The labyrinthine American health insurance system, while ostensibly designed to safeguard our health care dollars, is rife with the specter of fraud, a malaise that stealthily siphons off staggering amounts of money. More than $1 trillion — one of every three dollars that passes through the health care system — is lost to fraud, wasted on services that don’t help patients, or otherwise misspent.
With private insurance spending soaring to $1.2 trillion in 2019, it's disconcerting that there's no systematic tracking of funds lost to fraud. Investigators and experts speculate that up to 10% of all healthcare spending may be devoured solely by fraudulent schemes. While insurance companies assure the public of their vigilance in monitoring and protecting these funds, the stark reality is alarmingly different: fraudsters find easy access to this system, and convincing insurance companies to shut them down is an uphill battle.
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One egregious example reported in Marshall Allen’s fantastic book, “Never Pay the First Bill: And Other Ways to Fight the Health Care System and Win,” is the case of David Williams. Williams, a personal trainer who exploited vulnerabilities in the healthcare payment system to bilk millions from private insurers and employers. Williams, without any valid credentials, applied for a National Provider Identifier number (NPI), a requisite for medical providers to bill insurance plans, and was handed one with no verification. Equipped with this, he embarked on a fraudulent scheme, billing insurers for workout sessions under the guise of medical services. His victims included not only UnitedHealthcare but also Aetna and Cigna, with Southwest Airlines being the hardest hit through its self-funded benefits plan. By the time he was apprehended, Williams had successfully defrauded these companies for over four years, amassing about $4 million in cash from $25 million in fraudulent billing.
This staggering case elucidates a stark reality: health insurers are woefully inadequate in protecting your healthcare dollars. Fraud like this thrives due to a lack of vigilance and urgency on the part of insurers, who often fail to validate the credentials of those submitting claims. Williams, for instance, was able to submit claims and receive payments, despite complaints and warnings about his fraudulent activities. His exploitation of the system was not an act of a criminal mastermind but rather a demonstration of the system's vulnerabilities and the insurance companies' laxity.
When it comes to dealing with fraud, insurance companies often adopt a passive stance, primarily for two reasons. First, as it relates to self-funded plans, prosecuting fraud cases is costly and challenging. In many cases, the approach is to settle or block suspicious providers rather than pursue costly legal proceedings. This practice raises serious doubts about the commitment of these corporations to stamp out fraud.
Secondly, as it relates to fully insured plans, insurance companies are disincentivized to uncover fraud, waste, or abuse. The Patient Protection and Affordable Care Act (Obamacare) unintentionally created an environment where health insurance carriers have a reduced motivation to vigilantly monitor and control waste, fraud, and abuse. This is due to the mandatory minimum Medical Loss Ratio (MLR) rule, which stipulates that insurance carriers must spend at least 85% of premiums on actual health claims, leaving a maximum of 15% for administrative costs, marketing, and profit.
In theory, this regulation was designed to ensure that a substantial proportion of premiums go towards actual healthcare services. However, it also inadvertently created a scenario where carriers might benefit from higher claims.
If the total claims increase, the 15% that carriers are allowed to keep also increases in absolute terms. For instance, 15% of $1,000,000 ($150,000) is less than 15% of $2,000,000 ($300,000). This means that the carriers' potential profit increases as the total claims cost increases, even though the percentage they are allowed to keep remains constant.
As a result, the system incentivizes carriers to be less aggressive in controlling waste, fraud, or abuse because reducing these would decrease the total amount of claims and hence their portion of the profits.
It is as if you tell your sweet-toothed twelve-year-old that she may only eat one-fourth of a bowl of ice cream. Her mathematically astute retort: “In that case, Dad, I’m going to need a larger bowl.”
The widespread nature of healthcare fraud further diminishes the chances of smaller cases being pursued, with one investigator admitting to Allen in “Never Pay the First Bill” that suspicious cases worth less than $300 were often ignored. The true cost of this laissez-faire approach is staggering when considering that these "small" cases can accumulate into millions of dollars, as exemplified by Williams' scheme.
United Healthcare’s stock price since Obamacare became law illustrates that its lack of fraud control is having zero impact on its ability to profit staggeringly on American healthcare.
Nobody Cares When It is Someone Else’s Money
Here's an illustration of how third-party payments turbocharge the healthcare crisis, ultimately birthed by the stranglehold of political interference. Picture this story from Overcharged: Why Americans Pay Too Much For Health Care, by David A. Hyman and Charles Silver - a friend, recently victim to a minor wound, suffers from a stitch malfunction. He finds himself at a nondescript, hospital-owned urgent care center tucked away in a strip mall. His ordeal - a mere 30 minutes of treatment.
The bombshell lands soon after: a staggering bill of $3,000 - laughable, bordering on criminal. Yet, a miraculous reduction of $1,170 is granted due to a hush-hush agreement with his insurance company. The insurance, in a stupendous show of naivety or perhaps indifference, coughs up the "allowed" sum of $1,770. Our friend, slapped with a trifling $60 bill, shakes his head in bemusement and pays up.
Now, ask yourself this: would he have been so nonchalant if the full, ludicrous amount of $1,830 had been his burden, not to mention the original, jaw-dropping $3,000? Would these healthcare providers dare to fire off such exorbitant bills if they couldn't hide behind the veil of third-party payments?
Obamacare was trumpeted as a healthcare revolution, a monumental shift. But it was nothing more than a brazen reinforcement of the failed third-party payment strategy. The payment system was already pumping obscene amounts of money into the healthcare sector. Obamacare did nothing but add fuel to the fire, pouring in subsidized insurance and an explosive expansion of Medicaid.
At this juncture, you might be crying foul: Isn't insurance and government aid necessary because healthcare is too costly for us to shoulder alone? Occasionally, yes. However, history tells us it's not that simple. The skyrocketing prices of medical services are not the cause but the consequence of insurance. Prior to the meteoric rise of third-party payers during and after World War II, healthcare was affordable, and directly paid for by patients. It wasn't until the advent of Medicare and Medicaid in the 1960s that spending went off the rails. In Overcharged, professors Ted Marmor and Jon Oberlander point out that in the first year of Medicare’s operation, the average daily service charge in American hospitals spiked by a shocking 21.9%. Over the next five years, this figure grew at an average compound rate of 13%.
Regrettably, the burden of health care fraud is often borne by the ordinary people paying for health insurance or benefits, as it's their money, not the insurers', being stolen. It's a sobering reminder that we need to be vigilant in checking our receipts, as we could be unwitting victims of fraud. The current health insurance landscape is a breeding ground for fraud, with its intricate system and lax oversight. It's a troubling reality that demands urgent and decisive action to protect the funds intended for our healthcare.
Employers, There Is A Better Way
Unleashing a HealthCost Revolution - Three Steps to a Jaw-Dropping 40% Cost Reduction
Step 1: If your organization is too small to venture into self-funding or partial self-funding terrain, strive to purchase the bare minimum of insurance. The heftier the premium you shell out, the more you fall prey to an insatiable beast. It's time to break free from this rigged game. Opt for the highest deductible plan your insurer offers, then self-fund the amount beneath that deductible with a Health Savings Account (HSA) or Health Reimbursement Account (HRA). If your workforce is less than about 250, this strategy could be your golden ticket, contingent, of course, on your cash flow, industry, and geographic footprint. Employees spending their “own” money in an HSA or HRA will be more incentivized to ensure healthcare facilities are not fraudulently or erroneously billing them.
Step 2: For those privileged to have a team exceeding roughly 250, it's time to consider a bold move - abandon the fraudulent system entirely, bid farewell to your insurers, and transition to a reference-based pricing (RBP) model. This system lets you pay a modest markup over the Medicare price - say, 120% to 140% of Medicare. It's a strategy that not only functions exceptionally well, but is also a masterstroke of legal creativity and acumen. This could pave the way to a future where your employees enjoy superior benefits, drastically lower costs, and unprecedented freedom.
Yes, the initial step might be daunting, fraught with challenges, and demanding of extensive education. But once you take this leap of faith, you'll witness a staggering 20% to 40% reduction in your health plan costs.
In 2020, I penned an article highlighting how this strategy might be our last, best hope for preserving private healthcare in America: "America will dramatically change the way it provides healthcare by 2030".
More recently, I discussed the urgent financial necessity of evaluating this process in my piece, "The fiduciary imperative of reference-based pricing: A legal and financial analysis."
You can also hear me dissect this issue in-depth on the Armstrong and Getty Radio program.
An RBP platform removes the laissez-faire carrier approach to fraud detection and replaces it with a reference base repricer. Many RBP entities audit every single bill your organization generates and, often, are compensated more the further they reduce your claims cost. This is in stark contrast to the perverse claim-inflation incentives created for carriers by Obamacare.
Step 3: As you transition towards a self-funded RBP platform, it's crucial to seize control of your pharmacy coverage. Enter into a direct contract with a Pharmacy Benefit Manager (PBM), or one of the innovative consortiums that pool numerous employers under a singular contract, thereby amplifying your pharmacy discounts and rebates, benefiting you rather than the insurer. This strategy can slash your pharmacy bill by an impressive 25% to 50%. This is the road to revolution, employers.
Will you dare to take the first step?
I’m a healthcare attorney and senior vice president at McGriff Insurance Services. My full professional bio.
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