Malcolm Sparrow

When it comes to the tens of billions of dollars of annual health care fraud that all of you eventually pay for, the sophistication of the private criminal enterprisers is ahead of the government’s law enforcers.

The usual figure for the amount of billing fraud and abuse that the government estimates is 10 percent of what is spent, which amounts to over $100 billion this year alone. Some specialists believe this is the minimal figure and that it could be much higher if the government devoted modest resources to finding out.

The Clinton Administration proudly reports that it has cut 45% of the medicare overpayments and that this has helped curb the inflation in health care costs. But Malcolm Sparrow, who is on the faculty of the Harvard University’s Kennedy School of Government and an expert on fraud control, says that the control systems do not go deeply enough to reach the criminal practices.

The more automated and efficient the claims processing systems are, the easier it is for the criminals to achieve their objectives. He says: “most of the control systems essentially assume that the information content of incoming claims is true — they don’t question it. They merely ask questions like — Does the diagnosis match the procedure code? Is the price about right for this procedure in this region of the country? Is this procedure covered by the insurance policy that is operative?”

Sparrow, who has experience in police fraud detection and adoctorate in applied mathematics, avers that these questions are important medical utilization inquiries. However they do not test the truth of the claim itself. “None of them check to see whether the patient knew anything about the diagnosis or whether the patient was even sick, “he says, adding “that’s the basic flaw in the upfront detection systems.”

As he explained in his groundbreaking book: License to Steal: Why Fraud Plagues America’s Health Care System (Westview, Boulder, Colorado), the rule for criminal perpetrators in the health care industry is to “bill correctly.” If the outlaws bill correctly, “matching the diagnosis to the procedure code, making sure they are within the confines of policy coverage, making sure the treatment is medically orthodox, then the crooks are mostly home free.

Sparrow believes that fraud control is a much harder problem than anyone understood or imagined. Academia has paid remarkably little attention to this subject, he notes. The science here is weak, especially since “fraud control is a game played against intelligent opposition” that is always trying to outwit the law enforcers who have very few cops on this beat to begin with. And computers are not the answer, he insists, explaining that he believes in “a long-term role for humans in a fraud control operation. . . any fraud control strategy that relies heavily on automated prevention is going to be a sitting duck for fraud perpetrators.”

Well, then is managed care the answer to fraud? Sparrow replies that “under capitated systems, fraud changes its form. Instead of billing for services not provided or billing for unnecessary services, fraud takes the form of diversion of capitation payments — where a lump sum is paid per patient per month — away from front-line medical provision. . .the net result is that patients who need treatment are not going to receive it. . . When that happens, patients die as a result of fraud.”

In the meantime, there is a growing business in firms that specialize in advising payors how to detect and recover overcharges on hospital and other medical bills. About 90% of hospital bills have mistakes, with overcharges comprising two out of three of the errors, according to business surveys. Unlike in Canada where everybody has health insurance and no one sees a bill under this system of single payer, in our country, complex, inscrutable, duplicative phony, sometimes unitemized bills devour huge amounts of time of consumers and other payors and processors.

This morass is why administrative expenses as a percentage of the health care dollar are over twice as high in the United States as they are in Canada.

Whether the abuse is the “non-self revealing” health care fraud or the invisible billing overcharges, the legal, economics and accounting-auditing professions need a wake-up call to seriously pay attention. Most law schools still do not even have a course or seminar on corporate crime.

(To contact Malcolm Sparrow, write him at the Kennedy School of Government, Harvard University, Cambridge, Massachusetts 02138).