the legal and constitutional right to the records which were subpoenaed.

I should make further note of the fact that we have received information that employees of the Department of Health and Human Services have been urged by their superiors to notify physicians in the private sector and people within the pharmaceutical industry to communicate with Members of Congress expressing their objection or unhappiness to the activities of this subcommittee.

I simply want to note for the record that activities which are in the nature of lobbying or encouraging lobbying against Congress are prohibited by law, and I would hope that the administration would take that information into account.

We are now ready to proceed with this morning's hearing. Today the subcommittee will review the Department of Health and Human Services' management of health maintenance organizations participating in the Medicare Program.

The hearing will focus on the Federal Government's experience with one particular company, International Medical Centers [IMC], a former Medicare HMO that once had 130,000 Medicare beneficiaries enrolled, the most in the country.

From 1981 to 1986, the Medicare Program paid IMC $977 million for the care of elderly beneficiaries.

The company now lies in ruins. Its corrupt president is a fugitive from justice, fleeing the country just prior to his trial on Federal labor racketeering charges. He left behind a company that owes millions of dollars to HHS, the State of Florida, and local medical providers.

Some Medicare beneficiaries, the very people the program was created to protect, may be forced to pay medical bills for which IMC has already received Federal reimbursement.

Today we will be examining the role of a string of HHS officials who passed through the revolving door between the Federal Government and IMC. These officials accepted salaries and consultant's fees well above the norm, and in return helped IMC charge the Federal Government for millions of dollars in improper payments that are not likely to be recovered.

From the time IMC was welcomed into the Medicare Program as part of a demonstration pilot program in 1981 to the day its Medicare contract was terminated by HHS in 1987, it appears that the company's prime motivation was profit, not the care of the Nation's elderly.

IMC illuminated the pitfalls of risk-based HMO contracts, which can save the Government money when they are handled by responsible providers, but can be a disaster when managed by profiteers. Because risk-based HMO's are paid a flat fee by Medicare regardless of the amount of services provided, they have an incentive to give less medical care.

With this incentive in mind, IMC illegally screened out the sickest of patients.

While these improprieties occurred, HHS, allegedly with knowledge and approval at the highest levels, waived a key Federal rule that allowed IMC to expand its operations at a time when the Federal Government should have been cracking down on the company.

Today we will hear testimony about outrageous expenses charged to the Medicare Program and outlandish salaries paid to former HHS officials by IMC.

We intend to determine if current Federal laws and regulations are sufficient to prevent such activities from being repeated and, if they are not, to recommend future actions to prevent their recur

rence.

Our first witness will be Richard P. Kusserow, the distinguished inspector general of the Department of Health and Human Services, to whom we are grateful for the cooperation that he and his office have given to the subcommittee.

We will also hear from David Williams, the Director of the Office of Special Investigations at the U.S. General Accounting Office, and Kevin Moley, Director of the Office of Prepaid Health Plans at HHS.

Other witnesses who have agreed to testify are C. McClain Haddow, Jeffrey Prussin, Wayne Fowler, and Arthur Goulet.

Before we go on to our witnesses, we have now been joined by our distinguished ranking minority member, Mr. Lightfoot, and I am pleased to call on him for his opening comments.

Mr. LIGHTFOOT. Thank you, Mr. Chairman, and good morning. Today's hearing examining Medicare's Health Maintenance Organization [HMO] Program should provide us with valuable insight into how we can strengthen the program to make sure that our Nation's senior citizens receive affordable, high quality health care services.

During the past several years we have seen a large increase in the number of Medicare beneficiaries participating in HMO's. And, of course, HMO's are attractive alternatives for many Medicare beneficiaries because they provide more comprehensive health care services at lower costs for individuals. However, because this is a relatively new type of health care plan, it is extremely important that we have diligent Federal and State oversight over HMO's.

Many of today's witnesses will discuss the problems of one particular HMO, International Medical Centers, or IMC. Before the Health Care Financing Administration [HCFÁ] terminated its contract earlier this year, this particular HMO was the Nation's largest, serving at one time almost 20 percent of Medicare's HMO enrollees.

Looking back at the history of IMC, it appears that its problems were many and that Federal and State oversight over IMC was hampered by not having adequate flexibility to crack down on IMC, while trying to protect beneficiary services. It is also my understanding that oversight over IMC was complicated by the fact that several former Department of Health and Human Services officials went to work for IMC. Testimony from the witnesses should shed some light on the problems of overseeing this particular HMO.

The central question, however, is whether the problems associated with IMC are unique or if they represent broader problems in the HMO Program. I hope our witnesses will be able to respond to that question today. In addition, I would be interested in hearing from the witnesses on how we can make sure that we do not create other HMO's like IMC and how we can effectively resolve problems once they are identified.

Mr. Chairman, I look forward to the testimony to the extent that it can help us improve and strengthen Medicare's HMO Program. However, it is my understanding that the Attorney General's Office and the FBI are conducting an investigation of IMC. I would, therefore, like to express caution and concern about possibly disclosing information during this hearing that would jeopardize this ongoing investigation, and I am sure that you will be diligent in that effort, and we appreciate the opportunity to do this.

It is an important subject and I, with you, look forward to hearing from our witnesses today.

Mr. WEISS. Thank you very much for your opening statement. You can be assured that, in fact, we will be extremely cautious and careful in not disclosing information which could jeopardize any of the ongoing investigations.

any

previously noted the presence of Ms. Pelosi, and I am also pleased to note the presence of another one of our very active members, Mr. Sawyer.

Ms. Pelosi, do you have an opening comment?

MS. PELOSI. Thank you, Mr. Chairman. I, too, want to thank you for calling this hearing, not only as a member of the subcommittee, but also as a Representative in Congress of many people who feel menaced by the HMO situation now. I am very anxious to hear the answers the witnesses have.

Mr. WEISS. Mr. Sawyer.

Mr. SAWYER. Thank you, Mr. Chairman. I, too, appreciate the effort that has gone into making this hearing possible.

Medical care for an aging population has become one of the most important issues facing our country. Over the last 50 years, Congress and the Nation have developed programs that seek to provide basic levels of care and security for the elderly, particularly for those at or near the poverty line.

Providing that kind of care is an expensive and a difficult job. It becomes even more difficult and costly when public officials charged to oversee those programs don't do their jobs.

Today we are investigating just such a case in which International Medical Centers was certified for the Medicare HMO Program and operated for several years before its contract was terminated, even though it did not comply with Federal regulations. There are several questions that need to be resolved.

The president of the IMC has a criminal record and boasted about his ties to organized crime. It would be interesting to know why his company was certified.

IMC never complied with the regulation requiring that HMO's have no more than 50 percent_Medicare enrollment, and yet was given a waiver. Why did the Department of Health and Human Services circumvent its own regulations for IMC?

And perhaps most important, what kind of care was given to the Medicare patients enrolled with IMC?

Mr. Chairman, we have a strong array of health care options in this country, and yet these programs can be placed in jeopardy by sloppy management and inadequate oversight.

I hope this hearing will go some way toward addressing those problems.

Mr. WEISS. Thank you very much, Mr. Sawyer.

Mr. Inspector General, as you know, it is the custom of this subcommittee to swear in its witnesses. So, if you would, please, first identify the associates who are sitting with you and have them stand with you.

Mr. KUSSEROW. Thank you, Mr. Chairman.

I am Richard Kusserow, inspector general of the Department of Health and Human Services, and with me on my left is George Reeb, who is in charge of Health Care Audits in the Department, and on my right is Michael Cesario, a senior inspector for health care financing programs in the Office of Investigations.

Mr. WEISS. Thank you.

If you would all stand at this point, and raise your right hands. [Whereupon, Messrs. Kusserow, Reeb, and Cesario were duly sworn by the chairman of the subcommittee.]

Mr. WEISS. Thank you very much. Let the record reflect the fact that each of the witnesses answered in the affirmative.

Mr. Kusserow, as I said before, we are grateful to you for the cooperation and for the hard work that you and your office have put into this matter, and we are ready to proceed as you so please.

Your prepared statement in its entirety will be entered into the record and you may go on as you feel is most appropriate.

STATEMENT OF RICHARD P. KUSSEROW, INSPECTOR GENERAL, DEPARTMENT OF HEALTH AND HUMAN SERVICES, ACCOMPANIED BY GEORGE REEB, DIRECTOR, HEALTH CARE AUDITS, AND MICHAEL CESARIO, SENIOR INSPECTOR FOR HCFA PROGRAMS

Mr. KUSSEROW. In that case, Mr. Chairman, let me summarize my written comments. I would also like to make some additional observations at the end of my testimony.

Mr. WEISS. Fine.

Mr. KUSSEROW. Our testimony will summarize all aspects of the Office of the Inspector General involvement in the investigation and audit of IMC.

As you know, Mr. Chairman, we do have some limitations on our testimony with regard to those facts which are under the protection of the U.S. district court, the Department of Justice, or the Federal grand jury.

By way of background, since 1982 the number of risk-based health maintenance organizations, or HMO's, has grown tremendously. HMO's are now a major provider of health care to Medicare beneficiaries.

The Health Care Financing Administration pays HMO's on a capitation basis. In other words, the HMO receives a fixed amount for each Medicare beneficiary it enrolls in return for providing all the Medicare covered health care services needed by these individuals.

In 1982, HCFA began funding 32 demonstration projects whose purpose was to gain experience with the concept of risk-based contracting with HMO's for Medicare services. And IMC was one of the HMO's selected and, effective August 1982, began enrolling Medicare beneficiaries.

Enrollment in IMC grew quickly as a result of a variety of aggressive marketing strategies. IMC developed into the largest enroller of Medicare beneficiaries of any HMO at-risk contract.

As you pointed out in your opening comments, by May 1986, they had enrolled in excess of 130,000 Medicare beneficiaries. And, as Mr. Lightfoot noted, IMC enrollees then grew to represent about one-fifth of the total national Medicare beneficiary enrollment in risk-based HMO's.

IMC's initial operations were in Miami, FL, and the Dade County area. However, its rapid growth was facilitated by the establishment of a highly decentralized network of 186 affiliated provider groups which extended coverage to five Florida counties.

Only seven of these affiliates were wholly owned and operated by IMC. The remaining 179 were private entities under contract to IMC.

The size and financial viability of these affiliates varied, but whatever the size, the per capita reimbursement paid by IMC to each of them was substantially less than the amount IMC received in Medicare capitation payments.

The inspector general's mission and role led us to review IMC operations from four different aspects.

First and foremost, we were concerned about the quality of care afforded to our beneficiaries. We wanted to be sure that the promised care under the law in fact was being provided.

In responding to a rising number of complaints and concerns from affiliates that were dealing with IMC, as well as beneficiaries, we conducted an inspection and evaluation of IMC to determine whether beneficiaries were receiving and were satisfied with the promised high quality Medicare health services.

We took a stratified sample of 351 beneficiaries enrolled with IMC. Most of these people that we interviewed expressed satisfaction with IMC. But among those dissatisfied, several complaints seemed to prevail.

For example, there were difficulties in getting specialist care. Also, there were problems in that beneficiaries did not receive care that met their expectations.

A third problem area was with drug prescriptions. Fourth, there was a problem with the assignment of a physician to beneficiaries, that is, the physician that they were assigned to. Fifth, there were difficulties with payment for services beneficiaries received outside the geographic area directly served by IMC and its affiliates.

We also found that IMC members used fewer services and were hospitalized at a much lower rate than the Medicare population in general.

Further, we found that some beneficiaries may have been encouraged to cancel their membership to allow Medicare to pick up the coverage of their illness, thereby reducing the cost to IMC for actual patient care.

We made several recommendations from this report.

We suggested that HCFA should send notices to all IMC enrollees to further disclose what IMC does not cover and to explain IMC's policy on out-of-plan care, to avoid the confusion expressed by the beneficiaries in our study.