MIAMI, Florida — On July 30th, 1965, President Lyndon Johnson led a delegation of dignitaries to Independence, Mo., where he officially brought Medicare into law with the stroke of a pen.
Sitting to his left was former President Harry S. Truman, who years before had begun efforts to create a national health insurance program. In honor of Truman's leadership and foresight, Johnson enrolled him as the program's first beneficiary and presented him with the nation's first Medicare card.
It was a moment of great hope and promise in American history, and a time when few could have ever imagined that years later Medicare would fall prey to an array of aggressive criminals.
Through a variety of billing schemes, phony medical supply companies and payoffs to unscrupulous doctors and patients, these thieves now steal an estimated $60 billion a year in taxpayer money that is supposed to finance health care for 43 million American seniors and the disabled.
"The legitimate Medicare recipient is hurt— the legitimate business that's dispensing this and serving patients is hurt, every taxpayer is hurt, and we need to come down on this with both feet," said U.S. Secretary of Health and Human Services Michael Leavitt.
Another official, putting it more bluntly, said, "The system is broken." And referring to the level of fraud, he added, "It's an epidemic."
False billing continues despite complaints
One of the patients dramatically affected by the widespread fraud is 82-year-old Muriel Sherman. During the last three years, Sherman received dozens of statements from Medicare indicating that the system was billed for tens of thousands of dollars in medicine and medical equipment in her name — care and equipment she never got and didn't need. It began after someone stole her Medicare patient identification number. She suspects the theft occurred at a facility where she went for treatment.
Flipping through page after page of Medicare benefits statements, Sherman insisted that none of the charges were real. "It's all phony," she said. Among other things, the bills indicate she is taking medicine for AIDS, a disease she doesn't have. "The FBI says if I was getting this amount of medicine, I'd be dead," she said. On her behalf, Medicare was also billed for a wheelchair, artificial knees, ankles and an eye, plus other medicines for diabetes. "None of it is real."
Sherman's biggest gripe is that her repeated complaints to Medicare were not acted upon quickly. "They don't want to know you when you call on the telephone," said said. She also complained that discussions with law enforcement officials never resulted in the prosecution of any of the fraudulent billers. "For these people to do this and not be apprehended is an absolute insult to me and to everyone else," she exclaimed.
A federal official familiar with her case admitted Sherman had a valid complaint, because some of the billing continued after she alerted authorities and there were no prosecutions.
Raul Lopez, the president of the Florida Association of Medical Equipment and Services and the director of a legitimate medical supply company, said he, too, made fraud complaints that he felt were ignored. "We've been reporting these issues for five years at a minimum and it seems like our reporting these issues falls on deaf ears."
Another complaint voiced by industry experts and federal law enforcement officials is that The Centers for Medicare and Medicaid Services -- known as CMS -- which administer Medicare is too lax in allowing new medical supply companies to start billing, without first doing proper background checks.
"How did they get that supplier number?" asked Tyler Wilson, the President and CEO of The American Association for Home Care, a national industry group representing medical equipment companies. "Somehow they dropped the ball in not imposing the up-front control in order to prevent these sham operations from being able to bill."
Bernardo Rodriguez, a supervisor in Miami's Office of Inspector General for the Department of Health and Human Services, said preventing illicit companies from being allowed to start in the first place will go a long way toward cutting down on much of the high-level fraud. "It's very important that we scrutinize the people coming into the program," he said.
Taking advantage of a trust-based system
In Miami this year, the U.S. Justice Department set up a strike force with prosecutors, FBI agents, a nurse practitioner and other healthcare investigators dedicated solely to attacking Medicare fraud. In the back of their offices, a big warehouse is filled with rows of tall shelves stacked with case files and evidence.
In just six months the strike force indicted 120 people in 74 different cases, leading to convictions and long prison terms. As of this writing the prosecutors had never lost a case, and, in fact, had never lost even one count in their multi-count indictments. The strike force, which was originally designed to last just six months, has now been made permanent by the U.S. Attorney's Office in Miami.
Kirk Orgrosky, the Justice Department prosecutor who headed the strike force, said one of the reasons Medicare is so vulnerable to criminals is because of its original theory of operation, which still looms today. "It was established as a trust-based system," Ogrosky explained. "We still trust that people that are participating in a Medicare program, that are supposedly caring for our elderly and our disabled, are going to be honest with the government. That has made it an area that is very ripe for fraud."
Tim Delaney, a supervisor and health care fraud specialist at the FBI office in Miami agreed, pointing out much has changed since that celebrated day in Independence, Missouri. "No one in 1965 looked this far down the road to think that people would actually take advantage of a health care program," he said.
Unfortunately, criminals have become quite inventive and extraordinarily brazen in concocting methods to steal millions of dollars at a time from Medicare.
Mostly it's done through illegal billing schemes for medical services rarely given, fake medications and expensive equipment never delivered. Many of the thieves register corporations in empty storefronts or hallway offices that are purported to be legitimate clinics or medical supply companies.
The reality, authorities said, is that many of these "fronts" or shell companies have no actual healthcare purpose and exist only to provide cover for fraudulent billing and the widespread theft of Medicare funds — all of it money provided by American taxpayers.
Professor Malcolm Sparrow, a fraud expert at Harvard's Kennedy School of Government and the author of the book, "License to Steal — How Fraud Bleeds America's Health Care System," said Medicare is a "perfect target" for criminals.
"Fraudsters love targets that pay quickly, pay easily, that are helpful and friendly and that if they don't pay. They even send you very helpful, computer generated messages explaining why this claim was not paid," he said.
"It's a little bit like playing a one-armed bandit, except the one-armed bandit has a transparent front and you can see everything that's going one inside," Sparrow added. "You can learn how it behaves, and, therefore, it's very easy to defraud."
Relying on computers to verify claims
Health care fraud experts and law enforcement officials said a big problem is that because of the millions of claims filed with Medicare every day, most of its billing and payments are handled by regional contractors who rely heavily on computers to verify the claims and send out checks. Their primary mission, officials said, is to process and pay claims quickly.
"What we find is that the adjudication process of claims is almost entirely automated, and we don't annually review claims with many of our carriers the way a private insurance company would," said Ogrosky. "So we're trusting in the healthcare community, our doctors that care for the elderly and the disabled. We're trusting that they're telling the truth."
Federal agents said they worry that Medicare's computer billing program is so user-friendly that, while it benefits the legitimate health care providers, it also assists the criminals in defrauding the system by instructing them on-line about how the process works.
"They can tell that day if their claim is being paid, it it's being reviewed, if it's being looked up or held," said Delaney. "They use that to see what's paying."
From his office at Harvard, Sparrow said criminals have learned that the trick to beating the automated system is to file their fraudulent bills properly. "As long as they bill correctly and the claim looks good on its face, the claim matches the diagnosis, the price is about right, it's right in the middle of medical orthodoxy, then no questions are going to be raised," he said.
The core problem, Sparrow added, is the lack of close scrutiny and manual cross-checking. "Having set up systems like that, particularly highly automated ones where the claims are paid by computers with almost no human intervention, you have unwittingly created almost a perfect target for fraud."
A law enforcement official gave the example of many patients whose Medicare numbers were stolen, and their names were used to bill Medicare for artificial limbs. No cross-checks were made before the bill was paid to verify that the patients had actually had limbs amputated. As it turned out, they had not. Of course, they had never received any artificial limbs, either. It was all a fraud that was undetected at the time of billing and payment.
A need for more inspectors and 'truth testing'
When asked for recommendations on how to more effectively confront the Medicare fraud problems, prosecutors, agents, a high-ranking government official, Medicare patients and other experts suggested a dramatic increase in funding and human resources along with a change in focus and philosophy. They uniformly insisted that CMS must vastly improve its system for approving new medical providers and judging claims.
Timothy Delaney, of the FBI, said more of an across-the-board attack is required. "There needs to be regulatory enforcement, there needs to be possibly legislative changes, providers need to stand up against this, the legitimate (medical supply companies) need to stand up against this and the patients need to stand up," he said.
Video: Medicare Fraud: How it happens Experts suggested an important first step is to greatly increase the amount of money spent on reviewing Medicare claims and ferreting out fraud. "These are resources that pay back very quick," said Michael Leavitt, the U.S. Secretary of Health and Human Services, who oversees Medicare and who has argued to Congress for more funds. "For every dollar we invest in this kind of enforcement, we'll see $10, $15 sometimes $20 back."
Many complained that the percentage of money currently spent on the administration of Medicare -- including fraud control -- is woefully less than the amount spent by private insurance companies.
"They're only spending less than one-tenth of a cent for every dollar of Medicare money to make sure that this dollar is spent in an appropriate fashion," said Sparrow. "I don't think that's a sensible way to go shopping. So a lot more resources can be put into this control."
Sparrow also suggested a shift in the way Medicare claims are assessed, in order to cut down on some of the hundreds of billions of dollars in losses to taxpayers over the years. "We need to shift the emphasis even more toward truth testing. It's not any more about medical orthodoxy or policy coverage," he explained. "It's about whether these claims that look fine on their face are actually true."
Toward that end, he and others recommended a sizeable increase in the number of Medicare inspectors and other officials assigned to field operations around the country. As envisioned, their duties would include tougher background checks and increased scrutiny of new companies and owners applying for Medicare billing numbers, along with more surprise inspections of existing businesses and clinics.
"You can't do truth testing from a desk, you can't do truth testing purely through data analysis," argued Sparrow. "You have to be out there on the street, finding out what people are doing, what they are saying, what they are sending you."
Prevention is the most important antidote
The HHS Secretary, Michael Leavitt, insisted that prevention is the most important antidote to the widespread fraud problem, which he saw first hand when he was given a tour in Miami of many of the illicit business that were billing Medicare from tiny storefront offices. "In a decade and a half of public service this was the most disheartening, disgusting day I have ever spent. We have to fix this," he said.
Leavitt agreed with others who have called for thorough checks of applicants seeking Medicare billings numbers, along with more surprise inspections and scrutiny of the prices that companies charge Medicare for equipment and medical services. "People need to know we're going to be checking," he said. "People need to know they cannot set up a system that anticipates the system."
He also recommended stiffer prison sentences for people convicted of Medicare fraud. "Compared to other crimes, the risks are less and the penalties are lower. We need to change that."
In Miami, federal judges are starting to hand down longer sentences in these cases. "Judges are seeing how big this is," said Bernardo Rodriguez, from the HHS Office of Inspector General. "The sentences are much bigger than we saw five years ago."
Recently, CMS announced it was clamping down on fraudulent companies by requiring some of them in the Miami, Los Angeles and Houston areas to re-apply for billing privileges. Surety bonds are also recommended, although critics argued the bonds are way too low to be very effective.
Officials said CMS is cooperating with law enforcement officials by providing billing information. It is also attempting to more carefully review billing statements and to control payments for such things as AIDS infusion therapy and durable medical equipment supplies, which are areas of rampant abuse.
While officials commend those efforts, many said they are just the beginning of what it needed. "We're not even scratching the surface," said one expert, who added, "The system needs to be revamped."
Cracking down without punishing the innocent
In pushing for more aggressive monitoring and control over Medicare billings, HHS Secretary Leavitt said he has met resistance from medical industry groups that are concerned that crackdowns will further complicate and slow the payment system for legitimate services.
"There are some cross pressures," Leavitt said. "There are legitimate businesses that are saying don't take it out on us, because you've got a series of bad actors, and there's some legitimacy to that."
Professor Sparrow argued that in designing solutions to the fraud schemes it's important to remember that Medicare is an important social program, and that legitimate doctors and medical providers need a workable system where they can be reimbursed quickly without their integrity always being questioned.
"You want to root out the cancer in as surgical and precise a way as possible," he said. "I think we need to get much better at telling the difference between the good and the bad in these systems."
Law enforcement officials, though, insisted the only way Medicare fraud can truly be controlled is for more people to get involved in the fight. "What is really necessary to solve the problem is to have the legitimate healthcare community step up and support us," said Ogrosky.
Taxpayers, officials insist, should be particularly incensed about the fraud since it's their money that is being stolen, and because the Medicare program designed for them is already under financial strain.
"As the baby boomers begin to retire and increase the burden on the Medicare system, these dollars that we're losing [to fraud] are going to be dollars that can't pay for Medicare," said Delaney.
"We've got to have a political commitment to take this on, and to sustain the effort," Sparrow argued. "We've got to be as smart, at least, and probably a lot smarter than the people who are ripping into these systems."
© 2013 NBCNews.com Reprints