Healthcare Fraud, Waste and Abuse (FWA) in the US is a national disgrace

In round numbers, experts like Evolent Health and Truven Health Analytics believe that up to $1 trillion of the $3.2 trillion that will be spent on healthcare in the United States in 2015 is either A) fraudulent (medical claims paid when no actual service was provided), B) wasted (unnecessary or marginal value services) or C) abusive ( a lab charging Medicare $1,500 for a simple urinalysis by charging separately for every test possible). Think of fraud, waste and abuse (FWA) as a continuum beginning with simple billing errors on one end and outright and premeditated fraudulent billing on the other end. Waste and abuse are in the middle.

Waste and abuse sadly make up 70-80% of this trillion $ pie. 

Fraud then is by far the smallest piece of the pie but I believe the easiest to fix in the short term.

1 trillion US dollars.

That is more than:

?               $3,000 for every man, woman and child in the U.S. per year

?               Most countries actually spend in total for healthcare annually

?               6% of the US GDP

From time to time I am called by a Fox Business or Fox News producer when the Attorney General announces yet another massive Medicare fraud sting. In this case, on June 18th 2015, the Department of Health and Human Services (HHS), the Department of Justice (DOJ) and local law enforcement arrested 243 individuals for an alleged $712 million in fraudulent Medicare charges in 17 different US cities. The DOJ believes these “perp walks” and press conferences deter criminals from committing Medicare fraud. Based on the small amount of ink and media coverage I am not so sure about that. That said, The DOJ alone has recovered more than $15 billion in healthcare-fraud-related cases in the last 5 years which is very laudable but a rounding error compared to $ 3 trillion + in US healthcare spending.

I always say the same thing on these shows about any one particular bust: “This is just the tip of the iceberg”.

On this show which aired June 20th, the host Liz Claman asked me "what is the worst healthcare fraud you have ever seen ?”.

I stumbled for an answer as all healthcare fraud, perpetrated by a tiny percentage of an otherwise noble and law abiding profession, is repulsive, and affects all US citizens whether they realize it or not.

So how do we stop this fiscal raping of the US healthcare system?

Well, it is not rocket science- it’s a lot harder.

The core problem is fee for service (FFS) reimbursement for medical services. As long as traditional Medicare, Medicaid (73% paid by the federal government and administrated by The Centers for Medicare and Medicaid Services (CMS) and every state) and commercial health plans pay medical claims on a FFS basis, FWA will be rampant. Submitting a medical claim to any of these payers is built entirely on a legacy trust based payment methodology. Think of the Willie Sutton bank robbing principle on steroids.

Turns out that not everyone is trustworthy. Shocker right?

Take traditional FFS Medicare which spends $400 Billion for 39 million mostly over 65 year old Americans each year.

CMS administers 5 million medical claims every day, processed by 15 Medicare Administrative Contractors and 4 DME Contractors across the country for 1.5 million providers.

You might ask how can there be so many providers if there are only 750,000 practicing doctors in America?

Well, don’t forget about home healthcare agencies, durable medical equipment (DME) distributors, ambulances, mental health professionals, and hundreds of other “providers” that Medicare pays for services. Turns out that some of the biggest fraud schemes to date are around wheelchairs ordered fraudulently and paid by Medicare that were never delivered, millions of home health visits billed and paid for but never delivered, even talking glucose monitors sent to Medicare recipients regardless of whether they were needed or requested.

Long term, and I mean 10-20 years from now, payment reforms that replace FFS with so called value based reimbursement (pay for value/outcomes not pay for volume) will eliminate a big chunk of the waste and abuse problem across all payer types. Led by Medicare payment reform, state Medicaid agencies and commercial insurance plans always take what Medicare does and shape their payment models accordingly.  Make no mistake this is a tectonic change for the US healthcare system. As doctors and hospitals take on more and more of the financial risk for actual healthcare services delivered to defined populations, the incentives for waste and abuse begin to vanish. 

Take Kaiser Permanente in California for example, which is a vertically integrated hospital and provider system as well as a health plan, has virtually zero medical fraud, waste or abuse from its own providers. There simply is no incentive to do so as a salaried employee not paid on “ production” (or how much you can bill in a year). However, when Kaiser Health Plan members go outside of the Permanente Medical Group, Kaiser’s FWA exposure explodes.

So fraud, especially against traditional FFS Medicare and Medicaid, is the real problem to solve for today.

Here is how I would do it:

1              Medicare Fraud prevention and prosecution is WAY underfunded

?                                 What other Federal Agency returns $8 for every 1$ it spends for fighting fraud? The ACA brought an additional $335 million to CMS, which looks like it might be cut in the future, to this fight. It needs a lot more spending spread between HHS, DOJ and local law enforcement. Today there are 2,700 active and ongoing investigations. Many of these will take years to come to fruition. Let’s speed this up.

?                                 I would increase fraud prevention spending up to 2% - or $8 billion a year-of Medicare FFS spend to build the data architecture and analytics capability that is required to increase the capacity of simultaneous fraud investigations with a lot of additional manpower armed with actionable, accurate and near real time analytics

?                                 Incentivize each state to crack down on FFS Medicaid fraud by letting them keep 50% of the recoveries they make. Today they have to pay CMS what they collect so they do not prioritize their efforts and hence do a very poor job.

2              Implement realtime cloud based fraud analytics across all payer’s claim data

?                                 It is unacceptable, in this era of big data, machine learning, AI and Cloud delivered services, that 50 States administer FFS Medicaid claims and 15 Medicare Administrative Contractors pay Medicare Part A&B (professional and facility claims) and 4 contractors pay Durable Medical Equipment (DME) claims in a vacuum and in separate silos which are not connected in near real time that are funded (mostly) by the same agency - CMS. The Public-Private Healthcare Fraud Prevention Program has never lifted off the ground primarily due to funding and a focus on retrospective data mining projects that while interesting has not been productive from first hand experience.

3              “Pay and Chase” must become “pre-payment prevention” to effectively fight fraud in near real time

?                                 The technology exists today to send encrypted files of every FFS claim that is received and adjudicated by Medicare and state Medicaid agencies, as well as Medicare Advantage and Managed Medicaid federal and state contractors, and commercial payers as well to a centralized cloud infrastructure at the close of business every day or several times a day in batch mode. This claim data across all payer types, could be aggregated up to each unique provider that has filed a medical claim that day and analyzed for aberrant billing behavior compared to his/her normal billing behavior, his/her specialty peers in their community and against regional and national norms. Applying algorithms and machine learning to known and previously unknown fraud schemes would enable each payer to stop payment of the discovered claims and start an investigation immediately. My former employer, Verisk Health, has accomplished this feat, albeit not in real time, for medical claims in the Property and Casualty Insurance industry with much success to identify medical fraud in Workers’ Compensation, Auto and Personal Injury lines of business. Turns out if you are a bad apple in P&C you most likely are in group health, Medicare and Medicaid. Go figure.

4              If my smartphone recognizes my iris or finger print, why not use this technology for all Medicare and Medicaid recipients and providers to uniquely identify and time stamp and locate the office visit and verify services?

?                                 CMS has a “provider ambiguity problem”. In other words, they really don’t know or cannot uniquely identify the difference in many cases, due to poor or redundant provider data, of John Smith, MD vs J Smith MD vs Jack Smith MD hence they often send checks or ETF payments to the wrong provider. In Medicaid, the latest FFS payment cycle error rate ( for FY-2013) was 8.8%. For managed care the payment error rate was 0.1% according to CMS. Imagine if your company’s accounts payable department sent millions of payments a year to vendors that you don’t actually know exist or actually provided a service or product your company used? I won’t even go there to the amount of deceased providers who have received payments.

5              Medicare and Medicaid FFS claims payment policies need to come in line with the commercial Medicare and Medicaid Managed Care industry standards

?                                 Did you know that BY LAW, up until the Affordable Care Act, Medicare Administrative Contractors were required to pay every claim they received without question and very quickly? That’s insane. Even today they are able to only not pay claims to providers that they have good reason to suspect are fraudulent. Do you how easy it is to acquire active Medicare provider #’s and Medicare eligibles to bill for, send in thousands of false claims, collect the $ then leave the country? Happens every day I am afraid.

Come on America. We can do better than this. What ways could we envision to spend or save $1 trillion a year? I urge every person who reads this to send it to your federal and state elected representatives and demand that they do their job in tackling this immense problem head on and with alacrity.

Brian C Smith, former Executive Vice President Verisk Health and CEO and President of B Castle Smith & Co. Park City, Utah

Phone 626-298-3178 email [email protected]