Medicare Fraud: A Symptom, Not The Disease

Volume III, Number 15 December 15, 1997

Last summer, HHS's Office of the Inspector General issued a report concluding that a large share of Medicare's payments to providers -- 14 percent in 1996 -- are "improper." Seizing on the report's finding, the White House and Congress are fulminating against Medicare "fraud" and proposing tough new enforcement measures. Some even say that all we need to do to control federal health costs is to crack down on the scam and rip-off artists. As Senator Tom Harkin, co-chair of the Democratic Agenda Task Force, sums it up, the key is "cutting waste and not benefits, attacking fraud and not seniors, and ending abuse but not quality care."

There's just one problem with the current crusade: It misdiagnoses the problem and misprescribes the cure. While it's easy to point to horror stories, there are no data, in the Inspector General's report or elsewhere, which suggest that raw fraud is a quantitatively important cause of rising Medicare expenditures. The current furor will not solve Medicare's cost crisis -- and may even prove counterproductive if, by covering up the real causes, it leads the public to expect painless reform.

A Tiny Fraction

What exactly does the Inspector General's report say? Simply this: Of $167 billion in total payments to fee-for-service providers in 1996, $23 billion (or 14 percent) "did not comply with Medicare laws and regulations." These improper payments count any claim auditors construed as out of line with Medicare rules, including "inadvertent mistakes." The report makes no attempt to determine how many claims were actually fraudulent. As Inspector General June Gibbs Brown herself explained to Congress, "We cannot quantify what portion of the error rate is attributable to fraud."

Indeed, we can't. But if by "fraud" we mean blatant schemes to bilk Medicare, it's safe to say we're talking about just a tiny fraction of total expenditures. According to the Inspector General's report, 47 percent of all improper payments were so classified because they lacked full documentation. (Full documentation? By that standard, countless millions of personal income tax returns would be fraudulent.) Another 37 percent were for services deemed to be "medically unnecessary" -- which means no more than that a bureaucrat and a physician disagreed about best medical practice. All told, just 5 percent of improper payments, or under 1 percent of total Medicare expenditures, were for "noncovered or unallowable" services-the category most clearly encompassing what most of us would call fraud. (See chart below.)

One might suppose that the anti-fraud crusaders have more persuasive data to fall back on. But they don't. Although a 10 percent estimate for fraud is sometimes cited in expert testimony, the number turns out to be an unsubstantiated guess. Like the Inspector General's figure, moreover, it includes large gray areas that may or may not be fraud at all.

That leaves the stacks of anecdotal evidence. From the infamous "rolling labs" scheme, involving over 200 physicians, to the case of the enterprising psychologist who billed for over 24 hours of consultations in a single day, fraud-fighters have uncovered hundreds of shocking (and often costly) Medicare scams. But in a program with a budget four-fifths the size of the Pentagon's, processing 800 million claims a year for nearly 40 million beneficiaries, it's hardly surprising to discover fraud. The relevant question is what it all adds up to.

An Underlying Malady

The only answer the data allow is that, relative to total expenditures, Medicare fraud is small if we take a strict definition -- but large if we broaden the definition to include any infraction of the rules. Our inability to be more precise points to an underlying malady of the system that the current furor over fraud ignores.

Within Medicare's fee-for-service payment structure, no one directly involved in treatment decisions -- provider or patient -- has much incentive to care about cost. Absent that incentive, government has no choice but to try to cap spending by micro-managing care. Inevitably, some providers game the system-for example, by "upcoding" diagnoses and "unbundling" treat-ments-which in turn leads to more regulation.

In such an environment, fraud defies practical definition. Was a particular medical problem of "high severity" (in which case the physician gets reimbursed more), or was it only of "moderate severity"? Was a particular lab test ordered to confirm a suspected diagnosis (in which case it's allowable), or did it merely constitute preventive screening (in which case it's not)? In such instances, how can anyone know whether the decision justified the cost? Clearly, regulation cannot ensure that Medicare makes the right trade-offs so long as doctors have a financial interest in providing more services to patients who have no financial interest in refusing them, and who indeed may value them greatly.

This brings us to one of the great myths about Medicare "fraud" -- namely, that patients are the unwitting victims. In truth, they are usually the beneficiaries. In congressional testimony last spring, former HCFA Administrator Bruce Vladeck decried the "profiteers" who "prey" on the frail elderly by enrolling them in home health services for which they are not quite sick enough to qualify. This is absurd: The only obvious victim is the taxpayer. It's no wonder that the types of Medicare services most subject to abuse are the very services which many beneficiaries desire in limitless quantities (diagnostic testing and home care). It's also no wonder that recent federal efforts to get beneficiaries to blow the whistle on providers have attracted little response.

In the end, today's Medicare system pleases no one. With the foot simultaneously on the gas and the brakes, it writes blank checks from an open-ended budget while subjecting patients and providers to more interference in day-to-day treatment decisions than any other health system on earth. Wherever medical guidelines are hazy and judgment calls are required, it tries to ration claims through arbitrary rules, creating a feast-or-famine reimbursement policy. It imposes huge compliance costs and produces capricious results. Worst of all, despite the estimated 45,000 pages of regulations, the system careens toward bankruptcy as costs keep rising.

A New Paradigm

Significantly, the Inspector General's audit of "improper" payments was limited to traditional fee-for-service Medicare. Fraud is generally not an issue in "capitated" plans like HMOs, where government prospectively agrees to pay a fixed premium per beneficiary-and providers make more by doing less.

Why then are the politicians most exercised about Medicare fraud usually the same politicians who are most hostile to capitation? One concern is that, by reversing the incentives, prospective payment creates the opposite problem: not keeping costs down, but keeping quality up. This might indeed be a big problem if beneficiaries had no options. But when quality ratings become widely available and beneficiaries can vote with their feet by switching plans, it's not.

The advantage of the capitated model is not just that it eliminates fraudulent billing. Decades of open-ended payments have encouraged a lavish approach to medical technology and treatment that admits no trade-offs-and this in turn is a primary force behind rising costs. Over the long run, capitation promises to reorient the entire health system (including basic research and preventive care) around a cost-effective approach.

It would also allow for more patient choice. Capitation need not mean HMOs -- or even "managed care." A system of capitated vouchers, for instance, could allow people to opt for any type of health coverage, including traditional fee for service. Once upon a time, one-size-fits-all institutions like Medicare may have helped bring us together as a nation. But the old paradigm is breaking down -- not just because it's too expensive, but also because it no longer appeals to a public increasingly drawn to diverse styles of health care.

With the enactment of Medicare Plus Choice, we're already moving in this direction. Moving much further poses real dangers -- including widening divisions by health (adverse risk selection) and income (two-tiering). But these problems are solvable. Edmund Burke wrote that even our most treasured institutions sometimes must change in order to survive. On its current course, Medicare is at grave risk. Those who staunchly defend government health benefits should be eager to change Medicare so that it does survive. Perhaps it's time for a new paradigm.


The Concord Coalition web pages were designed by Marla Parker and Krista Reymann. These pages are now maintained by Craig Cheslog. . Last updated: 17 Dec 1997