Extent and Persistence of Medicaid
Prescription Drug Diversion

option. By this time, claims are old-sometimes beyond the statute of limitations and providers have had ample time to disperse their remaining assets. Officials cited lack of resources, other priorities, and uncertainty of successful outcome as reasons for not invoking the penalty laws.

States have introduced approaches aimed at reducing losses due to
Medicaid fraud. (App. IV lists the major initiatives of the states visited.)
Highlights include

prevention and enhanced detection through advanced identification
technology and automated systems that flag suspicious activity
immediately;

bypassing the criminal pursuit process through innovative administrative
remedies such as Florida's guidelines and sanctions matrix, now embodied
in state law, or streamlining it through interagency task forces that strive
to expedite investigations involving several agencies; and
stronger tools for collecting losses, such as requiring certain high-volume
providers to post performance bonds or other forms of financial security.

New York has introduced a combination of prevention and early detection controls. The state's Department of Social Services correlates the implementation of these controls with an 8-percent decrease in the number of Medicaid prescription claims during the past 5 years and a sharp reduction in spending for the most abused drugs. These innovations include the following:

• Electronic Medicaid Eligibility Verification System: Under this
credit-card-type system, Medicaid recipients have an electronically coded
card that lets the Medicaid agency track receipt of each covered service or
prescription at the time of service. Within 24 hours, system-generated
reports indicate how many recipients a particular provider has seen, what
services were provided, and what was ordered for the recipients. Although
HHS has encouraged all states to implement electronic point-of-service

Extent and Persistence of Medicaid
Prescription Drug Diversion

Facilitating Criminal and
Disciplinary Actions

(POS) claims management systems for prescription drug claims,21 New York is one of the few states where such a system is operational.22

• Utilization thresholds: New York has caps, or thresholds, on the use of prescription drugs and Medicaid services that work in combination with the electronic verification system. If the system shows that a Medicaid recipient has already reached a yearly service utilization threshold, the provider can assure payment only by first obtaining a waiver from the Medicaid state agency to provide the service.

• Post and clear: As an adjunct to the electronic verification system, New York also uses "post and clear" for certain providers. When physicians order medication for a patient on a prescription form, they must also electronically "post" an order in the system that is subsequently “cleared” by the pharmacy rendering the service. The system thus prevents the prescribing physician from disclaiming responsibility and detects any attempt by the pharmacist to bill Medicaid for more prescriptions than the physician ordered.

To expedite final case resolution, states have sought ways to reduce procedural delays. New York has recently mandated tight time frames for initiating and completing disciplinary actions by the states' professional licensing authorities, which have the power to suspend or revoke a provider's license to practice. In a similar vein, the HHS Inspector General recently agreed to exclude New York state providers convicted of Medicaid fraud from Medicare upon receipt of a sworn affidavit of adjudication from the MFCU, instead of―as previously-waiting for official court documents.

In addition, states are finding ways to avoid lengthy and costly trials.23
Several states are making greater use of negotiation involving all
interested parties, to reach what are termed "global" settlements. As an
alternative approach, New York has established Medicaid provider
agreements (which the state regards as contracts) for pharmacists that can
be terminated by either party without cause. Such contractual

21 The establishment of drug utilization review (DUR) systems is required under the Omnibus Budget
Reconciliation Act of 1990 (OBRA 1990-P.L.101-508). Its primary purpose was to improve the
monitoring of pharmacological treatments, rather than fraud control.

22 Officials in Florida told us they were in the process of implementing an on-line POS system.
According to a May 1992 HHS report, New York and Massachusetts were the only states with such a
system in 1991, and only 10 states had definite plans to introduce one. However, the report noted in an
epilogue that all major suppliers of Medicaid management information systems were now developing
POS technology, meaning that POS systems will likely find increasing use in the Medicaid program.
*This approach entails making trade-offs between harsher sanctions and faster resolution of cases.

Extent and Persistence of Medicaid
Prescription Drug Diversion

arrangements preclude the need for prosecution to discipline malfeasant providers.24

Some states have also participated in efforts that focus on interagency coordination to help disable organized networks. In Operation Goldpill, the FBI worked with the federal Food and Drug Administration, Drug Enforcement Administration (DEA), HHS Inspector General, and Postal Inspection Service; with state MFCUS, police units, attorney generals' offices, and licensing boards; and with private insurers and the pharmaceutical industry. In just one of Operation Goldpill's many fraud cases, agents seized $1.9 million in cash, representing the proceeds of a pharmacist's fraudulent Medicaid billings.

Continuing this emphasis on health care fraud, the Department of Justice is encouraging states to set up cooperative working groups. Florida and other states have established multiagency task forces to coordinate the investigative procedures of the various agencies involved. Some task forces work to streamline the investigative process by arranging for agencies to make decisions and actions concurrently that would otherwise take place sequentially. Others jointly develop fraud cases.

holding persons ordering or prescribing excessive or medically unnecessary medical care or services responsible for their orders-New York State's Department of Social Services investigates and, if appropriate, takes administrative action to recover overpayments under this provision

24 New York has used this authority against various providers, including pharmacies, and been upheld in court. Texas has a similar termination provision, but has never used it. HCFA prepared a model statute along these lines, but the states' reception was mixed.

25 Joseph L. Ford, “Investigating a National Problem Through a Global Strategy," Federal Bar News and Journal, Vol. 40, No.1, (January 1993), pp. 66-69.

Appendix I

Extent and Persistence of Medicaid
Prescription Drug Diversion

requiring enrollment and closer monitoring of physicians' assistants, who, in some instances, are providing patients with previously signed prescription forms; and

requiring expanded ownership information as a condition of provider enrollment and comparing it to state business filings; information from these records can reveal connections between Medicaid facilities and physicians not otherwise evident.

To help collect overpayments, fines, and other financial penalties, states
have developed several recovery initiatives. New York requires
high-volume Medicaid pharmacies to post performance bonds or other
financial security to improve the state's chances of recovering losses if
fraud is detected. New Jersey permits freezing of a provider's bank
account or other assets under certain circumstances. Texas also has the
power to freeze and seize assets, and the MFCU is currently exploring its
application in cases of Medicaid fraud. According to investigators and
state officials, drugs are often diverted by individuals able to move assets
out of the country, and therefore states need the ability to identify and
freeze assets before they are hidden or otherwise protected from seizure.

Appendix V discusses federal initiatives that support or enhance state efforts to control Medicaid drug diversion.

26 The regulation specifically assigns joint and separate liability to the person furnishing such services, the person under whose supervision they were furnished, and the person causing them to be furnished.

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GAO/HRD-93-118 Medicaid Drug Fraud

Appendix II

Objectives, Scope, and Methodology

We performed this study at the request of Congressman Rangel in his former capacity as the Chairman of the House Select Committee on Narcotics Abuse and Control; and of Congressman Towns, Chairman, Subcommittee on Human Resources and Intergovernmental Relations, House Committee on Government Operations. Our objectives were to explore (1) the nature and extent of Medicaid drug diversion, particularly pill mills; (2) the reasons such activities persist; and (3) actions being taken to curb such abuse.

To determine how many states experienced such diversion, we conducted a telephone survey of the 42 MFCUS, located in 41 states and the District of Columbia. We then focused our efforts on the four most populous states whose MFCU Directors reported a significant pill mill problem: California, Florida, New York, and Texas. We interviewed officials from the state Medicaid agencies, MFCUS, state licensing authorities, and the appropriate HHS regional offices. We also met with representatives of the Department of Justice, the HHS Office of the Inspector General, HCFA, and the National Association of State Attorneys General.

Each year, U.S. pharmacies dispense more than 1.5 billion prescriptions. The majority of these are legitimately obtained and consumed. Others, however, are diverted-channeled away from legitimate supply routes for an inappropriate or illegal purpose. According to the DEA, the greatest diversion occurs at the level of the pharmacy or prescribing physician. Our study focused on this level.

Diversion occurs in several ways, including (1) illegal sales by physicians
or pharmacies; (2) procurement of prescriptions by individuals from
multiple physicians under the pretext of legitimate medical need;
(3) indiscriminate, inappropriate, or careless prescribing by a physician or
dispensing pharmacist; (4) prescription forgeries; and (5) theft of drugs
from a physician's office or pharmacy. We focused our review on cases of
systematic abuse involving collusion between at least two of the parties:
physicians, patients, and pharmacists.1

We obtained MFCUS' records of Medicaid drug diversion cases adjudicated during 1991 to review their outcomes and the time taken to achieve resolution. In states where this resulted in very few cases, we expanded our time frame to include 1990. We deliberately did not focus on more recent cases to allow time for completion of other actions, such as exclusion from Medicaid and Medicare, license suspension or revocation,

'Other individuals may also be involved, for example, as financial backers or as "middlemen."