Detecting Medicare Abuse

The American Enterprise Institute held a health policy conference on Friday titled “Detecting Medicare Abuse: Can Economists Help the Inspector General Bloodhounds?” Discussion centered on forthcoming research findings presented by Daniel P. Kessler of Stanford University that seeks to identify the link between Medicare anti-fraud enforcement, financial savings to the government, and health outcomes. Daniel Kessler and his coauthors, Mark McClellan, formerly of Stanford University and now commissioner of the Food and Drug Administration, and David Becker of the University of California at Berkeley compared the health and spending patterns of Medicare patients from states with high levels of Medicaid anti-fraud measures with those from states with lower levels of Medicaid anti-fraud measures. Kessler assumed Medicaid anti-fraud measures would carry over to the Medicare program. A random sample of one-fifth of the Medicare patients with six illnesses commonly associated with fraud and abuse were used as data. The study found:



  • Increased anti-fraud enforcement leads to fewer resources spent on non-acute care and better health outcomes in males as compared to females for four of the six illnesses.
  • Increased enforcement leads to better health outcomes in blacks compared to whites in three of the six illnesses.
  • Increased enforcement saves financial resources in the younger elderly compared to the older elderly in three of the six illnesses.
  • Increased enforcement leads to larger declining health expenditures in non-profit hospitals versus public hospitals, and savings are even greater in for-profit hospitals.

“No one knows how big the problem of fraud and abuse in Medicare really is,” said Kessler. Estimates show about 7-14% of Medicare expenditures are improper, totaling about $12 to $23 billion per year. Fraud and abuse includes billing for services never performed, charging for services individually instead of in packages, up-coding marginal patients, and delivering services that are not medically necessary. “Fraud and abuse are a product of our complicated payment rules,” said Joe Antos of AEI. According to Antos, the Medicare payment rules cry out for misinterpretation, creative interpretation, and profit-seeking behavior. “When you create complicated payment rules, you have ample opportunity to game the system from every angle,” said Antos. David Hyman of the University of Maryland said several practical problems also contribute to the difficulty in reining in fraud and abuse in Medicare. In addition to determining which conduct is considered improper and then identifying it, the volume of claims is staggering. There were almost one billion claims in the year 2000 alone. Only about 10-12% of these claims can be individually reviewed, according to Hyman. Richard Kusserow, a former inspector general for the Department of Health and Human Services, said state anti-fraud enforcement units simply don’t have the resources to conduct the required physician and hospital investigations. He suggested a better system would be enforcement directed at the national level. “Heavy enforcement does affect behavior,” said Kusserow. “I’m convinced?that what we’re doing now is not right.”

–Joe Moser
Galen Institute

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The American Enterprise Institute held a health policy conference on Friday titled “Detecting Medicare Abuse: Can Economists Help the Inspector General Bloodhounds?” Discussion centered on forthcoming research findings presented by Daniel P. Kessler of Stanford University that seeks to identify the link between Medicare anti-fraud enforcement, financial savings to the government, and health outcomes. Daniel Kessler and his coauthors, Mark McClellan, formerly of Stanford University and now commissioner of the Food and Drug Administration, and David Becker of the University of California at Berkeley compared the health and spending patterns of Medicare patients from states with high levels of Medicaid anti-fraud measures with those from states with lower levels of Medicaid anti-fraud measures. Kessler assumed Medicaid anti-fraud measures would carry over to the Medicare program. A random sample of one-fifth of the Medicare patients with six illnesses commonly associated with fraud and abuse were used as data. The study found:



  • Increased anti-fraud enforcement leads to fewer resources spent on non-acute care and better health outcomes in males as compared to females for four of the six illnesses.
  • Increased enforcement leads to better health outcomes in blacks compared to whites in three of the six illnesses.
  • Increased enforcement saves financial resources in the younger elderly compared to the older elderly in three of the six illnesses.
  • Increased enforcement leads to larger declining health expenditures in non-profit hospitals versus public hospitals, and savings are even greater in for-profit hospitals.

“No one knows how big the problem of fraud and abuse in Medicare really is,” said Kessler. Estimates show about 7-14% of Medicare expenditures are improper, totaling about $12 to $23 billion per year. Fraud and abuse includes billing for services never performed, charging for services individually instead of in packages, up-coding marginal patients, and delivering services that are not medically necessary. “Fraud and abuse are a product of our complicated payment rules,” said Joe Antos of AEI. According to Antos, the Medicare payment rules cry out for misinterpretation, creative interpretation, and profit-seeking behavior. “When you create complicated payment rules, you have ample opportunity to game the system from every angle,” said Antos. David Hyman of the University of Maryland said several practical problems also contribute to the difficulty in reining in fraud and abuse in Medicare. In addition to determining which conduct is considered improper and then identifying it, the volume of claims is staggering. There were almost one billion claims in the year 2000 alone. Only about 10-12% of these claims can be individually reviewed, according to Hyman. Richard Kusserow, a former inspector general for the Department of Health and Human Services, said state anti-fraud enforcement units simply don’t have the resources to conduct the required physician and hospital investigations. He suggested a better system would be enforcement directed at the national level. “Heavy enforcement does affect behavior,” said Kusserow. “I’m convinced?that what we’re doing now is not right.”

–Joe Moser
Galen Institute

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About the author