Medicare and the President’s Deficit Reduction Plan: Shifting Costs to Seniors

How Cost-Sharing Leads to More Cost-Sharing: A Slippery Slope

President Obama’s newest proposal for reducing the federal deficit would slice Medicare reimbursements to drug-makers, nursing homes, rehabilitation facilities, home health services and teaching hospitals. As I explained in Part 1 of this post, using figures from the non-partisan and highly respected Medicare Payment Advisory Commission (MedPAC), these are groups that Medicare often overpays.  Some skilled nursing facilities turn an 18 percent profit on Medicare patients while reimbursements to home health agencies have consistently and substantially exceeded costs.

By and large, these recommendations make sense, and could help throw a spotlight on excesses in Medicare spending. But I very much doubt that either Congress or the Super Committee charged with addressing the deficit will embrace the President’s proposals in these areas. The lobbies that represent drug-makers, our most prestigious academic medical centers and three health care industries that have been taken over by for-profit companies (skilled nursing facilities, rehab centers and home health service agencies) can write the checks that help swing elections.

Proposals That Are Far More Likely to Find Support in Washington

President Obama’s plan also targets future retirees, asking them to shoulder a larger share of Medicare’s costs. Specifically, starting in 2017:

•    New Medicare beneficiaries would be hit with a penalty if they purchase MediGap insurance that covers all or most of Medicare’s copayments and deductibles. Administration officials claim that such insurance encourages excessive use of medical services.

•     Upper-income beneficiaries would be expected to kick in higher monthly premiums for doctors’ services (Medicare Part B) and prescription coverage (Part D).  Eventually 25 percent of all Medicare beneficiaries would be counted as “upper-income,” and hit with the 15 percent increase. This recommendation is likely to win votes, particularly among conservatives who would just as soon undermine wide-spread support for Medicare. “Divide and conquer” has long been considered a shrewd strategy. (Did someone say “class warfare”?)

•    All new beneficiaries would be asked to pay a higher annual deductible for outpatient services. The so-called Part B deductible, currently $162, is indexed for inflation. It would go up by $25 in 2017, 2019 and 2021.

•    New enrollees would have to come up with a $100 copayment for home health services, unless they have just been discharged from a hospital or nursing home.

•    Some Medicare beneficiaries don’t pay their deductibles or co-pays—usually because they just don’t have the money. Medicare currently reimburses 70 percent of those bad debts; the President proposes slicing those payments to 25 percent, beginning in 2013. This cost-saving strategy would disproportionately affect hospitals that treat high numbers of low-income Medicare beneficiaries: safety-net hospitals and rural hospitals. As a result, some might not be able to offer all of the services that the nation’s most vulnerable Medicare beneficiaries need.

In the aggregate, these changes are, as the President has said, “modest.” But the impact on individual low-income and middle-income individuals could threaten their access to care. The problem is that as of 2009, Medicare households were already spending an average of $4,620 on health care, more than twice what non-Medicare households spent, according to the non-profit Kaiser Family Foundation.

Going forward, Medicare beneficiaries are projected to lay out as much as a quarter of their income on health care in 2020, up from around a sixth now. “Some have the impression that seniors are quite wealthy and could afford more premiums,” says Tricia Neuman, director of the Medicare Policy Project at the Kaiser Family Foundation. “The numbers tell a different story.”

Median income for women over 65 now stands at roughly $15,000. (This estimate is based on a Census Bureau report showing that, in 2008, the average woman over 65 lived on $14,500.) Half make do with less. That $15,000 includes income from all sources: Social Security, wages, self-employment, pensions, government assistance, and investment income. As of 2010, the Current Population Survey reveals that households headed by someone over 65 reporte  $31,400 in joint income.

Even relatively affluent seniors are hardly rich. Singles over 65 who earn as little as $33,000 rank among the wealthiest 20 percent. At first glance, married couples appear to be doing better: to make it into that top quintile they must be earning at least $85,000 a year. But this is in large part because in many cases one spouse is under 65 and still working. In 2008, 41 percent of senior households reported earned income.  Over time, as working partners retire, older couples are forced to live on less.

At one time, the notion of shifting Medicare costs to seniors was considered a third-rail proposal. But these days, conservatives have stoked the intergenerational wars, and many younger Americans resent the “entitlements” that their elders receive, especially because deficit hawks assure them that after spending a lifetime supporting wizened boomers, they will never receive a penny of Social Security or Medicare benefits themselves.

Thus, even a Democratic President is willing to open the door to more cost-sharing. Unfortunately, experience shows that cost-shifting tends to lead to more cost-shifting—once an initial barrier is overcome, it’s just so easy to continue. At what point will Medicare become unaffordable for middle-class seniors? At what point will wealthier Americans who are asked to pay climbing premiums rebel, and decide to drop out of all or part of the program?

Yet when compared to more Draconian solutions—such as giving 80-year-olds vouchers and letting them fend for themselves in a for-profit insurance market—President Obama’s recommendations seem mild. This may explain why many progressives appear willing to accept what I see as another step on a slippery slope that, ultimately, could destroy Medicare.

Who Lobbies for Seniors? Can They Count on the AARP?

But don’t seniors, like drug-makers and nursing homes, have a group dedicated to advancing their interests in Washington? Yes, the American Association of Retired Persons (AARP) boasts 40 million members, and has long been seen as one of the most powerful lobbies in the nation.  Nevertheless in recent months the non-partisan organization has been accused of “waffling” on entitlement programs as it “gets too cozy with the political leadership it is trying to affect.”

Supposedly, size gives AARP its strength in Washington. But as Laura Olson and Frank Davis point out in an essay on “Senior Interest Groups and the Politics of Aging,” size also blunts its sense of mission: “While the AARP has spawned an enormous membership using material incentives, the diversity of its broad-based membership, with its questionable commitment to political causes, compromises its ability to launch and sustain political campaigns . . . The result is that AARP’s membership numbers may overstate its clout on a range of  political  issues, and policy makers seem acutely aware of this fact.”

The turning point for the AARP came in 1994, Olson and Davis suggest, when the organization endorsed the Democrats’ health care bill. At the time, it was rumored that many members resigned: “Since that time,” they write, “the group has been particularly careful to take ‘moderate non-threatening stands.’”

Granted, just last week, Executive Vice President Nancy LeaMond issued a public statement responding to the President’s proposal, and objecting, in no uncertain terms, to the idea of raising out-of-pocket costs for seniors. But there are indications that, behind the scenes, the nation’s largest senior lobby already has capitulated on this issue, and sees more cost-sharing as inevitable. “Our goal is to limit any changes in benefits,” John Rother, executive vice-president of AARP told the Wall Street Journal in June.

Thus, when faced with President Obama’s proposal that seniors should pay a surcharge on generous MediGap policies that cover out-of-pocket costs, Rother didn’t protest. Instead, the Boston Globe reported that he expressed relief that that no one is proposing “a flat-out prohibition against Medigap policies.”

Reportedly, some AARP officials were incensed by Rother’s public comments, and earlier this month the AARP announced that he is leaving the organization to become president and CEO of the National Coalition for Health Care. Nevertheless, Rother told the Wall Street Journal that “internally there was never a disagreement over the policy though some were upset by the “timing” of his remarks. In June the AARP issued a statement which seemed to confirm Rother’s claim, revealing that it might accept some benefit cuts to Social Security in order to preserve the solvency of the program.

Yet those who analyze safety-net programs point out that, when compared to Medicare, Social Security’s financial problems could easily be fixed. As The Century Foundation’s Greg Anrig has argued: “Social Security’s currently strong finances could be sustained beyond a 75-year time horizon entirely through modest tax increases targeted toward high-income workers. . . . One . . .  way to do that would be to raise the cap  on annual wages subject to the Social Security payroll tax, which is currently $106,800.”
In other words, Social Security benefits do not need to be trimmed. If the AARP is willing to see them on the chopping block, what does this say about its commitment to preserving Medicare as a program that seniors can afford?

A Closer Look at the President’s Proposals 

  • Penalizing Those With Supplemental “MediGap” Plans that Cover Out-Of Pocket Costs

Starting in 2017, this provision aims to save approximately $2.5 billion over 10 years by collecting  surcharges from  new beneficiaries who purchase supplemental MediGap policies with particularly low cost-sharing requirements. The surcharge would equal roughly 15 percent of the average Medigap premium. The hope is that if seniors duck the penalty by switching to less expensive MediGap policies that don’t offer “first dollar coverage,” they will be less likely to seek out “inappropriate” or unnecessary care. This provision appeals to those politicians who cling to the fantasy that if only the elderly had more “skin in the game,” they would suddenly become medical experts, able to make more prudent decisions about what care they need.

But as Naomi recently pointed out, when co-pays and deductibles are not covered, seniors are just as likely to defer preventive care as they are to skip an unnecessary doctor’s appointment. This, she reports, is particularly true of “the most vulnerable”—those who are “poor and chronically ill.”

The typical 70-year old simply does not possess the medical knowledge to discriminate between essential and optional care. Should he go to a doctor to check out that odd-looking growth on his back? After all, it’s no bigger than a pencil eraser; years ago, when he had a doctor look at something similar, it turned out to be nothing. The average senior also doesn’t know when he needs a colonoscopy, and almost certainly isn’t particularly eager to find out.

What many politicians don’t understand is that medicine is not “consumer-driven.” The supplier is in the driver’s seat. Relatively few patients wind up on an operating table because they “demanded” surgery. A doctor tells them what they need. Most patients then do what a doctor tells them that they should do. The only way money is saved, Naomi points out, is when “participants decide not to initiate care.” In other words, if a Medicare beneficiary doesn’t go to a doctor in the first place, no one will tell him that his  blood pressure is going through the roof—or that he should pay more attention to his diabetes. In these cases, patients just don’t receive the preventive care and chronic disease management that they need.

Once patients finally do go for help, the fact that they have a high deductible has virtually no effect on how much Medicare will wind up laying out for their treatment.  In the healthcare market, the supplier determines how much care the patient needs, and sends Medicare the bill. As Naomi writes: “once patients are hospitalized or under a physician’s care, the choices about the kind of treatments or cost of treatments they receive are no longer in their control.”

Politicians such as Joe Lieberman claim that when seniors have “first-cost coverage’ they use more health care. What he ignores, Naomi observes, is that “Medicare recipients who buy the most comprehensive MediGap policies often are low-income and in fact, many do suffer from chronic diseases.” So if they utilize more health care, “it’s because they are also sicker than the average Medicare beneficiary.” Indeed, according to a report released in May by America’s Health Insurance Plans (AHIP), some 33 percent of all Medigap policyholders had annual incomes under $20,000. Nearly 54 percent reported annual incomes below $30,000. In rural areas, AHIP revealed, some 62% of seniors with Medigap policies had incomes below $30,000.

The fact that low-income seniors scrape together the money to pay for comprehensive MediGap plans shows that while they may not know exactly what medical treatments they need, they do know that they need the financial protection that these policies offer. Typically, poorer 65-year-olds are sicker than the rest of us, and they are aware of the many gaps in traditional Medicare. They realize that they cannot afford 20 percent co-pays for doctors’ visits, a $1,132 deductible for a short hospital stay, or hefty co-pays for a lengthier hospitalization. Indeed, these out-of-pocket costs can easily force them to avoid doctors altogether. Rather than penalizing them for make a prudent choice, we should encourage them to buy policies that provide the first-dollar coverage that they sorely need.

  • Means-Testing Medicare

One of the more lucrative recommendations in Obama’s plan seems, at first glance, far more progressive. Rather than targeting the most vulnerable seniors, it asks more affluent beneficiaries to pay higher premiums for doctors’ visits (Medicare Part B) and the drug prescription program (Medicare Part D). The 15 percent surcharge is expected to generate $20 billion over 10 years. Today, only the wealthiest 5 percent of Medicare’s 48 million beneficiaries pay higher premiums. Under this proposal, 25 percent of all seniors would be labeled “high income.”

This raises a question: just how rich are the wealthiest 25% of U.S. seniors? Today, an individual with total income of  $31,000 makes the cut-off for the top quartile. (This 2011 estimate is based on 2008 figures from the Social Security Administration). Stories in the mainstream media have suggested that only seniors earning over $85,000 would be subject to the surcharge. But the Social Security Administration’s numbers show that $85,000 represents the joint income of married couples when one of the spouses is over 65, and as noted earlier, in many cases the younger spouse is still working. As the couple ages, their combined income plunges. And as spouses die, many widows wind up living on an average of $15,000 while the typical widower averages just $27,000.

As for those who are truly wealthy, they already contribute more. The Medicare Modernization Act of 2003 (MMA) established Part B premiums that vary by income; those changes took effect in 2007. The Affordable Care Act of 2010 (ACA) then brought means-testing to Part D; wealthier seniors began paying higher premiums for the drug program this year. Finally, as the Incidental Economist’s Austin Frakt notes: “Medicare benefits are implicitly means tested through a number of premium and cost-sharing support programs for low-income beneficiaries, such as the Medicare Savings Program (Part B), the Low Income Subsidy Program (Part D), and Medicaid.”

Now, the president proposes building on the means-testing that is already in place by adding the 15% surcharge.

Many would argue that this is both fair and necessary. As Frakt puts it: “Since revenue cannot be raised where it does not exist—e.g., from the millions of beneficiaries living at or near poverty—increasing premiums on wealthier program participants seems like a natural way to shore up program finances.”
But, he acknowledges, there is a real danger that these hikes could undermine broad support for Medicare. The very rich already chip in more than the rest of us through payroll taxes. (Keep in mind that while workers pay Social Security taxes only on income up to $106,800, they pay Medicare taxes on all earnings. Traditionally, the program has been extremely popular because, in the end, everyone benefits equally. Whether you are rich or poor, how much you take out of Medicare turns on how long you live and how sick you are.

This seems to me fair.

Moreover, asking the wealthy to pay significantly higher premiums on top of fat payroll taxes risks alienating affluent Americans. If they begin to think of Medicare as a program for the middle-class that asks the wealthy to foot more and more of the bill, they are as Frakt observes, increasingly “likely to be sympathetic to changes” that reduce benefits, or raise out of pocket costs for everyone.

Commenting on Obama’s deficit-reduction plan, he raises the critical question: “Have we reached the tipping point where increased premiums for higher-income beneficiaries will threaten popular support for Medicare in a significant, meaningful way? It’s instructive to recall the Catastrophic Coverage Act of 1988, repealed one year after enactment after a revolt by seniors who were asked to shoulder the costs of the program through income-related premiums. Though the uprising against the Catastrophic Coverage Act was due in part to confusion over the law, it stands as a reminder of the political power of beneficiaries and interest groups in the context of the introduction of income-based premiums. The wealthy are a potential source of revenue for Medicare but also possess the means to finance the most strident challenge to it.”

This is precisely the danger. Rather than threatening affluent Americans with additional surcharges, we should concentrate on the fact that one out of three Medicare dollars are squandered on overtreatment and overpayments. There are tremendous savings to be realized if we just focus on the waste.

  • Hiking the Part B Deductible

All new beneficiaries would be hit with this increase. Currently, the deductible for doctors’ visits and other out-patient services is $162, and is indexed for inflation. Under the president’s plan it will go up by $25 in 2017, 2019 and 2021. Phased in over time, this is a small increase that would generate $1 billion over 10 years. But as I explain below, that extra $25 gives seniors another reason to forego medical treatment.

  • Requiring a $100 co-payment for Home Health Services.

As noted in part 1 of this post, the Medicare Payment Advisory Commission warns of “widespread fraud” in this area. Some home health agencies send nurses to give supposedly homebound diabetics insulin injections. Too often, these patients are neither homebound nor unable to give themselves the injections. Some don’t even have diabetes. The co-pay would discourage these patients while raising $400 million over 10 years.  But it represents yet another burden for median-income widows who truly need those nurses.

  • Reducing Reimbursements to Providers Stuck with “Bad Debt”

Some Medicare beneficiaries who receive hospital care never pay their deductibles or co-pays, usually because they simply don’t have the money.  Even a short hospital stay requires that Medicare beneficiaries meet a deductible of more than $1,000. Given that 50 percent of all Americans over the age of 65 make do with less than $20,000 a year–sometimes far less– it should not be too surprising that hospitals wind up with a pile of unpaid bills.

To ensure that the costs of these services are not passed on to non-Medicare patients, Medicare currently reimburses providers for 70 percent of these bad debts after they make “reasonable and customary” attempts to collect. The President’s package would cut reimbursements to 25 percent, yielding $20.2 billion in savings from 2013 to 2021. Some argue that hospitals are not making a sufficient effort to track down Medicare beneficiaries who fail to meet their obligations. By covering 70 percent of their losses Medicare is making it too easy for them to sit back and wait from the check from the government.
The catch is that this cost-saving strategy would have the greatest impact on hospitals that treat high numbers of low-income Medicare beneficiaries: safety-net hospitals and rural hospitals. As a result, some might not be able to offer all of the services that the nation’s most vulnerable Medicare beneficiaries need.

  • Shifting Costs To Seniors: Penny-Wise and Pound Foolish?

A study published in the New England Journal of Medicine just last year shows that when Medicare managed care plans raise co-pays for outpatient visits, seniors go to the doctor less frequently. This of course, is just what the insurers hoped they would do. Having more “skin in the game” made them think twice about seeing a doctor.

Unfortunately,  thinking twice didn’t mean that they thought wisely. Too often patients skipped needed care and wound up in the hospital. “Policymakers should be very sensitive to adverse and unexpected consequence of increased cost-sharing,” warns Dr. Amal Trivedi, an assistant professor of medical science in the Department of Community Health at Brown University’s Alpert Medical School and the lead author on the study. “It can be a lose-lose proposition.”

Researchers looked at Medicare data involving nearly 900,000 beneficiaries; comparing 18 Medicare plans that increased co-payments for outpatient care to 18 that offered similar coverage but kept co-payments steady. The more expensive plans saw co-payments double for primary care, from $7.38 on average to $14.38, and from $12.66 to $22.05 for specialty care. For the plans where co-payments stayed constant, those co-payments remained at $8.33 for primary care and $11.38 for specialty care.

The following year, patients in health plans that increased co-payments cut back on doctors’ visits, just as expected. Higher cost-sharing led to nearly 20 fewer annual doctors’ appointments per 100 patients. But hospital admissions rose by 2.2 admissions per 100 patients, and the insurer wound up covering 13.4 additional  hospital days per 100 enrollees. By contrast, health plans that maintained low co-payments saw little change in hospital admissions.

Trivedi and his colleagues found the effects of higher co-payments for outpatient care were particularly magnified among lower income senior citizens and among patients who suffered from hypertension, diabetes or a history of heart problems.

The researchers concluded: “increasing copayments for ambulatory care among elderly Medicare beneficiaries may be a particularly ill-advised cost-containment strategy. Assuming an average reimbursement of $60 for an outpatient visit, seven annual outpatient visits per enrollee, and an average copayment increase of $8.50 per visit, a Medicare plan would receive an additional $5,950 in patient copayments and avert $1,200 in spending on outpatient visits for every 100 enrollees, for a total of $7,150 in savings for the health plan. However, assuming an average cost of $11,065 for hospitalization of a person 65 to 84 years of age in 2006, our estimates suggest that expenditures for inpatient care will increase by $24,000 for every 100 health plan enrollees in the year after copayments for ambulatory care are increased.”

Trivedi and his colleagues point to two other studies which report similar results: “The introduction of a $1 copayment in California’s Medicaid program in 1972 was associated with an 8% reduction in physician visits and a 17% increase in hospital days. Similarly, the introduction of a $10 copayment among elderly beneficiaries receiving supplemental insurance benefits through the California Public Employees Retirement System resulted in substantial declines in outpatient visits but increased utilization of hospital care.”

It’s worth noting that even a small co-pay can stand in the way of patients getting the care and counsel that they need.

One can only wonder how some of the larger increases in Medicare cost-sharing that President Obama is now recommending would affect seniors. These studies suggest that Medicare stands to lose more than it saves.

Why Washington Is Wrong About Cost-Sharing

Politicians may think that cost-shifting represents a shrewd way to reduce overtreatment. But politicians are not physicians. They don’t begin to grasp the uncertainties of medical science or the complexities of the human mind/body. And this is why politicians should not be making health care policy.

Sometimes even a doctor cannot be sure whether he needs to see a patient in three months, in six months or in a year. Should he order another test? Does the patient need to see a specialist? At least the physician can consult evidence-based research when prescribing a course of treatment. But how can we possibly expect a 70-year-old diabetic with little education to make savvy medical decisions?

19 thoughts on “Medicare and the President’s Deficit Reduction Plan: Shifting Costs to Seniors

  1. We forgot hospice. My 96 year old mom was recently placed on hospice. The caregiver at the assisted living facility shook her head and said they are always jumping the gun on this saying she did not need hospice. However, look at the winners. The hospice company charges over $6,000/mo and receives about $4,500 from Medicare. The owner of the facility charges me an additional $1,000/mo for her care and Kaiser no longer incurs any costs. She is on no (that’s right NO) medications, no equipment (catheter, IV, oxygen, etc. – nothing) and has no underlying health condition like diabetes, COPD, CHF, cancer or ANYTHING. When I tried to exercise my power of attorney and discontinue hospice I was told she could no longer be cared for in the facility because a doctor has made the determination she needs a higher level of care. Catch 22.
    I called the doctor and asked him to NOT recertify her. Thank heavens he understood and agreed.
    BUT WAIT – I guess I should have thought of all the jobs this created. I feel so sick. Now I think maybe I need hospice.

  2. I suggest the following three initiatives to mitigate fraud in the Medicare program. First, require every provider with the authority to bill Medicare to have a robust ID card including a name, physical address, picture, numerical identifier and biometric identifier such as a fingerprint. Second, extend the CMS payment schedule to 30 days common throughout much of commercial commerce to allow more time to identify suspicious bills before they are paid. Third, make Medicare’s vast claims database, including payments by individual provider, available to outside analytics firms to help CMS identify potential fraud. None of these approaches may easily lend themselves to a quantifiable budget savings score from the CBO but they seem like common sense approaches to me that could reduce fraud through deterrence alone as providers may perceive a much higher probability of being caught than they do now which should make them less likely to engage in fraud in the first place.

  3. Barry —
    The idea of making the Medicare payment process more like private insurance, including deliberately delaying payments as many private insurers do, would make sense if it were true that private insurance experienced less fraud than Medicare. In fact, private insurance experiences more fraud. Private insurance accounts for about half of total health care spending, with public insurance — including Medicare, Medicaid, veterans’ and servicemen’s programs, the PHS and IHS — accounting for the other half. However, according to private insurance industry groups private insurance accounts for about 60% of fraud and the public programs combined about 40%. This figure includes Medicaid “fraud” that involves very low income people understating income to qualify, meaning that a family that earns $7500 a year gets insurance intended to be cut off at $7000.
    The techniques that account for the difference in payment of claims by private insurance, including large volumes of paperwork for providers and lengthy delays before processing even starts, do not address significant fraud. Most of the estimated $150 billion a year in fraud payed by private insurance is based on very well documented claims and made by people who are good at the fraud. The same is true of the estimated $100 billion a year lost by public programs.
    This is an especially timely topic since the NYT wrote an article about this three days ago.
    For what it’s worth, I think that the best tools at hand for reducing fraud would be first to offer large rewards to whistle blowers who report fraud, based on a percentage of the fraud. The potential for reaping millions of dollars — or even billions — would lure more people like the pharmacy company in Florida that has devoted its business to finding fraud in pharmaceuticals and is making a lot of money doing so. Second, I would agree that there should be a system to make vendors other than physicians and hospitals comply with a robust system of ID, and penalize people committing fraud by not allowing them to make any more claims. That works as a powerful incentive to reduce fraud by doctors, and would work just as well with medical suppliers if it were enforced.

  4. Meanwhile, I am very happy to see yet another well designed study that documents that programs that make access to health care more difficult and costly often cost more, not less, money, due to discouraging patients from seeking help on a more timely basis and instead encouraging presenting later and sicker. This has been documented many other times in the past, but somehow the people who believe that making people pay more will result in savings never get it.
    Most likely the problem is that the enthusiastic supporters of more “skin in the game” base their ideas on ivory tower theories and ignore the test of real world economics. Unfortunately, there are large numbers of people whose test of reality is “it makes sense to me” or — more sophisticated but equally wrong — “the models developed in our calculations work out very well mathematically and therefore must be correct, and to heck with what is actually happening.” Economists like to refer to the latter as “zombie economics” because no matter how much real world history disproves the beliefs they continue to walk the earth, eating the brains of the unwary and gullible.

  5. Pat –
    When I talk about provider fraud, I’m thinking about the following:
    1. Billing for the same service more than once. Insurers are generally pretty good at catching this as far as I can tell.
    2. Billing for services never provided.
    3. Inappropriate upcoding.
    4. Recruiting patients to submit to services, tests and procedures that are totally unnecessary such as mental health evaluations, etc.
    Upcoding is probably the trickiest to combat. I don’t hear much about #2 and #4 from private insurers but I hear plenty from standard Medicare and Medicaid. I don’t view overtreatment or care that’s not evidence based as fraud though it is wasteful and unnecessary and generally gets paid for by all insurers both public and private.
    Perhaps you could shed some light on how the studies you cite define fraud and how much of it supposedly occurs among all payers.
    On the patient side, understating income to qualify for benefits is only an issue for Medicaid while hiding pre-existing conditions is an issue for private insurers in states that use medical underwriting as opposed to community rating. Once subsidies kick in under PPACA in 2014, I think understating income could be a huge issue. The IRS is good at matching up documents like W-2’s and 1099’s but they are not good at finding income earned by people in personal service businesses who work for themselves or small employers or income that goes unreported by small business owners.

  6. All:
    Tilting with wind mills when you attack fraud. It is a large issue; but, it is still not the biggest issue we face in healthcare, healthcare insurance, and controlling the root causes.
    “one out of three Medicare dollars are squandered on overtreatment and overpayments.”
    In any of the scenarios proposed by Congress or the President, the attack is not targeted on service for fees. Untill that issue is addressed everything is secondary and the cost model will continue to exasberbate all solutions because they do not et to the root cause.

  7. Pat S., Barry, run75411, Mike
    Pat S.–Good to hear from you.
    Yes, I too have read that
    fraud is a bigger problem in the private insurance sector.
    Private insurers can pass the losses on in the form of higher premiums which means they have less incentive to invest in fighting fraud.
    Of course Medicare also can raise deductibles, but not by nearly as much.
    Rewards for whistleblowers seems to me an excellent idea. Often, there are people on the fringes of an operation who know what is going on. If the whistle-blower is a patient, he would need to receive immunity or else he wouldn’t come forward.
    Robust ID for vendors also sounds like a good idea, though it would involve quite a bit of bureaucracy and paper-work.
    Pat S.–Re “skin in the game”– Yes, those who have a faith-based belief in a particular ideology often ignore empirical reality.
    Private insurers don’t like to talk about the amount of money they lose to fraud because people would realize how much this adds to their premiums as insurers pass along the costs. (See my response to Pat above)
    Critics of govt-based healthcare, on the other hand, like to talk about Medicare and Medicaid fraud because it fits into their belief system: “Gov’t is always inefficient,” and “the poor are always trying to steal from us.”
    I’m not sure that healthcare subsidies will increase under-reporting of income. Tax evasion is enough of an incentive to under-report. But I agree that people who do it to evade income taxes will also get subidies they shouldn’t be getting.
    The biggest problem is cash businesses. I believe that it should be illegal for a business over a certain size to refuse to accept credit cards. Credit cards provide an excellent paper trail of actual revenues.
    Restaurants, in particular, often have a “cash only” policy which allows them to evade both income tax and sales tax.
    I also think that if someone who is self-employed offers a discount if they are paid in cash (rather than by check) they should be turned into the IRS, and the whistleblower should receive a reward. (This probably should apply only to people asking for all cash payments over $2,000 or $3,000.
    Run 75411–
    I wouldn’t be prepared to call fighting fraud “tilting at windmils” but I agree that the amount of $$ wasted on overtreatment is a much bigger problem. The amount of $$ lost is much larger, and patients are actually hurt by overtreatment.
    A good story . . . As for-profit hospice operators have begun to take over the hospice business they have been gouging the government and patients. . ..

  8. Maggie –
    As I noted in my last comment, I think it is important to define fraud. The biggest issues in Medicare and Medicaid fraud, I think, are billing for services never provided, deliberate and inappropriate upcoding and recruiting people for a fee to agree to submit to services that are totally unnecessary. We’re talking mainly about provider fraud here, not poor people trying to steal from us. When PPACA subsidies kick in starting in 2014, though, it will be the middle class that steals from us as millions understate their income which they’re already doing when they file their tax returns and then qualify for health insurance subsidies in addition to underpaying their tax liability.
    Regarding the issue of public sector vs. private sector health insurance fraud, I think it would be interesting to take a known Medicare fraud hotspot like South Florida and compare Medicare spending per person there vs. Northern FL where it’s much less of an issue and then do the same for commercially insured younger people (27-64) and see if the difference in age adjusted per capita spending is anywhere near as large.
    As for people involved in cash businesses, I once asked a neighbor who retired as few years ago as an IRS agent why the IRS can’t do a better job in finding unreported income earned by people who don’t get W-2’s and 1099’s. He said that they would need an agent on virtually every corner to do that. They don’t have anywhere near the manpower to even begin to address the issue. Even whistleblower leads would need labor intensive and time consuming investigations. It’s fine for the big provider schemes that steal millions from Medicare and Medicaid but the individual person who understates his income by five or ten or twenty thousand dollars a year isn’t likely to get caught and they know it.

  9. Barry-
    Thank you for your reply.
    Let me begin at the end of your comment:
    You say that “the person who understates his income by $5,000, $10,000 or $20,000 is not likely to be caught, and they know it.”
    I totally agree. But I would submit that it would be a waste of taxpayers’ dollars to try to track them down.
    The amount of money at stake just isn’t worth the cost.
    As you say,under reform, some middle-class households will get higher subsidies than their real income would justify.
    But consider the state of the middle-classs in this country. As you know, median household income, (which defines “middle class) has fallen to roughly $50,000 at a time when the cost of the necessities of life– food, energy, healthcare and education– are rising.
    The subsidies under the Affordable Care Act are quite generous for low-income families, but I have always felt that they are jusat just
    aren’t high enough for families who fall into the true (statistical) middle-class
    So, while I abhor people who lie and cheat (and I do) I can’t get that upset about some in the middle-class getting the subsidies that they genuinely need. In some cases, they will be trying to protect their children.
    Trying to raise kids on joint income of $50,000 to, say $65,000 is pretty hard virtually everywhere in this country.
    Also, you write that hat when talking about “recruiting people for a fee to agree to submit to services that are totally unnecessary . . . we’re talking mainly about provider fraud here, not poor people trying to steal from us.”
    I agree that the providers are the ones who should be put in jail. But in these cases Medicaid fraud (among the poor) is much more prevalent because poor people need the money providers offer them to submit to unncessary services. Less educated patients also are likely to be less aware that unncessary services can actually hurt them.

  10. Maggie –
    Your suggestion in your last comment that even if people are cheating by understating their income, we should give them more subsidies than they legitimately qualify for because they may have trouble affording health insurance otherwise erodes political support not only for this program but other entitlement programs as well among those of us who are paying the bills.
    I’m more than willing to provide help to people who need it but I expect them to report their income honestly and in full and I expect them to be able to prove that they are who they say they are which is why I am a strong supporter of robust ID cards which the 9/11 Commission recommended.
    With respect to the health insurance subsidy specifically, it’s important to note that the program has a cliff structure at its upper end. That means that at the highest qualifying income, $88,000 or so, the subsidy is about $7K for family coverage. If you earn just $1.00 above the cutoff, you’re entitled to nothing. There are significant numbers of people, I believe, who earn all of their income in the underground economy and don’t even file tax returns. Many others report perhaps half or less of what they really earn. I think it’s highly likely that the subsidy program will cost far more than the CBO projects because incomes will be widely understated to a significant degree and the incentive to understate it will be even greater than it is now.
    For myself, all of my income shows up on a W-2 or 1099 and my brokerage firm calculates any capital gains I may realize. By contrast, I see the underground economy all around me including contractors, landscapers, waiters and waitresses, doctors, lawyers, personal trainers, and small business owners among others. The IRS is very good at matching up documents like W-2’s and 1099’s but they can’t find the undocumented income to any significant degree. While I’m not a VAT enthusiast, at least it would capture some of that unreported income as people who earn it buy things that presumably would be subject to the tax if it existed.

  11. Barry —
    Both the sources for the fraud data are private insurance industry organizations created to combat fraud. Neither specify a definition for fraud, but I am sure include all the activites you cite. They are clearly interested in defining the problem aggressively, and probably include every imaginable fraudulent activity. However, every study I have ever seen of health insurance fraud that is at all comprehensive has always concluded that private insurance fraud outweighs public insurance fraud, partly because of uneven enforcement from company to company, partly because of dealing with complaints by both providers and enrollees if they are very aggressive, and partly because, as Maggie says, the cost of fraud is not as critical an issue when it can be folded back into premiums. Public insurers also have more of a mandate to seek out fraud and a powerful apparatus, up to and including the FBI, for investigation.
    The info about Medicaid and “fraud” in qualifying income comes from an article by conservative economist Gary Becker, who to his credit was attacking aggressive efforts to prevent underdeclaring income as counter-productive and not worth the effort compared to pursuing other higher cost fraud.
    The biggest problems with Medicaid eligibility issues are the extremely low levels of qualifying income in many states, especially Southern states (this means you, Rick Perry.) I have long favored the idea of nationalizing Medicaid, relieving state budgets of the cost (generally second only to education in state budgets,) and creating a more equitable national standard.
    As far is the issue of double billing, Medicare is actually better and quicker at detecting it than private insurance and quicker about getting refunds or refusing payment — mainly due to their highly efficient computerized claims system (providers MUST submit claims electronically,) which also is part of the reason why Medicare is quicker on paying claimes.
    On the point of income tax and income statement cheating, I strongly agree with the idea of better enforcement, but unfortunately we are running against the wind on that, since the Republican House has made defunding IRS enforcement a priority.
    Finally, I agree with both Maggie and “run” that fraud, while a significant issue that deserves attention, is overemphasized because of political efforts by health care opponents while the issue of over-utilization and other inappropriate spending is where the real problem is.

  12. Barry–
    My point was not that it’s fine if people under-report income, but simply that it’s not worth the cost of trying to track down people who under-report relatively small amounts.
    See Pat’s comment: “The info about Medicaid and ‘fraud’ in qualifying income comes from an article by conservative economist Gary Becker, who to his credit was attacking aggressive efforts to prevent underdeclaring income as counter-productive and not worth the effort compared to pursuing other higher cost fraud.”
    Barry, I think you may worry too much about the “underground ecomony all around me” — your response seems more emotional than strictly logical . . . As Pat, Run and Gary Becker all suggest it just isn’t worth expensive, aggressive efforts to ferret out under-reporting of income by middle-class and lower-middle class people.
    White collar fraud, doctors who perform unnecessary surgery on thousands of people, hospitals like Tenet– these are examples of the”higher-cost fraud” that Becker is talking about.
    Also see Pat’s response on the private insurance industry vs. public insurance: Govt has the FBI, and Medicare’s computers.
    Finally, he’s right in noting that conservatives are trying to take funds away from the IRS. These politicans know that the biggest tax cheats are very wealthy individuals and corporations who are more likely to vote for them.
    People who earn less cost us far less when they cheat on their taxes.
    Thanks for your comments.
    I totally agree about making Medicaid a federal program. Some states really can’t afford it (i.e. Alabama) other states simply have no interest in caring for their poor (Texas and Florida) and will do everything they can to avoid providing care.
    A national program would be far more equitable and more efficient. (Administrative costs would be centralized and national Medicaid would enjoy economies of scale when it comes to computerization of billing, health IT, investigating fraud, etc.)
    Most state governors would be thrilled to get rid of Medicaid. States could be asked to contribute to the program according to their
    ability ( based onaverage income in the state and the state’s revenues). If a state had relativelly high average income but low state revenues it might haved to raise its income tax (or institute an income tax) in order to pay its share.
    Many governors would rather simply contribute to the pool and not be burdened with the headache of trying to administer Medicaid. Even if you try to do it well, it’s a nightmare.
    Probably Medicaid should be folded into Medicare (again economies of scale) and all doctors, hospitals and other providers should definitely be paid as much to care for Medicaid patients as they are paid to care for Medicare patients.
    We all know that caring for the poor is not easy. They’re sicker, they have
    more mental health problems, and less education which makes compliance harder. There is absolutely no reason to pay Medicaid doctors less.

  13. Pat S. and Maggie –
    While I certainly agree that inappropriate care and over utilization is a bigger healthcare cost problem than fraud, both issues can be attacked at the same time using different strategies on parallel tracks.
    Insurers are attacking the former with narrow network and tiered insurance products as well as higher deductible plans all of which are gaining more traction with employers of late. I’ve said before that sensible tort reform would be helpful as well, especially safe harbor protection for doctors who follow evidence based standard where they exist and replacing juries with health courts for dispute resolution. Moving away from the fee for service payment model in favor of bundled payments at least for surgical procedures and capitation where appropriate is also worth pursuing.
    The widespread perception of extensive fraud hurts prospects for other reforms by, as I said previously, eroding political support regardless of its actual contribution to healthcare costs. You don’t need to look any farther than AARP opposition to any cuts in Medicare benefits or restrictions on what’s covered. They say instead to get rid of all the fraud.
    Whether we’re talking about provider fraud or individuals hiding income to qualify for benefits or higher subsidies than they’re entitled to, people implicitly weigh the benefits of such activity with both the probability of being caught and the likelihood of significant punishment if they are caught. Right now, way too many people see the risk vs. reward relationship as favorable. To alter that balance, I think we could do a lot more with respect to ID cards for both medical providers and the general population. The IRS could do more like cross checking government databases including social security and public sector payrolls to identify unreported or understated income. Even if it’s not worth going after most people who commit fraud, the widespread perception of its existence makes honest people feel who declare all their income and pay all of their taxes feel like chumps.
    As for so-called fraud committed by wealthy individuals and corporate individuals, I don’t see it. I do see lots of favorable tax treatment like low rates on capital gains and dividends that disproportionately benefit high income people and various deductions that benefit companies in specific industries that Congress enacted for reasons that may have even originally made some sense. Those are issues that can be addressed by broad based tax reform – broader base with lower rates but people who take advantage of current rules are not doing anything illegal.

  14. Barry-
    On tax fraud among high-income individuals and by corporations: The IRS has created a new Global High Wealth Industry Group. Commissioner Shulman announced its formation in an address to the American Institute of CPA’s during October of 2009. In his remarks, Shulman noted the need for a highly specialized audit unit to closely examine high-income taxpayers.
    They are looking at high wage earner, people who operate a hedge fund, make extensive use of trusts, have a privately held company, utilize flow-through entities or have offshore real estate holding.
    Earlier this year, Bloomberg reported that “Jan. 27 (Bloomberg) — New York Attorney General Eric Schneiderman said he is creating a taxpayer-protection unit to target multi-state corporate tax fraud schemes. The enhanced False Claims Act, sponsored by Schneiderman when he was a state senator and approved by the Legislature last year, has a provision aimed at illegal off-shore tax shelters, he said in a statement when it passed. The provision is a first- in-the-nation state program to allow whistleblowers to go after what he called “millionaire tax cheats” that defraud the state of more than $350,000, he said last year.
    Then there is this: “Here’s how the little scam works: American corporations, headquartered and realistically based here, file the name of a dummy shell company subsidiary with the Security and Exchange Commission, giving its address as being Ugland House in the Caymans, or elsewhere outside the country. They take tax deductions for phony overseas expenses and then don’t report any of the overseas income. Citigroup listed an astonishing 427 foreign subsidiaries , including 91 in small Luxembourg, 90 in the Cayman Islands, and even 12 in the tiny Channel Islands! Bank of America showed 115 foreign subsidiaries in the Caymans, Bermuda, the Bahamas, Luxembourg, and even on the miniscule rock of Gibraltar! And good ol’ Morgan Stanley listed 273 foreign subsidiaries supposedly operating in the Caymans, the Marshall Islands, and even the Island of Jersey. The list goes on and on and on, and has increased steadily since 2004.”
    This is where the real money is.

  15. On fraud and corporations: this weekend I was at a party and one of the other guests turned out to be a doctor who acted as a whistleblower against Hospital Corporation of America (owned and run by former Senator Bill Frist’s family and the largest privately owned hospital chain in the world) in a case involving systematic substitution of more extensive lab orders for more simple orders. This was part of a case that ended up finding that HCA had defrauded Medicare of well over $1 BILLION, with similar or more widespread fraud against private insurers. HCA ended up agreeing to pay Medicare $750 million in a plea bargain and entered a guilty plea, also agreeing to additional supervision of their billing.
    This was all completely undetectable by the insurers because of excellent documentation, and was detected only due to whistleblowers. One whistleblower got a $34 million reward, and the doctor I spoke with collected almost $15 million.
    Rich people and corporations cheat a lot on insurance,taxes, and other issues, but are very hard to catch because they are good at it and have lots of lawyers and accountants to help them out. Whistleblowers who either work for or with them or who have created extensive data mining techniques to analyze claims, and who are motivated by a touch of civic responsibility and a lot of greed are the best chance of catching them.
    And yes, I certainly agree that policing fraud is an important effort in addition to cutting overutilization, just as efforts at improved quality of care are important in bringing costs down. Our best tool against fraud, whistleblowers, is under attack by government, congress, and courts, all moving to protect the wealty and powerful from the force of law.

  16. Maggie:
    In comparison, Medicare and Medicaid fraud pales in to the planned cuts in Medicaid for which 70% of ll occupants of Long Term Care depend upon. The Fraud aspect of either is similar to the Tort Reform measures being touted to save doctors. It is a red herring offered up.
    More importantly we have to address this now, improve the system as we proceed, and now get distracted. I beieve this to be a far bigger problem and has bigger implications thn fraud.

  17. Pat–
    You write:
    “This was all completely undetectable by the insurers because of excellent documentation, and was detected only due to whistleblowers. One whistleblower got a $34 million reward, and the doctor I spoke with collected almost $15 million.”
    This serves as an excellent example as to how whistelblowers are our best defense against fraud.

  18. Run–
    I agree that Medicaid fraud can be used as a red herring to avoid talking about cutting access to Medicaid or benefits that Medicaid patients need.

  19. Just to put all this in perspective, following the Willie Sutton rule (go where the money is) there are three main ways to save money on US health care:
    First, decrease spending on questionable, disproven, or harmful care: potential savings of between $500 billion and $1 trillion a year while health care is actually improved.
    Second, increase the use of quality control measures to improve care and prevent bad results: potential savings of 100 billion to $300 billion a year while significantly improving quality of care and preventing tens of thousands of needless deaths and a total of years of added hospital and ICU time due to health care mistakes.
    Third, prevent fraud by providers and vendors: potential savings of $50 billion to $250 billion a year with no effect on quality of care.
    Implemented all together there is a potential to reduce US health care spending by up to half (bringing it in line with other developed countries and better than some) while making results and outcomes better and Americans healthier and longer lived.
    In contrast, programs aimed at decreasing the value of insurance and increasing the amount paid by patients — including issue of vouchers, increases of co-pays and deductibles, increasing the age of Medicare, cutting Medicaid, and so on — lead to worsening of care, poorer health, and in many cases, as cited above by Maggie, ultimate increases in costs.
    The only arguments against this approach are protection of stakeholders incomes, avoiding treading on doctors’ and hospitals’ toes, and wrongheaded ideas about American exceptionalism.
    The solutions are there on the shelf and have worked well in other countries, but we are insisting on ignoring them. This is all sort of like insisting on not installing anti-lock brakes on cars because they were developed on Europe and the “American way” is just letting more people die in crashes while car insurance premiums go through the roof.