Insurance in Medicine Is a Natural Locus of Fraud

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Fraud against Walmart may not be a good way to compare fraud against Medicare. Walmart is not an insurance company, while Medicare uses insurance and claims as its way of operating. The insurance feature, however, introduces a playing field or locus for more fraud than would be the case if people bought their medical services from doctors, hospitals, medical equipment suppliers, ambulances, etc. in the same way they buy products from Walmart — that is, directly, and without the use of insurance.

Insurance in medicine got its start when the government allowed companies to deduct medical costs if they provided their employees with medical insurance. This treated fringe benefits differently than cash payments. One history of how that came about and its relation to wage and price controls is here. The National War Labor Board did this unthinkingly. Before that, there wasn’t much health insurance. The article cited says all types of plans covered 9 percent of people. People paid for their medical costs directly. That prevents many kinds of frauds that occur in most all insurance methods.

Health insurance at companies grew much faster than privately-purchased health insurance because of this tax deduction and because unions began to bargain over health benefits.

Fraud is a very big crime problem, both in free markets and against government programs like Medicare. If we use insurance companies as a comparison, we find this. The FBI reports that there are 7,000 insurance companies that collect $1 trillion in premiums, roughly twice what Medicare handles. The FBI puts the fraud at $40 billion. If Medicare had that rate of fraud, it would come to 4 percent rather than the 12 percent it has. Medicare fraud might be about 3 times the rate that occurs against insurance companies.

Insurance companies, by the way, are regulated by states. This no doubt introduces inefficiencies in their ability to track down and prevent frauds, in their ability to combine with other companies in tracking fraud, and in their incentives to track fraud, since many have rates that are controlled by state regulation. Hence, these “private” insurers are by no means automatically to be preferred to Walmart in grasping the extent of Medicare fraud.

But if we do use them, we still find that Medicare fraud is in a class by itself.

And, as I have suggested, turning medicine into a massive insurance-associated scheme is a sure fire way to increase fraud as compared with direct payment for services because insurance companies are all subject to frauds that other kinds of companies do not experience, not that the latter are totally free from frauds, of course.

Insurance companies are regarded by many Americans as legitimate targets for fraud. Many people easily become criminals against insurance companies if they can. According to surveys of American attitudes on insurance fraud, about 10-20 percent of Americans do not consider it unethical and that’s a measure of how many might do it.

The process of insurance itself raises the possibilities of fraud, as compared with simply buying a medical service directly. The insurer has to assess risk, and people filling out questions can lie. The insurer cannot check all the questions. If it could, it wouldn’t be asking them. It has to rely on a degree of honesty. People can misrepresent the status of their health or a car’s mileage. People can collude with agents on claims. Agents can divert payments from insurers to themselves. People can file false claims. Crime gangs can empty a warehouse, fill it with junk, and then burn it down. Then it can collect the insurance. There are various ways to inflate claims and use kickbacks to defraud the company. People can file a claim for damage that occurred before the insurance took effect, because the company cannot check everything. People can inflate a claim to cover the deductible.

11:21 am on October 26, 2012