This is the first of several columns that will analyze the emerging issue of fraud in the world of managed care.
For generations, the problem of fraud in the delivery of health care services lay beneath the surface like roots growing in the fertile soil of traditional fee-for-service/indemnity payment plans. Health Insurers, whether they were commercial companies or non-profit plans such as Blue Cross and Blue Shield, relied heavily upon a sometimes misplaced trust that providers such as doctors and hospitals would simply "do what was right" for their covered patients, providing only medically necessary and appropriate services and rendering accurate bills.
After all, this was the profession of medicine, good faith was presumed, and providers had not only their licenses but their community reputations at stake. Co-payments and deductibles were, at least in theory, supposed to give subscribers a stake in their own care. By paying a part of the cost (e.g., 20 percent), it was thought that insureds would take a more active role in educating themselves and making informed choices as to which services to accept or reject.
Sophisticated Fraud
Above the surface, garden-variety fraud typically involved outright scams such as billing for services that were never provided to patients. Beneath the surface, however, more sophisticated fraud grew within the rich financial incentives provided by indemnity health insurance plans: providing medically unnecessary services; misrepresenting services billed; self-referrals by physicians to entities in which they had a financial interest; hospitals, nursing homes and other institutional providers filing false information in cost reports; kickbacks for patient referrals; and many other schemes.
Private health insurers for the most part were unable and often unwilling to root out fraud. Faced with literally millions of claims to process, the task of preventing fraud, let alone making any recoveries, was deemed nearly impossible and not cost-justified. Until recent years, in house anti-fraud units were small and relatively ineffective. The occasional prosecution for defrauding a health insurer was as likely to have been set in motion by anonymous tips as by affirmative anti-fraud efforts.
Accordingly, for many years, fraud losses were factored in as a cost of doing business. While the federal government and some states were more active in combatting fraud in government health benefit programs such as Medicare and Medicaid, even those efforts were sporadic and ineffective given the growing size of the problem. State Medicaid fraud units, for example, seldom recovered anywhere near what they cost to operate. The unfortunate result of all this was that over the years hundreds of billions of dollars have been drained away from the health care system as insurers went about their business and the government pursued other priorities.
The end of the Cold War combined with national alarm over the skyrocketing costs of health care finally forced the government to make the problem of health care fraud a high priority. Indeed, the Department of Justice now refers to such fraud as its highest priority after violent crime. As a result, criminal and civil investigations and cases are regularly in the news. Private insurers too, under competitive pressure as well as new regulatory mandates, have become more aggressive in their anti-fraud efforts. The resulting highly publicized war now taking place to try to contain the problem has snared many perpetrators ranging from "boiler room" operations to prestigious university hospitals.
If indemnity health coverage has been rife with fraudulent activity, one of the theoretical attractions of managed care has been that the cost containment mechanisms inherent in its systems and structures (e.g., careful screening and selection of approved providers, ongoing review of service utilization, closer scrutiny of claims payment patterns) would act as a brake not only on escalating medical costs but also on fraudulent claims against HMOs and other managed care plans. This potential has been realized to a certain extent, as cost increases have slowed somewhat and as undesirable providers have been excluded from participation. In addition, the development of sophisticated software programs has enabled insurers to monitor and detect unusual activity or patterns of activity that may be indicative of abuses.
A relatively common misperception, however, is that fraud will eventually be minimized through managed care arrangements. This is, as Dr. Johnson said of second marriages, the triumph of hope over experience. The simple fact is that managed care plans that offer modified indemnity coverage are still subjected to fraudulent claims, although perhaps to a lesser extent than standard indemnity plans have been. Managed care plans that are risk-based, such as capitated payment plans, have resulted in entirely new breeds of health care fraud. In a sharp departure from history, not just providers and patients are involved in fraud, but the payors, the managed care plans themselves have been swept into the anti-fraud vortex.
New Varieties
Thus, with the coming of new payment systems have come new varieties of fraud, and one can only marvel not only at the capacity of fraud to re-invent itself to suit the circumstances, but also at the government's increasingly expansive re-definition of what practices constitute fraud.
A fundamental principle of managed care is controlling costs by reducing unnecessary utilization of medical services, procedures, drugs, devices, hospital stays and thereby allowing the managed care plan to charge lower premiums than traditional indemnity coverage. In theory, this is supposed to result in care that not only costs less but offers better quality through the selection of better providers and through not subjecting patients to unnecessary and possibly detrimental care.
For example, when a managed care plan reviews a physician's request for approval for a particular surgical procedure, but the plan recommends a more conservative approach such as drug therapy prior to an invasive procedure, and the plan's decision is based upon a competent objective review of the patient's clinical information, one of managed care's primary purposes is accomplished.
On the other hand, when payment denials are based less on clinical factors and more on a desire to avoid otherwise justifiable expenditures in order to boost profits, the specter of fraud arises above and beyond whatever civil action might lie for breach of contract in failing to pay for covered services. The federal government has made clear that in the case of payment denials such as these, where Medicare or Medicaid managed care beneficiaries are involved, it will regard such denials as fraud if they are based on the plan's desire to maximize its profits.
Managed care, with its significantly different financial relationships, offers other financial incentives for fraudulent activity. It has therefore set the stage for more subtle and creative types of fraud, which in turn can be more difficult to discover. All types of managed care programs are affected, whether they are commercial plans funded by employer or enrollee premiums, or government-funded managed care plans for Medicare or Medicaid beneficiaries.
Something for Everyone
From the plan side, fraud is to be found in areas ranging from a plan's marketing and enrollment practices (misrepresenting covered benefits to prospective enrollees; discouraging enrollment by the elderly and chronically ill); to placing unreasonable restrictions on emergency care or on referrals to specialists; to denials of payment for treatments; to its overall financial and payment practices with its contracted providers of services. Even the government's own Medicare intermediaries and carriers have been charged with fraud in connection with their administration of Medicare plans.
From the provider side, fraud is to be found in areas ranging from undertreating patients when the provider is in a capitated or other risk-based payment arrangement; to dissimilar treatment of patients depending upon how much their plan pays; to exploiting the difference between in-network and out-of-network fee schedules; to placing unreasonable restrictions on needed ancillary services (X-ray, laboratory, etc.).
Driven by the changed financial incentives of managed care and its emphasis on cost-effective treatment, providers have begun forging new financial relationships among themselves. For example, for years hospitals were frustrated by the indifference of many physicians to reducing their patients' length of stay in the hospital. Hospitals were financially penalized when the physician who admitted a patient to the hospital, failed to discharge the patient on a timely basis.
Managed care has forced both hospitals and physicians to become more cost-conscious in this regard and, to that end, hospitals have gone a step further and begun offering physicians a share in money saved as a result of expeditious treatment and discharge of patients, or as a result of overall savings in outpatient care.
The problem with these so-called "gainsharing" arrangements is that, while they may reduce costs and possibly even improve patient outcomes, if they are not properly structured, they raise the same concerns that underlie the anti-kickback and anti-referral laws, as well as such ancient proscriptions as the fee-splitting and corporate practice prohibitions, viz. that clinical decisions regarding treatment of patients should not be influenced or "tainted" by financial considerations.
Gainsharing arrangements raise both fraud and tax issues and will be covered in a future column, along with other evolving areas of managed care fraud.
Francis J. Serbaroli is a partner in Cadwalader, Wickersham & Taft.
This article is reprinted with permission from the September 30th issue of the New York Law Journal © 1999 NLP IP Company.