing constraints on carriers' authority to act against abusive providers; establishing relevant measures of effective carrier performance; and using these measures to assess carriers' claims review performance.
The Subcommittee had planned to continue its oversight of how Medicare dollars are being spent, the efficacy of HCFA's existing programs to control spending and whether HCFA's Medicare contracting dollars are well spent in the carriers' postpayment efforts.
During the 103rd Congress, the Subcommittee: (1) monitored the activities of the Office of Research Integrity (ORI) at the Department of Health and Human Services (HHS) and ORI's own investigations of cases of alleged or suspected scientific misconduct; (2) monitored ORI's prosecution of cases before the HHS Appeals Board in which there had been a finding of scientific misconduct; and (3) continued its investigation of suspected governmental misconduct associated with the HIV blood test patent dispute and related matters. The Subcommittee also provided support to the full Committee in its work on measures to promote whistleblower protections and institutional responsibility in matters relating to scientific integrity.
First, during 1993, the Subcommittee monitored developments in several institutional investigations of alleged or suspected misconduct. One of the more significant is a case at Michigan State University, in which a graduate student was accused by her professor and laboratory chief of plagiarizing his work and of removing valuable data and reagents from his laboratory. Because of serious questions raised about the University's handling of the matter, ORI is reviewing the University's investigative report and the University's response to that report.
Another case which the Subcommittee has followed closely is the "Tufts/MIT" (Baltimore) investigation. ORI and its predecessor, OSI, have been dealing with this matter for a total of over four years. The final ORI investigative report, finding researcher Thereza Imanishi-Kari guilty of misconduct, was released in late 1994. It is expected to be heavily attacked by Imanishi-Kari's lawyers.
Second, during the Spring of 1993, a Scientific Integrity Panel of the HHS Appeals Board began hearing appeals from respondents in cases in which ORI had made a finding of scientific misconduct. As of November 1993, ORI had found scientific misconduct in a total of 22 cases. In 13 of these cases, the respondent chose not to pursue an appeal. Of the remaining nine cases, three were abandoned by the respondents before the Appeals Board hearings. However, in the remaining cases, there have been legal, procedural, and evidentiary rulings that are cause for concern about the appeals process. These rulings resulted in ORI's decision to withdraw continued prosecution before the Appeals Board of its finding of scientific misconduct against Dr. Robert C. Gallo. According to ORI, it made this decision because the board's rulings in previous cases "established a new definition of scientific misconduct as well as a new and extremely difficult standard of proving misconduct." ORI said these rulings "have made it extraordinarily hard for ORI to defend its legal determination of scientific misconduct regarding Dr. Gallo."
HHS plans several strategies to strengthen its entire effort to combat scientific misconduct, and these should be monitored.
Third, during 1993, the Subcommittee continued its investigation into the institutional response to the HIV blood test patent dispute. The Subcommittee has encountered significant delay at HHS and other agencies. Repeatedly, documents have been declared to be nonexistent only to appear later, after strong Subcommittee demands for production. Many of the documents produced belatedly were of substantial significance. Moreover, one key witness refused to cooperate. The Subcommittee subpoenaed the individual, Dr. Lowell T. Harmison, a former Deputy Assistant Secretary for Health at HHS. The Subcommittee heard Dr. Harmison's testimony in Executive Session on July 21, 1993. A report on the HIV blood test controversy is being drafted, but may not be completed in this Congress.
SCIENTIFIC FRAUD IN BREAST CANCER RESEARCH
In January 1994, the Subcommittee initiated an inquiry into the adequacy of the institutional response to a serious case of scientific fraud involving clinical research on breast cancer treatment. The institutions principally involved were the funding agency, the National Cancer Institute (NCI) of the National Institutes of Health (NIH); the grantee institution, the University of Pittsburgh; and the Office of Research Integrity (ORI), an office within the Public Health Service (PHS) of the Department of Health and Human Services.
The research at issue was coordinated by the National Surgical Adjuvant Breast and Bowel Project (NSABP), an international collaborative network based at the University of Pittsburgh. The NSABP had been funded by NCI for over two decades and was headed by a prominent breast cancer surgeon, Dr. Bernard Fisher. The original episode of scientific fraud, apparently perpetrated by Dr. Roger Poisson of St. Luc Hospital in Montreal, Canada, was discovered in the Spring of 1990; by late 1994, at least three additional episodes of suspected fraud in the conduct of breast cancer research were under formal investigation, all of them discovered subsequent to the initiation of the Subcommittee's review. In one of these cases, Dr. Fisher himself was the individual accused of scientific misconduct.
The Subcommittee held two hearings on breast cancer research fraud. The first hearing, on April 13, 1994, focused on the conduct of Federal agencies, particularly NCI, NIH, and ORI. The opening panel at this hearing included breast cancer victims and advocates, who gave eloquent testimony concerning their anger and alarm over the fact that they had been kept in the dark about the fraud for nearly four years. The second hearing, on June 15, 1994, focused on matters relating to Dr. Fisher and the University of Pittsburgh, and the apparent inadequacy of the efforts by the NCI and others to monitor them.
The Subcommittee hearings revealed that many institutional breakdowns had occurred in the four-year saga of the breast cancer research fraud:
The single bright spot in this entire matter was NCI's forthright, albeit belated, admission of its failings, and its commitment to reinvigorate its efforts responsibly to oversee NSABP and other clinical research. The response of Dr. Fisher and his supporters to the NCI's announced intent to improve operations consisted of shrill expressions of outrage, charges of interference and harassment, and calls for the resignation of the NCI's Director, Dr. Samuel Broder. The response of HHS officials was little better. Dr. Broder was given no visible support and, in fact, was cautioned by some officials that some of his actions had been extreme and unwarranted.
Developments in this case, including the outcome of the several pending investigations, and the ultimate fate of NCI's efforts at reform, should be watched. Also, follow through on the commitments of University of Pittsburgh officials to more effective, responsible oversight of their institution's research should be checked. The Subcommittee had planned further work on this matter.
NIH FUNDING OF AN ACELLULAR PERTUSSIS VACCINE
The Subcommittee continued its investigation into the circumstances surrounding the development of an acellular pertussis (whooping cough) vaccine by North American Vaccine, Inc. (formerly Selcore, Inc.). The National Institute of Child Health and Human Development's (NICHD) efforts to test, market, and receive Food and Drug Administration (FDA) approval for a vaccine invented by NICHD scientists have raised serious questions about the possible misuse of taxpayer money to start and fund a private company controlled by a former government employee.
Children have traditionally been vaccinated with a vaccine made of whole killed bacteria cells that stimulate the formation of antibodies against pertussis bacteria. However, pertussis whole cell vaccines contain a small amount of residual toxin (the agent that causes whooping cough) and have therefore occasionally elicited adverse reactions and side effects that range from uncontrollable crying to convulsions, encephalitis and, more rarely, death. (The incidence of these adverse reactions was sufficiently high that it led the Swedish government, in the late 1970s, to deem whole cell pertussis vaccines a public health hazard and discontinue their use.) Dr. Ronald Sekura, an NICHD scientist, developed a vaccine made from one part of the pertussis bacterium -- the pertussis toxin -- as opposed to the entire cell organism. Because the toxoid is permanently deactivated and does not reverse to a toxin, this "acellular" vaccine purportedly does not have the adverse side effects observed in whole cell vaccines.
Development of an acellular pertussis vaccine that is safer than existing whole cell vaccines has been a priority of public health officials for some time. NICHD's vaccine is considered in some quarters to be innovative, but the clinical trials are almost complete and the results will soon be known.
In order to begin field tests of the acellular pertussis vaccine, NICHD researchers needed an outside company to produce the vaccine on a large scale. In January 1987, while still an employee of NICHD, Dr. Sekura formed Selcore Laboratories, Inc. Dr. Sekura left his government job in the Spring of 1987 and immediately joined Selcore as Chief Scientific Officer.
In 1988, NICHD entered into a license agreement with Selcore, which underwent several corporate acquisitions and in September of 1988 became North American Vaccine. By the terms of the license agreement, Dr. Sekura's company was given the exclusive foreign patent rights to the vaccine invented by Dr. Sekura while he was on the government payroll. In return for rights to the vaccine, North American Vaccine agreed to pay license fees and royalties and to undertake commercial development of the product.
Information obtained by the Subcommittee indicates that NICHD officials may have improperly funded the company with government funds and in some cases lobbied investors to support the company for the sake of bringing to the market what they judged, without having at that time definitive scientific evidence, to be a superior vaccine. In 1988, NICHD issued a request-for-proposal for procurement of a batch of acellular pertussis toxoid (the raw material for the new vaccine) for clinical trials being sponsored by NICHD in Gothenberg, Sweden. With no competing bidders, North American Vaccine was granted a multi-million dollar contract.
This $14 million contract was granted by NICHD despite concerns that the company was a marginal operation, with no staff, and no real production facilities. (Indeed, information obtained by the Subcommittee indicates that the company would not have existed as a business entity without the NICHD contract.) The evidence also indicates that this contract may have been overpriced. Moreover, NICHD officials, particularly, Dr. Charles Lowe, an Associate Director for Special Projects, extolled the virtues of this vaccine in several meetings with potential investors in Dr. Sekura's company. Thus, the former NICHD employee and his coll