Is fraud a hidden factor in the rise of health costs?

INTRO TEXT In the preface to the first edition of his 1996 book License to Steal: Why Fraud Plagues America’s Health Care System, Malcolm Sparrow states that of all the research projects he has undertaken, this one was the most lonely. A professor at Harvard’s Kennedy School of Government, Sparrow often found himself the lone academic at national conferences on health care fraud. When he went to visit law enforcement agencies, he was frequently asked to wait outside when it came time to discuss a confidential investigation. Within the health care industry itself, Sparrow’s presence was scarcely more welcome. The insurance industry is more concerned with efficiency in claims processing than with rooting out fraud, according to Sparrow. And the medical profession, defensive about its reputation, has little interest in investigative activities that might reveal fraud committed by its members, he says.

Yet most analysts agree that the opportunities for fraud are boundless in the nation’s trillion-dollar-a-year health care industry. In his book, Sparrow describes numerous such schemes–from pharmaceutical “recycling” scams, in which physicians bill Medicaid for expensive medications that they’ve prescribed to homeless or drug-addicted people whom they’ve recruited for that purpose, to durable medical equipment fraud, in which unscrupulous suppliers bill insurers for more expensive versions of equipment than are actually used.

This spring, 11 current and former employees of TAP Pharmaceutical Products stood trial in US District Court in Boston, accused of offering bribes and kickbacks to doctors for prescribing the company’s prostate cancer drug, Lupron. The scandal has partially ensnared Burlington’s prestigious Lahey Clinic, where top officials allegedly took advantage of payments by TAP for a clinic Christmas party, golf tournaments, seminars, and other perks, according to The Boston Globe.

Nicholas Messuri, chief of Medicaid Fraud Control Unit, says Attorney General Thomas Reilly has “prioritized the investigation and prosecution of heath care fraud from day one, and has given me all the resources I need to go about the job in a professional and thorough way.” He says his unit has more than 100 ongoing health care fraud investigations.

While fraud gets plenty of attention in terms of enforcement, it doesn’t get figured into the economics of health care, and Sparrow says that’s a mistake. A former detective chief inspector with the British Police Service, Sparrow maintains that fraud may well be a “hidden factor” in the growth of Medicaid, Medicare, and health care spending in general.

‘Why not measure it,’ asks Sparrow, ‘Just to be sure?’

“Health care economists have for decades tried to identify the factors that account for health care cost inflation,” says Sparrow. “Their models always fail to account for all the growth. I press them to consider fraud and abuse. Their reply is usually, ‘We don’t think that’s significant,’ and ‘By the way, we have no data on that.'”

Sparrow thinks it’s high time we had that data. In the fee-for-service part of Medicaid budgets, in particular, he maintains, it isn’t difficult to measure the fraud rate, and some states are already doing so. According to Sparrow, many Medicaid agencies around the country have been testing various types of sampling protocols for insurance claims submitted by health care providers, and the federal Centers for Medicare and Medicaid Services has been encouraging such measurement.

But Massachusetts has not been taking part in such efforts. Health and Human Services Secretary Ron Preston maintains that while “in every system there’s almost certain-ly some fraud,” he doesn’t believe it’s a major factor in rising health care costs. Furthermore, Preston argues, even if all fraud could be eliminated, it would be a one-time saving. “Meanwhile,” he says,”every year, health care would march against you at 10 percent a year [in inflation]. So it’s no solution.”

Richard Powers, a spokesman for Preston’s office, says the state’s Medicaid program, known as MassHealth, is constantly on the lookout for wrongdoing, and when evidence of fraud appears the case is referred to the Attorney General’s office. He adds that “efforts undertaken by MassHealth to combat fraud, waste, and abuse are carried out in all program areas, and include information systems features to identify outlier behavior before paying for services, utilization management, and program review.”

Sparrow calls that response “a standard example of what I call ‘defense by display of functional apparatus.’ The story is, ‘Look at all the things we have and do. In view of those, we couldn’t possibly have any serious [fraud] problem.’ In which case I say, ‘Why not measure it, just to be sure?'”

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In his book, Sparrow presents a “model” fraud control strategy, which includes systematic measurement of the extent of the fraud problem, as well as a “problem solving approach to fraud control,” in which insurers, law enforcement agencies, and policy-makers work together to identify fraud problems and to search for new patterns of deception. As part of that approach, fraud control teams would undertake a series of “focused reviews” prior to payment of claims, including routine random selection of a small proportion of claims for validation. “Every claim submitted for payment,” Sparrow says, “should suffer some risk of review for fraud, regardless of its dollar amount, regardless of its medical orthodoxy, and regardless of the reputation of the claimant.”

For a system under great pressure to control costs, fighting fraud could have a big payoff, says Sparrow. “If the industry learns the art of fraud control, [it] will have learned a discriminating way to save money, by investing in the capacity to distinguish between legitimate and illegitimate claims,” he says. “The alternative is to use less discriminating methods, such as across-the-board reductions in benefits, further restrictions on eligibility, or lower reimbursement rates for providers.”

Those methods, he says, “hit the honest and the genuinely needy much harder than the dishonest,” who can “easily adjust their billing patterns and patient lists to fit the new rules.” As a result, honest providers will be driven away from the major public programs like Medicare and Medicaid because they can no longer afford to participate. Says Sparrow: “Ultimately, in a vicious cycle of decay, only the crooks will remain, and important public programs will be destroyed.”

David S. Kassel is a writer in Harvard.