The Right Prescription

Medi-Fraud for Everyone

Democrats argue that creating a new government-run health care program will bring efficiency to the system, but the existing programs are rife with fraud.

By 10.23.09

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Guillermo Denis Gonzalez was released from prison in Florida in 2004 after serving 12 years for murder. By the end of 2006, he owned a health care business officially licensed by Medicare.

This August, the Miami Herald reported that Gonzalez pled guilty to filing $586,953 in phony Medicare claims for supplies that were never given to any actual patients -- but this was only after he was arrested for murdering and dismembering another victim, to which he also confessed.

While it's shocking that government policing efforts are so lax for Medicare that even a convicted murderer can be granted a license to sell equipment and file claims, Gonzalez is actually a small player compared to other cheats. Last June, for instance, the Washington Post ran a story about a high school dropout who scammed $105 million from the federal government by filing 140,000 fraudulent Medicare claims, buying herself a Mercedes-Benz and two condominiums with a portion of the proceeds.

The rampant fraud in existing government health care programs is nothing new, but the problem warrants increased attention given recent reports of growing momentum behind Democrats' push to create a new government-run program modeled after Medicare.

Earlier this week, the Hill reported that House Democrats were discussing rebranding their so-called "public option" as "Medicare Part E," or "Medicare for Everyone," in hopes that it would be an easier sell. And on Thursday, ABC News cited sources who said that Senate Majority Leader Harry Reid planned to include some form of a government plan in Senate legislation.

"I thought the government plan was dead," Republican Sen. John Thune said during a Wednesday conference call with bloggers. "I don't think that anymore."

Proponents of creating a new government plan argue that Medicare is much more efficient than private insurance and boast that it has administrative costs of just two percent. The number is highly misleading in that it doesn't include many expenses that would be considered when calculating administrative costs in the private sector, because those expenses show up elsewhere in the federal budget. Examples include the cost of tax collection, office space, and staff salaries. The true administrative cost of Medicare is more like 6 percent to 8 percent, according to a 2006 report by the Council for Affordable Health Insurance. But to the extent that Medicare does have lower administrative costs than private insurance, the programs' defenders ignore one of the consequences: lax oversight of claims that leads to widespread fraud.

Ironically, President Obama has insisted that he will cut several hundred billion dollars out of Medicare's budget without affecting benefits simply by eliminating waste, fraud, and abuse -- yet he simultaneously makes the case that creating a new government plan is necessary to improve efficiency in the health care system.

"He's kind of put himself in a box," said Jim Frogue of the Center for Health Transformation, editor of the book Stop Paying the Crooks: Solutions to End the Fraud That Threatens Your Healthcare. Obama's argument, Frogue said, is "yes, there's tons of fraud in these programs -- massive amounts -- but let's create another one just like it. Now that's a very tough position to make sense out of."

There are tremendous difficulties in measuring precisely how much of money is lost to fraud in Medicare and Medicaid. Some estimates put the number at around $60 billion, while Sen. Tom Coburn has argued that it's at least $100 billion, perhaps even double or triple that. Coburn based his figures on an estimate from health care fraud expert Malcolm Sparrow of Harvard University, who has said -- at the low end -- 10 percent of the roughly $1 trillion in spending on government health care programs may be lost to fraud.

"By taking the fraud and abuse problem seriously this administration might be able to save 10 percent or even 20 percent from Medicare and Medicaid budgets," Sparrow said in May testimony before the Senate Judiciary Committee. But to accomplish this, Sparrow explained, the government would have to boost anti-fraud spending to as high as 2 percent of the cost of the programs from the roughly 0.1 percent now dedicated to the task.

At least anecdotally, accounts of massive fraud cases appear regularly in the news, and they are staggering.

In 2006, the Los Angeles Daily News wrote about the indictment of a Russian-Armenian crime syndicate "that gutted Medicare of more than $20 million using a network of clinics, paid kickbacks to marketers for patient referrals and billed Medicare for tests that were unnecessary or went undelivered." And the Associated Press recently found that the mafia is increasingly resorting to Medicare fraud as a substitute for dealing drugs.

"Building a Medicare fraud scam is far safer than dealing in crack or dealing in stolen cars, and it's far more lucrative," the AP story quoted Lewis Morris, a lawyer the Department of Health and Human Services, as saying. There's also a lower likelihood of getting caught, and even if caught, the penalties are much lighter.

Scam artists often file fake claims by paying people for their Medicare numbers or somehow acquiring lists of beneficiaries. In some cases claims have been filed by dead doctors, or on behalf of patients who were dead or deported at the time of the claim. In his testimony, Sparrow noted a July 2008 study by the Senate Permanent Subcommittee on Investigations that found from 2000 to 2007 "between $60 million to $92 million was paid for medical services or equipment that had been ordered or prescribed by dead doctors." 

By contrast, only about 1.5 percent of private health care claims are lost to fraud, because private insurers are more aggressive about policing claims, Merrill and Meredith Matthews write in a chapter of Stop Paying the Crooks.

Frogue said that Medicare and Medicaid fraud can't be addressed by law enforcement, because it's too expensive to prosecute and imprison the cheats, and by the time they get caught the stolen money has likely disappeared. Instead, he said that the government had to do a better job at the front end, through such measures as thorough background checks before licensing Medicare vendors. He also suggested that the government should flag the top half-percent of Medicare spenders to make sure their claims are legitimate. As evidence that it's possible to police for fraud, Frogue pointed out that the credit card industry handles about $2 trillion in transactions a year -- about the same as the health care sector -- yet card fraud is less than 1 percent.  

Unfortunately, despite Obama's talk about eliminating fraud in government health care programs, legislation currently making its way through Congress does very little to address the problem.

"They're not even close to scratching the surface," Frogue lamented.

Instead, Democrats are pushing for the creation of a massive new government health care plan that will be a magnet for criminals everywhere.

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Philip Klein is The American Spectator's Washington correspondent. You can follow him on Twitter at: http://twitter.com/Philipaklein