Unmasking the health care fraud epidemic: 3 steps to a revolution
Expert estimates suggest that up to a tenth of all health care spending might be swallowed by fraudulent operations. The insurance industry insists it's vigilantly safeguarding these funds, but the unnerving reality reveals a different story.
Taking a casual look at media coverage on the subject, it becomes apparent that there are numerous stories highlighting the extensive waste and fraud present in Medicare and Medicaid, while comparatively limited attention is given to employer plans. In 2019, private insurance expenditure skyrocketed to a whopping $1.2 trillion, yet no systematic tracking exists to monitor funds diverted by fraud. Expert estimates suggest that up to a tenth of all health care spending might be swallowed by fraudulent operations. The insurance industry insists it’s vigilantly safeguarding these funds, but the unnerving reality reveals a different story — fraudsters find easy loopholes in this system, and persuading insurers to clamp down on them seems a Sisyphean task.
A striking illustration of this predicament can be found in Marshall Allen’s riveting book, “Never Pay the First Bill: And Other Ways to Fight the Health Care System and Win.” Here, he shares the tale of David Williams, a personal trainer who masterminded a scam to swindle millions from private insurers and employers. Williams, lacking any legitimate credentials, procured a National Provider Identifier number (NPI) — a prerequisite for medical providers to bill insurance plans — without any of the requisite oversight commanded by the Health Insurance Portability and Accountability Act (HIPAA) and the rules and regulations of the Centers for Medicare and Medicaid Services (CMS). Armed with the NPI, he embarked on a fraudulent spree, billing insurers for workout sessions disguised as medical services, defrauding them of millions. Notably, amongst his victims were the big players: UnitedHealthcare, Aetna, and Cigna, with Southwest Airlines bearing the brunt through its self-funded benefits plan. By the time he was apprehended, Williams had successfully defrauded these companies for over four years, amassing about $4 million in cash from $25 million in fraudulent billing.
This unsettling case reveals a painful truth: Health insurers are woefully unprepared to protect your health care dollars. Fraud of this magnitude thrives due to insurers’ complacency and lack of urgency in validating the credentials of claimants. Williams, for example, managed to submit claims and collect payments despite repeated alerts about his fraudulent activities. His scam was less a testament to his cunning and more a stark demonstration of the system’s frailties and insurance companies’ lax oversight.
When it comes to combating fraud, insurance companies often adopt a rather passive attitude for two primary reasons. First, prosecuting fraud cases related to self-funded plans is both costly and challenging. Often, suspicious providers are merely blocked or settled with rather than dragged through expensive legal proceedings. This approach casts serious doubts on these corporations’ commitment to eradicating fraud.
Secondly, with fully insured plans, insurance companies have little incentive to uncover fraud, waste, or abuse, thanks to the Patient Protection and Affordable Care Act. The Act, despite its noble intentions, inadvertently created an environment conducive to waste, fraud, and abuse, courtesy of the Medical Loss Ratio (MLR) rule. This rule mandates that insurance carriers must spend at least 85% of premiums on actual health claims, leaving a mere 15% for administrative costs, marketing, and profit.
While this regulation was conceived to ensure a significant proportion of premiums are dedicated to actual health care services, it inadvertently created a situation where insurers can profit from higher claims. If the total claims increase, so does the absolute value of the 15% they’re allowed to retain. This twisted incentive structure encourages carriers to be less stringent in controlling waste, fraud, or abuse, as reducing these would shrink the total claims and hence their profits.
To illustrate, imagine telling your dessert-loving 12-year-old that she may only have one-fourth of a bowl of ice cream. Her mathematically savvy response? “In that case, Dad, I’m going to need a larger bowl.”
Moreover, the pervasive nature of health care fraud often results in smaller cases being overlooked, as one investigator confessed to Allen that cases valued less than $300 were generally disregarded. Yet, the cumulative impact of these “minor” cases can escalate into millions of dollars, as the Williams case demonstrates. I recently learned from one respected third-party administrator that claims of less than $2,000 were auto-adjudicated and paid as fast as possible in order to improve the organization’s efficiency scores.
It’s easy to laugh when it’s someone else’s money
Consider this scenario from “Overcharged: Why Americans Pay Too Much For Health Care,” by David Hyman and Charles Silver: A friend recently needed medical attention for a minor wound at a nondescript, hospital-owned urgent care center. His treatment lasted just 30 minutes. However, the bill he received was a whopping $3,000. A secret agreement with his insurer led to a miraculous reduction of $1,170, but the insurer still paid an “allowed” amount of $1,770. His out-of-pocket expense? A mere $60, which our friend says after shaking his head in bemusement. The question is, would he have been so dismissive if the original, exorbitant $3,000 bill, or even the reduced $1,830, had been entirely his responsibility?
Obamacare, hailed as a game-changing health care revolution, merely reinforced the flawed third-party payment system, further inflating an already bloated health care sector with subsidized insurance and an explosive expansion of Medicaid.
Historically, before the rise of third-party payers post-World War II, health care was affordable and directly paid for by patients. It was only after the advent of Medicare and Medicaid in the 1960s that health care spending started spiraling out of control. In “Overcharged,” professors Ted Marmor and Jon Oberlander note that in the first year of Medicare, the average daily service charge in American hospitals skyrocketed by 21.9%. Over the next five years, this figure grew at an average compound rate of 13%.
It’s a disconcerting reality that ordinary people bear the brunt of health care fraud, as their money, not the insurers’, is being pilfered. This underscores the need for us to scrutinize our receipts, as we could unknowingly be victims of fraud. However, employers, there is a better way.
Three steps to a health cost revolution
1. For smaller organizations unable to venture into self-funding or partial self-funding, aim to purchase the minimum insurance required. The larger the premium you pay, the more you’re feeding this insatiable beast. Opt for the highest deductible plan your insurer offers, then self-fund the amount beneath that deductible with a health savings account (HSA) or health reimbursement account (HRA). Employees will be more incentivized to ensure they’re not being fraudulently or erroneously billed when spending their “own” money. Recently, some employers have been similarly achieving this added consumer oversight by sharing in a portion of the plan’s savings with any employee who finds that he was billed for services he did not receive or, more likely, who was up charged for services that should have been more modest.
2. For organizations with a team of roughly 250 or more, consider abandoning the flawed system, ditching your insurers, and transitioning to a reference-based pricing (RBP) model. This approach allows you to pay a modest markup of, generally, 20% to 40% over the Medicare price. Despite the initial challenges and the need for extensive education, this step will likely result in a remarkable 20% to 40% reduction in your health plan costs. Moreover, rather than maintaining a wider buffer on exaggerated claims as a traditional insurer would in a fully-insured plan under the mentioned MLR regulations, numerous RBP providers actually receive additional financial rewards the more they reduce your claims. In that sense, RBP not only removes employers from the PPO shell game but reverses the economic forces at work on that employer’s claims.
3. As you transition towards a self-funded RBP platform, seize control of your pharmacy coverage. Contract directly with a pharmacy benefit manager (PBM), or join one of the innovative consortiums that pool several employers under a single contract, thus boosting your pharmacy discounts and rebates. This move could slash your pharmacy bill by a substantial 25% to 50%.
This is the path to revolution. Are you ready to take the first step?
Craig Gottwals is a health care attorney and senior vice president at McGriff Insurance Services.