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Detecting Medicare Abuse

August 2005

STANFORD GRADUATE SCHOOL OF BUSINESS—Fraud and abuse are serious problems for the U.S. health care system. The U.S. Department of Health and Human Services estimates that improper Medicare payments could be as much as 14 percent of the program's budget, or $23 billion. Abuses range from billing for services that were never provided to classifying patients improperly—for a related but more complex illness, for example—to providing services that were not medically necessary.

Daniel Kessler, professor of economics, law, and policy at Stanford Business School and senior fellow at the Hoover Institution; Mark McClellan, administrator of the U.S. Centers for Medicare and Medicaid Services; and David Becker of the University of Alabama at Birmingham studied the cases of Medicare beneficiaries hospitalized with one or more of six illnesses that are particularly prone to fraud or abuse: pneumonia, general infections, circulatory disorders, kidney disorders, diabetes, and strokes. They analyzed medical claims data linked with Social Security death records, hospital characteristics, and anti-fraud enforcement efforts by state and year.

The researchers tested whether certain types of hospitals were more responsive to states' stepped-up health care fraud control efforts. Their results support the theoretical concerns expressed by many commentators. Increases in fraud control led for-profit (and, to a lesser extent, nonprofit) hospitals, for example, to reduce spending more than public hospitals. Taken with other work by the researchers showing that competition from for-profit hospitals makes nonprofits more efficient, this work supports a more mixed view of for-profits. Although the profit motive can lead hospitals to become more productive, it can lead them to inflate their Medicare spending as well.

According to the study, other common forms of hospital ownership that are argued to improve productivity can have a similar effect on spending. Hospitals with close financial ties to their physicians reduced spending more in response to enforcement than hospitals without such ties. Hospitals that own a skilled-nursing facility reduced spending on skilled nursing more than hospitals that did not. These findings are consistent with the concerns that close financial ties provide a vehicle for hospitals to disguise illegal payments to physicians for referrals, and that there may be substantial wasteful use of skilled nursing care in integrated facilities.

Because none of the effects of enforcement was accompanied by systematic or substantial effects on patient health outcomes, the researchers concluded that enforcement-induced reductions in spending were, on net, beneficial for society as a whole. However, the researchers cautioned that their data did not allow them to measure all dimensions of health, such as the rapidity or completeness of recovery from illness. They concluded that if more clinically detailed audit studies validate their findings, then their study could be used to target enforcement activity.

Related Information

Detecting Medicare Abuse
David Becker, Daniel Kessler, and Mark McClellan
Journal of Health Economics, 2005