I have repeatedly wondered why the United States allows fraud and abuse in the health care system to flourish. Fraud is especially rampant in Medicare and Medicaid. Medicare is required to pay on a timely basis and often must chase down fraudulent transactions later. It’s called pay and chase. By contrast, a better system would flag suspicious transactions and stop payments or slow them until further investigation.
Medicare and Medicaid do not invest heavily in fraud control. How much should the government (and private insurers) invest in fraud detection? That question is easy. Economics tells us that to maximize revenue you should invest until each dollar of input equals one dollar our output. Federal programs should invest in fraud control until each dollar equals one dollar saved. Estimates vary but over the years the return on investment for anti-fraud programs in Medicare is $2.90 for every dollar invested. Some specific initiatives have returned $8.30 for every dollar of input. While that sounds great it is actually an indication that we are not doing enough.
The Manhattan Institute writes about the fundamental problem with Medicare and why fraud will not be stopped:
Because of the program’s unique design, Medicare fraud does not exist in a separate universe from normal Medicare billing; it exists on a continuum. At one end is essential care—the hip replacement, chemotherapy, or cardiac stent that clearly needed to happen. Further along is care that is probably reasonable but not strictly necessary. Then comes unnecessary but harmless care; then unnecessary care that harms the patient. At the far end is fraud: services never rendered, diagnoses inflated to justify more expensive treatment, or equipment shipped to patients who never requested it.
Then there is Medicaid fraud.
Medicaid fraud is somewhat different. The program is administered by states, but while individual patients often face limits on services, the federal commitment to states is itself an uncapped entitlement. The more spending a state can attribute to Medicaid, the more federal matching funds it receives. This makes state governments, unwittingly or not, partners in fraud.
Writer David Goldhill explains that no politician wants to champion limits on spending when the recipients are voters. Back in the 1980s, managed care was supposed to control spending by limiting care only to care that was necessary. Managed Caren (HMOs) were supposed to ration care reducing expenditures on care of little value. People hated it precisely because they didn’t like limits on what they could receive. The same is true of 75-year-old Medicare beneficiaries.
The fundamental problem is systemic. It’s structural. The programs need limits. For example, Medicare and Medicaid lack the ability to easily say certain treatments are not covered because they’re not a substantial value. Take the recent (ongoing) debate about GLP-1 weight-loss drugs. Nearly four-in-ten adults over the age of 60 are obese, while another 35% are overweight. That means nearly half of seniors (40%) should qualify for GLP-1 drugs and two-thirds or more could benefit from losing weight. The monthly list price of Wegovy (semaglutide) in 2023 was $1,349. That is a lot of money ($712 billion) if two-thirds of the 66 million people on Medicare receive Wegovy. The White House is negotiating a price in Medicare of $245, with a copay capped at $50. It is a delicate balance for health insurance programs to exclude expensive drugs like Wegovy when the medical benefits are undeniable. Furthermore, it’s not permissible for Medicare to tell, say, five hospitals in a given area that they must bid to perform various procedures and only four will be allowed to provide those treatments next year. Or make three out of five, or two out of five. The program needs competitive bidding. More from Manhattan Institute City Journal:
Other publicly funded health systems—in Europe, Canada, and elsewhere—make tradeoffs explicitly. They operate within budgets, tolerate waiting lists, and make collective decisions about which treatments are cost-effective. But when there is no budget, there is no pressure on spending. And when there is no pressure on spending, incentives flow in only one direction: more care, more billing, and more cost.
Medicare, Medicaid (and private health insurance) costs are unsustainable. Until the costs become more painful, Congress is unlikely to do anything more than tinker around the edges of health reform. Should rationing be used in Medicare and Medicaid? Of course, ration is something consumers use everyday in our own lives. Consumers ration purchases based on value and budgetary constraints. Prices are a form of rationing that economists refer to as price rationing.
Manhattan Institute City Journal: Why Medicare and Medicaid Fraud Won’t Go Away