Program Review and Investigations Committee




<MeetMDY1> December 8, 2005


The<MeetNo2> Program Review and Investigations Committee met Thursday,<MeetMDY2> December 8, 2005, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Representative Tommy Thompson, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Ernie Harris, Co-chair; Representative Tommy Thompson, Co-chair; Senators Charlie Borders, Brett Guthrie, Vernie McGaha, Joey Pendleton, Dan Seum, and Katie Stine; Representatives Sheldon E. Baugh, Dwight D. Butler, Charlie Hoffman, Rick G. Nelson, and Ruth Ann Palumbo.


Guests:  Robert J. Benvenuti, Inspector General; Zach Ramsey, Director, Division of Fraud, Waste and Abuse/Identification and Prevention, Office of Inspector General, Cabinet for Health and Family Services.  Pamela Murphy, Director, Medicaid Fraud and Abuse Control Division, Office of the Attorney General. Jerry Deaton, Director of Governmental Affairs; Craig Maffet, Legislative Counsel; Kentucky League of Cities.


LRC Staff:  Greg Hager, Committee Staff Administrator; Kara Daniel; Rick Graycarek; Jim Guinn; Tom Hewlett; Margaret Hurst; Van Knowles; Nadezda Nikolova; Rkia Rhrib; Cindy Upton, and Susan Spoonamore, Committee Assistant.


Minutes of the November 18, 2005 meeting were approved, without objection, by voice vote upon motion made by Sen. McGaha and seconded by Rep. Hoffman.


Kara Daniel, Program Review staff analyst, presented the report Implications of the U.S. Supreme Court’s Kelo Decision for the Use of Eminent Domain in Kentucky.

Ms. Daniel stated that in June 2005 the U.S. Supreme Court issued a decision in the case Kelo v. City of New London, Connecticut, which upheld the city’s plan to take private residential property for economic development.  She stated that the Kelo case was the first case of its kind in which the U.S. Supreme Court had allowed a locality to take property that had nothing wrong with it to be used for economic development.

Ms. Daniel stated that the main objectives of the report were to describe Kentucky’s eminent domain law; the Kelo decision and any implications it could have for Kentucky law; and actions other states were taking in response to the Kelo case.

Ms. Daniel said that eminent domain referred to the right of the government to take privately owned property without the owner’s consent.  She explained that eminent domain is an inherent and sovereign right of government that is limited by state and federal constitutions and laws.

She stated that it was well accepted that a landowner must be compensated for any property taken, but the question of what constitutes a public use has been the subject of dispute. She said that the U.S. Supreme Court originally interpreted public use to require actual use or access by the public, such as with roads and parks.  Over time, the court has broadened the definition to include uses that benefit the public generally, such as redeveloping slum or blighted property. She said that in Kelo the court held that promoting economic development is also a valid public use under the U.S. Constitution.

Ms. Daniel said that the U.S. Constitution sets the minimum protections that governments must provide for individual rights. The Kelo decision stated that states or localities are allowed to use eminent domain to promote economic development, but were not required to.  She said that states were free to place additional restrictions on the use of eminent domain through their constitutions or laws.

Ms. Daniel stated that Kentucky case law prohibits the government action that occurred in Kelo. In Kentucky, eminent domain may not be used to take property solely for economic development.  She said that the Kentucky Constitution has its own public use provisions in sections 13 and 242. As interpreted by Kentucky’s courts, these sections set the outer limitation on acceptable public uses. 

Ms. Daniel explained that the issue in the 1979 case, City of Owensboro v. McCormick, was the constitutionality of the Kentucky Local Industrial Development Authority Act of 1970. She said that the Kentucky Supreme Court struck down a portion of the act as unconstitutional because it violated the public use requirement. The court said that taking one person’s property to enable another person to build a factory or a shopping center did not serve a public use and was therefore prohibited.

She stated that Kentucky does not have a general statutory limitation on the use of eminent domain. She said that if the Kentucky Supreme Court should interpret the constitution differently, then Kentucky’s protection of property rights could be reduced.

Ms. Daniel said that after reviewing state and federal law, staff concluded that the Kelo decision did not directly impact Kentucky law because the Kentucky Constitution provides greater protection of individual property rights.

She stated that the McCormick case made it clear that under Kentucky law, economic development is not a valid public use, but the court also said that taking slum or blighted property for redevelopment is an appropriate public use.

Ms. Daniel stated that KRS Chapter 99 contains several sets of statutes establishing the procedures and requirements to take substandard property. For example, she stated that under one set, a city or county council may only take property for redevelopment in accordance with a redevelopment plan that has been properly adopted.  Other sets of statutes in Chapter 99 have fewer safeguards and appear to give localities greater discretion to take substandard property. She stated that there have been court decisions indicating that some Kentucky localities have misapplied the blight statutes by taking property for redevelopment that was not in a blighted or slum area.

Ms. Daniel said that regardless of the purpose for using eminent domain, in order to condemn property in Kentucky, the process and requirements of the Eminent Domain Act must be followed.

She said that following the Kelo decision, many states introduced legislation to restrict the use of eminent domain.  Staff identified 77 pieces of legislation that were introduced in 22 states.  She said that the most common approach was to propose substantive changes to define public use. Such legislation had been enacted in Alabama, Delaware, and Texas.

Ms. Daniel stated that four eminent domain bills had been prefiled in Kentucky for the 2006 session.  She said that BR 134 was a concurrent resolution urging the U.S. Congress to pass a constitutional amendment to prohibit the use of eminent domain for economic development.  BR 311 and BR 253 would restrict the use of eminent domain to a qualified public use, which is defined as any acquisition that leads to public ownership or control by a public entity. BR 195 would expressly prohibit the use of eminent domain for economic development that would benefit the public only indirectly.  It would also require that commissioners who value property as part of the condemnation process be real estate appraisers or brokers.

Ms. Daniel stated that Kentucky law does have some of the safeguards proposed in bills introduced in other states. She stated that some Kentucky redevelopment statutes require findings to be made, public hearings to be held, and local elected officials to approve of plans to condemn property. She said that these safeguards are not uniformly required in the statutes, and even when followed, they may not prevent the use of eminent domain for economic development.

In conclusion, Ms. Daniel said that Kentucky law does not have any single statute that broadly defines valid public uses or lists prohibited ones. She stated that in the absence of such a statute, the only general limitation on the use of eminent domain is the Kentucky Supreme Court’s prohibition of its use for economic development as established in the McCormick case.


Sen. Stine asked if the term public use or public purpose was used in the constitution.


Ms. Daniel stated that the U.S. and Kentucky Constitutions use the term public use in connection with eminent domain.  Under federal law, the United States Supreme Court has broadened the definition of public use to encompass a public purpose resulting in a general public benefit.  She stated that Kentucky’s Constitution uses both phrases: public use in connection with eminent domain and public purpose in regard to the power to levy and collect taxes.  Kentucky’s Supreme Court has declined to say a public use and a public purpose are the same thing. 


Sen. Stine asked what recourse is there when public entities cause the blight and then use that as a basis for the taking.


Ms. Daniel replied that she was unaware of any specific mechanism of recourse in that situation apart from the required public hearings.


Sen. Stine asked whether this had occurred anywhere other than Newport and Bowling Green, in which residents have said that they were concerned that this may have happened.


Ms. Daniel said that she knew of no other specific examples.


Rep. Thompson commented that some of the frustration on this topic results from the change from the traditional definition of public use, in which condemnation is used for infrastructure such as a road, bridge or utility path. In the Kelo case, private property was condemned and then allowed to be used, in part, for a shopping center with the justification being the economic development that would result.


Sen. Harris said that based on the presentation, in KRS Chapter 99 there are procedures for blight and substandard property, but other statutes have fewer safeguards, and safeguards are not required uniformly and may not be effective.  He asked if there were loopholes in the law that should be closed.


Ms. Daniel said that KRS Chapter 99 has several sets of redevelopment statutes, which can be confusing. She said that slum and blight conditions are addressed in one section of Chapter 99, while another section allows the taking of substandard or insanitary property by cities of the 1st and 2nd class.  She said it uses the terms substandard and insanitary, which are not defined anywhere.


Sen. Harris stated that this raises the issue of how to address potential changes. He asked if the Kentucky League of Cities believes there are problems with current statutes.


Jerry Deaton, Director of Governmental Affairs for the Kentucky League of Cities, stated that the report cites only two examples of cities misapplying the blight statutes. He said that eminent domain takings occur a very small percentage of the time, and that usually the property is sold voluntarily. He stated there are areas in the law that can be tightened up and that codifying the McCormick case is a good step. He said that changes should not be made that limit local and state governments when economic development is needed. He stated that they do not want to see private property taken in a wholesale way, but that elections serve as public referendums on elected officials to keep the situation under control. 


Sen. Harris stated that most state legislators believe that the best government is local government because local governments are most sensitive to needs.  He noted, however, that legislators are dedicated to the protection of private property.


Mr. Deaton stated that the League of Cities is willing to work with the General Assembly.


Sen. Seum asked who paid the $11 million fine that resulted from the ruling in the Prestonia  case.


Ms. Daniel stated that she presumed the fine was paid by the City of Louisville.


Sen. Seum stated that the City of Louisville took a neighborhood that was full of homes worth more than $100,000, declared it blighted, demolished the homes, and turned the property over to the airport, which then leased it to private entities.  He noted that taxpayers had to pay the fine, but that public officials should be held responsible.


Rep. Baugh stated that it seemed the distinction between public use and private use is disappearing; for example, sometimes it becomes public use if private enterprise builds something that increases the tax base.  He asked whether building a road to a new Wal-Mart would be a private or public use.


Ms. Daniel stated that under Kentucky law, the building of the road would be considered public use.


Rep. Baugh asked whether the statutes clearly describe what is public and what is private use.


Ms. Daniel stated that some of the statutes are not clear.


Rep. Hoffman asked whether under BR 195 the person would have to be a member of the realtor’s association or just a licensed agent.


Ms. Daniel stated that she was not sure but would study the bill and let him know.


Sen. Seum related the scenario of a large retailer that wanted the property of an existing hardware store. He asked whether it was correct under Kelo that the retailer could get the local entity to condemn the hardware store’s property, so that no direct dealing with the hardware store would be necessary.


Ms. Daniel stated that the Kelo case arose in Connecticut and Connecticut law was applied in addition to the federal constitution law. She stated that the scenario he outlined would not be allowed under Kentucky law.


Rep. Thompson said that the Supreme Court’s decision had engendered a controversy around the country regarding the protection of private property rights. He added that the decision made the point that states cannot offer citizens less protections than are afforded by the federal constitution, but they can afford them greater protections.


The report Implications of the U.S. Supreme Court’s Kelo Decision for the Use of Eminent Domain in Kentucky was adopted, without objection, by roll call vote upon motion made by Sen. Harris and seconded by Sen. McGaha.


Cindy Upton and Van Knowles, Program Review staff, presented the report Information Systems Can Help Prevent Health Care Fraud and Abuse but Are No Panacea.

Ms. Upton stated that the report examined the two computerized information systems: the Kentucky All Schedule Prescription Electronic Reporting system (KASPER) and the Medicaid Management Information System (MMIS). The report also included a chapter on fraud, abuse, and other improper payments made by the Medicaid program. 

Ms. Upton began by reviewing the three major conclusions of the report. The first conclusion was that eKASPER, the Web-based enhanced KASPER—the only system of its kind in the United States—is effective in preventing and detecting prescription drug abuse and diversion.  She stated that the system could be more effective by adding information on the method of payment and obtaining prescription information more quickly. She said that having an interface with the MMIS would strengthen the integrity of the Medicaid program.

Ms. Upton said that second conclusion was that the new MMIS and Kentucky’s Medicaid modernization plan must be considered together to understand either. She stated that several vendors have contracts for MMIS functions that are tied to modernization initiatives, and other contractors and the Office of Inspector General (OIG) are involved in assessing improper payments made by Medicaid.  She stated that a number of operational issues had not been resolved among Medicaid, OIG, and the contractors.

She explained that the goals of Medicaid modernization include improved health care and optimized costs, but the goals depend on the effectiveness of the information systems and the proposed Medicaid program initiatives. At this time, all the systems and initiatives are not in place and cannot be assessed. She stated that perhaps another review by Program Review staff could be conducted in 2007 after the new MMIS had been operating for several months.

Ms. Upton said the third conclusion was that Medicaid makes improper payments because of fraud, abuse, and error.  She stated that some improper payments could be detected through the use of information in computerized systems, but others could not.  She said that in addition to improper payments, Medicaid makes unnecessary payments because of unenforced dependent medical support orders.

Ms. Upton stated that Chapter 2 of the report discusses KASPER, which monitors the dispensing of Schedule II-V controlled substances. Officials with the Office of the Attorney General and OIG indicated that KASPER was effective in law enforcement investigations and also in determining appropriate medical care. She stated that the average investigation time fell from 156 days to 16 days after KASPER was first introduced.  She stated that physicians and pharmacists use it in prescribing and dispensing medications. She said that eKASPER made reporting faster, often producing a report within 15 minutes of the request.

Referring to Recommendations 2.1, 2.2, and 2.3, Ms. Upton stated that potential improvements to KASPER include an interface between MMIS and eKASPER, adding method of payment to the KASPER database, and obtaining more timely information in the KASPER database.

Ms. Upton stated that the report addressed five other KASPER-related issues that did not result in recommendations:

1. Absence of a unique person identifier.  She stated that the Cabinet for Health and Family Services plans to amend the regulation to require a social security number or driver’s license number.

2. Absence of information in KASPER on prescriptions filled in other states.  She stated that cabinet officials were talking with officials from other states.

3. Only about half of the health care professionals in Kentucky who are eligible to use KASPER use it on a regular basis.  Ms. Upton stated that the cabinet was educating providers about KASPER.

4. Potential use of electronic prescribing, which would record the prescription in KASPER when it is written.  Electronic prescribing could prevent forged or altered prescriptions.

5. Illegitimate Internet pharmacies that do not register with the Kentucky Board of Pharmacy can ship drugs to almost anyone with a credit card number.  Ms. Upton stated that KASPER has no record of these transactions. The Attorney General’s Office has been working with shippers to intercept some of the shipments, but Kentucky cannot solve the problem alone.


Van Knowles presented Chapter 3 of the report regarding Kentucky’s Medicaid modernization. He stated that the Pharmacy Benefit Administrator (PBA) has been operational for more than a year; the Kentucky Medicaid Administrative Agent (KMAA) is scheduled to be in full operation on January 1, 2006 using a mix of existing and new systems; and the all new KMAA systems would be operational later in 2006.

 Mr. Knowles stated that another study by Program Review staff could be conducted in 2007 after all systems have been operational.

Mr. Knowles stated that Kentucky Medicaid modernization vendors are placing their databases and processing systems in other states.  He said that staff was concerned that there might be problems related to access and control of the databases, especially if a vendor’s contract was being terminated.  Mr. Knowles stated that Recommendation 3.1 asks the Department for Medicaid Services (DMS) to evaluate keeping a duplicate copy of Medicaid data in Kentucky and to ensure that all contracts provide for a smooth transfer when the contracts terminate.

Mr. Knowles stated that in order to optimize health care and improper payments, MMIS analysts will need complete information about pharmacy claims and managed care claims.  He stated that Recommendation 3.2 asks DMS to include all claims-related information from all sources in the MMIS and the enterprise data warehouse.

Mr. Knowles stated that a number of cases of duplication of functions was identified, one involving the PBA. He stated that when the new MMIS is built and becomes operational, it might be cost-effective for the MMIS to take over some of the functions. He stated that Recommendation 3.3 asks DMS and the vendors to consider the costs and benefits of this approach and to use the MMIS when it is feasible and cost-effective.

Mr. Knowles stated that KMAA systems appeared to duplicate capabilities of the new MMIS. He stated that when the new MMIS is built and becomes operational, it might be cost-effective in the long run for the MMIS to take over some of these functions.  He stated that Recommendation 3.4 asks DMS and the vendors to consider the costs and benefits of this approach and to use the MMIS when it is feasible and cost-effective.

Mr. Knowles stated that vendors have copies of MMIS data that they use to perform their tasks; some vendors have full data warehouses and decision support systems. He stated that Recommendation 3.5 asks DMS, OIG, and the vendors to consider the costs and benefits of this approach and to use the MMIS data warehouse and decision support system when it is feasible and cost-effective.

Mr. Knowles stated that the report contained three recommendations pertaining to the handling of improper payments:

Recommendation 3.6 asked DMS and OIG to take an aggressive stance on preventing improper payments and to evaluate manual review of claims versus fully automated claims processing.

Recommendation 3.7 asked DMS to document and follow strict and vigorous procedures to control disabling and reactivating edits and audits.

Recommendation 3.8 asked the relevant vendors and OIG to include all relevant data in their efforts to optimize care and recover improper payments.

Mr. Knowles stated that Medicaid modernization has two primary goals: improving health care and containing costs. He said that the PBA, KMAA, and other vendors were hired to achieve these goals. In order to know if the goals are being achieved, Recommendation 3.9 asks that DMS describe how the efforts of the PBA and KMAA will be measured. It also asks that the department describe how the evaluation plan in the waiver will be implemented.

Mr. Knowles stated there is potential for enhanced federal financial funding for the PBA and KMAA. He stated that Recommendation 3.10 asks the department to consult with the Centers for Medicare and Medicaid Services (CMS) and submit a proposal for enhanced funding if CMS so advises.

Mr. Knowles also said that the state must have ownership of the MMIS software to obtain enhanced federal funding. Recommendation 3.11 asks DMS officials to review the contract language and report their findings to the Program Review and Investigations Committee by December 2006.


Ms. Upton resumed her presentation by discussing improper payments made by the Medicaid program. She explained that in this report improper payments are defined as overpayments, which includes fraud, abuse, and error. She stated that based on staff’s research for this study, most providers are honest and try to abide by Medicaid program rules.  She said that according to the United States Government Accountability Office, fraud may be as much as 10 percent of program expenditures.

Ms. Upton stated that the Office of Attorney General’s (AG) Medicaid Fraud Control Division investigates many of the allegations of provider fraud.  She said that the OIG in the Cabinet for Health and Family Services is responsible for the cost of preliminary investigations and investigating recipient fraud because the federal government will not fund the AG’s Medicaid Fraud Control Division for these functions.

Ms. Upton stated that the division found instances of fraud against Kentucky’s Medicaid program by analyzing information in computerized systems. For example, a provider was ordered to pay restitution of $575,000. In one case, the total amount of the agreement was more than $3.6 million. She stated that there are some incidents that cannot be found in the computerized systems. Those cases typically involve corporations that provide false information. In two cases against pharmaceutical companies, Kentucky’s recoveries were $10 million and $5.7 million.

Ms. Upton stated that adequate funding of the Medicaid Fraud Control Division is essential to controlling Medicaid fraud and abuse. Federal reimbursements to the division increased from $1 million in 1999 to $1.3 million in 2004, but the increase had not kept pace with the overall growth in Medicaid expenditures.

She reviewed two recommendations that addressed the need for additional state funding for the division. Recommendation 4.1 asked the Office of the Attorney General to request additional state funding from the General Assembly to more fully access the federal funds available to operate its Medicaid Fraud Control Division.  The Office of Attorney General should develop a plan showing how the additional funds would be used and the expected results.  Recommendation 4.2 asked the General Assembly to consider appropriating sufficient state funds to the Office of Attorney General to enable the office to more fully access the federal funds available to operate its Medicaid Fraud Control Division.  Additional funding should be made contingent on planned and actual results of the division.

Ms. Upton stated that the extent of Medicaid’s improper payments has not been measured. She said that DMS voluntarily participated in a federally funded Payment Accuracy Measurement Project from October 2003 to January 2005. Overall, the department reported a 94 percent payment accuracy rate. She stated because of the methodology required by the federal government, the department did not report total estimated overpayments nor did it consider false claims. She stated that in order to identify false claims, a fraud audit would be needed. She said that it had been estimated that fraud in the form of false claims might add another 10 percent or more to an estimated overpayment rate based on this methodology.

Ms. Upton stated that the OIG was addressing Medicaid overpayment issues. She said that the OIG coordinates the work of Medicaid program integrity contractors. The contractor reviews paid claims data, identifying outliers for investigations, and recommends policy changes and prepayment computer system edits for preventing improper payments.

Ms. Upton said the OIG also administers the contract that involves identifying third-party liability for claims presented to Medicaid for payment. She stated that in

FY 2005, more than $755 million in costs was avoided and more than $42 million was collected due to third-party liability.

Ms. Upton stated that insurance companies are required to provide coverage information and data on claims paid on behalf of Medicaid-eligible recipients to the cabinet, but there is no penalty for noncompliance.  She reviewed Recommendation 4.3: To maximize Medicaid’s ability to avoid paying claims that are the responsibility of a liable third party, the General Assembly may wish to consider amending KRS 205.623 to include a penalty for noncompliance.

Ms. Upton stated that the OIG conducts preliminary investigations of suspected recipient fraud and abuse, which are referred to the Office of Attorney General. Because the federal government does not fund investigations of recipient fraud by the Office of Attorney General, the recipient cases are returned to the Inspector General. She stated that Recommendation 4.4 asks that the General Assembly consider amending KRS 205.8483(2) to eliminate the requirement for the OIG to refer allegations of recipient fraud and abuse to the Office of Attorney General.

Ms. Upton stated that the OIG also conducts preliminary investigations of provider fraud and abuse. The OIG then refers its findings to the Office of the Attorney General’s Medicaid Fraud Control Division, which can decline the case and return it to the OIG. She stated that the OIG is limited in its ability to pursue the case because the office does not have administrative subpoena power and has limited ability to impose civil penalties. She stated that Recommendation 4.5 asks that the General Assembly consider amending KRS 194A.020(5) to enhance the ability of the OIG to pursue administrative actions in allegations of fraud and abuse against the Medicaid program, including the ability to issue administrative subpoenas and impose civil penalties.

Ms. Upton stated that the OIG had implemented new initiatives to prevent and detect improper payments by the Medicaid program. Within the Division of Special Investigations, there is a new civil enforcement team that recovers overpayments through civil settlements. She said there is also an internal audit group in the Division of Audits and Detection that will conduct prepayment reviews.  She stated that Recommendation 4.6 asks that the OIG conduct a cost-benefit analysis of the initiatives of its Division of Special Investigations and its Division of Audits and Detection and report the results to the Program Review and Investigations Committee, the Medicaid Oversight Committee, and the Health and Welfare Committee.

Ms. Upton stated that an expert on health care fraud has described seven levels of health care fraud, which range from the individual claim or transaction level to multiple-party criminal conspiracies. She stated that some of the situations are being addressed by DMS through its contracts and agreements with vendors and the OIG. She said other situations might be addressed in the future when the final responsibilities of the department’s contractors are determined. She stated that Recommendation 4.7 asks that DMS and OIG work with Medicaid contractors to develop a plan for controlling fraud against Kentucky’s Medicaid program. The plan should consider the roles of the DMS, OIG, and each relevant contractor, and should provide a timeline for implementing a cohesive fraud control strategy. DMS should report the plan to the Program Review and Investigations Committee, the Medicaid Oversight Committee, and the Health and Welfare Committee.

Ms. Upton explained that the federal False Claims Act is used by prosecutors to pursue civil actions involving false claims against the federal government, including the Medicaid program. She said that under the act, recoveries have totaled more than

$12 billion over the past 20 years and 18 of the top 20 recoveries involve health care corporations.  She stated that 16 states have false claims statutes to supplement the federal law, but Kentucky does not.  She stated that Recommendation 4.8 asks that the Office of Attorney General’s Medicaid Fraud Control Division and the Cabinet for Health and Family Services’ Inspector General work together to explore the feasibility of implementing a false claims statute in Kentucky.  Issues to be considered include required staffing of all agencies, required monetary resources, and a cost-benefit analysis of implementing such a statute.  The two agencies should present a joint report to the Program Review and Investigations Committee, the Medicaid Oversight Committee, the Health and Welfare Committee, and the Judiciary Committee.

Ms. Upton discussed the issue of unenforced medical support orders.  She stated that noncustodial parents who do not provide health insurance as ordered increase the number of dependent children who are eligible to receive Medicaid and KCHIP benefits.  In FY 2005, Program Review staff estimated that unenforced medical support orders cost the Medicaid program $10 to $46 million.  She said that Recommendation 4.9 asks that the Cabinet for Health and Family Services (a) reexamine the costs and benefits of providing greater financial incentives to county child support offices for improving enforcement of medical support orders and (b) determine whether noncustodial parents who cannot provide dependent health insurance should be required to provide some financial assistance for dependent medical care through the Medicaid program and KCHIP.  DMS and the Department for Community Based Services should provide a joint report to the Program Review and Investigations Committee, the Medicaid Oversight Committee, and the Health and Welfare Committee.


Rep. Hoffman asked whether the FDA controlled the amount of Schedule II to V drugs produced by the manufacturers. He also asked how Internet pharmacies get these drugs.


Ms. Upton stated that some of drugs come from outside the U.S. and that some are not authentic drugs. She said the Office of the Attorney General works with federal agencies, the Drug Enforcement Agency for example, to stop illicit drug imports. She stated that this is a growing international problem.


Rep. Thompson introduced Robert J. Benvenuti, Inspector General, Cabinet for Health and Family Services; and Zach Ramsey, Director, Division of Fraud, Waste and Abuse/Identification and Prevention, OIG, Cabinet for Health and Family Services.


Mr. Benvenuti stated that KASPER is the model program in the United States.  He stated that prescription drug diversion as it relates to Internet trafficking is a huge problem for every state.

Mr. Benvenuti stated the Medicaid Program Integrity Unit was moved from the Office of the Medicaid Commissioner to the Office of the Inspector General. He said that along with additional resources being added, the KASPER system and investigators from public health had also been moved into the Inspector General’s Office’s Division of Fraud, Waste, and Abuse. He stated that the unit is instrumental in identifying what needs to be investigated and that the office intends to make next year another record setting year for third party cost avoidance and collections.

Mr. Benvenuti stated that the number of highly trained and skilled investigators in the Division of Special Investigations has tripled.  He said that investigators have been placed in several counties, as opposed to working out of Frankfort or Louisville.

Mr. Benvenuti stated that the DETER program, in which agents are in DCBS field offices to confirm the accuracy of information given on applications for Medicaid and other programs, has saved Medicaid approximately $200,000.  He said that projections for the next three years indicate that the program will save Medicaid approximately

$1 million. 

Mr. Benvenuti stated that a new high-level team called Administrative Civil Enforcement (ACE) has also been added to OIG. The team looks at cases for what is known as parallel proceeding opportunities. These are cases that might have been prosecuted under criminal statutes or might have been returned by the Office of the Attorney General. ACE reworks the cases for administrative and civil action.  He said that in one instance, the OIG’s office was able to identify $282,000 to be returned to the agency.

Mr. Benvenuti stated that the OIG’s office did not wish to eliminate the referral of allegations of recipient fraud and abuse to the Office of the Attorney General. He stated that it was the raw referral, which has not been subjected to preliminary investigation, that would put both offices in conflict with federal regulations.  He said that although both agencies have handled the conflict in the past, the state statute should be clear that raw referrals are not required to be sent.  He said that those referrals can be sent after a preliminary investigation.

Mr. Benvenuti stated that the Division of Audits and Protection is now a true internal auditing unit of OIG. The division hired a director with more than 25 years of federal internal auditing experience.

Mr. Benvenuti explained that the False Claims Act can be useful, but careful consideration should be given as to how it should be created at the state level. He stated that it is the most heavily litigated statute in the federal court system, so there should be clear and concise statutory guidelines to help deter court appeals and legal challenges.  He cited as an example a potential provision related to qui tam, which allows a private citizen to bring a case in cooperation with the government and then receive up to 25 percent of a recovery.  He said that consideration should also be given as to whether the Commonwealth has the resources to handle the almost certain influx of cases.


Sen. Stine asked what the keys to fighting the Medicaid fraud problem are.


Mr. Benvenuti stated that having a strong coordinated parallel process of criminal prosecutions and civil actions is very beneficial, but this requires the right human and technical intelligence. He said that providers need to be educated that not only is there criminal liability, there is also civil and administrative liability.


Sen. Stine asked how much reporting of recipient abuse comes from the public.


Mr. Benvenuti stated that the hotline receives almost 6,000 calls a year, many of which relate to recipient fraud.


Sen. Stine asked who prosecutes the cases.


Mr. Benvenuti stated that the cases go to county prosecutors.  He said the DETER program is critical in catching the fraud at the application level before the loss occurs.


Sen. Stine asked for clarification as to why the General Assembly may wish to consider amending KRS 205 to eliminate the requirement of the Inspector General to refer allegations of recipient fraud abuse to the Office of the Attorney General.


Mr. Benvenuti stated that federal regulations require the state Medicaid agency—through the OIG—to conduct preliminary investigations and refer to the Office of the Attorney General. State law requires the OIG to immediately refer and to conduct preliminary investigations at the same time. The Inspector General would like Kentucky law to mirror current practice and be in compliance with federal law.


Sen. Stine asked who prosecutes.


Mr. Benvenuti stated that anybody with prosecutorial authority can prosecute.


Sen. Stine noted that the presentation had indicated that the Fraud Control Division may decline a case and return it to the OIG, which would seem to indicate a circular pattern.


Mr. Benvenuti stated that this was correct for recipient cases but not for provider cases. He said Kentucky law requires allegations to be referred to the appropriate prosecuting authority when there is reasonable cause to believe fraud occurred. He said two state statutes and one federal statute are involved and that one state statute and the federal statute are consistent. He added that consideration is being given to bringing the other state statute into compliance.


Sen. Stine said that there should be assurance that once a case is referred that some action is taken by the agency that received it.


Mr. Benvenuti replied that OIG has worked with other agencies to make sure that these cases proceed. 


Zach Ramsey stated that the Division of Fraud, Waste and Abuse/Identification and Prevention deals with the administrative side of fraud. He stated that the division takes those cases that are returned. He stated that a provision was included in the federal waiver to allow the Medicaid agency, and the OIG acting on Medicaid’s behalf, to begin a process of sanctioning and terminating recipients when they have been convicted of Medicaid fraud or illegal diversion of drugs under state law.

Mr. Ramsey discussed the recommendations regarding the KASPER program.  He stated that the division was already taking actions related to the recommendations. He said the Medicaid system match with KASPER should make it possible to compare overall narcotic dispensing and Medicaid usage. He said that the pharmacy investigators in the drug enforcement branch and the Medicaid program integrity investigators all work in the OIG.

Mr. Ramsey stated that adding the method of payment, as suggested in the report, may not require a statutory change. He noted that the cabinet plans to file administrative regulations to shorten the time period for reporting to KASPER from 16 to 8 days and to begin recording the method of payment.


Rep. Thompson introduced Pamela Murphy, Director, Medicaid Fraud and Abuse Control Division, Office of the Attorney General.


Ms. Murphy explained the purpose of the Medicaid Fraud and Abuse Control Unit (MFCU) within the Attorney General’s Office. She stated that effective communication is important in order to accomplish the goals of controlling provider fraud and provider abuse against patients in health care facilities. She stated that a surveillance and utilization review unit can detect spikes in payments made to a provider, which could indicate possible wrongdoing. She said a functional unit should be given to the Inspector General.  She stated that the Office of Attorney General had recently updated a Memorandum of Agreement with the Cabinet for Health and Family Services.

Ms. Murphy stated that the state investment in the Medicaid Fraud Program was $530,225. 

Ms. Murphy said that in addition to pursuing fraud cases, the division also investigates abuse cases, which are increasing.  She said that the division is now investigating 30 cases of deaths in health care facilities. 

Ms. Murphy stated that the division has received nearly 1,000 more complaints this year than in the previous year.  As of November 2005, there are 104 fraud cases pending and 105 abuse cases pending.

Ms. Murphy stated that in some cases there is insufficient evidence of a crime and the Office of the Attorney General will decline them. She said that this is an example of the benefit to the state of a false claims statute or administrative action by the cabinet

Ms. Murphy stated the MFCU within the Attorney General’s Office agreed with Recommendations 4.1 and 4.2. She stated that MFCU disagreed with Recommendation 4.4.  She stated that consistent with abuse allegations, all allegations should be referred to the Office of the Attorney General; some allegations tie into existing provider fraud and drug diversion cases.

Ms. Murphy stated that the Office of the Attorney should be included in Recommendation 4.7 to develop a plan for controlling fraud against Kentucky’s Medicaid program.

As to Recommendation 4.8, Ms. Murphy stated that the Office of the Attorney General had developed a draft model of false claims legislation and the federal government is discussing mandating such a law as a condition for states’ participation in the Medicaid program.


Sen. Harris asked for clarification of the role of the Medicaid Fraud Control Division and its funding sources.


Ms. Murphy stated that division prosecutes Medicaid fraud against providers and that it receives state and federal funding specifically for addressing Medicaid provider fraud.


Sen. Harris asked how many staff were in the division.


Ms. Murphy stated that there are 30 employees, which includes 5 attorneys—not counting her. She said the rest are investigators and support staff.


Sen. Harris asked how she envisioned the operation of a false claims statute.


Ms. Murphy replied that a false claims act would allow for a civil case when there is not enough proof to meet the criminal threshold. She said that MFCU staff could work on those cases.


Sen. Stine asked how many calls the MFCU receives from the general public about abuse by Medicaid recipients.


Dan Gibbons of the Office of the Attorney General responded that calls regarding a recipient issue are rare.  He said that when such calls are received, they are documented and forwarded to OIG.


Sen. Stine asked ask for clarification about agency hotlines.


Ms. Murphy stated that the MFCU has a hotline and the Office of the Inspector General has a separate hotline.


Sen. Stine asked how much money had the MFCU recovered for the Medicaid program by going after those engaged in fraud.


Ms. Murphy stated that the MFCU recovers quite a bit, exceeding the cost of doing business each year. She said that from 1983 to 2005, the MFCU recovered more than $51.5 million.


Sen. Stine asked for a yearly breakdown.


Ms. Murphy stated that she would get that for her. 


Sen. Stine stated that she was interested in the OIG’s track record as well. She asked for a comparisons to other states.


Ms. Murphy said that the amount recovered by year varies significantly because  white collar crime cases take a long time to investigate.  She said that based on the average for fiscal years 2002 to 2004, Kentucky was 10th in the nation per federal dollar invested.


Sen. Harris asked if the $51.5 million included global settlements, and if so, how much.


Ms. Murphy responded that there is about $10 million in civil penalties, about $6 million in criminal, and about $35 million in global settlements.


Sen. Stine asked for clarification of what is involved in a global settlement.


Ms. Murphy replied that global cases come from qui tam actions, which are whistleblower actions that the federal government can agree to participate in. She said a typical case involves someone who works or used to work for a pharmaceutical corporation contacting a lawyer and filing a whistleblower case, which goes to the U.S. Attorney’s office for review.  The office will determine whether the government wants to participate based on lost federal money, usually from the Medicare system.  She said the National Association of Medicaid Fraud Control Units then reviews the case to determine if Medicaid money may be involved.  If so, then the MFCU joins the case. The cases are generally settled in one to five years with some recovery going to the initial whistleblower, then to Medicaid and Medicare.


Rep. Thompson said that the committee recognized the work that is being done and looked forward to working together to enhance and support the viability of the program and following up on some of the suggestions made today.


Rep. Thompson said there was no longer a quorum so official action on this report would have to be deferred.


Rep. Thompson stated that study proposals were in members’ folders for the five study topics approved at the November meeting. 


Rep. Thompson said that the committee typically does not meet during the legislative session, but that members would be notified if a meeting was to be scheduled.


Meeting adjourned at 12:25 p.m.