The Systemic Nature of Medicare Fraud

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It’s the kind of Medicare fraud case that makes your skin crawl. But the FBI is finally getting serious. California Watch reported today that federal agents interviewed the patient who was at the core of an investigative report in mid December. The patient, a diabetic, who was treated for acute kidney failure in 2010 at the Shasta Regional Medical Center in Redding, CA, didn’t know that the hospital would bill Medicare for the treatment of a disease she’d never heard of: kwashiorkor.

The often fatal illness is caused by severe malnutrition. Its symptoms include a distended belly and stick-thin arms. It afflicts children during famines in Africa. The patient was overweight. But by mentioning kwashiorkor on its billing documents, according to California Watch, the hospital boosted its Medicare reimbursement from $4,708 to $11,463—a 143% jump in revenue.

The temptation was just too great. The hospital was bought in 2008 by Prime Healthcare Services, a chain based in Ontario that owns 14 hospitals and a medical group in California. In 2008, the hospital billed Medicare for eight cases of kwashiorkor. In 2009, it billed Medicare for 303 cases. And in 2010, 727 cases. Stunningly, 19.4% of all its Medicare patients were suffering from kwashiorkor.

Why did Medicare allow this to happen? Wasn’t anybody paying attention? Well, actually no. Because Medicare has a systemic problem. It lacks, inexplicably, the first line of defense that every insurance company has used for decades: computerized analysis of all claims to detect abnormalities. Instead, Medicare relies on the honor system. It expects healthcare providers to forgo easy profits for the sake of “honor,” whatever that means in corporate America. So claims are paid automatically. Not even 5% are audited. And after-the-fact federal crackdowns, if they happen at all, merely cause fraud to shift to a different area.

Another systemic problem is Medicare’s bonus system. It heaps additional payouts on providers who treat patients diagnosed with certain dangerous diseases, such as kwashiorkor, blood infections, and acute heart failure. Providers simply add the billing codes to their Medicare bills and get paid extra. It’s found money.

So a special industry has sprouted up around Medicare. California Watch, which claims to have analyzed more than 50 million Medicare patient records that it obtained through the Freedom of Information Act, identified thousands of instances where Prime Healthcare Services billed Medicare for the treatment of rare conditions. At Prime’s Chino Valley Medical Center in San Bernardino County, for instance, a whopping 35.2% of the Medicare patients were treated for acute heart failure, six times the average rate. The hospital chain meanwhile claims its billing statements are accurate.

No one knows the amount of improper payments. The Office of Management and Budget estimated it at $47.9 billion in 2010, or about 9% of total Medicare spending. That much money cannot be spread over just a few “bad apples.” Fraud is built into the system. And given the powerful lobby of healthcare providers, one might wonder if Congress will ever step in to force a change.

Medicare cannot afford to be lax. The system is facing $36 trillion in unfunded obligations under Part A—over an infinite horizon which is a pretty long time, but it’s still terrifying (though less terrifying than the current budget deficits). As baby boomers retire, the ratio of workers to beneficiaries will decline from 3.9 currently to 2.4 by 2030. Meanwhile, Medicare spending is expected to grow 7% per year. The system is on collision course with reality.

Everybody agrees: something needs to be done. Demographics can’t be changed easily. Adjusting contributions and benefits is a painful procedure. And fixing a system that encourages fraud on a massive scale is hard because so many businesses benefit from it, though technically, it would be relatively simple. Governments aren’t good at shutting off the money spigot when things go seriously awry. There is just too much vested interest.

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