Fraud and Abuse in Government Programs: It’s Really Not About Politics

Medicare and Medicaid Fraud and Abuse ... It's PervasiveMalcolm Sparrow, esteemed author and professor at Harvard University’s Kennedy School of Government, has been alerting us recently about the problems with various government programs like Medicare and Medicaid.

He’s painting a pretty bleak picture, actually. And the issues have little or nothing to do with ideology, but of competence.

Dr. Sparrow’s main argument is that the seemingly endless stream of horror stories about Medicare and Medicaid scams proves that many people are using these programs as “personal tills.” The number of cases that have come to light in recent years runs into the hundreds and involve millions of dollars – and there are likely many more incidences that have not ever been uncovered.

Seeking to find common threads between the many cases of fraud and abuse, Dr. Sparrow has concluded that the system’s vulnerability comes not from how it is designed, but because of the payment mechanisms the federal government has chosen to utilize.

It turns out that most Medicare and Medicaid funds are paid out automatically in response to electronic claims received from a slew of healthcare providers. Most of these claims are processed using rules-based systems – with no human interaction at all.

What this means is that fraudsters need only learn the rules, and then proceed to submit hundreds or thousands of bogus claims electronically – with little risk of detection.

And here’s a real kicker: If someone makes a mistake in their submission, the government returns a computer-generated message explaining the error(s) – thereby enabling the fraudulent activity to continue!

In short, those who are gaming the system find it nearly effortless to receive payments for fabricated claims … all because the systems check for billing “correctness” but not for “truthfulness.”

Dr. Sparrow’s conclusion: “The simple rule for getting rich quick through health care fraud is [to] bill your lies correctly.”

The thing that makes this state of affairs doubly distressing is that the government has been aware of the propensity for abuse for years now.

Dr. Sparrow quotes one Medicaid fraud investigator back in 1995 warning about the fraud risk of electronic claims processing: “Thieves get to steal megabucks at the speed of light, and we get to chase after them in a horse and buggy. No rational businessman would ever invent a system like this.”

But did this realization make a difference in “business as usual”? Nope.

Why? Dr. Sparrow believes it’s because the processing efficiencies of such payment systems are so obvious and tangible. But the problem with such an approach is that it becomes a sitting duck for fraud. Dr. Sparrow sets up the scenario like this:

“The recipe for disaster is now clear. Whatever the nature of the payments … pay them electronically. Set up the system with honest claimants in mind. Allow claims to be submitted electronically. Set the administrative budget low enough that the bulk of the claims have to be paid without verification.”

He then proceeds to conjecture how these programs make it so far down the road with so little in the way of critical evaluation:

“To make things really dangerous, add a degree of urgency to the public purpose … Urgency tends to trump caution and raises policymakers’ perception of the ‘business-acceptable risk.’ And if it’s a really ‘valuable’ program, supporters and officials will be loath to hear any criticism of it, and to discount reports of fraud.”

After painting such a bleak picture, Dr. Sparrow does not leave us without a path forward to a possible solution. He notes that fixing vulnerabilities in Medicare, Medicaid and other federal programs would offer good promise for long-term deficit reduction – an action that both political parties could support. But there needs to be the political will to make major structural and procedural reforms to the programs in order to meet the objective.

Call me a curmudgeon, but I’m a bit less optimistic than Dr. Sparrow; much as I’d love to believe that these changes could happen with everyone on board with the program, I’m not holding my breath waiting for them to happen anytime soon.

For U.S. Households, the $534,000 Elephant in the Room

It doesn’t matter where you may be on the political spectrum, the most recent financial figures about the U.S. economy and our financial obligations have to be stunning in their import.

It turns out that the federal government’s financial condition has deteriorated much more rapidly and significantly than is commonly understood – far more than the ~1.5 trillion in new debt that was incurred to finance the budget deficit.

Instead, USA Today is reporting that the government took on some $5.3 trillion in new financial obligations during 2010. Not surprisingly, a big chunk of these unmet obligations fell under Medicare and Social Security.

Adding these new obligations to the existing ones translates into a record of nearly $62 trillion in financial promises not paid for.

And if that particular number isn’t striking enough, perhaps putting it this way will get your attention: It translates into ~$534,000 in unfunded obligations for each individual household in the United States.

In addition to $534,000 being a breathtaking number in and of itself, it represents more than five times what Americans have borrowed for everything else (mortgages, car loans, college loans, etc.).

Now there’s certainly a big difference between the government and the private sector, of course. Corporations would be required to account for these new liabilities when they are taken on – and thereby report big losses to their shareholders. But unlike businesses, Congress can conveniently stave off recording these commitments until it’s ready to write the check. “See no evil … hear no evil …”

And here’s another big difference between the federal government and everyone else: the ability to “manufacture” greenbacks to pay for debt obligations. Whether we call it euphemistically “quantitative easing” or more bluntly “printing money,” that’s a solution that comes dangerously close to the famous quip attributed to H. L. Mencken: “For every problem, there’s a solution that is simple, elegant, and wrong.”

Sheila Weinberg, founder of the Chicago-based Institute for Truth in Accounting advocacy organization, raises another key point: “The [federal] debt only tells us what the government owes to the public. It doesn’t take into account what’s owed to seniors, veterans and retired employees. Without accurate accounting, we can’t make good decisions.” She has a good point.

The blind leading the deaf: It certainly doesn’t portend well for the future. But there’s always the hope that if we can somehow create robust future annual economic performance in the 4-5% range, we’ll grow our way out of the problem.

We’ll have to see about that.