Healthcare Fraud and how to Prevent it

Health Care Fraud and How to Prevent It


Louis Freeh, FBI Director noted in 1996 that health care fraud in the US was estimated at about 10% of health care claims. A more recent estimate tags it at $100 billion dollars a year. The startling fact is no one really knows exactly what the amount is because much of the fraud goes undetected. The thesis of this analysis is that fraud goes undetected because the assumptions, approaches, and processes of fraud detection- the paradigm of fraud gathering, investigation, and identification- needs to be reshaped, rewoven, and redirected. The model must change so that the fraud is based on actual data, and empirically driven assumptions, and processes. This also demands personal adjustments and systemic reshuffling of how health care fraud is attacked. What does this mean?

Case Studies

Ed Martin owned and operated a counseling center in Camden, New Jersey. The center was staffed by counselors holding required graduate degrees in counseling. Martin held a doctorate. A tip revealed that Martin was operating his center for 15 hours a day including Saturdays. The New Jersey Attorney General began an investigation and found that the degrees held by the staff including Martin were bought from a unrecognized school- one counselor indicated that Martin took the money from her paycheck and gave her a diploma mill degree at the same time he provided her with the books for the course. It was also found that the costs billed for were more hours than actually taking place. The over-billings amounted to about $100,000. Martin was convicted and is currently serving time.

In Neptune, New Jersey, the Attorney General’s office was supplied information indicating that the Park West pharmacy was providing kickbacks to HIV patients to bring other patients to the pharmacy.

The investigation revealed that not only were kickbacks provided, but patients were given $50 dollars to request drugs and not use them. The pharmacist filled out the prescription and was paid $1500 by the state.

The pharmacist was arrested and is currently facing trial. In Freehold, New Jersey, a tip led to the arrest of Manny Store, a pharmacist who provided bogus medical claims to the state for $1,300,000, over a 6 year period. He was tried convicted and is currently serving a seven year sentence. (Incorrect names were deliberately provided)

The Present System of Healthcare Assumptions

Research has noted that the common elements of health care fraud move on the levels, are shaped within certain dimensions, and are earmarked by particular behaviors. To begin with the health care professional is viewed as a completely trustworthy professional performing his or her job with integrity, fairness, and an overarching sense of ethics. This assumption goes back to the 1940s where the doctor, the penultimate professional was looked upon as a god. His status was second only to Supreme Court justices. The doctor as a supreme trustworthy being permeated the health care field to the point that a generalization began to take shape that the whole field was clean as the white jackets health care professionals wear. The health care trustworthiness syndrome forged a second assumption which made it clear that any monies due to health care providers are bereft of taint and pollution and can be looked upon as accurate and containing no fluff. In point there are no aberrant financial behaviors operating in providing health care to the population.

Processes of Insurance Payments

Keeping in line with the march of technological development health care billing by providers looked to computerization as the most efficient way to seek payment for the services they provide. Computers keep costs down and also ward off fraud. The computerization of billing identifies how fraud occurs, where it is located, and who commits it. The need for human inspection or controls is minimal. The paradigm continues by accepting that referrals, whistle blowing and complaints seems to be the only way that fraud is best identified. Investigation, as such, is a reactive process. Investigators wait for fraud referrals for the most part and then react. There does not exist any preventative policing. Fraud investigators do not attempt to catch fraud in its early stages but react to fraud in its later or finished stages. This is problematic of course since all the data and the culprits are leaving or left the building.

Auditing Failures

Health care billing fraud is further controlled by corporate auditors. In addition to the normal array of professionals checking for accuracy and integrity of billing, auditors have a responsibility to provide oversight of all data supplied to ensure accurate accountings of the books and a financial system which is uncompromised. A further control has to do with a process named EOMB which provides an, explanation of member benefits to all benefit recipients. This tells each person applying for benefits how the process works and the recipient’s legal responsibilities in applying and receiving benefits.

Lack of Executive Oversight

The paradigm accepts that costs supplied by providers represent actual costs. If a provider is sending a bill for 50 minutes of counseling time, it is assumed and accepted that this cost is based on 50 minutes of counseling time. It also affirms that behind all the billing and processing of costs there is a point person who is in control of the operation. This could be a chief medical officer, CEO, CFO or senior manager.

Faulty Credentials

The model also notes that efficiency of operations between providers and those that pay the bills, i.e. state and federal agencies, further controls fraudulent activities. The least expensive, and timely submittal of bills is a significant method of controlling fraud. Credentialization of health care personnel is assumed to be grounded in schools accepted as accredited purveyors of the necessary skills to carry out health care work and operations. Lastly, the prosecution of health care violations should not occur within a criminalization domain but is best left to the various regulatory agencies monitoring health care. In summary, the health care fraud prevention paradigm begins with the belief that the health care industry is an ultra ethical and clean industry, that its work is carried out in a technologically advanced and efficient manner, that EOMB, auditors, and the computer control false billings, that health care training occurs within an a sound environment, and is supported by accredited schools and universities, that one person is controlling the process, and that punishment for any offenses or derelictions should be contained within a non-criminal domain.

Towards reconstructing a new health care fraud prevention paradigm

Research has indicated that there is a challenge to the notion that doctors are clean, totally ethical, and that health care organizations can be looked upon as following the same ethics, professionalism, and mandates. Public Citizen notes that 20,000 complaints against physicians have been filed with medical boards in 2004. 2500 of these complaints resulted in severe reprimands. These complaints have included sexual crimes against patients, fraud, kickbacks, ethical lapses, and over prescription of drugs. There is also evidence that excessive surgery occurs in 15-20% of surgeries performed. The consequences of these malfeasant physicians have left 16,000 patients dead, and 180,000 injured. Health maintenance organizations which control many of the procedures and processes of health care providers are notorious for being more interested in profits than legitimate treatment have been settling with government investigators for amounts reaching one billion dollars rather than going to trail for fraud. Ball notes that since 1986 15 physicians have been charged with homicide. The upshot of these developments is that the squeaky clean image of the health care field might need a dose of Clorox.

In the case of Martin and his health care facility, one of the interesting assumptions challenged by the state was the credentials provided by the practitioners. No one questioned whether the credentials were genuine beforehand. The assumption made by the state in paying for services billed for by the center was that the practitioners held legitimate credentials. Under cross examination by the defense attorney it was found that almost all the practitioners in the center possessed degrees purchased from a diploma mill. One practitioner of the center revealed that Martin removed the costs for her degree from her paycheck, handed her the course materials and gave her the degree at the same time. Prepayment investigation would have revealed that since the degree was from a diploma mill, the center would not be eligible for payments for services, and the fraud would have been prevented. Proper management entails planning, scheduling, organizing, and controlling. Reacting to fraud is the telltale of improper management. Just as proper police work seeks to prevent street crime, white collar crime must be grounded in the same principals. Health care fraud must look to prevent rather than react. Proactive management must replace the reactive syndrome associated with health care fraud and look to prevent the fraud acts before they occur.

The computer as the main technological weapon to control fraud must be shaped to align itself with human intervention. Research notes that computers programmed with Microsoft Excel perform a significant and effective analysis of numbers to draw conclusions, but that given that the data supporting fraud is just data, human inspection is a necessary intermediary to identify crimogenic factors supporting fraud. The above case is noteworthy in that the lack of human analysis was instrumental in allowing the center to operate. It was only when questions were raised was it made evident that the data in itself was not enough to identify that the credentials supplied were suspect. This is not to say that sometime in the future neural approaches or decision support systems could not perform as well as present human systems. Presently, such systems are not available.

EPDM control systems alerting users to the protocols of treatment and the consequential responsibilities of such use have been found to be lacking in significance. Patients don’t read or understand them and providers have been known to keep the information out of the hands of the users. They are a non-performing control.

To the extent trust is afforded to doctors, similarly the system relies on auditors to provide a trustworthy backup control for criminal activities related to financial accounting. Recent events such as Enron, A.I.G, Health South, and a host of others have revealed that not only are company auditors supplying questionable oversight, outside auditors do not fare any better. Anderson is no longer in business, KPMG has been implicated in various accounting problems and the accounting industry in general is being looked upon as a shill for corporate misbehavior. One group suggested to fill in the hole left by poor auditing is the Association of Certified Fraud Examiners. This organization specializes in fraud detection and forensic accounting.

Post payment analysis of fraud works to establish fraud after the trail is cold. The culprits have

shredded the documents, left the company, or fled to Mexico. Even if the incriminating documents are around no one knows where they are kept, and if they are in storage there is no guarantee that time and money will be allocated to search for them. Much time is eventually spent reconstructing paper trails, and even under reconstruction many gaps are left in the final product. This results from investing in street crime more than white collar crime. The scales are tipped toward street crime even though the losses in street are minuscule compared to companies fleecing the public via various frauds, and embezzlement’s. Fraud deterrence must be provided a more significant share of crime investment prevention monies. This involves a shift in priorities. The focus should be on where the public is being hurt both emotionally and financially. The data seems to support white collar rather than blue collar crime. The pharmacy case studies bilked the government out of millions; it is rare that street crimes ever reach this amount.

Provider costs should be challenged. There are many ways to develop bills for payment. Such costs should be analyzed to determine if they are genuine health costs or pumped up to account for rent, lunches, and trips. Patients should certify that the hours and treatments are genuine, and payment for services should not be rendered if such a sign off is not available. Patients should be brought into the billing as a further control, and also be liable if statements made are false.


Ball, R., Gaines, L., Shichor, D. (2002). Readings in white collar crime. Waveland: Illinois

Lowell, A. & Arnold, K. (2003, September). Corporate crime after 2000: a new law enforcement challengeor dejavu? American Criminal Law Review,40, 2, 219-1150