A Chicago bank has been accused of improperly generating $12.5 million of interest income from handling Medicare funds.

The inspector general of the Department of Health and Human Services said $252 million-asset Highland Community Bank skirted Medicare rules to make the interest from federal money from 1993 to 1999. Highland is one of 20 banks that act as intermediaries between the government and private insurers. The accusation was Highland's third scrape with federal authorities in recent months.

June Gibbs Brown, the Health and Human Services inspector general, said her office and the Health Care Financing Administration are seeking to recoup the $12.5 million from Highland.

Also, the bank's annual Health Care Financing Administration contract, which expires April 1, will not be renewed.

Highland has been working with Medicare since 1978. An official of the agency, speaking under condition of anonymity, said Bank One Corp., Chase Manhattan Corp., and American National Bank in Cheyenne, Wyo., have already picked up much of Highland's Medicare business.

Ms. Brown discussed the case last week in testimony before a House Government Reform subcommittee.

Each day, she said, intermediary banks receive and process piles of claim checks from private insurers made out to doctors and hospitals. The banks are allowed to withdraw from the Treasury only the amount of Medicare funds needed to cover checks or wire transfers that would be posted the following day, and then must deposit the funds directly into the insurers' demand accounts.

But Highland repeatedly withdrew hundreds of millions of government dollars daily before the money was needed, Ms. Brown said. It then temporarily diverted the money to other banks' overnight accounts, thereby earning interest, she said.

"Bank officials believed that withdrawing funds a day early was a 'perk' of maintaining Medicare accounts, and that bank charges alone were not sufficient to cover administrative expenses for the accounts," Ms. Brown testified.

George Barr, Highland's new president and chief executive officer, disputed the testimony. "We have not taken funds early," said Mr. Barr, who joined Highland in February. "We have very carefully reviewed the contract and all related documents. We disagree with her conclusions."

Still Mr. Barr acknowledged that all of Highland's business with Medicare insurance providers except one will be terminated before March 31, and that the other insurer will follow later.

Ms. Brown said Highland's practices came to light in early 1999 during an examination by the FDIC, which then notified the Health Care Financing Administration.

The Medicare interest accounted for 14% of the $90.3 million of interest income that Highland earned between 1993 and 1999. Its net income in those seven years was $13.7 million, according to FDIC reports.

Mr. Barr said the loss of the Medicare business would not have an "adverse impact" on Highland's profitability.

Alwyn Cassil, a spokeswoman for Ms. Brown, said her office is investigating other banks to determine if they have similarly run afoul of Medicare-funds procedures. Bank One and American National told American Banker that they have not.

In December the Federal Deposit Insurance Corp. slapped the bank with a cease-and-desist order, saying records were so sloppy that it was unclear whether it was solvent. Regulators said many of the record problems, which cost the chief executive officer his job, were rooted in the currency exchange business that the bank operates at O'Hare International Airport.

And in early January the Health Care Financing Administration, which runs Medicare, said Medicare payments across the country were delayed because a Highland computer system crashed, apparently because of a Y2K-related bug.

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