U.S. vows to recoup back taxes

Washington -- Federal officials said they will take a closer look at Medicare payments to doctors after an oversight agency found a small portion of physicians continued to receive reimbursements despite owing significant taxes.

The Centers for Medicare & Medicaid Services will work with the Internal Revenue Service and Treasury Dept. on developing a better way to screen Medicare participants for outstanding debts to the government they are billing, said CMS Acting Administrator Leslie V. Norwalk.

The Treasury can use its Financial Management Service to identify contractors that owe back taxes and to facilitate IRS levies on their federal payments. However, Medicare Parts A and B do not yet participate in this process. CMS will explore the feasibility of funneling hospital and doctor fee-for-service pay through that system.

If the government started doing a better job of identifying tax delinquents among physicians and other Medicare participants, the program and the IRS could collect hundreds of millions of dollars owed, according to the Government Accountability Office. A GAO review of Medicare Part B payments for the first nine months of 2005 found more than 21,000 physicians, other health professionals and suppliers received payments from the program, despite collectively owing more than $1.3 billion in income and payroll taxes.

A closer look at 40 of the cases found evidence of fraud and other criminal activity, GAO reported. Some physicians, for instance, withheld payroll taxes from their employees' paychecks but used the funds to enrich themselves or their businesses instead of passing on the money to the government. In one example, a doctor collected more than $100,000 in Medicare reimbursements during the first nine months of the year, despite owing nearly $3 million in back taxes, which the physician tried to evade by transferring certain assets.

Although the number of tax delinquents identified by the investigation is small, they still represent about 5% of all Medicare Part B participants.

The agency did not report what portion of the cases involved physicians, but doctors made up the majority of them, said Gregory D. Kutz, GAO managing director of forensic audits and special investigations.

GAO also said its figures were conservative given that many tax cheats understate their incomes or withhold documentation. The agency only looked at Part B payments, which represent about 20% of Medicare expenditures.

More than $400 million of the estimated $1.3 billion in outstanding 2005 debts are payroll taxes, which help fund Medicare services.

"Adds insult to injury"

The bilking of the system has to stop, said lawmakers on the permanent investigations subcommittee of the Senate Committee on Homeland Security and Governmental Affairs, who discussed the report at a March 20 hearing.

"Besides hurting honest businesses, this type of tax dodging hurts our country by undermining the fairness of our tax system and by forcing honest taxpayers to make up the shortfall needed to pay for basic federal protections -- like health care," said Sen. Carl Levin (D, Mich.), who heads the subcommittee. "When these tax delinquents also receive large payments of federal funds, it adds insult to injury."

Although GAO only selected 40 cases for extra scrutiny, government officials say the willful wrongdoing found there is not confined to those individuals. "I am outraged that there are Medicare providers out there right now harming our beneficiaries," said CMS' Norwalk.

But a disconnect remains between the process of identifying tax cheats and the process of garnishing their federal reimbursements. Norwalk said the agency's use of numerous decentralized carriers to handle Medicare payments means funneling money through the Treasury screening process would be difficult. At the same time, the IRS is barred by statute from providing certain tax information directly to CMS that would allow Medicare to garnish federal payments on its own.

Such bureaucratic barriers make the job of finding and eliminating fraud and abuse more difficult, said Patrick Burns, a spokesman for Taxpayers Against Fraud, a watchdog organization in Washington, D.C. "This is a classic example of the left hand of the government not knowing what the right hand is doing."

Although Medicare does not run its physician payments through Treasury screening, it does process requests to garnish reimbursements forwarded directly from the IRS. Sen. Claire McCaskill (D, Mo.) took Norwalk to task for not knowing how much tax debt CMS has been able to help recoup under the current system.

"That's pretty much in the category of 'The dog ate my homework,' " McCaskill said.

More scrutiny ahead

Despite renewed congressional pressure on federal agencies and the pledge by CMS to take a harder look at the problem, action could take years. Medicare's outdated accounting system poses one of the biggest challenges to improving the process but will not be fully upgraded until 2011.

Still, the government is getting more aggressive on all fronts when it comes to collecting unpaid debts and seeking out fraud. Driven largely by an increase in tax levies on defense contractors, federal payment screening has increased collections from less than $100 million in fiscal year 2003 to more than $300 million in 2006, said Kenneth R. Papaj, commissioner of the Treasury's Financial Management Service.

While physicians who cheat on their taxes have the most to fear from heightened attention, increased scrutiny of Medicare payment recipients could inadvertently target honest doctors or those with legitimate tax disputes if the government is not careful, acknowledged Burns, of Taxpayers Against Fraud. Investigators will need to balance the need to safeguard federal finances with the need to steer clear of program participants who are law-abiding, he said.

Still, going after the relatively few doctors who are the biggest violators without casting the net too wide could be very effective in discouraging fraud and abuse by many others, Burns said. "Just the knowledge that somebody is looking has a deterrent effect."