Every day it seems, another story surfaces about fraud in healthcare, followed by glowing reports of how much the Biden administration has recovered. There is never any discussion about how to eliminate medical fraud. 

Healthcare fraud  “occurs when an individual, a group of people, or a company knowingly mis-represents or mis-states something about the type, the scope, or the nature of the medical treatment or service provided, in a manner that could result in unauthorized payments being made.”

The metric of healthcare fraud is financial, not medical. 

Healthcare fraud occurs through billing and coding. After medical care is provided, a billing department assigns numerical billing codes to all care activities. These codes are sent to third-party payers, especially Medicaid and Medicare, who in turn pay a pre-determined amount for each code based on what government has decreed is an “allowable reimbursement,” usually a fraction of the actual bill. 

Fraud usually involves upcoding (using a code that pays more than the proper code), phantom coding (sending codes for procedures not performed) double coding (sending two different codes for the same service) or submitting correct codes for care provided when that care was unnecessary or inappropriate. 

According to Detective John Savino in his book False Allegations, “most believe fraud originates from individuals [single practitioners] abusing state assistance.” Data indicates the bulk of healthcare fraud is systematic embezzlement by medical organizations, doctor groups, health plans, distributors, pharmacies, and/or manufacturers on large groups of patients. According to Savino, “health care fraud schemes tend to be not only lucrative and complex, but long term,” well beyond the capabilities of an individual practitioner. 

Revenue recouped from prosecution of fraud was $2 billion in 2022. The cost to collect the $2 billion is undoubtedly large. 

In addition to the numerous federal agencies involved, such as HHS (Health and Human Services), FDA, FBI (56 field offices), Centers for Medicare and Medicaid Services (CMS), Homeland Security, DEA, and others, every state has its own MFCU (Medicaid Fraud Control Unit). The cost of the accountants, agents, bureaucrats, investigators, lawyers, reviewers, etc., is undoubtedly huge.  Assuming at least 50,000 individuals are involved nationwide, their salaries alone – $3.5 billion – far exceed the dollars recovered – $2 billion – from settlements and judgements for healthcare fraud. 

Those are 3.5 billion healthcare dollars taken away from health (patient) care. 

Compared to the cost of healthcare’s massive BARRCOE (bureaucracy, administration, rules, regulations, compliance, oversight, enforcement), fraud is a rounding error. Even if actual fraud is ten times greater than the documented $2 billion, i.e., $20 billion, that sum represents 0.4 percent of the $4.3 trillion we spent on healthcare last year. Contrast the cost of fraud to the  31 percent to 50 percent of U.S. spending that went to healthcare BARRCOE: $1.33 trillion to $2.15 trillion taken away from patient care, not $20 billion.  

Since healthcare fraud occurs almost exclusively through a third-party billing system where some entity other than the patient-consumer pays for what the patient-consumer receives, the solution is obvious. Cut out the third-party middleman. Make billing and payment direct. Provider gives bill to patient, and patient pays provider. No third party in between. Upcoding and phantom codes, in fact fraud as a whole, becomes impossible since there are no codes, only words. 

The advantages of restoring a direct connection between patient and provider without a third-party decision maker, has been called direct pay medical care. However, a better descriptor is patient-controlled healthcare. With PCHC, the patient makes all financial as well as medical decisions. 

Fraud is eliminated. BARRCOE for fraud prevention and for most of healthcare becomes unnecessary, saving the public trillions. With PCHC, the cost of care itself will go down 60 percent to ninety percent compared to the current insurance-based, third-party system.   

There is another, even greater benefit from PCHC. When patients pay providers directly, they regain medical decision-making capability. Directly connecting patient with provider restores medical freedom or autonomy. 

Concerns will undoubtedly be raised.  The first is an exclamation, “I can’t possibly pay for my medical care! It’s prohibitively expensive!” 

With PCHC, families would have very large, no time-limit MSAs (medical savings accounts). This year, the average family will spend $30,065 on healthcare. At least 80 percent represents compensation the employee did not receive that the employer paid to an insurance company. With PCHC, that $24,052 would be placed in a family MSA tax-free. The patient then shops for care and pays directly. Add a very high deductible, viz., $10,000 catastrophic insurance policy. Finally recall the great reduction in the cost of care – 60 to 90 percent – when (a) wasteful spending on healthcare BARRCOE is mostly gone, and (b) health care spending is exposed to free market forces: buyers’ incentive to economize and competition between sellers. 

For impoverished Americans and the medically fragile, PCHC safety nets (state, not one-size-fits-all federal) can easily be constructed. Financial models prove such safety nets not only work but are much cheaper than Medicaid.  

There may be concern regarding millions of healthcare bureaucrats losing their jobs. Taxpayers will hail this as a triumph because trillions now going to bureaucracy can be used to pay for patient care. 

The cure for healthcare fraud, and for healthcare system failure more broadly, is patient-controlled healthcare. 

Some may say PCHC is impossible. Sixty years ago, President John Kennedy answered these pessimists. "The problems of the world [substitute healthcare] cannot possibly be solved by skeptics or cynics whose horizons are limited by the obvious realities. We need men who can dream of things that never were and ask, why not?"

Deane Waldman, M.D., MBA is Professor Emeritus of Pediatrics, Pathology, and Decision Science; former Director of the Center for Healthcare Policy at Texas Public Policy Foundation; and author of the multi-award winning book Curing the Cancer in U.S. Healthcare: StatesCare and Market-Based Medicine.

Graphic credit:Nick Youngson CC BY-SA 3.0 Pix4free.org