Medicare Fraud and the Deficit

It seems that every few weeks there is an announcement of arrests in a Medicare fraud scheme. The amounts of money involved are staggering. There is more money being wasted in Medicare fraud than in Wall Street bonuses, just to put things in perspective. Recently I came across two stories that highlight just how endemic the problem has become.



There was a famous comparison between Medicare spending rates in McAllen Texas and other nearby cities which indicated McAllen seniors were costing much more than nearby counterparts. This was interpreted as McAllen having an inefficient or profit–hungry medical establishment. A subsequent study looked at medical spending patterns for non-seniors and discovered that this discrepancy disappeared when a private insurance company was monitoring the spending. It would appear that the cultural difference was not in healthcare but probably in criminal activity. As we shall see, Medicare fraud has been way to easy to carry off.


A second report is so bizarre as to leave few legal interpretations.

“In a curious case of Medicare billing, two California hospitals are reporting highly unusual rates of a Third World nutritional disorder.”

“The condition, called Kwashiorkor, is familiar to anyone who has seen photos of malnourished children living in impoverished regions of developing countries. Kwashiorkor is a Ghanaian word that means weaning sickness. Caused by insufficient protein in the diet, its chief physical manifestations are a distended belly, altered hair color and texture, and muscle wasting."

"Kwashiorkor is rare in developed countries, to say the least. Yet a California Watch article appearing in SFGate reports that "in 2009, Shasta Regional Medical Center in Redding reported that 16.1 percent of its Medicare patients 65 and older suffered from kwashiorkor, according to a California Watch analysis of state health data. That's about 70 times the state average of 0.23 percent."

“Is there an alarmingly high incidence of malnutrition among Medicare recipients in California health facilities operated by Prime Healthcare Services? Or is something else going on? Prime's director of reimbursement management told California Watch that, ‘Prime Healthcare hospitals cannot, have not, and will not engage in 'upcoding' or Medicare fraud’."

CBS provided an article based on a 60 Minutes investigation that illustrates how simple and how pervasive Medicare fraud is.

“According to the FBI, all you have to do to get into this business is rent a cheap storefront office, find or create a front man to get an occupational license, bribe a doctor or forge a prescription pad, and obtain the names and ID numbers of legitimate Medicare patients you can bill the phony charges to.”

“Once the crooked companies get hold of the patient lists, usually stolen from doctors' offices or hospitals, they begin running up all sorts of outlandish charges and submit them to Medicare for payment, knowing full well that the agency is required by law to pay the claims within 15 to 30 days, and that it has only enough auditors to check a tiny fraction of the charges to see if they are legitimate.”

A one or two person operation can run up millions of dollars in phony claims, close up shop in a few months, then set up a new crooked operation and repeat the process. Consider the amount of money that can be scammed from the government/tax payers when organized crime gets involved. The article suggests that Medicare fraud is now a bigger industry than the drug trade in South Florida. One of the criminals who was actually convicted, estimated that 95% of all medical supply companies in the region are likely to be illegally dipping into the Medicare till.


Medicare doled out about $430B last year while handling a billion transactions. There were three field investigators in South Florida to investigate thousands of suspicious operations.


Is help on the way? Apparently so.

“The Obama administration is providing Medicare with an additional $200 million to fight fraud as part of its stimulus package, and billions of dollars to computerize medical records and upgrade networks, which should help Medicare catch more phony charges.”

Is this new level of oversight paying off? Apparently so.


A Reuters article describing the arrest of 111 doctors, nurses and others in what was described as the largest Medicare fraud crackdown ever, also provides a quote from the Human Services Secretary.

“Sebelius said $4 billion was recovered last year, and the government's Medicare Fraud Strike Force was recently expanded to nine cities, with the addition of Dallas and Chicago.”

“A top FBI official, Shawn Henry, said 2,600 health care fraud cases were under investigation and that organized crime groups have been increasingly linked to the alleged schemes.”

Recovering $4B is a big deal. However, the CBS article describes this as a $60B crime. Inexplicably, it does not define that number as an integral over time or as a yearly take. Either way, there is clearly a lot of money being extracted from the healthcare system.


Consider these spending projections.

Something has to be done to control expenses in Medicare and Medicaid. However one interprets the CBS number, fraud is a large fraction of the $430B being spent by Medicare. It would appear that one of the least controversial approaches to cutting healthcare cost would require nothing more than good old-fashioned police work.