Politics & Policy

The Great American Rip-Off

(Photo: Paul Hakimata/Dreamstime)
We must get control of entitlement fraud.

Ask a politician how he wants to balance the budget and, nine times out of ten, he’ll give you a politician’s answer: cutting “waste, fraud, and abuse.” Normally, the correct response to this is contempt and mockery: What drives federal spending isn’t office supplies walking out the back door with a rogue secretary at the Merit Systems Protection Board — what drives federal spending is Social Security, Medicare, and Medicaid.

And you know where there’s a lot of waste, fraud, and abuse? Social Security, Medicare, and Medicaid.

Identifying small-ball efficiencies at obscure federal agencies would not do very much to get federal spending under control, but getting a grip on the shenanigans that plague the major entitlements — especially the health-care entitlements — could mean substantial savings, “substantial” here meaning hundreds of billions of dollars.

Medicare and Medicaid together account for about $1 trillion in federal spending annually, and estimates suggest that $1 out of ever $10 of that spending is fraud. Some estimates go much higher. We do not have a very good idea of exactly how extensive fraud in the system is, because the federal government has put a fair amount of effort into not knowing. According to Malcolm Sparrow, a Harvard professor of public management who studies medical fraud, the government’s approach long has been backward: “Basically, the audits they’re using on a random sample are nothing like fraud audits,” he told The Nation. “The difference between a fraud audit and a medical review audit — a medical review audit, you’re taking all the information as if it’s true and testing whether the medical judgment seems appropriate. You can use these techniques to see where judgments are unorthodox or payment rules have not been followed, but almost nothing in these methods tests whether the information you have is true.”

Which is to say, investigators are asking whether a certain treatment was in fact appropriate for what ails Mrs. Jones, not whether Mrs. Jones exists.

Fraud tends to cluster in certain areas and in certain treatment categories. The reason for that is that this fraud is not random, not just the result of some yahoo general practitioner in Eucheeanna padding his bills. It’s the work of organized crime. As Sparrow points out, when there is a criminal case filed against one of these fraud artists, then billing in a particular category — some years ago, it was HIV fusion treatments — falls off steeply, by as much as 90 percent. The implication here is that fraudulent billing may make up the majority of Medicaid and Medicare spending in some categories.

This is a major criminal enterprise, one involving transnational crime syndicates looking for a better return than that provided by drug smuggling and the other familiar rackets. According to The Economist:

Some criminals are switching from cocaine trafficking to prescription-drug fraud because the risk-adjusted rewards are higher: the money is still good, the work safer and the penalties lighter. Medicare gumshoes in Florida regularly find stockpiles of weapons when making arrests. The gangs are often bound by ethnic ties: Russians in New York, Cubans in Miami, Nigerians in Houston and so on.

What to do?

On a dollar-per-dollar basis, the Department of Health and Human Services fraud-recovery units by most accounts do relatively effective work — but do not do very much of it, having recovered less than $2 billion in fraud losses in fiscal 2016. And there were only 1,160 convictions in fraud cases in 2016, or barely one fraud conviction a year for every two staffers in the anti-fraud division. There might be some benefit to beefing up the conventional in-house anti-fraud investigations (Sparrow has suggested setting aside 2 percent of the budget to protect the other 98 percent), especially if the additional funds are used in support of more-intelligent investigatory approaches. But that does not seem likely to be sufficient.

Without indulging in black-helicopter stuff, we should squarely face the fact that organized-crime syndicates are being permitted to use our medical entitlements to loot the Treasury.

Without indulging in black-helicopter stuff, we should squarely face the fact that organized-crime syndicates are being permitted to use our medical entitlements to loot the Treasury, and that not very much is being done about that, which suggests the possibility — only a possibility — that there is political collusion in this at some level. Entitlement fraud involves enough money and enough diverse political interests — 40 percent of the residents of Los Angeles County receive Medicaid — to warrant a genuinely independent investigation.

How about we ask Peter Thiel to get involved in that?

Thiel, a friend of the Trump administration and of this magazine, is a Silicon Valley entrepreneur who cofounded PayPal. As a payment system, PayPal was a natural target for fraud artists, and it developed sophisticated anti-fraud protocols, some of which were incorporated into a subsequent Thiel business called Palantir, a powerful data-mining platform that is used by everybody from U.S. intelligence agents to police detectives, for tasks ranging from mapping out where IEDs are likely to be planted to — more relevant to our immediate concern here — identifying fraud. The Centers for Medicaid and Medicare Services have run a few tests in which they attempted to use the system to identify fraud, but it is not clear whether that has resulted in wider implementation. My request to the agency for information on this matter remained unanswered as of this writing.

It should be understood that data mining isn’t a substitute for intelligent analysis — it isn’t a black box that can be switched on and start spitting out the home addresses of fraudsters. It is a tool, but one that can be used effectively only by an intelligent and creative team of human analysts. Entitlement fraud is what security experts describe as an “adaptive threat,” meaning that it is a problem without a solution, because the problem mutates in response to every solution developed. But even problems that cannot be solved can be managed, and we desperately need better management here. The “Let’s Put a Businessman in Charge!” school of public affairs has its limits, but lessons learned from technology companies’ experience with fraud prevention ought to be applicable here.

Policing “waste, fraud, and abuse” is not going to solve our national fiscal problem, though a few hundred billion a year would be real money. But progress on that front might help solve one of our national political problems: the crisis of trust in our institutions. We spend a great deal of money on government and public services, and there is a general impression — it is not inaccurate — that much of that money is not well spent.

Those Aston Martin–driving welfare queens in Brighton Beach do not just cost us money — they cost us that most precious of commodities in a free society: trust. For that reason as well as the billions of dollars at stake, our would-be health-care reformers ought to incorporate a hammer-and-tongs attack on entitlement fraud, and on fraud across federal spending generally, into their legislative agendas. The sooner the better.


The Facts about Medicaid Fraud: A Breathtaking Campaign of Thievery

Tax Reform Alone Won’t Solve the Coming Entitlement Crisis

The Easy Way to Entitlement Reform: Simply Assume Massive Cuts


The Latest