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Medicare Providers Face Tighter Scrutiny: Contractors Failed to Pay Over $1 Billion in Taxes, GAO Investigation Finds
 

By Jane Zhang, Wall Street Journal

March 20, 2007

A congressional probe into tax fraud by physicians, suppliers and other Medicare providers may lead to changes in how the program pays contractors and could expand into a wider inquiry into whether other individuals and institutions doing business with Medicare also abused the tax system.

The Government Accountability Office, Congress's audit agency, found that more than 21,000 providers of Medicare's physician and outpatient services failed to pay more than $1 billion in taxes owed through September 2005. In a report released yesterday, GAO said those Medicare providers failed to pay $430 million in payroll taxes, $523 million in individual income taxes, and $93 million in other taxes, such as corporate income and employment taxes.

The GAO's nine-month investigation stemmed from a request last year by the Senate's Permanent Subcommittee on Investigations to study the matter. The subcommittee will hear testimony on the problem in a hearing today, in which lawmakers may use the report to press the Centers for Medicare and Medicaid Services -- the agency that manages Medicare -- to adopt the federal levy system.

The levy system allows the Internal Revenue Service to withhold all payments to providers who owe government taxes until their debt is paid; agencies often withhold about 15% of payments to such providers. GAO recommended in 2001 that the IRS and the Treasury Department's Financial Management Service work with Medicare to develop plans for using the levy program, which has been adopted by several agencies, including the Defense Department and the Postal Service. GAO estimates that Medicare would have collected at least $50 million had Medicare collected back taxes through the levy system during the first nine months of 2005.

Medicare, which is funded through corporate, individual and payroll taxes, has the authority to issue payments without going through the Financial Management Service. As a result, the Financial Management Service doesn't check for tax debts before Medicare issues physician payments.

Medicare officials say they are working with the IRS and other agencies to manage payment policies.

"We are very concerned about this issue and are working hard with the Department of Treasury and the Internal Revenue Service to ensure that we do not overpay providers or other entities who owe the IRS money," said Leslie V. Norwalk, acting administrator of the Centers for Medicare and Medicaid Services. "In fact, in 2006, we sent over $110 billion in payments through the Treasury program designed to catch this type of abuse. Although we have not seen a final report from the GAO, we believe that it found a small number of physicians who billed Medicare and had a tax debt to the IRS. At this time, CMS has no explicit authority to deny physicians the right to participate in Medicare if they have tax debt. We will continue to work with Treasury to identify and implement strategies for improving the process to levy existing tax debt of Medicare providers or other entities."

"This is a classic case of the right hand not knowing what the left hand is doing," said Sen. Norm Coleman (R., Minn.). "Sadly, it is the American taxpayers who have to suffer the consequences."

The report came as Congress debates how the government should pay physicians and other providers amid rising health-care costs. Physicians face a nearly 10% cut in their Medicare payment rates next year; in the past, Congress has reversed this every year. But the Democratic-controlled Congress, with a pledge of observing "pay as you go" budget rules meant to keep tax cuts and new entitlement programs from boosting the deficit, will have to cut something else to find the money.

A spokeswoman for the American Medical Association, the physicians group, said she hadn't seen the report and declined to comment.

Write to Jane Zhang at Jane.Zhang@wsj.com


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