As Congress batted around higher eligibility ages and reduced Medicare spending last year, two topics that have not garnered much public discussion are fraud and overbilling. If Medicare is to clean up its fiscal act, it will need to be much more aggressive in these areas.

While the Affordable Care Act contains a number of measures—which have already made considerable progress—these were scarcely noted when program reforms were discussed in the context of the fiscal cliff/budget talks. Instead of benefit cuts, savings could be reaped through more aggressive fraud and overbilling policing.   

It's a poorly kept secret that fraud and overbilling have been fleecing the program and wasting taxpayers' money. According to a Reuters report, about $43 billion was lost from improper payments in fiscal year 2011.  

The combined overbillings paid by Medicare are sizable, representing more than one-third (37 percent) of all improper overpayments made to government agencies monitored by the Government Accountability Office (GAO).

Improper Medicare Payment Estimates FY 2011

Program                                            $ billions     Error Rate %

Medicare fee-for-service                    $28.8                      8.6

Medicare Advantage Plans                $12.4                    11.0

 (Part C)

Medicare Prescription Drug Plans      $1.7                       3.2

  (Part D)

The sources of the overpayments range from poor paperwork to outright fraud. For the largest portion of the wasted funds, the GAO said the reasons were mostly "medically unnecessary services and insufficient documentation."

For Part C (Medicare Advantage) plans, the private managed care option, faulty paperwork and "errors in the transfer and interpretation of data and payment calculations" accounted for the majority of the improper payments. For the Part D program, payment errors and "complexity of the program" were faulted.

While the Department of Health and Human Services, particularly its Office of Inspector General, has made progress in reducing the overpayments in recent years, it still has a long way to go. It only managed to cut overpayments in the Part C program by $1 billion in fiscal year 2011 -- a small bite of the nearly $30 billion in estimated overpayments. The agency has received more funding from Congress to upgrade its technology to detect more fraud, but it will take years before solid results are seen.

Medicare Advantage Overbilling

One promising new technology harnesses "predictive analytics" to spot patterns of abuse in billing, the GAO noted. Software is employed to monitor billing that may show "a high risk of fraudulent activity." This is a quantum leap for Medicare, which in the past relied upon whistleblowers or incidences of obvious fraud to turn up.

The agency has initiated a number of new programs to cut these losses, although they remain unacceptably high. Companies are still able to start up shell companies and fraudulently bill Medicare. State agencies responsible for monitoring incorporations are not policing Medicare fraud, so it's up to the Inspector General and Justice Department to ferret out the abuses.

One recent spate of scams by shell companies in the Southeast was detected by Reuters News. Of the more than 60 suspect Medicare providers identified, 35 were identified as criminal fraud rings and shut down. The rest are still billing, or bilking, the system.

Authorities are continuing their investigations and legislation has been introduced to curb the fraud, although some regulators are protesting increased enforcement due to turf battles. Here are some of the roadblocks the Reuters investigation found:

In Georgia, anyone can register a corporation for a $50 fee. Brian Kemp, Georgia’s Secretary of State, says he has no power to spot attempts by criminals to register fraudulent companies or to weed out bogus firms. "If you fill the paperwork out and send your money in, you are registered," he says. Even after a shell scam is detected, it can be hard to identify the criminals behind the company. In the fight against Medicare fraud by shell companies, two bills were introduced this year in Congress that would help U.S. investigators pierce the veil of corporate secrecy, but the effort is bogged down amid opposition from state regulators.

Outside of blatant fraud, other Medicare overbilling is difficult to discern and track down. A recent GAO report found that different ways of coding (identifying treatments for Medicare reimbursement) may have resulted in overpayments of up to $6 billion over the past three years to Part C providers.

Part C providers essentially assign "risk scores" to patients based on their health. Payments from Medicare are then based on the risk scoring provided by the private insurers. Unlike the fee-for-service program, which has no risk scoring, some Part C providers try to recoup their costs through this health-rating process. The GAO suggested that Medicare improve its data collection to avoid overpayments in the future.

The Physicians for a National Health Care Program, a group that favors universal Medicare, sharply criticized the practice:

"We now have considerable experience with risk adjustment between the private Medicare Advantage plans and the public fee-for-service Medicare program. The experience is not good. As Medicare has refined the risk adjustment tools, the private Medicare Advantage plans have found new ways to game the system which have resulted in even greater overpayments for their patients who are healthier than the data submitted by the insurers would indicate."

If more of Medicare is shifted away from fee-for-service into a privately run risk-management model, this area could be ripe for abuse. How does Medicare rein in expenditures while ensuring that private insurers can cover their costs? This would be a challenge for any new hybrid model that emerges under Medicare reform.  

In the interim, HHS’s Office of Inspector General has begun to police potential scams by targeting areas where abuse is prevalent. In 2011, it identified 20 counties where overbilling is most rampant. It also has a special Medicare "Strike Force" dedicated to fraud, which filed charges against 70 individuals/firms and recovered some $161 million last year.

While that's a drop in the bucket relative to the overall incidence of fraud, recovery may be accelerated as Congress looks to rein in costs for operating the system. 

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