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Texas Performance Review
Disturbing the Peace
Chapter 6
Fraud

FR 5: Measure Fraud

State law should be amended to direct the Comptroller of Public Accounts to determine the nature and size of fraud in state-funded health-care programs.

Background

The U.S. General Accounting Office estimates health-care fraud at 10 percent of the nation's total health-care spending.[1] Workers' compensation experts state that fraud accounts for as much as 30 percent of all workers' compensation claims.[2]

In fiscal 1995, Texas spent $7.3 billion in state and federal funds on Medicaid services--a joint federal and state health-care program for poor Texans--and $522 million to pay for health insurance benefits for state employees.[3] In addition, state employee workers' compensation claims in fiscal 1995 cost the state over $49.9 million.[4]

No one has any idea how big the health care fraud problem really is. A recent study by a national insurance research and investment firm estimates that only 1 percent of the $95 billion the health insurance industry lost in 1995 due to fraud was ever discovered.[5] Neither the federal government nor the private sector has systematically or scientifically measured the problem. None of Texas' agencies involved in fraud control or enforcement efforts maintain specific statistics on provider or patient fraud or abuse to indicate how big the problem is in Texas.

According to Malcolm Sparrow of the John F. Kennedy School of Government at Harvard University, this void has serious consequences for effective fraud control efforts.[6] Without measurement, it is impossible to know if the current programs to combat fraud and abuse are effective or even appropriate.

IRS's experience

The Internal Revenue Service (IRS) discovered how measuring fraud can completely alter anti-fraud programs and the discussion surrounding them. The amount of fraud uncovered by the IRS between 1989 and 1993 jumped from $7.5 million to $136 million. But no one knew if this was because IRS' fraud detection efforts were catching more fraud or if the problem had exploded.

In early 1993, Dateline, a network television news program, exposed a massive Earned Income Tax Credit (EITC) fraud problem. Scam artists used EITC, which was designed to benefit the working poor, to defraud IRS. The perpetrators paid housing project residents $400 for their names and social security numbers.[7] The con men used this information to file bogus returns electronically and receive bank loans using the amount of the EITC refund as collateral. This incident led the IRS to examine the size of the EITC fraud problem.

After randomly selecting 1,000 returns, the IRS sent a criminal investigator to a taxpayer's home. Based on the survey results, the IRS estimated that about $4 billion of the $15 billion in EITC refunds were made in error.[8] This revelation led to a critical investment in control systems and a number of policy changes including a slowdown in EITC tax refunds and a decision to make banks liable for loans made to EITC filers. When the IRS repeated its survey in 1995, the agency had cut its losses by $2 billion and identified areas where new controls were needed.

Measuring fraud

Measuring health-care fraud is more complicated than measuring fraud in the EITC program. IRS could take a one-page survey to the homes of EITC filers and ask the questions on the survey. Measuring health-care fraud requires in-depth claims analysis and interviews with both providers and patients.

When measuring fraud, researchers must first select a random sample of recent claims that have not yet been paid. Investigators then survey the patients in the sample to determine if the service identified on their claim was delivered and if it was delivered in the manner described in the claim. Survey results can then be categorized by such things as services not delivered and number of services delivered but not medically necessary. This information would give state officials a picture of the type and magnitude of problems they face.

Independence essential

Three state agencies oversee significant health-care related programs and dollars: the Health and Human Services Commission (HHSC), the Texas Employees Retirement System (ERS), and the Office of the Attorney General (OAG). HHSC is the single state Medicaid agency overseeing all of Texas Medicaid programs. ERS administers health benefits for almost 200,000 state employees, retirees, and their dependents.[9] In fiscal 1995, OAG handled more than 137,000 workers' compensations claims. OAG administers such claims for all state employees except public higher education and Texas Department of Transportation (TxDOT) employees.

An agency with no investment in the outcome, should study fraud in these health-care programs. While the Comptroller's office has extensive fraud control experience, it has no stake in the outcome of health-care fraud study because it oversees no health-care-related programs. Comptroller investigators, however, do have experience with Medicaid fraud control efforts through its Medicaid Fraud Detection (MFD) project.

Involvement and participation by the agencies overseeing publicly funded health-related programs would be essential to the study's success. Each agency would be responsible for making provider and patient information available. A memorandum of understanding between the Comptroller and the individual agencies would be necessary to protect the confidentiality of those surveyed.

Use results

Knowing the size and nature of the state's health-care related fraud will not solve the problem unless the state acts on the study findings. For example, IRS found many fraudulent EITC filers had created "ghost" children. IRS matched its databases with the Social Security Administration to verify the children's existence. By focusing its resources, IRS cut its fraud losses in half in just two years. Moreover, IRS officials learned the agency's efforts had been more successful when IRS repeated its initial study. Repeating the study also enabled IRS to devise additional measures to continue reducing EITC fraud.

Recommendations

A. State law should be amended to direct the Comptroller of Public Accounts to conduct a study of Texas Medicaid, state employee health programs, and state-funded workers' compensation claims to determine the nature and size of fraud in these programs.

This recommendation restricts the study to measuring fraud in state-funded health-care programs. Moreover, it is anticipated the study results will be of interest to private insurers and the state's workers' compensation program officials in their efforts to combat fraud.

The study findings should be used to guide appropriate state agencies' fraud control programs. Once a baseline figure has been established, the study should be repeated every two years to allow state officials to determine the success of the agencies' efforts.

B. State law should be amended to require state agencies with health-care fraud enforcement responsibility to maintain statistics on the incidence and types of fraud identified and the results of each case.

This information would help agencies judge the effectiveness of their fraud control efforts.

Fiscal Impact

The cost of measuring the size and nature of fraud in Texas' publicly funded health care programs is estimated to be $250,000 for the initial baseline study and $100,000 every other year. Costs for the initial study include contracting with an outside consultant(s) with expertise in medical claims review and fraud investigations to develop a methodology and conduct the study. Medical necessity reviews would be conducted in conjunction with appropriate Health and Human Services Commission, National Heritage Insurance Company, and Texas Department of Health staff. This estimate assumes the Comptroller's office would donate space and phones for telephone surveys of patients, and its audit or criminal investigative staff would retrieve patient records as needed.

Fiscal Year Cost to the
General Revenue Fund
1998 $250,000
1999 0
2000 100,000
2001 0
2002 100,000

Endnotes

[1] U.S. General Accounting Office, Report to the Chairman, Subcommittee on Human Resources and Intergovernmental Relations, Committee on Operations, House of Representatives, Health Insurance: Vulnerable Payers Lose Billions to Fraud and Abuse (Washington, D.C., May 1992), GAO/HRD-92-69.

[2] Texas Comptroller of Public Accounts, The Texas Medicaid System-Fraud and Abuse, by National Bankruptcy Information Bureau, Inc. (Middleton, Wisconsin, September 15, 1996), p. 3. (Consultant's report.)

[3] Employees Retirement System of Texas, Legislative Appropriations Request for Fiscal Years 1998-1999, (Austin, Texas, revised September 13, 1996), p. 3.

[4] Office of the Attorney General, Request for Legislative Appropriations for Fiscal Year 1998 and 1999, (Austin, Texas, August 30, 1996), p. 80.

[5] Conning & Company, "Insurance Fraud Reaches $120 Billion in 1995, Says a New Study," Hartford, Connecticut,
August 8, 1996. (Press release.)

[6] Malcolm Sparrow, Health Care Fraud Control: The State of the Art (John F. Kennedy School of Government, Harvard University, 1995), pp. 37-58.

[7] Malcolm Sparrow, Health Care Fraud Control: The State of the Art, p. 46.

[8] "EITC Compliance Study: Tax Year 1993." The study was released publicly as an appendix to the Statement of Margaret Milliner Richardson, Commissioner of Internal Revenue, before the Subcommittee on Oversight, House Ways and Means Committee, U.S. House of Representatives, Washington, D.C., June 15, 1995.

[9] Employees Retirement System of Texas, Legislative Appropriations Request for Fiscal Years 1998-1999, p. 30.


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