Insurance Fraud and Abuse:
A Very Serious Problem
Stephen Barrett, M.D.
Fraud and abuse are widespread and very costly to America's health-care system. Fraud involves intentional deception or misrepresentation intended to result in an unauthorized benefit. An example would be billing for services that are not rendered. Abuse involves charging for services that are not medically necessary, do not conform to professionally recognized standards, or are unfairly priced. An example would be performing a laboratory test on large numbers of patients when only a few should have it. Abuse may be similar to fraud except that it is not possible to establish that the abusive acts were done with an intent to deceive the insurer.
Although no precise dollar amount can be determined, some authorities contend that insurance fraud constitutes a $100-billion-a-year problem. The United States Goverment Accountability Office (GAO) estimates that $1 out of every $7 spent on Medicare is lost to fraud and abuse and that in 1998 alone, Medicare lost nearly $12 billion to fraudulent or unnecessary claims .
Type of Fraud and Abuse
False claim schemes are the most common type of health insurance fraud. The goal in these schemes is to obtain undeserved payment for a claim or series of claims . Such schemes include any of the following when done deliberately for financial gain:
- Billing for services, procedures, and/or supplies that were not provided.
- Misrepresentation of what was provided; when it was provided; the condition or diagnosis; the charges involved; and/or the identity of the provider recipient.
- Providing unnecessary services or ordering unnecessary tests .
Many insurance policies cover a percentage of the physician's "usual" fee. Some physicians charge insured patients more than uninsured ones but represent to the insurance companies that the higher fee is the usual one. This practice is illegal. It is also illegal to routinely excuse patients from copayments and deductibles. (A copayment is a fixed dollar amount paid whenever an insured person receives specified health-care services. A deductible is the amount that must be paid before the insurance company starts paying.) It is legal to waive a fee for people with a genuine financial hardship, but it is not legal to provide completely free care or discounts to all patients or to collect only from those who have insurance. Studies have shown that if patients are required to pay for even a small portion of their care they will be better consumers and select items or services because they are medically needed rather than because they are free. Routine waivers thus raise overall health costs. They are considered fraudulent because averaging them with the doctor's full fees would make the "usual" fees lower than the amounts actually billed for.
Other illegal procedures include:
- Charging for a service that was not performed.
- Unbundling of claims: Billing separately for procedures that normally are covered by a single fee. An example would be a podiatrist who operates on three toes and submits claims for three separate operations.
- Double billing: Charging more than once for the same service.
- Upcoding: Charging for a more complex service than was performed. This usually involves billing for longer or more complex office visits (for example, charging for a comprehensive visit when the patient was seen only briefly), but it also can involve charging for a more complex procedure than was performed or for more expensive equipment than was delivered. Medicare documentation guidelines describe what the various levels of service should involve .
- Miscoding: Using a code number that does not apply to the procedure.
- Kickbacks: Receiving payment or other benefit for making a referral. Indirect kickbacks can involve overpayment for something of value. For example, a supplier whose business depends on physician referrals may pay excessive rent to physicians who own the premises and refer patients. Another example would be a mobile testing service that performs diagnostic tests in a doctor's office. Kickbacks can distort medical decision-making, cause overutilization, increase costs, and result in unfair competition by freezing out competitors who are unwilling to pay kickbacks. They can also adversely affect the quality of patient care by encouraging physicians to order services or recommend supplies based on profit rather than the patients' best medical interests. In 2000, the Office of the Inspector General issued a fraud alert warning against kickbacks disguised as rental payments .
Criminals sometimes obtain Medicare numbers for fraudulent billing by conducting a health survey, offering a free "health screening" test, paying beneficiaries for their number, obtaining beneficiary lists from nursing homes or boarding facilities, or offering "free" services, food, or supplies to beneficiaries.
Excessive or Inappropriate Testing
Many standard tests can be useful in some situations but not in others. The key question in judging whether a diagnostic test is necessary is whether the results will influence the management of the patient. Billing for inappropriate tests—both standard and nonstandard—appears to be much more common among chiropractors and joint chiropractic/medical practices than among other health-care providers. The commonly abused tests include:
- Computerized inclinometry: Inclinometry is a procedure that measures joint flexibility. Inclinometer testing may be useful if precise range-of-motion measurements are needed for a disability evaluation, but routine or repeated measurements "to gauge a patient's progress" are not appropriate .
- Nerve conduction studies: These tests can provide valuable information about the status of nerve function in various degenerative diseases and in some cases of injury . However, "personal injury mills" often use them inappropriately "to "follow the progress" of their patients.
- Surface electromyography: This test, which measures the electrical activity of muscles, can be useful for analyzing certain types of performance in the workplace. However, some chiropractors claim that the test enables them to screen patients for "subluxations" and to follow their progress. This usage is invalid .
- Thermography: Thermographic devices portray small temperature differences between sides of the body as images. Chiropractors who use thermography typically claim that it can detect nerve impingements or "nerve irritation" and is useful for monitoring the effect of chiropractic adjustments on subluxations. These uses are not appropriate .
- Ultrasound screening: Diagnostic ultrasound procedures have many legitimate uses. However, ultrasonography is not appropriate for "diagnosing muscle spasm or inflammation" or for following the progress of patients treated for back pain .
- Unnecessary x-rays: X-rays examinations can be important to look for conditions that require medical referral. However, it is not appropriate for chiropractors to routinely x-ray every patient to look for "subluxations" or to "measure the progress" of patients who undergo spinal manipulation .
- Spinal videofluoroscopy: This procedure produces and records x-ray pictures of the spinal joints that show the extent to which joint motion is restricted. For practical purposes, however, simply physical examination procedures (such as asking the patient to bend) provide enough information to guide the patient's treatment .
Many insurance administrators are concerned about chiropractic claims for "maintenance care" (periodic examination and "spinal adjustment" of symptom-free patients) , which is not a covered service. To detect such care, many companies automatically review claims for more than 12 visits. In 1999, the U.S. Inspector General recommended automatic review after no more than 12 visits for Medicare recipients . Some chiropractors attempt to avoid review by issuing a new diagnosis after the 12th visit.
Personal Injury Mills
Many instances have been discovered in which corrupt attorneys and health-care providers (usually chiropractors or chiropractic/medical clinics) combine to bill insurance companies for nonexistent or minor injuries. The typical scam includes "cappers" or "runners" who are paid to recruit legitimate or fake auto accident victims or worker's compensation claimants. Victims are commonly told they need multiple visits. The providers fabricate diagnoses and reports and commonly provide expensive but unnecessary services. The lawyers then initiate negotiations on settlements based upon these fraudulent or exaggerated medical claims. The claimants may be unwitting victims or knowing participants who receive payment for their involvement . Mill activity can be suspected when claims are submitted for many unrelated individuals who receive similar treatment from a small number of providers.
In processing claims, insurance companies rely mainly on diagnostic and procedural codes recorded on the claim forms. Their computers are programmed to detect services that are not covered. Most insurance policies exclude nonstandard or experimental methods. To help boost their income, many nonstandard practitioners misrepresent what they do. They may also misrepresent their diagnosis. For example:
- Brief or intermediate-length visits may be coded as lengthy or comprehensive visits.
- Patients receiving chelation therapy may be falsely diagnosed as suffering from lead poisoning; and the chelation may be billed as "infusion therapy" or simply an office visit .
- The administration of quack cancer remedies may be billed as "chemotherapy."
- Live-cell analysis may be billed as one or more tests for vitamin deficiency.
- Nonstandard allergy tests may be represented as standard ones.
- Services not covered because they were performed outside of the United States may be billed as though they were performed within the United States.
Other Overbilling Schemes
In 2000, a Government Accounting Office (GAO) official told a Congressional committee how four other types of schemes are carried out:
- In "rent-a-patient" schemes, organizations pay ("rent") individuals to go to clinics for unnecessary diagnostic tests and cursory examinations. Licensed physicians sometimes participate in the rent-a-patient scheme. Insurers are billed for those services and often for other services or medical equipment never provided. In a variation of this scheme, perpetrators merely buy individual health care insurance identification numbers for cash.
- In "pill mill" schemes, separate health care individuals and entities—usually including a pharmacy—collude to generate a flood of fraudulent claims that Medicaid pays. After a prescription is filled, the beneficiary sells the medication to pill buyers on the street who then sell the drugs back to the pharmacy.
- "Drop box" schemes use a private mailbox facility as the fraudulent health care entity's address, with the entity's "suite" number actually being its mailbox number. The fraudulent entity then uses the address to submit fraudulent insurance claims and to receive insurance checks. For example, while the insurer sends payments to "Suite 478" at a certain address, payments are actually going to "Box 478" at a privately owned mailbox facility. The perpetrator then retrieves the checks and deposits them into a commercial bank account..
- Third-party billing schemes revolve around a third-party biller—who may or may not be part of the scheme—who prepares and remits claims for health care providers. The third-party biller may add claims without the providers' knowledge and keeping the remittances .
Bogus Health Insurance Companies
The GAO has issued two reports concerning the sale of health insurance plans that lack legal authorization. These plans place the buyer at risk for financial disaster if serious illness strikes. One report focuses on consumer vulnerability . The other notes that from 2000 to 2002, 144 unauthorized entities enrolled at least 15,000 employers and more than 200,000 policyholders who got stuck for over $200 million in unpaid claims . The investigatirs found that many of the entitles bore names similar to those of legitimate companies. In response to the report, the Health Insurance Institute of America is again urging the National Association of Insurance Commissioners to create an online database of licensed health insurance companies so that anyone can easily check the legitimacy of companies offering health insurance products. Meanwhile, the Coalition Against Insurance Fraud offers ten warning signs of a possible swindle:
- The coverage costs 25 percent or more below the norm, yet promises generous benefits and a large provider network.
- The plan readily accepts people with serious illnesses and other medical conditions that other plans normally reject.
- The insurance has few or no underwriting guidelines—the agent or rep appears almost too eager to sign you up.
- You're approached by an insurance agent, phone or direct mail. Honest group plans normally are sponsored by your employer—and aren't sold directly to individuals.
- The plan isn't licensed in your state, and the agent (falsely) assures you the federal ERISA law exempts the plan from state licensing.
- The plan seems like insurance, but the agent or rep avoids calling "insurance," and instead uses evasive terms such as "benefits."
- The agent or rep doesn't have clear answers to your questions, seems ill-informed, or avoids sharing information.
- You've never heard of that health insurance company—and nobody else has, either.
- You have to join an "association" or "union" to obtain the health coverage. But you get no voting rights, receive no bylaws or other material, and aren't involved in the group's activities.
- Your hospital keeps calling you to complain that your health plan isn't paying your medical bills. Often the plan's reps keep making flimsy excuses, or stop returning phone calls altogether .
In a viatical settlement transactions, people with terminal illnesses assign their life insurance policies to viatical settlement companies in exchange for a percentage of the policy's face value . The company, in turn, may sell the policy to a third-party investor. The company or the investor then becomes the beneficiary to the policy, pays the premiums, and collects the face value of the policy after the original policyholder dies. Fraud occurs when agents recruit terminally ill people to apply for multiple policies. They misrepresent the truth and answer "no" to all of the medical questions. Healthy impostors then undergo the medical evaluation. In many cases, the insurance agent who issues the policy is a party to the scheme. The agent or one applicant may even submit the same application to many insurance companies. Viatical settlement companies then purchase the policies and sell them to unsuspecting third-party investors. The insurance industry is the biggest victim of this fraud . Some investors receive nothing in return for their "guaranteed" investment.
Several large insurance companies have joined forces through the National Health Care Anti-Fraud Association to develop sophisticated computer systems to detect suspicious billing patterns. The Federal Bureau of Investigation (FBI) and the Office of the Inspector General (OIG) each have assigned hundreds of special agents to health-fraud projects. The Coalition Against Insurance Fraud, a public advocacy and educational organization founded in 1993, includes consumers as well as government agencies and insurers.
The Omnibus Consolidated Appropriation Act of 1997 authorized a Health Care Anti-Fraud, Waste, and Abuse Community Volunteer Demonstration Program to further reduce fraud and abuse in the Medicare and Medicaid programs. The program enrolled thousands of retired accountants, health professionals, investigators, teachers, and other community volunteers to help Medicare beneficiaries and others to detect and report fraud, waste, and abuse. The Health Insurance Portability and Accountability Act of 1996 funded a similar program that trained community agency workers . This act also gave the U.S. Inspector General jurisdiction over private insurance plans as well as public ones.
The Inspector General's office has recovered over a billion dollars through fines and settlements. Its Operation Restore Trust, which began in 1995, was a joint federal-state program aimed at fraud, waste, and abuse in three high-growth areas of Medicare and Medicaid: home health agencies, nursing homes, and durable medical equipment suppliers. The questionable activities included:
- Billing for advanced life support services when basic life support was provided. Documentation may be falsified to indicate a patient needed oxygen—which is a key indicator in establishing medical necessity for advanced life support.
- Billing for larger amounts of drugs than are dispensed; or billing for brand-name drugs when less expensive generic versions are dispensed.
- Billing for more miles than traveled for transportation.
- Falsification of documentation to substantiate the need for a transport from a hospital back to the patient's home. Medicare will only cover transport from hospital to home if the patient could not go by any other means.
Allstate Insurance Company announced that during 2004, judges and juries around the country awarded the company more than $30 million in damages resulting from insurance fraud schemes against the company—the result of a campaign Allstate began in 2001 to go after the pocketbooks of fraud perpetrators in court. Since that time, the company has gotten more than $55 million in judgments against criminals that range from individuals to sophisticated organized crime syndicates. Unfortunately, bankruptcies and money laundering make it difficult to collect such awards. In February 2005, Allstate reported that only $5.24 million out of the $30.81 million awarded in 2004 had been recovered .
What You Can Do
Many frauds can be detected by examining insurance payment reports to see whether they accurately reflect the services rendered. Suspicious reports involving a private insurer claim should be reported to the company's fraud department. Suspicious practices involving Medicare or other federal programs should be reported to the OIG Hotline by phone (1-800-368-5779) or e-mail.
Other Information Sources
- Aetna US. Healthcare Coverage Policy Bulletins
- American Association of Retired Persons
- Coalition Against Insurance Fraud
- How to Spot a Personal Injury Mill
- Medicare Fraud Prevention Tips
- Department of Justice Health Care Fraud Report (1997)
- Department of Justice Health Care Fraud Report (1998)
- Health Insurers' Anti-Fraud Programs Research Findings (1999)
- The Illusion of Group Health Insurance: Voluntary Associations
- Insurance Fraud Case Reports on Chirobase
- Medicare Coverage Issues Manual (lists many noncovered products and procedures)
- National Insurance Crime Bureau
- OIG Exclusions Database: (individuals/entities excluded from federally funded health-care programs)
- OIG Semi-Annual Reports
- Department of Justice Health Care Fraud Report, Fiscal Year 1998. Washington, DC: Department of Justice, 1999.
- BlueCross & BlueShield United of Wisconsin. What is health care fraud? Accessed Nov 30, 1999.
- Guidelines to health care fraud. Adopted by the National Health Care Anti-Fraud Association Board of Governors, Nov 19, 1991.
- 1997 Documentation guidelines for evaluation and management services , Centers for Medicare & Medicaid Services, 1997.
- Rental of space in physician offices by persons or entities to which physicians refer. OIG Special Fraud Alert, February 2000.
- Homola S. Inside Chiropractic: A Patient's Guide. Amherst, NY: Prometheus Books, 1999.
- Campbell WW and others. Recommended policy for electrodiagnostic medicine. American Association of Electrodiagnostic Medicine, Sept 26, 1996.
- Brown JG. Utilization parameters for chiropractic treatments. Washington, DC: Office of the Inspector General, Nov 1999.
- Stern RA, Montana R. Identify patterns of medical provider fraud through data base graphic pattern. FDN Fraud Report, Nov 1999.
- Barrett S. Chelation therapy and insurance fraud. Quackwatch, May 8, 2000.
- Hast RH. Health care fraud: Schemes to defraud Medicare, Medicaid, and private health care insurers. Testimony before the Subcommittee on Government Management, Information and Technology, Committee on Government Reform, House of Representatives. GAO/T-OSI-00-15, July 25, 2000.
- Private health insurance: Employers and individuals are vulnerable to unauthorized or bogus entities selling coverage. #GAO-04-312, Feb 2004
- Private health insurance: Unauthorized or bogus entities have exploited employers and individuals seeking affordable coverage. #GAO-04-512T, March 3, 2004.
- Scam alert. Coalition Against Insurance Fraud Web site, accessed March 5, 2004.
- Viatical settlements. FTC, 1998.
- Kohtz DA. Viatical fraud. Quackwatch, Aug 16, 2000.
- Implementation of the Administration on Aging's health care fraud and abuse programs: 18-month outcomes. Washington, DC: Office of Evaluations and Inspections, Aug 1999.
- Fraudsters ordered to pay allstate more than $30 million in '04. Allstate news release, Feb 14, 2005.
This article was revised on January 10, 2006.