The Medicaid Scandal

Medicaid, the $14.7-billion-a-year program designed to provide free medical care for those who cannot afford to pay, has been a blessing to millions of Americans. But because of widespread cheating and skyrocketing costs, the system is fast becoming a national scandal. This week the Senate Subcommittee on Long-Term Medical Care is holding hearings in Washington on Medicaid fraud in clinical laboratories. Says Subcommittee Member Pete Domenici, a Republican from New Mexico: "The system is ripe for plucking. Medicaid ranks as one of the highest ripped-off federal programs."

One sample of the fraud is evident in Illinois, where the subcommittee staff estimates that one dollar out of every six spent by the Public Aid Department on health care is illegally siphoned off. Working with investigators from Chicago's Better Government Association, a citizens' watchdog agency, the subcommittee last December set up a clinic near ghetto areas on the city's North Side. To all appearances, the operation was indistinguishable from other "Medicaid mills" that have been hastily assembled to provide treatment for Chicago's poor and to collect payments from the federal and state governments. Posing as a doctor's representative and his assistant, the investigators sent out word to major medical laboratories that they were opening a business. With feverish haste, 13 labs approached the clinic, eleven with lucrative offers. If the doctor referred patients to them, they promised, he would get ample compensation. Among the inducements: they would give him 50% in kickbacks; they would give his private patients free tests; they would pay his secretary's salary, provide X-ray equipment and even include electrical and plumbing services. There was little, in short, they would not do to get their hands on Medicaid funds.

One-Way Mirror. When each lab representative showed up at the clinic to make his pitch, the conversation was jotted down by a secretary; some of the sessions were photographed through a one-way mirror. The material was turned over to the U.S. Justice Department for possible prosecution. Later investigation disclosed other kinds of fraud besides bribery. Some labs were in the habit of offering two sets of prices for tests, one for private patients and a higher one for Medicaid recipients. An examination of 20,000 laboratory billings showed that the median overcharge for Medicaid patients was 116%.

Unnecessary tests were commonplace. Often the tests were not even performed. TIME learned that bills were submitted for menstrual and pregnancy tests for male patients; Medicaid was billed for sickle cell anemia tests for whites, though the disease mainly afflicts blacks. Altogether, the eleven labs under investigation collected a total of $6,978,213 in Medicaid money from all their operations last year. Almost a quarter of this amount was estimated to be fraudulent.

But the get-rich-quick schemes could not have succeeded without the cooperation of venal clinic owners, many of them nonphysicians. The favorite ploy was to disguise the kickbacks as rent; that is, the clinic owners would sublease their office space to the labs--which often did not use it. The more patients the doctor sent to the labs, the more rent he would collect. One lab representative told a disguised investigator: "If the volume goes up ten times, rent could go up ten times." A clinic could collect $1,000 a month by renting a cubbyhole containing only a chair. TIME Correspondent Richard Woodbury visited a physician who paid $300 a month rent for his office space, yet he received $2,000 a month in rent for its "use" from a laboratory and a pharmacy. He professed to be untroubled by the arrangement. "I talked to my lawyer," he said, "and he sees nothing wrong."

The scandal has reached epidemic proportions because so many medical people seem unconcerned about breaking the law. Until recently, the cheaters had little chance of being caught. There were not enough investigators and auditors, and trails of wrongdoing are all too easily lost in the bureaucratic maze of Medicaid.

But now prosecutors are reacting to public and congressional pressure and are starting to do their job. In Illinois last month, five owners of a Chicago drug company and four owners of suburban nursing homes were indicted under a new federal fraud law; the druggists were charged with paying more than $7,000 in kickbacks and bribes to the nursing homes in exchange for exclusive contracts to supply drugs to Medicaid patients. A Cook County grand jury is investigating a dozen major pharmacies for padding prescription bills. Under fire for slack administration of Medicaid, the Illinois Public Aid Department has recently suspended four labs and five doctors from the program. A team of department investigators and auditors have turned up $3.4 million in Medicaid overpayments and recovered $821,000.

Still, effective policing of Medicaid cannot be achieved without help from Washington. In a report issued this week, subcommittee investigators urge that states be required to license laboratory owners and operators. They suggest that the same billing form be used by a doctor ordering a test and the lab performing it. In this way, the lab would not be able to inflate the bill.

Subcommittee Chairman Senator Frank Moss, a Democrat from Utah, agrees that these and other measures are urgently needed. Says he: "This is a horrible commentary on our medical delivery system. If this many weaknesses show up in Medicaid, the rip-off will be infinitely larger with national health insurance."

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