getting in and getting disenchanted for some reason, and then getting out.

But to get back to your basic question, clearly, there will be another whole set of incentives, as Professor Bucy said, when you have a capitation-type set-up. Actually, the temptation could be even greater, because in a provider's case, when they provide an individual service, they might get a certain amount of money for providing an office visit or whatever, but in an HMO, it is so competitive to try to get as many beneficiaries as possible, because for each one you get, you get several hundred dollars from HCFA to cover all the care of that particular beneficiary, and if you do not do a very good job, then you could make a lot of money every month on having these people enrolled.

We have done a lot of work, and I think it is way too complex at this point or at this time in the hearing to talk about it at length, but we would be happy to come and talk to you later, about looking at resetting the proper payment rate for HMOs. Right now, we believe they are receiving too high a capitation rate, and the formula that HCFA uses to try to decide or figure out how much to pay HMOs is too high in terms of what we think the elements of the formula should be; so that needs to be adjusted.

There is definitely a strong incentive to underserve. It would extend to individual physicians who take on some of the risk, who would be paid by the HMO to take on some of the risk and serve a patient. So patients are very vulnerable under this system, and there need to be very strong protections, quality assurance systems that need to be looked at, not just on paper, but actually, people need to go out into the field and make sure that the quality assurance systems and also the process by which people could appeal a denial of coverage or other types of complaints-all those types of issues certainly need to be investigated much more closely, especially when you have information that is occurring.

So there are tremendous vulnerabilities in this approach, and they have got to be dealt with.

The last thing I want to say is that very often, the marketing abuses that we find really come when beneficiaries have no basis to make a selection about what HMO to get into. And right now, HCFA collects a lot of information that would be extraordinarily helpful to a beneficiary to decide what plan to go into.

On this chart, if you wanted to choose a plan just based on this one piece of information in 1995, I think you would probably want to choose one of those with a lower disenrollment rate, just because, without even knowing why, you would think maybe it is a little safer because fewer people are leaving.

So it is those kinds of questions that I think HCFA needs to be more aggressive in helping the beneficiaries work out.

Senator COLLINS. Thank you very much.

I want to thank you both for your testimony and cooperation. We look forward to working with you further on this important issue. Ms. BUCY. Thank you.

Ms. ARONOVITZ. Thank you.

Senator COLLINS. Our final witness today is Bruce Vladeck, Administrator of the Health Care Financing Administration, or HCFA, which is the agency charged with managing the Medicare

program. Since his appointment by the President in 1993, Mr. Vladeck has been responsible for the delivery of health care services to 70 million Americans who are served by the Medicare and Medicaid programs.

We very much appreciate your being here today. I know it took considerable juggling of your schedule, and we appreciate your efforts.

Pursuant to Rule 6, requiring all witnesses who testify before the Subcommittee are required to be sworn, I would ask that you please stand and raise your right hand.

Do you swear that the testimony that you are about to give to the Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you, God?

Mr. VLADECK. I do.

Senator COLLINS. Thank you.

If you would proceed, we would ask that you attempt to limit your oral testimony to 10 minutes.

TESTIMONY OF BRUCE C. VLADECK,1 ADMINISTRATOR, HEALTH CARE FINANCING ADMINISTRATION, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

Mr. VLADECK. Thank you very much, Madam Chairwoman and Senator Glenn. I am pleased to be here to have the opportunity to talk about our efforts to fight fraud, waste and abuse in Medicare and Medicaid. We have a prepared statement, and I will, in keeping with your suggestion and the other scheduling difficulties we have had today, to try to keep my opening remarks quite brief.

We understand how important it is to our programs and to our beneficiaries that we do everything that we can to ensure the integrity of the program, to make sure that every Medicare and Medicaid dollar is well-spent, and that goals of efficiency and cost-effectiveness do not compromise the quality of health care.

It is also important to emphasize that remedying a very significant and pervasive set of problems that have grown up over a period of years and suffered from years of neglect is necessarily a process that takes time and requires a stepwise set of changes. When I arrived as HCFA's administrator at the beginning of this administration, there was not a single senior official at the Health Care Financing Administration whose full-time job was program integrity activities. Many of the issues that have been identified by earlier witnesses today obviously involve matters that have gone back for quite a number of years.

Since 1993, we have taken a number of new and aggressive steps regarding HCFA's internal organization, the way in which we conduct business, and work with our partners in the Office of the Inspector General, the FBI, the Department of Justice, and the States. Operation Restore Trust, which began in 1995, became the focus for a lot of our experimentation with development of new techniques and new approaches to detecting, combatting and prosecuting fraud and abuse against the programs. We learned a lot in that process. The provisions related to fraud and abuse in the HIPAA, previously the Kennedy-Kassebaum legislation, were large

1 The prepared statement of Mr. Vladeck appears on page 154.

ly the result of proposals that we had been making for several years. These fraud and abuse provisions provide us with very important tools and, perhaps most importantly, with new resources in which to pursue some of the problems, which we have identified. In two sets of legislation this year, the President's budget bill and his supplementary anti-fraud and abuse legislation which he announced in March, proposed a number of other specific policy changes growing out of our experience of the last several years. We believe that the President's proposals will contribute importantly to our continuing anti-fraud efforts. We are delighted that, as the reconciliation process has proceeded in both chambers a large proportion of the administration's recommendations and proposals have indeed been incorporated into the legislation, passed by the House and Senate.

Just a few other observations, if I could make them very quickly. The first is that our underlying philosophy relative to fraud and abuse in Medicare and Medicaid should ensure that we need to do as much prevention as possible. This prevention philosophy is also applicable to health care generally. We have to prevent problems from arising, rather than retrospectively engaging in what we have come to call "pay and chase" after the fact when problems emerge.

There are two major components to a philosophy of paying right the first time. The first is identifying policies or problems that are inherently subject to abuse or inherently awkward in a variety of ways. Previous witnesses have suggested a number of examples. The second component involves changing the policy to achieve a number of objectives, such as reducing opportunities for certain kinds of fraud and abuse.

Therefore, this year's legislative proposals involving prospective payment skilled nursing facilities under Medicare require consolidated billing for all ancillary and other professional services rendered to nursing home residents. When implemented, the prospective payment provisions will eliminate a major area that has been identified by the Inspector General as an area of fraud and abuse. This was a subject of the GAO's testimony. Prospective payment for home health care will change very dramatically the issues involved with program integrity.

Similarly, we need the tools, such as competitive bidding for durable medical equipment and other Part B services to drive out the excess profits built into the pricing structures in many parts of the Medicare program which make those services particularly attractive for people whose motives are less than entirely pure. We are delighted that the Senate reconciliation legislation grants HCFA the authority, which we have sought for many years, to use the mechanism of competitive bidding as a way of setting prices for Part B services rather than requiring HCFA to continue to follow very cumbersome payment determination methods that are currently established in statute in excruciating detail.

Finally, I wish to emphasize the administration-wide commitment to anti-fraud efforts. While it may seem to most to be a common sensical approach, how significant a change it has been in the last 3 or 4 years, as one of the previous witnesses suggested,_to find an Administration-wide commitment in anti-fraud efforts. For instance, the Attorney General, the Director of the FBI, the Sec

retary of Health and Human Services, and the Inspector General of the Department of Health and Human Services, and the Inspectors General of a number of other agencies with important health care responsibilities, such as the Office of Personnel Management and the Department of Veterans Affairs, have come together on a regular basis to have a single administration-wide steering Committee on efforts to combat health care fraud and abuse. These entities are sharing a common database about investigations for the first time in history, are exchanging detailed investigative information for the first time, and the benefits of such cooperation have already begun to emerge in identifiable cases, prosecutions, convictions, and exclusions of fraudulent individuals from the program all across the country.

Cooperation among Federal entitles was strengthened by the language in the Kennedy-Kassebaum legislation. This cooperative structure was put into place recently, and we believe that it is going to pay significant dividends in years to come.

That is a very brief summary of much material, and I am obviously happy to answer any questions that you might have about any of these issues, and again, I appreciate the opportunity to be with you today.

Senator COLLINS. Thank you very much.

One of my major concerns, which I know Senator Glenn shares from a conversation we just had, is that the amount of improper Medicare payments are not going in the right direction. They seem to be going up with each new report that we get from the GAO or the IG's office. We now have the latest report, which suggests that improper payments may be as high as 17 percent, annually. The mid range estimate is 14 percent. First, let me ask you whether you agree that the problem is getting worse, and if you do not agree, how do you account for the findings of the GAO and IG?

Mr. VLADECK. I do not agree that the problem is getting worse. I think we do have some evidence that it is getting less bad-I will not say "better," but that it is getting less bad. The study you cite, which was reported in The Wall Street Journal and which will be made public in the next month or 6 weeks represents the first ever statistically valid national sample audit of Medicare claims payment. There is no comparable data available historically with which to compare those findings.

All of the other numbers that have been cited before, involving the numbers estimated and the documents from which the figures originate, are recognized to be much rougher estimates based on much less systematic and much less complete data. Therefore, the estimates that will be contained in the Inspector General's audit of HCFA's fiscal year 1996 financial statement is the first time a nationally replicable, statistically valid estimate on Medicare claims has ever been conducted.

Senator COLLINS. I guess I am not comforted by that fact in that this new estimate of fraud is higher than the estimates described in previous studies. This is the first study that shows an improper payment rate of approximately 14 percent. We have a $23 billion problem on our hands.

Mr. VLADECK. We have a very considerable problem. However, consideration of other indicators of changes over time, involving

categories of billings for the Medicare program where HCFA has been most concerned about fraud and abuse and has focused its investigative and other efforts over the last 2 or 3 years, we have found in the last 18 months or so, a significant reduction in the rate of growth of payments for durable medical equipment in Medicare. We would be happy to share the specifics of these findings with the Committee. There has been an actual reduction from 1 year to the next in the dollar volume of laboratory claims which HCFA has paid in certain parts of the country. There has also occurred a significant flattening in the growth of home health care claims. We are seeing changes in the trend line in these areas and jurisdictions in which HCFA has concentrated its investigative and prosecutorial resources. This is why we are seeking to expand these efforts performed over the last 2 or 3 years.

Senator COLLINS. You mentioned durable medical equipment and that you are seeing some progress in that area. I do not know whether you were here earlier when some of the witnesses were doing comparisons of the amount that the Veterans Administration was spending for the same items and citing competitive bidding as the reason for the difference. Has HCFA actually been precluded from using competitive bidding? I understand the reconciliation bill permits you to do so, but in the past have there been legal obstacles to your using competitive bidding to help control the costs of commonly available items?

Mr. VLADECK. Let me be very careful about this because this is very important, and the answer is that except for the possible application of HCFA's demonstration authority on an experimental and trial basis, we have not legally been permitted to use competitive bidding for setting prices for durable medical equipment. The one time in the past in which HCFA publicly announced its intention to conduct a demonstration of competitive pricing for durable medical equipment, we were specifically forbidden by the Congress from proceeding with that demonstration.

Senator COLLINS. From your answer, can I assume, now that Congress is giving you a green light, that you will aggressively pursue competitive bidding in this area?

Mr. VLADECK. Aggressively.

Senator COLLINS. Let me ask you a question about the automated information systems that are being used to process Medicare claims. It is my understanding that HCFA now is in the process of replacing those systems with a single, unified system which is referred to as the Medicare Transaction Systems. GAO, as I am sure you know, issued a report last month which concluded that the success of implementing the Medicare transaction system depends upon HCFA correcting very fundamental managerial and technical weaknesses in the program, and one area that I found particularly troubling was the cost growth in this project.

I know that all of us who have tried to implement new computer systems find that it frequently costs more than we think, but in this case, the estimated cost had increased, I am told, from $151 million to $1 billion. That is a 600 percent increase in 5 years. Could you explain the significant growth in the cost estimate and also give us some update or assurances that these problems are under control, because clearly, if we cannot get an automated sys