Medscam

A Mother Jones Investigation

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The medical industry is the largest business in the land, with nearly $1 trillion in revenue. Of that, an estimated $100 billion or more is lost to insurance fraud. No one is sure exactly how much, because the only ones who know the system are the crooks, who range from hospital executives down to taxicab drivers.

Great Moments in Medical Fraud
A $1.4 billion program that pays junkies to stay on dope
Glossary of Medical Fraud
More resources on medical fraud

Consider the following cautionary tale: In 1981, the Senate Special Committee on Aging undertook a pioneering study of the extent and nature of medical insurance fraud. To assist the committee in its thinking, the legislators called upon Dr. Richard Joseph Kones, a Philadelphia cardiologist who had been convicted of submitting fraudulent bills in excess of $500,000 to the public and private insurance systems of three states. To the doctor’s disingenuous surprise, he had actually been paid.

“The problem is that nobody is watching,” he told the senators. “The system is extremely easy to evade. The forms I sent in were absolutely outrageous. I was astounded when some of those payments were made.”

In the seven years since he’d first stumbled upon a felon’s pot of gold in 1974, Kones had been convicted of fraud no fewer than five times. Dr. Kones, in effect, begged Congress to stop him before he billed more.

But Congress didn’t stop him. In 1990, not long after he was released from a Texas jail, Kones was able, despite his record, to get his Pennsylvania medical license reinstated. According to the FBI, he was soon up to his old tricks, submitting outrageous bills that charged insurers anywhere from $2,500 to $5,000 for a single visit by a single patient. “I can’t get into specifics,” says John Narvaez, the FBI agent in charge of the latest investigation, “but if you saw his claim submissions to the insurance companies, you wouldn’t believe them.”

When Kones was finally hauled in again last year, he was charged with 200 counts of mail fraud for billing in excess of $1 million over four years. The trial is pending.

For two decades, Dr. Kones had remarkable success milking the fee-for-service system that has been the standard form of reimbursement since modern medical insurance was introduced in the 1930s: A doctor performs (or pretends to perform) a professional service, and the insurance companies or the government pay the doctor for it. Under managed care–the wave of the future, no matter what happens in Washington, since many employers and insurance companies want it–the perverse, fraud-porous incentives of fee-for-service will presumably vanish, because health care providers will be placed on salary. Unfortunately, the medical investigators contacted during the course of this investigation agree that health care theft will simply mutate like a virus, adapting itself to changed circumstances.

The United States’ $1 trillion annual health bill is 14 percent of the gross domestic product, making the medical industry the largest business in the land. Of this sum, a staggering amount is stolen. According to the National Health Care Anti-Fraud Association (an alliance of insurance companies, concerned individuals, and federal and state agencies), the yearly swag totals between $31-$53 billion. According to a widely quoted 1992 report by the General Accounting Office, the annual bill has probably hit $100 billion. Other investigators estimate the amount is as high as $250 billion. In fact, as an extensive Mother Jones investigation has discovered, no one really has the foggiest notion of how much money is stolen from the medical system every year–and no one has any way of finding out.

We are no longer dealing with the usual handful of physicians who make an extra buck by fudging on the bill, or the bogus patients who fake an injury for the insurance money, although both are with us always. Fraud is perpetrated at every level, even down to the taxicab companies who receive insurance money for driving elderly patients to their appointments. For a couple of decades, Congress has dutifully held hearings, listened to hair-raising testimony, wrinkled its brow, and occasionally passed corrective legislation. But while some of the perpetrators are caught, an unknown but substantial number continue to laugh all the way to the bank, with money obtained from the citizenry through inflated insurance premiums and lost tax monies.

Part of the problem stems from the always-vexing nature of white-collar crime. When a grocery store is robbed, the court is presented with a simple question: Is the guy standing before the bar of justice the guy who robbed the store? In white-collar cases, the question is whether a crime has been committed at all–and the more complex the crime, the harder it is to prove. Gathering evidence can take two to four years. Presenting it to the judge and jury takes even more time, and the outcome is far from certain: A court, faced with a pile of hard-to-understand documents and a defendant who is a pillar of the community, may be disinclined to convict. Small wonder, then, that the government and insurance companies often seem to lack enthusiasm when it comes to recovering stolen insurance money in court.

More than 4 billion private and government health insurance claims are processed annually. For seemingly sound, humanitarian reasons, a number of states require that private insurance claims be processed and paid swiftly, in as little as 15 days, giving investigators a vanishingly small amount of time to prevent fraud before it occurs.

When a claim seems suspicious, an investigator must decide whether a health care provider is a possible crook or merely incompetent or overzealous. (A RAND study of 4.4 million Medicare beneficiaries revealed that in permissive jurisdictions, patients were 11 times more likely to have a hip operation, 6 times more likely to have a knee replaced, and 3 times more likely to have a coronary bypass than in jurisdictions where the rules were less generous.) Moreover, according to Dr. Marc J. Roberts, professor of political economy and health policy at Harvard, 90 percent of all hospital bills are wrong–not necessarily fraudulent, but wrong.

Until recently, many of the nation’s 1,200 claims payers showed little interest in medical insurance fraud–it was far easier to tack an invisible surcharge onto premiums. Even when they do investigate fraud, insurers face formidable obstacles. Often, a successful practitioner of medical insurance fraud will file claims with a number of companies, concealing the extent of the crime by charging a hundred bucks here and a hundred bucks there until it adds up to real money. Anti-trust and civil liability laws make it difficult for insurers to share information, and though some states have passed laws granting them limited immunity, companies are still reluctant to cooperate with one another, according to the GAO. Meanwhile, the government’s efforts are undermanned, underfunded, and woefully inadequate.

Although Medicare and Medicaid were created in 1965, no specialized police force was established until 1978, giving the bad guys, according to Bill Whatley Jr., president of the National Association of Medicaid Fraud Control Units, “a 13-year head start, and we never caught up. The people who put this program together didn’t believe that the [health care providers] in the program would commit fraud, because medicine was such a high calling.”

There are currently 42 state Medicaid anti-fraud units, run by the states but largely funded with federal money; since 1978, they have successfully prosecuted more than 7,000 cases, which looks good until examined closely.

“We have no idea how much fraud falls through the cracks,” says Whatley, an Alabama deputy attorney general. “I just doubled the number of my investigators, and my caseload doubled. If I tripled the investigators, the caseload would triple.”

Because the Medicaid units are state-controlled, the quality of prosecution varies–and according to Ed Kuriansky, New York’s chief anti-fraud investigator, no state uses all its share of the federal money available. Furthermore, the state units only patrol the Medicaid system; at the federal level, at least nine agencies have some responsibility for investigating medical fraud, with the task falling mostly on the FBI and the Office of the Inspector General (OIG) of the Department of Health and Human Services, where the story is different but no more encouraging.

“There were always a limited amount of resources,” says Richard Kusserow, a former FBI agent who was inspector general from 1981 to 1992 (at which point he was hired as part of the damage-control effort of a hospital chain convicted of fraud). “When you think about the gigantic programs and the very limited number of investigators available, it’s shocking. On the federal side, there are only about 125 [full-time] investigators. Now it’s going to be cut again. You’ll have 100 investigators left for some 250 programs, among them Medicare and Medicaid.” With 4 billion annual claims, each investigator at the OIG or FBI faces a load of millions of possible cases–this, just to determine whether or not a crime might have occurred.

The irony is that prosecuting medical insurance fraud is one of the government’s few profit centers, returning about $72 for every taxpayer dollar spent; even allowing for the usual bureaucratic exaggeration, the monies recovered are substantial–to say nothing of the money that is saved when a fraudulent practitioner is removed from circulation.

The government and private insurance companies are finally awakening to the problem, and they promise wonders when computers are turned loose on the paperwork, instantly detecting suspicious billing patterns. But while computers may help to identify possible problem areas, human beings will still have to investigate them. The government agencies remain understaffed, and legal problems still constrain private insurers from sharing information in all but a dozen or so states.

Proponents of managed care claim it will eliminate powerful incentives for fraud by replacing the fee-for-service system with flat-rate payments, but not one investigator contacted by Mother Jones expects managed care to eradicate medical fraud. “It’ll just wear a new jacket,” says San Martin, chief investigator for Medi-Cal. Large-scale managed care has already come to several states, and investigators have already begun to detect certain patterns. Under managed care, fraudulent profits can be maintained by providing less care, pretending to provide more, and bribing public officials to look the other way. “You get paid a certain amount of money at the beginning of the year to treat a certain number of people,” says Dr. Alan A. Stone, professor of law and medicine at Harvard. “The more you have left at the end of the year, the richer you are. A patient comes in with a stomachache, and you say, ‘Here’s an antacid. Don’t bother me.’ When you introduced the profit motive into health care, the whole industry became permeated with greed.”

It seems safe to say that the Republican obsession with deregulation and market economics will make an unknowably bad situation unknowably worse. Under the market theories so popular in the conservative quarters now ascendant, mad, bad, and dangerous medical practitioners are supposed to be driven out of business as consumers make informed health care choices. Unfortunately, when it comes to health care, an informed consumer is a near-mythical beast, rarely encountered.

“Ordinary market principles cannot apply to the health care industry,” says Dr. Stone. “The basic problem is the problem of information. The patient knows he’s sick, but he relies on the physician to identify the illness. Take the doctor in Rhode Island who im-planted a pacemaker into every elderly patient who came in. He was putting pacemakers into every patient with mild congestive failure, just to make money. But how were the patients to know that?”

With the free marketeers now riding high and the Oval Office occupied by a man who seems to want nothing more than Newt Gingrich’s approval, the future looks very bleak indeed. After all, fraudulent medical providers have had 30 years to perfect their act.

“The only ones who aren’t confused,” says New York anti-fraud investigator Ed Kuriansky, “are the crooks.”

L.J. Davis is a contributing editor to Harper’s and Buzz magazines, and a frequent contributor to Mother Jones.

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We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with The Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

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