Health Programs Rank High on List of Improper Payments

In many ways a credit card is fraud waiting to happen. A thief doesn’t really need your actual card. With the number alone he can start buying things. Even with that vulnerability, however, the fraud rate with credit card companies is less than 1/100th of what it is in some government health programs.

Payment is an Office of Management and Budget website that tracks “high-error” government payment programs. Of the 14 “high-error” programs listed, six are government run health related benefit programs: Medicaid Fee-for-Service, Medicaid, Medicare Advantage, the Children’s Health Insurance Program, the Medicare Prescription Drug Benefit program, and the Supplemental Security Income Program. In 2009, an estimated $47.9 billion of the $422.8 billion spent in the combined Medicare Advantage and Medicare Fee-for-Service programs was “improper.” That’s more than a dollar for fraud out of every ten dollars of spending.

The Obama administration has attacked this problem with one Executive Order, two memoranda, and “the President’s FY 2011 Budget Proposal” which, it claims, allocates more resources to “improve program integrity.”

Unfortunately, there is little reason to believe that more government spending will significantly reduce fraud as long as the people receiving the health care have no responsibility for making payments. As Malcolm Sparrow, a professor at Harvard University’s Kennedy School pointed out in his 2009 Senate testimony, government run health care programs rely on highly automated payment processes. Without patient oversight, criminals wishing to defraud Medicare simply have to fill out the proper forms to have their claims go through without a hitch.

Professor Sparrow believes that government estimates of fraud are too low. The government studies that have been relied upon for the estimates have been “sadly lacking in rigor, and have therefore produced comfortingly low and quite misleading estimates.” He notes that credit card companies consider fraud losses equal to 0.1% of transaction volume an “’acceptable business risk,” far less than the figure for health industry fraud, which ranges from 3 to 14 percent.

Chris Edwards and Tad DeHaven of the Cato Institute provide more information on the form that the fraud takes in their 2009 paper, Fraud and Abuse in Federal Programs. Along with detailing the fraud in housing subsidies, student aid, and farm programs, they note that New York State’s Medicaid program “is especially fraud-ridden. The former chief investigator of the state’s Medicaid fraud office believes that about 10 percent of the state’s Medicaid budget is consumed by pure fraud, while another 20 to 30 percent is consumed by dubious spending that might not cross the line of being outright criminal.”

If the experience with the Earned Income Tax Credit (EITC) program is any guide, there is literally no hope that the government will make any progress against health payment fraud. The EITC is the largest anti-poverty program in the United States. According to a February 7, 2011 report from the Treasury Inspector General for Tax Administration, between 23 and 28 percent of its total payments are “improper.”

The problems with EITC fraud have been known since 2002. However, the Inspector General reports that no progress has been made in protecting taxpayers against it. Worse, no future progress is expected. The title of one section of the report is “The Risk Remains High That No Significant Improvement Will be Made in Reducing Improper Earned Income Tax Credit Payments.”

The policy question is whether a program that is unable to prevent ¼ of its expenditures from funding fraudulent enterprises deserves to be continued.

Comments (11)

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  1. Virginia says:

    Excellent post! My husband and I were talking about this the other night and came to the same conclusion: If people that are receiving the care aren’t making the payments, then they have no reason to worry about it. The reason that consumers pay so much attention to their credit cards is that if they don’t recognize fraud immediately, they might end up liable for it.

  2. Devon Herrick says:

    If OIG were to outsource fraud detection to private companies in return for a cut of the amount detected, I suspect that data mining firms would quickly identify common patterns of fraud. For that matter, if the government contractors (BlueCross is one) were given a cut of any fraudulent funds that it detects (and does not pay in error), I bet it could find plenty. Firms like BlueCross already have systems in place to detect fraud for its clients and to prevent its own losses. But the government isn’t paying for these services or doesn’t allow the flexibility or incentive to go after irregular activities. Medicare for the most part just pays claims rather than manage claims.

  3. Bruce says:

    Governemtnt health care is wasteful? I’m shocked. I’m shocked. As Claude Raines might say.

  4. Tom H. says:

    These numbers are surprisingly large. It’s hard to believe there is so much waste.

  5. Brian Williams. says:

    I can’t think of a comparable situation outside health care’s third-party payment system. Is there similar fraud happening in the microchip industry or the automobile industry or anywhere else? My guess is not.

  6. Erik says:

    I don’t think blaming Medicare for paying a seemingly legitimate claim is appropriate because if they didn’t pay the claim in a timely manner they would be negatively impacting doctors practices financially which would sour doctor’s to the program.

    What we should be asking is “What is driving doctors to feel the need to defraud Medicare at such high levels?”

  7. Ken says:

    Remember that folks on the left who want everyone to be in Medicare frequently boast that the administrative costs of Medicare are very low. One reason they may be so low is that Medicare does so little to catch and punish fraud.

  8. Linda Gorman says:

    Erik, why do you assume that physicians are the ones defrauding Medicare?

  9. Art says:

    I have to wonder why you “hide” the true costs of fraud and waste with examples that don’t match the article, and tend to downplay the seriousness of the problems.

    The Mr. Sparrow testimony states “The units of measure for losses due to health care fraud and abuse in this country are hundreds of billions of dollars per year. We just don’t know the first digit. It might be as low as one hundred billion. More likely two or three. Possibly four or five. But whatever that first digit is, it has eleven zeroes after it.” Notice he doesn’t mention waste at all, and the amounts are considerable higher than what is mentioned in your articel.

    And you failed to include the Thompson Reuters October 26, 2009 report entitled “WASTE IN THE U.S. HEALTHCARE SYSTEM PEGGED AT $700 BILLION” which detailes all the components as waste, and lists fraud as a smaller component, even less than the Government says it is.

    At the WH Healthcare Summit a year ago this week, Sen. Tom Coburn said “And the facts we know is one out of every three dollars that gets spent doesn’t help anybody get well and doesn’t prevent anybody from getting sick.” And everyone there from the President down said “$1 out of every $3 spent is spent on waste, fraud and abuse”.

    We spend $2.7 trillion of our $14.6 trillion National budget on healthcare, and at the 33% waste, fraud, and abuse rate, this amounts to $900 billion every year, almost the exact amount Healthcare Reform is projected to cost, as Medicaid and Medicare roles will be exploding due to healthcare reform!

    The only question is who will tell the citizens they won’t get more and better healthcare as the crooks just get to steal more money from an increasing larger government trough and the constant supply of real healthcare providers? We don’t have enough doctors now and since it takes 110 yers to produce them, we’ll be real short in 2021!

  10. Linda Gorman says:

    Art, why do you consider fraud and waste the same thing? The post discusses fraud.

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