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Medicare Fraud: A $60 Billion Crime

The $60 Billion Fraud 14:09

Of all the problems facing the United States right now, none are more important than health care.

President Obama says rising costs are driving huge federal budget deficits that imperil our future, and that there is enough waste and fraud in the system to pay for health care reform if it was eliminated.

At the center of both issues is Medicare, the government insurance program that provides health care to 46 million elderly and disabled Americans. But it also provides a rich and steady income stream for criminals who are constantly finding new ways to steal a sizable chunk of the half trillion dollars that are paid out each year in Medicare benefits.

In fact, Medicare fraud - estimated now to total about $60 billion a year - has become one of, if not the most profitable, crimes in America.

This story may raise your blood pressure, along with some troubling questions about our government's ability to manage a medical bureaucracy.

If you want to find Medicare fraud, the first place you should look is South Florida, where 60 Minutes and correspondent Steve Kroft were told it has pushed aside cocaine as the major criminal enterprise.

It's a quiet crime - there are no sirens or gunfire. The only victims are the American taxpayers, and they don't even know they are being ripped off.

FBI Special Agent Brian Waterman, who 60 Minutes rode with for several days, told us the only visible evidence of the crimes are the thousands of tiny clinics and pharmacies that dot the low-rent strip malls.

You don't even know they're there because there's never anyone inside. No doctors, no nurses and no patients.

"This office number should be manned and answered 24 hours a day," Waterman explained, standing outside one of those small, unstaffed businesses.

The tiny medical supply company billed Medicare almost $2 million in July and a half million dollars while 60 Minutes was there in August, but we never found anybody inside, and our phone calls were never returned.

Sometimes, they don't even have offices: we went looking for a pharmacy at 7511 NW. 73rd Street that billed Medicare $300,000 in charges. It turned out to be in the middle of a public warehouse storage area.

"They've already told us that there's no offices here," Waterman told Kroft. "There are no businesses here. In fact they are not even allowed to have a business here."

Waterman is the senior agent in the Miami office in charge of Medicare fraud. And Kirk Ogrosky, a top Justice Department prosecutor, oversees half a dozen Medicare fraud strike forces that have been set up across the country.

The office Kroft visited operates out of a warehouse at a secret location in South Florida and includes investigators from the FBI, Health and Human Services, and the IRS.

"There's a healthcare fraud industry where people do nothing but recruit patients, get patient lists, find doctors, look on the Internet, find different scams. There are entire groups and entire organizations of people that are dedicated to nothing but committing fraud, finding a better way to steal from Medicare," Waterman explained.

"Is the Medicare fraud business bigger than the drug business in Miami now?" Kroft asked.

"I think it's way bigger," Ogrosky said.

Asked what changed, Ogrosky told Kroft, "The criminals changed."

"Sophistication," Waterman added.

"They've figured out that rather than stealing $100,000 or $200,000, they can steal $100 million. We have seen cases in the last six, eight months that involve a couple of guys that if they weren't stealing from Medicare might be stealing your car," Ogrosky explained.

"You know, we were the king of the drugs in the '80s. We're king of healthcare fraud in the '90s and the 2000's," Waterman added, speaking about South Florida.

But it's not just Miami: in March, the FBI arrested 53 people in Detroit, including a number of doctors, and charged them with billing Medicare more than $50 million for unnecessary medical procedures.

And in Los Angeles, the City of Angels Medical Center recruited homeless people off the street to fill their empty beds, offering them cash and drugs plus clean sheets and three square meals a day, while billing Medicare tens of millions of dollars for their stay.

"We have to understand this is a major fraud area," United States Attorney General Eric Holder told Kroft.

Holder is taking a crime that has been in the backwaters of law enforcement and made it a top priority at the Justice Department.

"Why do you think it's been so attractive for the criminals?" Kroft asked.

"Because I think it's been pretty easy. I think that they have found a way in which they have been able to get pretty substantial amounts of money with not a huge amount of effort and at least until now, without the possibility of great detection," Holder explained.

The attorney general agreed that the risks are much lower. "You'll see some of these people and they'll say 'You know there is not a chance that you are going to have some other drug dealer shooting at you.' The chances of being incarcerated were lower, the amount of time you would spend in jail was smaller. All of which is different now."

"You're wakin' up every day makin' $20,000, $30,000, $40,000. Every day, almost literally. And you're like 'Wow I just won the lottery,'" a man we'll call "Tony" told Kroft.

Tony is not his real name. Before he was ratted out by a friend and brought down by the FBI, he was making Wall Street money running a string of phony medical supply companies out of a building that were theoretically providing wheel chairs and other expensive equipment to Medicare patients.

He told Kroft he stole about $20 million from Medicare. He told Kroft it was "real easy."

"And you're not exactly a criminal mastermind?" Kroft asked.

"No. No," Tony said. "No, not really. It's more like common sense."

Asked if he actually ever sold any medical equipment, Tony said, "No. Just have somebody in an office answering the phone, like we're open for business. And wake up in the morning, see how much, check your bank account and see how much money you made today."

He told Kroft he didn't have any medical equipment or real clients - all of it was fake.

"And you would just fill out some invoices and some forms and send 'em to Medicare?" Kroft asked.

"That's it. In 15 to 30 days you'll have a direct deposit in your bank account. I mean it was ridiculous. It's more like taking candy from a baby," Tony said.

According to the FBI, all you have to do to get into this business is rent a cheap storefront office, find or create a front man to get an occupational license, bribe a doctor or forge a prescription pad, and obtain the names and ID numbers of legitimate Medicare patients you can bill the phony charges to.

"There's a whole industry of people out there that do nothing but provide patients," Waterman told Kroft.

Asked what he means by "provide patients," Waterman said, "I'm just talking about lists of patients, people's names, Social Security numbers, addresses, and date of birth. With those four things, you can bill for a patient."

Asked where Tony got his fictitious customers, he told Kroft, "They'll be people that would sell you a list of maybe $10 per patient. And I'll buy 1,000, 10,000 maybe at a time. And then you just fill in the patient's name and you send it. And then I used the same patients with the same company and then the next company I used the same patients and I kept using them, and they'll pay for the same patient every time."

Once the crooked companies get hold of the patient lists, usually stolen from doctors' offices or hospitals, they begin running up all sorts of outlandish charges and submit them to Medicare for payment, knowing full well that the agency is required by law to pay the claims within 15 to 30 days, and that it has only enough auditors to check a tiny fraction of the charges to see if they are legitimate.

If they're not, it's usually people like 76-year-old Clara Mahoney who catch them.

She began to notice all sorts of crazy things turning up on her quarterly Medicare statements back in 2003 - things that Medicare paid for on her behalf that she had never ordered, never wanted and never received.

"Air mattresses, a wheel chair, urine bag for my leg," Mahoney said, listing some of the unwanted items Medicare was charged for on her behalf. "It was getting so I didn't wanna open up the explanation of benefits because you know, it's like, 'Oh, no. Not again.'"

Mahoney, who says she hasn't been sick in 30 years, began calling Medicare to tell them that someone was ripping them off. But the only responses she received were letters saying that someone was looking into it. The bogus charges are still turning up on her statements.

"And I continued to report and I kept saying, 'Can't you flag my account? You know, I'm not getting any equipment or supplies. Nothing,'" she told Kroft.

They have been "looking" into Mahoney's issue for six years.

Once criminals like Tony get their hands on usable patient numbers, they try and charge Medicare for the most expensive equipment possible, which requires having access to a list of Medicare codes.

Asked what some of the best codes were, Tony told Kroft, "Artificial limbs, electric arms, electric wheelchairs. I mean, a regular patient, you can put them on two artificial legs and an artificial arm and they'll pay for it."

And that's what happened to former Federal Judge Ed Davis. He was one of those patients who started getting charges on his Medicare statement for artificial limbs.

"And I looked at it and it had charges for prosthesis. And I knew I had my arms," Judge Davis explained.

Though he has two healthy arms, his statement showed Medicare had been billed for a left and a right arm.

"Didn't anybody in Medicare check to see if any of these charges were valid?" Kroft asked Tony.

"Sometimes they'll do it. But by the time they did it, it was too late," Tony said. "We've already made $300,000, $400,000, $500,000 on it. And then we will never send 'em nothing back. And then at 30 days they'll send an inspector to your office. And by that time…it's all closed down."

They would pay first and send an auditor later.

"There's somethin' I don't understand. I mean, you're saying essentially people just fill out the phony paperwork, they send a bill to Medicare and they pay it," Kroft remarked to Brian Waterman.

"That's why you have companies that can run for 60, 90 days, and bill for ridiculous things. Because there are very few checks and balances to even determine whether these things a, were medically necessary, b, were ever given, or c, even physically possible for a patient with the kind of conditions they have," Waterman explained.

The FBI calls it "pay and chase." And riding around with them we saw plenty of examples. One tiny pharmacy in a Hialeah strip mall went from billing Medicare $13,000 in May to billing nearly a million dollars a month later.

The small, now shut-down office billed $800,000 in the month if June.

By the time we were there in August, the FBI says the owners had already burned the company, shut it down and moved on to another operation.

"We were here last week. There was stuff on the shelves. The business still had a name on it. You can still see from where the tape is that someone just took this off," Waterman told Kroft, standing outside the empty storefront.

To understand just how preposterous all of this is, the FBI says the tiny little store collected six times more money from Medicare in June than the largest Walgreen Pharmacy in the state of Florida.

It's quite an achievement, since neither the FBI nor the proprietor of the bingo parlor next door ever saw a customer coming or going.

"I've never seen people, only twice," the Bingo hall proprietor told Kroft. "No customers. It's always been locked."

We obviously had a few questions to ask the people at Medicare and requested an interview with the person in charge of preventing fraud. That turned out to be Kim Brandt, Medicare's director of program integrity.

"We went around with an FBI agent and a woman from Health and Human Services. They took us to storefront, billing three or four hundred thousand dollars a month. And they were completely empty. Nobody there. I mean, how do they get away with that?" Kroft asked.

"We're as frustrated by that as the law enforcement officials that you went out with. And in fact, our primary focus over the past years has been to tighten our enrollment standards to make it so it's much harder for people like that to be able to get in the program, and to be able to commit that kind of fraud," Brandt said.

"Look, I'm sure that you're aware of these problems. But it doesn't seem like you're doing a very good job. I don't mean you personally, but I mean, the government. This is still like a huge problem, and getting worse, right?" Kroft asked.

"Well, it really does come down to the size and scope of the Medicare program, and the resources that are dedicated to oversight and anti fraud work. One of our biggest challenges has been that we have a program that pays out over a billion claims a year, over $430 billion, and our oversight budget has been extremely limited," Brandt said.

About that there is little dispute: Medicare has just three field inspectors in all of South Florida to check up on thousands of questionable medical equipment companies.

"Clearly more auditing needs to be done and it needs to be done in real time," Attorney General Eric Holder said.

Asked why it has taken Medicare so long to figure out they were being scammed, Holder told Kroft, "I think lack of resources probably. And then I think people I don't think necessarily thought that something as well intentioned as Medicare and Medicaid would necessarily attract fraudsters. But I think we have to understand that it certainly has."

The Obama administration is providing Medicare with an additional $200 million to fight fraud as part of its stimulus package, and billions of dollars to computerize medical records and upgrade networks, which should help Medicare catch more phony charges.

But Tony, who has just begun serving his 12 year prison sentence, says there's no shortage of people in Miami waiting to take his place.

Asked how many people in Miami were doing this, Tony said, "I'd say at least 2,000 people. At least 2,000, 3,000 companies."

He estimated that less than five percent of these companies were legitimate.

"If went to the phone book and looked under medical equipment suppliers, 95 percent of the companies would be phony?" Kroft asked.

"Yes, sir," Tony replied.

Produced by Ira Rosen and Joel Bach

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