Taking On The “Epidemic” of Health Care Fraud

When it comes to reducing health care spending, everyone agrees that ferreting out the fraud and abuse in the system is absolutely imperative. But despite this urgency, because fraud pervades almost every facet of our health care system, routing it out will be a formidable task. Will an injection of funding, new anti-fraud initiatives coming from the Affordable Care Act, and a fundamental change in the way the government pays for certain services allow us to finally make a dent in health care fraud?

First of all, getting a fix on the total cost to taxpayers from health care fraud is like guessing how many jellybeans are in a jar. Some estimates calculate only “improper billing”—payments made in the wrong amount to the wrong person or for the wrong reason—reported by the Medicare and Medicaid programs. Other figures include private insurance fraud in the mix. Still other estimates factor in waste and abuse as well (this includes improper use of procedures and tests, preventable errors and hospital readmissions and defensive medicine costs; for example.)

Louis Saccoccio, executive director of the National Healthcare Anti-Fraud Association—whose members include about 100 private insurers and public health agencies—testified recently at a House Ways and Means Committee hearing that financial losses due to health care fraud range from $75 billion to a staggering $250 billion a year. Meanwhile, the Centers for Medicare and Medicaid Services (CMS) estimated that in fiscal year 2010, government health programs made a total of over $70 billion in improper payments, about $48 billion of them paid by Medicare alone.

Even more confounding, “fraud” can be perpetrated on vastly different scales: by multi-state organized crimes rings that improperly bill Medicare for $40 million dollars of home health care, by a single physician who brings in an extra $20,000 a year by regularly “up-coding” office procedures (i.e. like the dermatologist my daughter used to see who squeezed a pimple at each visit and billed our insurance $250 for “acne surgery”), and by giant health care companies like HCA who systematically defrauded Medicare of hundreds of millions of dollars.

According to experts like Gerald T. Roy, deputy inspector general in the Department of Health and Human Services’ Office of the Inspector General, health care fraud is so extensive because it is so easy to commit. The federal health care system is “trust-based,” (meaning that providers are presumed to be on the up-and-up), there are low barriers to entry, lucrative targets, and perpetrators see the risk of detection as low. Beyond that, the penalties for committing fraud have historically been low—criminal prosecution is reserved for the biggest defrauders, many individual providers get a warning but are allowed to continue participating in government programs.

All a scammer needs to get started is a government-issued provider number, Medicare or Medicaid beneficiary numbers, and billing codes for goods or treatments. Once those are submitted, government computers tend to automatically pay claims. There are plenty of doctors or clinics willing to sell access to their provider numbers and, Roy told a House panel recently, “we estimate that 270,000 Medicare beneficiary numbers have been compromised and may be employed by criminals as part of national fraud schemes.”

“The perpetrators of these schemes range from street criminals, who believe it is safer and more profitable to steal from Medicare than trafficking in illegal drugs, to Fortune 500 companies that pay illegal kickbacks to physicians in return for Medicare referrals,” says Roy.

On March 2, three separate Congressional panels were convened to hear testimony from witnesses including government investigators like Roy, CMS officials, academics, and, in the case of the House Ways and Means panel, a Nigerian man convicted of defrauding Medicare of nearly $10 million as leader of a multi-state crime ring. All witnesses described an out-of-control epidemic of fraud and many discussed their hope that increased federal activity and new provisions in the Affordable Care Act will be able to at least help stem the tide.

A week later, the U.S. Government Accountability Office released a report critical of the two information systems set up by CMS specifically to detect Medicare and Medicaid fraud, calling them "inadequate and underused." These systems—one is a centralized repository for Medicare and Medicaid claims data, the other is an on-line portal that will allow contractors access to this data—cost the federal government $158 million and, according to the GAO report, have been plagued by delays, failure to train contractors and other bureaucratic problems.

Between the GAO report and the Congressional hearings, it is glaringly clear that despite a growing number of high-profile cases like HCA’s nearly $2 billion Medicare fraud settlement, past government efforts to prevent and detect fraud have been stymied by the sheer extent of the problem and the under-powered, piecemeal efforts to combat it.

But there is hope. The Affordable Care Act provides an additional $350 million over the next ten years to help fund new initiatives to more effectively fight fraud. These funds will be used to support the development of a an even larger general repository that will allow disparate agencies such as Medicaid, the Veterans Administration and Social Security to share and mine data, identify criminals and ultimately, prevent fraudsters from plying their trade. The ACA also directs CMS and the Department of Justice to hire new investigators and agents to work with these systems.

Another change is that providers and suppliers at high risk for fraud, including durable medical equipment (DME) suppliers (wheelchairs, home infusion products, orthotics, prosthetic devices etc.), home health care agencies, and Community Mental Health Centers, will be subject to greater scrutiny and oversight. Since last March, all Medicare providers and suppliers (new and old) have been required to re-enroll or be re-validated to participate in the government program. CMS places providers and suppliers in one of three risk categories – limited, moderate, or high – representing the different levels of screening they will undergo based on their perceived potential to commit fraud, waste and abuse in federal health care programs.

So, for example, skilled nursing homes and hospitals are included in the “limited” screening level, meaning that they will undergo screening procedures similar to those already in use. Out-patient rehab centers that provide services like physical and occupational therapy, hospice organizations, and home health agencies already enrolled in the system are included in the “moderate” screening level which will add a site visit to current screening procedures. Consigned to the high-risk level are newly enrolling home health agencies, community mental health centers and DME suppliers. Besides standard screening procedures and a site visit, employees of these suppliers will eventually be subject to background criminal checks and fingerprinting.

Through the ACA’s anti-fraud initiatives, the HHS Secretary can now exclude providers and suppliers who provide false information on an application to enroll or participate in a federal health care program. New fines and penalties will be levied on providers who order or prescribe items while they’ve been excluded from federal health care programs, as well as on doctors or medical suppliers who identify a Medicare overpayment and do not return it. A provider or supplier excluded from Medicare is now banned from participating in Medicaid (and vice versa). Finally, in the interest of improving fraud deterrence, the ACA calls for dramatically increasing the federal sentencing guidelines for health care fraud offenses, especially those that involve large amounts of money.

The new focus of the government’s anti-fraud efforts is best summed up by Peter Budetti, Director of the Center for Program Integrity at the Centers for Medicare and Medicaid Services who told the Senate panel,  that “CMS is pursuing an aggressive…strategy that seeks to prevent payment of fraudulent claims, rather than chasing fraudulent providers after a payment has been made.”

In other words, the government has decided that after years of playing “pay and chase;” hunting down fraudulent payments and law-breakers after they’ve already bilked the system, it’s time to be proactive. Instead, the focus will be on using a mix of sophisticated fraud detection technology (intensive analysis and cross-checking data from central repositories), better screening of providers and suppliers, and increased “on the street” surveillance and investigation to prevent scams from proliferating in the first place. Another new focus will be to expand initiatives like the Medicare Strike Force; a collaboration between the Office of Inspector General, the FBI, regional Medicaid Fraud Control Units and other law enforcement agencies that targets large defrauders and boasts a 94% conviction rate.

Finally, there will be changes in Medicare payment rates that may indirectly impact the level of fraud in one particularly scam-prone business; durable medical equipment suppliers. The government (after 8 years of stalling over two administrations) began a competitive bidding process earlier this year for durable medical equipment (DME) that CMS claims has already yielded 35% in savings (compared to traditional fee schedules) for some products like oxygen supplies, wheelchairs, hospital beds and diabetic supplies.

This is a good first step because as many experts point out, current reimbursement rates for these goods has made them irresistible to defrauders. Aghaegbuna (Ike) Odelugo, a convicted felon who led a DME ring made up of 14 different companies in 11 states that bilked Medicare out of almost $10 million, agrees. He recently testified that “DME fraud is incredibly easy to commit.” Odelugo added that the “most significant flaw” in Medicare—and what makes it most attractive and lucrative to would-be criminals—are the “beyond exorbitant” reimbursement rates for particular goods and services. He told a House panel:

“An example is the case of the knee braces. These items are available on the market to a DME provider for less than $100.00. Medicare, however, reimburse, if I remember correctly, approximately 1,000% of this cost. Back braces that cost approximately $100.00 are reimbursed at a rate of almost 900%. Wheelchairs that cost less than $1,000.00 are reimbursed at almost 500% of cost. For anyone engaging in fraud, these numbers are too good to be true. It defies logic to believe that a system like Medicare can reimburse at these rates and not attract a great deal of fraud.”

A second round of competitive bidding announced last week “will save Medicare, seniors and taxpayers $28 billion over 10 years” says CMS chief Donald M. Berwick. “Medicare is paying much more than the private sector for equipment like wheelchairs and walkers. By expanding our successful competitive bidding program, we can ensure that Medicare pays a fair rate for these goods.”

(The jury is still out on how successful CMS’s competitive bidding process will be and how it will impact fraud in the DME industry. But just a thought: wouldn’t it be simpler for durable medical equipment prices to be set by the Independent Payment Advisory Board or other panel that isn’t beholden to industry)

There has clearly been a lot activity on the anti-fraud front with new initiatives to both detect scams earlier and punish perpetrators more harshly when they are caught. As OIG’s Roy points out in his testimony, a more sustained focus on targeting areas like New York, Florida and California with law enforcement collaborations has already reaped financial rewards. An April press release from the Department of Justice contends; “Since its inception in March 2007, the Medicare Fraud Strike Force operations in nine locations have charged more than 1,000 defendants that collectively have billed the Medicare program for more than $2.3 billion.”

Those are the spoils from bagging big-time fraud perpetrators. CMS’s Budetti expects fraud prevention initiatives, including those spelled out in the ACA, could save government health programs $32.3 billion over 10 years. That’s not a staggering amount—but it does represent a slowing of the juggernaut.

Reducing “waste, abuse and fraud” has become a mantra for those of us who talk about “bending the cost curve” of health care. Estimating how much needless taxpayer money is spent on this irksome trio is ridiculously difficult—in large part because it’s so hard to differentiate between what constitutes waste vs. abuse vs. fraud. To me, fraud is distinct from the other two because it involves malicious intent—knowingly submitting false claims, and improperly billing with the clear motive of profiting financially from these actions. The government’s new focus on cracking down on fraud is laudable for its emphasis on a wide range of approaches. If these initiatives can be sustained, even in the face of budget cuts, attempts to shift control of Medicaid to states and conservative attempts to privatize Medicare, they may put a lot more accountability–and savings–into our struggling health care system.

Health care fraud is a big topic. In future posts I will revisit specific anti-fraud efforts to illustrate the breadth of the problem. First up will be the view from Florida; the state with the dubious distinction of having the highest rate of Medicare and Medicaid fraud in the country. Now the site of a Medicare Strike Force, it has long been considered “ground zero” in the fight against health care fraud.