Medicare Fraud: Moratoria Miss the Mark

(A version of this Health Alert has been published by Forbes. A longer version of this Health Alert has been submitted to the U.S. House of Representatives Committee on Ways & Means, Subcommittee on Health, for the May 19, 2015 hearing titled, “Improving Competition in Medicare: Removing Moratoria and Expanding Access.)

Medicare fraud is a serious problem. The Medicare bureaucracy has the power to impose moratoria on new providers in geographic or program areas it deems susceptible to fraud. However, preventing new competitors from providing Medicare benefits reduces competition and cannot reduce fraud by incumbent providers. A better way would be to give Medicare beneficiaries a financial interest in combatting fraud.

Last February, the Government Accountability Office issued its annual report on federal programs that it identifies as high risk due to their greater vulnerabilities to fraud, waste, abuse, and mismanagement.  Medicare is a longstanding member of the list: “We designated Medicare as a high-risk program in 1990 due to its size, complexity, and susceptibility to mismanagement and improper payments”. A quarter of a century has gone by and Medicare is still on the list.

In 2013, Medicare spent $586 billion taxpayer dollars. The FBI has estimated that three percent to 10 percent of all health spending is fraudulent. For Medicare, that would amount to at least $17 billion and up to almost $60 billion. In its latest annual report, the federal program to combat Medicare fraud reported that it had covered $3.3 billion in 2014.

The Affordable Care Act gave the Secretary of Health & Human Services a new power to combat fraud: The authority to impose temporary moratoria on new providers if the geographic area or applicant type indicates a significant risk of fraud, waste, or abuse. In July 2013, the CMS issued its first set of moratoria. Further announcements were made in January 2014, July 2014 and January 2015.

Moratoria are unlikely to prevent fraud and likely to have unintended consequences by reducing competition. It is a little like solving bank robberies by preventing people from entering banks. Imposing moratoria is the extreme case of focusing antifraud efforts on regulating providers. The burden of compliance has become so great that it is interfering with honest providers’ ability to do business with Medicare. Enrollment by providers is already highly bureaucratized.

Many trade and professional associations have complained that the burden of antifraud compliance is increasing their members’ costs and frustrating their businesses. Many complaints address Recovery Audit Contractors (RACS), to whom Medicare pays a share of the spoils from claims they challenge. This has resulted backlog of 500,000 denied claims being appealed. It is unlikely that this backlog comprises many claims from actual fraudsters, who are unlikely to appeal a denied claim.

Dialing up the pressure on providers even more, to the extreme of imposing moratoria on new entrants, is unlikely to improve fraud recovery and prevention for two reasons: Fraud is a common feature of insurance markets; and government does not have the right incentives to prevent fraud. Combining these results in a toxic brew in which fraudsters can breed happily.

In proper markets, insurance only comes into play for unforeseen and catastrophic events. This is because third-party payments are unavoidably susceptible to attempted fraud. Consider the classic case of a businessman who has unsold inventory, hires someone to torch his warehouse, and submits a claim to his property insurer. The desperate and unethical businessman has to take extreme measures to defraud the insurer. In Medicare, and U.S. health care in general, so many low-cost and routine items and services are run through insurance claims that fraudsters can easily pick holes in the system.

Because Medicare is spending taxpayers’ money, not its own, it cannot have the right incentives to effectively prevent and recover from fraud. A better way to prevent fraud would be to give beneficiaries direct control of more of the money Medicare spends on their behalf. Consider an obvious example: Certain categories of medical equipment are notoriously susceptible to Medicare fraud. Durable Medical Equipment (DME) incudes power wheelchairs, electrical hospital beds and diabetic test strips. In 2011, Medicare began a competitive bidding program for these items. Since then, DME bidding has saved $2 billion for Medicare.

All these savings accrue to the government. Much more could be saved if Medicare could share the gains with America’s seniors something like this. For example, Medicare has been paying over $4,000 for power wheelchairs. They can be purchased for around $3,000, or even less in some parts of the country. Allow patients who need power wheelchairs to buy their own, and reward them by crediting a share of the savings to their Social Security, Medical Savings Accounts, or Health Savings Accounts.

Medicare beneficiaries have to control more Medicare spending directly. It is time to shift a significant proportion of current Medicare spending away from providers directly and into seniors’ Health Savings Accounts and Medical Savings Accounts.

Continuing to focus antifraud efforts solely on playing whack-a-mole with fraudsters, to the extreme of preventing new competitors by imposing moratoria, is unlikely to reduce fraud much further.

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