CBO Suggests Additional Spending to Combat Fraud Would Reduce Federal Budget

October 21st, 2014
in econ_news

from the Congressional Budget Office

Observers often cite fraud as an important contributor to high health care spending, particularly in federal programs. This report describes how CBO estimates the budgetary effects of legislative proposals to reduce fraud in Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP), and how those estimates are used in the Congressional budget process.

Follow up:

What Is Fraud?

For the purposes of this report, fraud is considered to be any deliberate attempt to use deception to receive a service or payment from Medicare, Medicaid, or the Children’s Health Insurance Program when the individual or entity in question has no right to that service or payment under the program’s statutes and rules. Importantly, whether fraud has been committed is a legal determination and cannot be definitively known unless there has been some sort of adjudication (for example, a trial verdict or a settlement agreement).

Fraud falls within the broader category of improper payments, which are any payments in an incorrect amount (whether an overpayment or an underpayment) or to the wrong person. Not all improper payments are fraudulent, however; some improper payments are the result of human error, mistakes in documentation, waste, or abuse.

How Much Fraud Occurs in Federal Health Care Programs?

Measuring fraud is not simple, in part because fraud can be determined with certainty only after the fact. Fraud also requires that someone act with intent to commit a crime, and determining intent can be challenging. Moreover, although fraud that has been successfully prosecuted can be quantified, there is no reliable method to estimate the amount of fraud that goes undetected, especially because at first glance successful fraud can look very much like appropriate payment for health care services.

The Government Accountability Office (GAO) has concluded that “there currently is no reliable baseline estimate of the amount of health care fraud in the United States,” and CBO has not estimated the amount of fraud—either detected or undetected—in Medicare, Medicaid, and CHIP. The Centers for Medicare & Medicaid Services (CMS), which has primary responsibility for federal oversight of all three programs, is developing an estimate of the incidence of fraud for some Medicare services; that estimate is expected to be available soon.

How Extensive Are Current Efforts to Combat Fraud in Health Care Programs?

The federal government—primarily the Department of Health and Human Services (HHS), CMS (an agency within HHS), and the Department of Justice (DOJ)—has considerable flexibility in setting priorities and taking action to reduce fraud, but funding for antifraud activities is limited. In fiscal year 2014, spending on dedicated antifraud activities through the Health Care Fraud and Abuse Control (HCFAC) program was about $1.4 billion, equal to about 0.2 percent of the federal government’s spending for the programs’ benefits.

In addition, HHS and DOJ have formed the Health Care Fraud Prevention and Enforcement Action Team (HEAT) to make preventing fraud a cabinet-level priority. Task forces drawn from multiple federal agencies have focused on reducing fraud in cities where it has been prevalent, including Chicago, Dallas, and Miami. According to HHS, since 2009 the HEAT Medicare task force has filed criminal and civil charges against more than 1,700 defendants who falsely billed the Medicare program for more than $5.5 billion.

What Factors Affect CBO’s Estimates of the Budgetary Effects of Antifraud Legislation?

In general, CBO estimates that federal spending for the programs’ benefits would be reduced by legislation that would provide either additional funding or new authority to reduce fraud. Most proposals fall into one of four broad categories (see Table 1 below):

  • Appropriating additional funds for antifraud activities;
  • Making statutory changes that give federal agencies additional antifraud authorities or that redefine or clarify permissible practices, services, or behaviors in Medicare, Medicaid, and CHIP;
  • Requiring agencies to undertake activities aimed at reducing fraud, some of which may already be authorized under current law, with or without additional funding; and
  • Increasing penalties for violations of applicable law.

Legislation designed to reduce fraud can have spillover effects and also reduce waste and abuse. Antifraud proposals are often referred to as “program integrity” legislation, because they could reduce fraud, waste, and abuse, thus improving the accuracy of payments generally.

CBO’s Estimating Approach for Program Integrity Proposals

Appropriating Additional Funds. In its analyses of past proposals for providing additional funding for antifraud activities, CBO has estimated that such funding would yield savings that exceed the cost of carrying out those activities. For such estimates, CBO compares the proposed funding against its baseline (projected spending over the next 10 years) for HCFAC spending under current law and applies to the difference a return-oninvestment factor of about 1.5:1 (that is, a dollar invested saves, on average, $1.50). Under Congressional scorekeeping guidelines, however, those estimated savings cannot be used to offset spending for purposes of overall budget enforcement—in other words, although the new investment would yield savings, the estimated savings do not “pay for” increased spending from those or other policies for the purpose of enforcing Congressional budget rules. Those rules were established in large part to avoid crediting uncertain potential savings as offsets against very certain up-front spending (in case the hoped-for savings did not materialize). Nevertheless, those savings, if realized, ultimately reduce federal budget deficits. Whenever possible, CBO provides information about such potential savings to lawmakers while legislation is under consideration.

Making Statutory Changes. CBO also analyzes legislative proposals to modify permissible practices and behaviors in Medicare, Medicaid, and CHIP. Because it is already illegal to defraud those programs, CBO looks at the scope of new authorities and requirements in proposed legislation and whether they would augment existing laws and regulations—for example, by expanding the universe of prohibited behaviors or by adding conditions for providers who wish to participate in the programs.

Mandating New or Additional Antifraud Activities. In analyzing proposals to mandate new or additional antifraud activities, CBO considers whether the federal government could undertake the activity under its current authority. Proposals might reduce spending for health care programs if they direct resources away from less effective antifraud activities or if they include funding for new activities that would save more than they cost.

Conversely, CBO might conclude that the newly required activity would displace other actions that are more effective at reducing fraud; if so, requiring new program integrity activities might increase, rather than decrease, federal spending.

Increasing Penalties. In assessing proposals to increase penalties, CBO considers how the proposed change in penalties would affect the expected costs (both monetary and nonmonetary) for individuals or businesses that commit fraud. In the past, CBO has estimated that the increase in expected costs from proposed changes in penalties for those inclined to commit fraud would have been too small to serve as a discernible deterrent to illegal behavior. Such policies, however, would probably yield increased revenues from the collection of larger financial penalties. With respect to nonmonetary penalties (such as jail time and prohibitions on serving Medicare beneficiaries), CBO evaluates, among other factors, the likelihood that the penalty would be enforced. In legislation CBO has analyzed, the monetary and nonmonetary penalties are often set at the discretion of legal authorities or executive branch officials, reducing the likelihood that they would serve as an effective deterrent.

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