December 12,2005

Chairman Grassley seeks accounting of expenses from a Quality Improvement Organization paid by Medicare to investigate complaints, improve care provided

December 8, 2005

Martin Margolies
Chief Executive Officer
557 Cranberry Road, Suite 21
East Brunswick, NJ 08816-4026

Dear Mr. Margolies:

As you are aware, in July 2005, the Washington Post featured a series of articleson healthcare quality in the Medicare Program. More specifically, the July 26 articlequestioned whether or not Quality Improvement Organizations (QIOs) limit patientaccess to medical information and have a more than cozy relationship with physicians.

The concerns raised in this article necessitated a further analysis and in-depth inquiry,especially since QIOs received $367 million in FY 2004 from the Centers for Medicare &Medicaid Services (CMS) and $1.1 billion for their current three-year contract. Of the$367 million allocated to QIOs in FY 2004, PRONJ received approximately $18 millionto ensure medical care is: reasonable and medically necessary, meets professionallyrecognized standards of health care, and is provided in the most economical setting.As Chairman of the Senate Finance Committee (Committee), I sent a letter toCMS on August 11, 2005, which requested information (e.g., contracts, travel expenses,board compensation, and performance audits) from more than 15 QIOs to ensurebeneficiaries are receiving quality care and pertinent information in a timely andappropriate fashion. Thank you for your prompt response to my letter; however,additional information is necessary to clarify a number of issues that surfaced during theCommittee’s review of PRONJ’s documents.

Accordingly, please respond to the inquiries set forth below by no later thanDecember 29, 2005.


PRONJ documents revealed that the entire board of directors traveled from NewJersey to the Cayman Islands and California for annual “retreats,” with total costsexceeding $100,000 in FY 2003 and 2004. In both years, the retreats occurred during thefirst week of November. The Committee would appreciate receiving additionalinformation regarding these retreats.

As a preliminary matter, it is difficult to understand why an entire board wouldneed to travel from New Jersey to the Grand Cayman to discuss improving quality of carefor beneficiaries, but I am eager to receive your detailed and documented explanations.

In this regard, please:

a. Identify all attendees present for any portion of these two retreats, includingname, title, affiliation with the QIO, if any, etc.;

b. Identify any speakers, presenters or the like, including but not limited to familymembers, CMS or Department of Health and Human Services (HHS) staffmembers, and/or other non-board members present;

c. Identify the source of the funds expended for each of these retreats, includingamounts and specific allocations; and

d. Provide expense reimbursement and travel policies that the board has adopted.


In FY 2003, PRONJ compensated its 21-member board a total of $526,976,averaging about $25,000 per board member. This seems like an alarming sumconsidering the majority of national not-for-profit corporations do not pay their boardmembers. Based upon our preliminary review, one PRONJ board member received$18,485 from a single CMS contract. Accordingly, please respond to the followingquestions and requests for information and records:

a. Provide descriptions of all transactions with disqualified persons (as definedunder Internal Revenue Code section 4958(f)). Provide copies of all legalopinions and minutes from board meetings discussing these transactions for theperiod of September 2000 through December 31, 20051;

b. Describe in detail and explain the process used by PRONJ for determiningcompensation levels for board members;

c. List the total compensation provided to each PRONJ board member for the periodof September 2000 through December 31, 2005, including all funding sources;

d. Verify that the amounts reported on Form 990 represent the total economicbenefits each board member and top five highest paid staff received from PRONJfor FY 2003 to the date of this letter. If not, please describe in detail what otherbenefits were received, including the fair market value of those benefits;

e. Did you establish the rebuttable presumption under section 53.4958-6 of theFoundation and Similar Excise Taxes Treasury Regulations as to thecompensation and benefits reported for any of the board members? If yes, pleaseprovide copies of all supporting documentation. If no, provide the documentationsupporting the reasonableness of the compensation and benefits reported;

f. Did PRONJ have an employment contract or any other compensatory agreementwith any of the board members? If yes, please provide a copy of the contract oragreement;

g. Does the amount of compensation and benefits reported agree with the amountreported on each board member’s Form W-2 or Form 1099? If not, please explainthe difference;

h. Did any of the board members use any property that PRONJ owned or leased(such as an automobile, aircraft, real estate, credit card, etc.) from FY 2003 to thedate of this letter? If yes, did PRONJ include the value of this usage in theamount of compensation and benefits reported? Was the value included on theindividual’s Form W-2 or Form 1099? Please explain if this value was notincluded; and

i. Provide the number of years each board member has served on the PRONJ boardand any include any policies that reference term limits for board members, theChief Executive Officer (CEO) and executive management.


Only one member of PRONJ’s 21-member board is not a physician. Althoughcurrent guidelines only require one consumer member, many QIOs have taken dramaticsteps to diversify board membership. For example, one QIO has a mix of certified publicaccountants, physician assistants, registered nurses, and multiple consumerrepresentatives. This example completely contrasts the PRONJ physician-monopolizedboard.

The CMS Organizational Manual requires that QIO boards be composed of “adiverse group of members so as to reflect in terms of gender, race, ethnicity, rural/urban,and socio-economic status, the Medicare Population of the State.” Furthermore, section9353(b) of the Omnibus Budget Reconciliation Act of 1986 requires that QIOs have atleast one consumer representative who must be a Medicare beneficiary. After reviewingPRONJ’s Board of Trustee’s curriculum vitae, bylaws, and responsibilities, it appears theboard lacks diversity and the necessary procedures to prevent inappropriate businessrelationships. Furthermore, it is disconcerting that PRONJ board members areoverseeing contracts, reviewing beneficiary satisfaction surveys, and assessing physicianperformance for the same organizations where they stand to benefit or lose profits basedupon the board’s decision. QIO boards should be diverse and transparent, allowing allmembers to make clear decisions unhampered by apparent conflicts of interest.Accordingly, please:

a. Clarify PRONJ’s rationale for maintaining a physician-monopolized board; and

b. Provide a copy of PRONJ’s bylaws and other policies designed to prevent boardmembers from possible conflicts of interest and inappropriate businessrelationships. If bylaws have changed over the past five years, please provide allversions.


Beneficiaries must be knowledgeable of and have access to the QIO complaintprocess for QIOs to fully address quality concerns and detect errors and fraud. Inaddition, QIOs should respond to all beneficiary complaints in a timely and responsivemanner. However, from August 2004 to July 2005, PRONJ reviewed 106 beneficiarycomplaints. Although this is an increase of 80 percent over the 59 complaints reviewedin 2000, this number still appears drastically low given the more than 1.2 millionMedicare beneficiaries residing in New Jersey. Accordingly, please:

a. Explain why, in the PRONJ’s opinion, there are so few reported complaints.

In light of the fact that there are so few beneficiary complaints in New Jersey,another question logically arises. Are Medicare beneficiaries in New Jersey aware of andknowledgeable about the complaint process? In particular, the PRONJ website does notclearly identify a link for beneficiaries to file a compliant. When the term “beneficiarycomplaint” is entered into the search button, only two documents are identified andneither the1-800-MEDICARE nor the PRONJ number for reporting a complaint is listed.Moreover, the only “educational document” on the PRONJ website was found under theMedicare Beneficiary Protection Program site and then under “Intervention Materials.”In light of the limited information on the website, please:

a. State whether or not PRONJ educates Medicare beneficiaries on the complaintprocess and describe in detail all efforts to do so; and

b. Provide the results of PRONJ’s beneficiary satisfaction survey on the complaintprocess for each of the last five years.

The CMS Manual requires that QIOs complete reviews of beneficiary complaintswith no quality concerns within 85 calendar days and within 120 calendar days forcomplaints with quality concerns. Of the 106 complaints reviewed from August 2004 toJuly 2005, 23 percent contained a valid quality concern. However, from the informationprovided it appears that 43 cases are still under review and do not have a completion date.This conflicts with the required timeframe for reviewing beneficiary complaints.

Furthermore, information provided by CMS shows that PRONJ had only completed 61percent of cases referred to mediation in a timely fashion. It is alarming that beneficiariesare not receiving information about quality of care in a more expeditious manner. In lightof these facts, please:

a. Explain what actions PRONJ has taken to address the 24 cases that had a qualityconcern and what actions PRONJ has taken to correct similar deficiencies thatmay have gone unreported;

b. Provide documented reports to CMS on PRONJ’s timeliness and responsivenessfor all reported claims over the past five years; and

c. Describe PRONJ’s coordination with hospitals and State Survey Agencies tomaximize the number of beneficiary complaints received and reviewed.2


The CMS requires that QIOs refer payment errors or fraud for investigation to theOffice of the Inspector General at the Department of Health and Human Services. This isessential to identify, prevent, and deter fraud, waste, and abuse and to recoup improperpayments in the Medicare Program. The error rate is also an important measure toevaluate government accomplishments and to identify improvement opportunities. TheCMS Error Report (Report) released last week showed that although CMS was successfulin cutting the Comprehensive Error Rate, there is still a lot of work that must be done toreduce the QIO error rate. The Report found the QIO error rate increased by 8.3 percentover last year. More specifically, the Report projected that PRONJ has the fifth highestimproper payment amount across the QIOs, a total of $156,585, for long-term PPS acutecare. From the increase in the QIO error rate it appears QIOs are not accomplishing theirmission. Accordingly, please:

a. Provide information on the extent of PRONJ’s efforts to comply with CMS’srequirement to report fraud and errors to the OIG; and

b. Describe PRONJ’s efforts to reduce its QIO specific error rate and to work withCMS in reducing the overall QIO error rate.3


As you are aware, there are numerous stakeholders involved with the nationalinitiative to improve health care quality. The QIOs are one of these important playerstasked to promote quality health services for Medicare beneficiaries and to determineappropriate utilization of services rendered. The Committee seeks to better understandwhether or not the mission of the QIOs is unique from other quality initiatives andorganizations. For example, the New Jersey 2005 Hospital Performance Reportaddressed hospital performance measures and acknowledged not the QIOs but the NewJersey’s Quality Improvement Advisory Committee, the Department of Health andSenior Services, and the Joint Commission on Accreditation of Healthcare Organizationsas the major contributors. Accordingly, please:

a. Describe PRONJ’s coordination with the Joint Commission on Accreditationof Healthcare Organizations, the National Quality Forum, the New JerseyDepartment of Health and Senior Services, the Quality Improvement AdvisoryCommittee, and the New Jersey State Board of Medicare Examiners. What isPRONJ’s unique role in each of these partnerships?

b. Describe in detail the relationship between PRONJ, Area VII – PhysiciansReview Organization, Inc., and Physicians Alliance of New Jersey, Inc.(PSRO)4.


In addition to the concerns raised in this letter, please provide the followinginformation:

a. The notes section from PRONJ’s FY 2004 audit5;

b. Copies of all internal control memos (to any board member and/or Chair)from FY 2000 through the present, including a summary and status update onall contracts subject to the penalty clause from FY 2002 to the present6; and

c. Costs and rationale associated with the change in PRONJ’s name toHealthcare Quality Strategies, Inc. (HQSI).

Thank you in advance for your assistance on this matter. I would appreciate aresponse to the enumerated requests and concerns raised in this letter no later thanDecember 29, 20057.


Charles E. Grassley

cc: HHS Secretary Michael Leavitt and CMS Administrator Mark McClellan


1 As a 501(c)(3) organization, PRONJ reported on it’s Form 990 that it spent over $1.2 million compensating its five highest paidemployees.

2 According to the August 18, 2005 memo from CMS to State Survey Agencies, “The hospital must inform the patient that he/she maylodge a grievance with the State agency directly, regardless of whether he/she has first used the hospital’s grievance process.”

3 CMS allows QIOs that have well established methods for estimating local payment error rates to use the available data it analyzes todirectly engage providers in education activities related to payment errors.

4 Please include appropriate contact information for each organization for question VI-a and VI-b.

5 The notes section was not included in the FY 2004 audit report provided by CMS.

6 The internal memos are a vital component in reviewing the financial position of PRONJ.

7 In complying with this document request, respond to each enumerated request by repeating the enumerated request and identifyingthe responsive document(s). In the event that a document is withheld on the basis of privilege, provide the following informationconcerning any such document: (a) the privilege asserted; (b) the type of document; (c) the general subject matter; (d) the date, authorand addressee; and (e) the relationship of the author and addressee to each other. Each document produced shall be produced in aform that renders the document susceptible of copying. If the information requested is not available in the format requested, pleasenotify the Committee, and we will be happy to accommodate other formatting options.