Sunday, August 28, 2011

Reforming Medicare and Fraud

Medicare is both one of the most costly and popular entitlement program, rivaling social security in annual outlays. Medicare is projected to spend $623 billion in this fiscal year, 2011 compared to $748 billion for social security. What is not widely reported is the high level of fraud and theft involved in a system that is designed to quickly reimburse doctors, albeit at low rates. Further, the reimbursement rates for medical devices are out of control. Many of the fact in this article come from a Reason magazine article by Peter Suderman, Medicare Thieves, which is not available on line.

While there are no reliable numbers on the amount of medicare fraud, the GAO made an estimate of $48 billion in improper payments in a 2011 report. Because this did not include the drug program, and was only an estimate, the actual rate of fraud is potentially much higher. Fraud against Medicare is reportedly very easy to accomplish. In prepared testimony before the House Ways and Means committee, Aghaegbuena Odelugo testified: DME fraud is incredibly easy to commit. The primary skill required to do it successfully is knowledge of basic data entry on a computer. Additionally required is the presence of so- called “marketers” who recruit patients and often falsify patient data and prescription data. With these two essential ingredients, one possesses a recipe for fraud and abuse.
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Physicians are given a “unique physician identifier number” (UPIN) to prove that the physician is who he/she claims to be. These numbers are readily available to the public online. The UPIN can be a useful tool for a fraudulent DME provider to exploit.
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I would like to finally talk about what I perceive to be the most significant flaw in Medicare: the rates of reimbursement. I do not know who decides, or how the decision is made, but the rate of reimbursement for certain pieces of durable medical equipment is beyond exorbitant. An example is the case of the knee braces. These items are available on the market to a DME provider for less than $100.00. Medicare, however, reimburse, if I remember correctly, approximately 1,000% of this cost. Back braces that cost approximately $100.00 are reimbursed at a rate of almost 900%. Wheelchairs that cost less than $1,000.00 are reimbursed at almost 500% of cost. For anyone engaging in fraud, these numbers are too good to be true.

On the last point, even if you are not engaging in fraud, these numbers are too good to be true. One might try to institute various reforms of the system to catch the crooks, but that would be unpopular, as physicians and patients would be left waiting for payment or services respectively. The private insurance markets are much more effective at detecting fraud. Further, the whole fraud issue obscures questions around patient abuse of the system in which they have no financial stake.

This is why I am in favor of Paul Ryan's plan to allow senior's to shop for their own insurance with medicare dollars. It is a necessary first step in reforming the system. First, given the private sector's higher success in combating fraud, the savings can be used to reduce spending on the program. Second, if we were to repeal Obamacare, then the insurance market place could open up novel cost sharing proposals that would stretch senior's insurance dollars for when they really needed costly medical care.

Ultimately, I understand that the U.S. has a robust social safety net. But I think we have gone overboard. We aren't a country that promises cradle to grave support, like socialist Europe. The vast majority of Americans need to enter old age having planned for their retirement, not reliant on social security and medicare as their sole means of support. To this end, I support rationalizing these programs a step at a time, to wean people from them, and give them back more choice.


  1. Guess you can tell who donates, huh?

    Doctors who actually accept the patients get screwed, but some items get repaid at Nth times the price.


    Maybe it's just normal Gov't screwups, I know the Navy was paying over a hundred for ten gig drives just a few years back. (simple, standard ones- totally off the shelf, no warranty)

  2. "We aren't a country that promises cradle to grave support, like socialist Europe."

    There might not be an explicit promise but there appears to be an increasing implicit acceptance by the public that there is indeed a promise of cradle to grave support.

  3. When I was a kid, just before welfare reform went through, my mom and dad were chatting about the folks who were on generation three of living entirely on public funds. As I remember, it came up because one of them was about to hit retirement age and went in to ask what they'd be giving her for retirement. (I seem to remember most of the local multi-gens were female, simply because the guys tended to move around a lot.)