WASHINGTON (AP) — The agency that runs Medicare renewed a fraud-fighting contract with a firm that had been implicated in a massive fraud case, government auditors said Friday.

The Health Care Financing Administration, known as HCFA, knew or should have known that KPMG was directly involved with the allegations of fraud against Columbia/HCA, which was accused of massively bilking Medicare and agreed to pay a $750 million fee to settle the case.

Specifically, KPMG had advised Columbia/HCA on cost reports that were later found to be fraudulent. They led to well-publicized criminal and civil charges, with two KPMG officials identified as unindicted co-conspirators.

Still, the agency renewed a contract with KPMG to audit other Medicare contractors, reviewing the same kind of transactions about which the firm had advised Columbia/HCA.

"Senior HCFA officials should have used the information that was available to make an informed decision about KPMG's continued performance," the General Accounting Office said in a report released Friday.

If agency officials had considered the information, the report said, they still might have reasonably opted to extend KPMG's contract. "However, the decision would have been reasoned and supported; and it would have minimized embarrassment"

The report was requested by Rep. Thomas Bliley, R-Va., chairman of the House Commerce Committee, who has been highly critical of HCFA.

"It's beyond comprehension that HCFA, in trying to attack Medicare fraud, would hire KPMG, a company that's been associated with one of the largest fraud cases in the Medicare program's history," said Bliley spokesman Pete Sheffield. "The little red devil that was sitting on the shoulder of Columbia is then given a contract to fight those very actions."

HCFA spokesman Peter Ashkenaz said the agency has not reviewed the report yet but will "take action as appropriate."

The KPMG contract and four others like it were terminated in September because of lack of funding, but the agency still has other contracts with the firm, which used to be known as KPMG Peat Marwick.

The allegations against Columbia/HCA and KPMG were not public when the agency awarded KPMG the initial contract in September 1997, which gave the agency authority to renew it annually. But the report said agency officials "knew or should have known" about pending civil and criminal actions when it renewed it in September 1998 and 1999.

None of the agency's staff involved with the KPMG contract had all the available information, it said.

The officer who handled the contract extensions read a news account about the allegations but "had not taken it seriously," the report said.

Later, she was anonymously given information about a related complaint against KPMG filed by a whistle-blower. She discussed the allegations with KPMG officials, who said the unit working on the current contract was not involved with the Columbia case. Evidently those assurances — along with KPMG's satisfactory work — were sufficient to renew the contract, the report said.

The officer did not include any of this information in the contract file, and when she left her position early this year, "that information was effectively lost." The current contract officer did not know about KPMG's role in the Columbia/HCA case until GAO investigators interviewed her.

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Furthermore, because the information from the whistle-blower was never passed on, the agency wound up asking KPMG to audit the same company that employed the whistle blower. They pulled the firm off that assignment after the Justice Department learned of it and asked for the change.


On the Net: GAO report available at: www.gao.gov/cgi-bin/

HCFA site: www.hcfa.gov

KPMG site: www.kpmg.com

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