Objectives, Scope, and Methodology

and the imposition of civil administrative penalties. Although we did not verify case records independently, we discussed individual cases with each of the agencies involved and resolved any inconsistencies.

State MFCU officials selected these cases because they involved drug diversion. The actual charges sometimes differed. It is difficult to isolate such cases, and state laws differ on what constitutes drug diversion. We rejected some cases suggested by MFCU officials for inclusion (for example, when drugs were obtained by an addicted health professional solely for his or her own use) but did not review their complete case files in search of others. Thus, it is likely that we achieved neither a complete set of related cases nor strict comparability among the states. Nevertheless, we believed-and state officials concurred-that analysis of these cases could provide broadly representative information about the process and outcome of drug diversion investigations.

We conducted our own investigation to assess whether cases pursued individually were likely to have involved multiprovider collusion. Because ownership and employee data were more readily available for labs than for pharmacies and because abusive clinical labs are typically involved in more complex pill mill operations, we focused on information about these labs.

From New York's Medicaid agency and HCFA, we obtained information that allowed us to compile a list of "suspect labs": medical labs that were excluded or voluntarily withdrew from the Medicaid or Medicare programs because they engaged in prohibited practices. To identify personnel-owners or employees-common to several of these labs, we reviewed HCFA records. We matched the list of common personnel with Department of Treasury and BCCI records of financial off-shore transfers.

The Medicaid agency provided profiles-based on filed claims-of high-volume recipients of services through several of the suspect labs. We compared these profiles to see if the suspect labs shared a common pool of such recipients and to identify possible duplication of lab tests and prescriptions.

We performed our field work in accordance with generally accepted government auditing standards between December 1991 and December 1992. The requesters asked us not to obtain written agency comments on this report because of time constraints, but we did show a

Objectives, Scope, and Methodology

draft to HCFA officials. We also obtained comments on relevant sections of the draft from officials in the four states on which we focused.

Economic Incentives to Divert Drugs

The economic incentives for diverting drugs are substantial and apply to a
wide range of medications. Pharmaceuticals prescribed for medical
use-commonly termed prescription drugs-fall into two broad groupings:
controlled and noncontrolled. The Controlled Substances Act divides
those drugs known to have the potential for physical or psychological
harm into five categories or schedules based on their potential for abuse,
accepted medical use, and accepted safety under medical supervision.
Schedule I controlled substances such as heroin-have no accepted
medical use in the United States and are not available to the public
through legal channels. Schedules II through V contain drugs with
accepted medical uses but some abuse potential. Schedule II are the most
dangerous, Schedule V the least.

Legal, controlled drugs make an appealing target for diversion: they are relatively cheap and chemically pure compared to illicit drugs. The economic incentives for diversion of controlled substances are evident from table III.1: profits from street sales can amount to several thousand percent of initial investment. According to DEA, the street value of controlled substances intentionally diverted for resale to facilitate illegal drug activity is $25 billion a year.

The Controlled Substances Act does not cover some prescription drugs
because they are deemed to lack a potential for harm. Nevertheless, these
noncontrolled substances have recently become popular targets for
diversion because they are comparatively easier to obtain and are
particularly attractive if obtained under an insurance program-such as
Medicaid requiring no copayment.' In this case, the recipient's outlay is
zero, so the price paid on the street, while typically much lower than the
pharmacy price-and thus attractive to buyers-is pure profit to the
sellers. DEA estimates that 36.5 million Medicaid prescriptions were abused
in 1989, for a street value of $8.7 billion. Table III.2 shows typical cost
patterns for noncontrolled substances in New York.

'In some states, the Medicaid program may require a nominal copayment.