In the health care field, the impact of fraud, waste and abuse on payers -- whether insurance companies, government agencies or self-insured employers -- is enormous. Fraud losses weaken a payer’s financial position, with fraud loss estimates rivaling net income.

Fraud losses feed the escalating care cost curve, undermining a payer’s ability to offer its most competitive rates to customers, eroding profitability and increasing pressure to ratchet down provider payment rates. In the end, fraud losses lead to higher premiums for contract holders and lower payment rates for providers. In this “victimless” crime, everybody pays the price. Technically, for an action to be labeled “fraud,” intent must be proven in a court of law. For purposes of this article, we will use the term “fraud” to mean fraud, waste or abuse, regardless of whether intent is proven.

The National Health Care Anti-Fraud Association (NHCAA) estimates conservatively that 3 percent of all health care spending—or $68 billion—is lost to health care fraud each year.

Health care fraud is a pervasive and costly drain on the U.S. health care system. In 2008, Americans spent $2.34 trillion dollars on health care. Of those trillions of dollars, the Federal Bureau of Investigation (FBI) estimates that between 3 and 10 percent was lost to health care fraud. In other words, between $70 billion and $234 billion is essentially stolen from the American public through health care fraud schemes annually. To put the size of the problem into perspective, $234 billion is roughly equivalent to the Gross Domestic Product of a nation the size of Columbia or Finland. Moreover, because spending on health care is projected to rise rapidly over the next ten years, the cost of health care fraud is likely to rise as well. In other words, health care fraud is already a massive problem and is only going to get worse – unless more coordinated efforts are made to prevent and minimize it.

Other estimates by government and law enforcement agencies place the loss due to health care fraud in the United States as high as 10 percent of our nation’s annual health care expenditure—or a staggering $226 billion—each year. Certainly, it's a priority for President Barack Obama, as indicated in these statements:

U.S. Department of Health and Human Services

“The President’s 2011 budget requests $1.7B for fighting fraud at the Department of HHS…The President’s budget will support investments in cutting-edge technology and techniques that allow for the analysis of potential fraud with unprecedented speed.”

The Washington Post - Sibelius Pledges to Fight Health Care Fraud
President Barack Obama's choice to head the Health and Human Services Department…called for a crackdown on medical fraud as part of any health care overhaul.

Part of the problem in detecting and reducing health care fraud is that the perpetrators often do not fit what would normally be considered as a “criminal profile.” Sheer numbers wouldn’t tell the whole picture either, because there are two distinctly different types of health care fraud:

• Opportunistic fraud is usually perpetrated by an individual who simply has a chance to inflate the services represented on a claim or to obtain the same services from multiple providers. This person might know an insider but generally isn’t operating with an insider’s knowledge of the insurer’s fraud detection systems or thresholds. Opportunistic fraud is commonplace, but the dollar amount per incident is relatively low. Individuals with no prior criminal history may begin to duplicate scripts in order to fill multiple prescriptions for the same drug, either to abuse the medication or to sell it on the street. Highly educated professionals, including doctors, nurses and pharmacists, may give in to the temptation to increase revenue by billing for exaggerated services or procedures that were not performed.
• Professional fraud is often perpetrated by organized groups with multiple, false identities, targeting multiple organizations. These criminals know how fraud detection systems work, and they routinely test thresholds to stay just under the radar. These crime rings often place or groom insiders to help them defraud health payers through several channels at once. The incidence of organized fraud is lower than ordinary health care fraud, but the dollar amount per scheme is far greater. However, it is only when viewed from a network perspective, which reveals the hidden linkages between the individuals involved, that the true financial magnitude of the scheme can be assessed.

Today’s fraudsters also have a good understanding of fraud detection systems, frequently recruit insiders into their schemes, and actively test and exploit thresholds and detection rules to avoid exposure.

Organized fraud is up and medical providers are leading the way
The data suggests that organized fraud activity is rapidly increasing and that insurers are taking action. Unsurprisingly, medical providers are a growing part of the equation, helping drive up claim values:

Health Care Fraud is a Lucrative Endeavor:

• As much as $700B lost to Fraud, Waste and Abuse annually in the U.S. alone.
• Greater than GDP of 120 countries.
• Enough to purchase every major sports franchise in the NBA, NFL, NHL, and MLB four times over.
• Losses are 100 times the credit card industry, but the spend to fight fraud is one tenth as much.

Global Problem – losses due to health care fraud:

• 3-10% in U.S.
• 6% in European Union
• 2% in Canada
• $580M-$2B annually in South Africa

On the rise:

• Organized Crime
• Collusion
• Crossing Borders

There is no one bulletproof fraud or abuse detection technique. Multiple techniques, working in concert, offer the best chance for detecting both opportunistic and professional/organized fraud. A hybrid approach, which integrates knowledge of existing fraud schemes, powerful predictive analysis techniques, and comprehensive triage and case management capabilities, is necessary in order to:

• Adapt to continuously evolving fraud and abuse schemes.
• Offer prepayment detection of suspicious claims with high certainty.
• Provide enough efficiency to enable triage of large volumes of claims.
• Automate the detection of multi-entity fraud and abuse schemes.

But the industry faces some hurdles in addressing this evolving threat. In my next post, I’ll discuss these hurdles and what can be done about it.