Stealing Hurts: A Historical Examination of Health Care Fraud and Abuse in America

Omri Benami is a rising senior Economics/Mathematics major at Grinnell College. He intends on pursuing a career in the Finance or Hi-Tech industries after graduation.

Healthcare is a constant topic in American current events, and has been a subject of national concern for many decades. Medicare and Medicaid are large government expenditures, and in theory are very beneficial programs. However these programs have been abused and misused by many, costing both taxpayers and the government itself greatly. In fact, the National Health Care Anti-Fraud Association (NHCAA) estimates that tens of billions of dollars are lost every year in the United States due to health care fraud. In addition, Medicare is a fiscal nightmare, and the biggest driver of long term government debt. Health care fraud has been a problem going back nearly a century due to the structure of the system, and the government has attempted to fight fraud with various statutes and programs. However, health care patients and other individuals from disempowered groups are equally affected by the financial, physical and intangible crimes associated with health care abuse. The current political regime has begun to address the suffering using a more holistic approach, thus providing a positive outlook for the battle against health care fraud and abuse in America.

1914 marks the beginning of America’s exploration of national health insurance. With their interest in the impact of industrialization, the American Association for Labor Legislation (AALL) pushed for a state bill for employment-based sickness insurance.[1] After the Great Depression, nationwide financial turmoil led to the resurfacing of the politics of health and the idea of national health insurance. The Committee on Economic Security (CES), part of Federal Social Security, believed that private insurance was inadequate to meet the needs of the population. They proposed combining wage-loss and maternity benefits (two previously underfunded areas) with a separate system of service benefits — all to be financed by payroll taxes and general revenues. The bill was shot down however, with a promise of further study by the government.[2] In late 1939 the Wagner-Murray-Dingell (WMD) health bill was proposed to expand Social Security’s public and maternal health programs, and aid with state hospital construction, indigent care, and disability insurance. With postwar optimism in 1945, the Truman administration backed WMD, by offering grants for hospital construction, nationalized unemployment insurance, and social insurance health coverage.[3] This period exemplifies the divide between proponents of public and private health insurance, with numerous amendments and debates ensuing until the founding of Medicare and Medicaid in 1965.

The creation of Medicare and Medicaid unfortunately led to two ways for physicians to engage in abuse on a scale much larger than ever before, marking the beginning of the true fraud epidemic as we know it today. The first way was for doctors to commit outright fraud, that is, to lie in their claims for reimbursement by seeking fees for services that were not rendered or that were performed at a lesser level of intensity than that claimed. The second was to abuse their ability to refer patients to other providers in return for financial inducements commonly known as kickbacks.[4]

One example of fraudulent behavior can be seen through the providing of Medigap services, which were created to account for some of Medicare’s limitations with regard to coverage. Medigap plans covered the Medicare copayment and additional services, and were offered by reputable insurers, including Blue Cross/ Blue Shield, but the industry admitted that some companies in this market subjected seniors to “high pressure sales tactics, fraudulent representation, false or misleading advertising, over insurance, replacement of already adequate policies, inadequate coverage at excessive rates, intentional inadequate disclosure or misstatement of coverage.”[5]

Health insurance scandals attracted nationwide attention, especially when insurance companies were accused of defrauding senior citizens. This was the case with Colonial Penn insurance company, whose leader Leonard Davis had created the American Association of Retired Persons to sell his Medigap insurance plan. Colonial Penn was sued by consumers in 1978 for consistently paying out less than half of its income in benefits to policyholders.[6]
In response to this and similar reports of Medicare and Medicaid fraud, in 1977, the U.S Congress increased the penalties for such actions, and made the crime a felony. Then in 1989 and 1993, Congress passed the Stark Amendments. The first amendment denied Medicare reimbursement for clinical laboratory services when the patient was referred by a physician who had a financial relationship with the facility. This shows that the patients’ health was a lesser priority for physicians than the specific facility that the doctor was able to send the patient. The 1993 amendment extended the scope of the prohibition beyond laboratory tests to nine additional designated health services, including radiology, physical therapy, and hospital services.[7]

This isn’t all that the federal government has done to fight this problem. Under the False Claims Act (FCA) of 1986, the United States can sue violators for treble damages, plus $5,500–11,000 per false claim. To further fight the rising incidence of fraud and abuse, in 1993 the Attorney General announced that tracking fraud and abuse would be a top priority for the Department of Justice. In 1993 the Health Insurance Portability and Accountability Act (HIPAA) established the Health Care Fraud and Abuse Control program (HCFAC). Finally, in 2007, the United States Department of Health and Human services (HHS) and the Attorney General allocated $248,459,000 to HCFAC to fight healthcare fraud and abuse.[8]

Due to all of this fiscal action and the vast amount of money being put towards the battle against fraud and abuse, health care fraud is usually examined through losses endured by the government and the national economy. However, as Malcolm Sparrow states, “most affected are those who are least able to protect themselves – our children, our elders, our poor, and our disabled. The cost of crime also manifests itself in higher insurances premiums, higher taxes for individuals and employers, and, because of the resulting resources constraints, in cutbacks in service for those genuinely in need.”[9]

Moreover, aside from the clear financial harm, physical harm from fraud occurs when unnecessary medical procedures are performed solely for the purpose of obtaining payment from the federal health care programs. There have been many cases where extremely invasive procedures were performed on patients who simply did not need them. Another example is when medically necessary care is performed in an improper manner in order to maximize reimbursement. Health care fraud can also cause patients intangible harm, which may arise when a health care provider misuses patient information to obtain reimbursement for services that were not performed.[10] This is exemplified by the case of a late 1990’s Boston psychiatrist, who had to pay back over $1 million and was sentenced to multiple years in federal prison for mail fraud, money laundering, and fabrication of therapy sessions, patient insurance information, and even diagnoses.

The structural features to the American health care system contribute to the major types of fraud that occur. Heavy private sector involvement and reimbursements through a “fee-for-service” approach mean the legitimacy of most claims is assumed. Most claims are submitted electronically and processed automatically as long as the right criteria are met, instead of verifying that the services billed were actually provided. This minimal human involvement increases the chance that fraud goes undetected. So the automation of the American health care system results in a lack of proper regulation.[11] We can compare this observation to the story of William W. Dyott, who created a successful patent medicine business in the early 1800s. Dyott lied about the ingredients in his medicines because the copyright laws at the time didn’t require him to disclose them. His story reveals how political and cultural changes that created entrepreneurial growth in America allowed frauds like him to profit greatly.[12] So in examining historical fraud and abuse from a regulation standpoint, one could reasonably argue that little has changed.

Given all of this, the question remains: why has health care fraud not been brought under control? The convincing answer that Malcolm Sparrow provides is that the health care industry has underestimated the complexity of the fraud-control business and has never developed any legitimate protection against fraudulent acts.[13] This is problematic because there is a lot at stake here. Due to the fiscal deficit, cost cuts are inevitable, and will negatively impact those who require help the most. If the health care industry were to learn the art of fraud control, “they could cut costs without denying the needy, restricting eligibility, or squeezing honest doctors out of business.”[14]

Long term prevention of health care money loss through fraud requires America to not only enforce penalties, but also have “control over who participates in the program and when their claims are paid in the first place.”[15] Under the Obama administration the health care reform debate represents one of the first committed attempts to prevent the fraudulent diversion of program money at both the front and back ends of the funding stream.[16] While the Patient Protection and Affordable Care Act (PPACA) includes increases to the health care fraud budgets of numerous government institutions and amendments to relevant statutes, it also contains provisions which allow better control and over those who bill the federal health care programs. The legislation also requires more thorough background checks and assessments of both suppliers and providers.[17] Time will reveal the results, but the Obama regime has certainly made a concerted effort to tackle health care fraud and abuse, and hopes to provide a positive future for the American health care system.

[1] Gordon, Colin. Dead on Arrival: The Politics of Health Care in Twentieth-Century America. New Jersey: Princeton University Press, 2003 pp. 12-20
[2] Ibid.
[3] Ibid.
[4] Field, Robert I. Health Care Regulation in America: Complexity, Confrontation, and Compromise. New York: Oxford University Press, 2007, pp 176-177
[5] Hoffman, Beatrix. Health Care for Some: Rights and Rationing in the United States since 1930. Chicago: University of Chicago Press, 2012, pp.131
[6] Ibid., 161
[7] Field, Health Care Regulation in America, 185
[8] Rudman, William J. “Healthcare Fraud and Abuse,” Perspectives in Health Information Management, Vol. 6, Fall 2009, pp. 1-2
[9] Sparrow, Malcolm K. License to Steal: Why Fraud Plagues America’s Health Care System. Colorado: Westview Press, 1996, pp. ix
[10] Krause, Joan H. “A Patient-Centered Approach to Health Care Fraud Recovery,” 96 Journal of Criminal Law & Criminology 579 (2005-2006), pp. 589-594
[11] Sparrow, Malcolm K. Fraud in the U.S. Health-Care System: Exposing the Vulnerabilities of Automated Payments Systems. Social Research Vol. 75, No. 4, Winter 2008, pp. 1153
[12] Breslaw, Elaine G. Lotions, Potions, Pills, and Magic, pp. 152
[13] Sparrow,  212
[14] Ibid., 213
[15] Krause, Joan H., “Following the Money in Health Care Fraud: Reflections on a Modern-Day Yellow Brick Road,” American Journal of Law and Medicine, Vol. 36, Nos. 2 & 3, 2010, pp. 365-367
[16] Ibid.
[17] Ibid.

For further reading:
Starr, Paul. Remedy and Reaction: The Peculiar American Struggle over Health Care Reform. New Haven & London: Yale University Press, 2011.
Aldhizer III, George R. “Fraud and Errors: A Ticking Time Bomb That Must Be Defused,” Journal of Government Financial Management, Vol. 12 (Winter 2009)