California Fraud Bill: The Solution is a Problem

August 19th, 2009 by

California has a California-sized fraud problem, with much of action in the medical arena. Unscrupulous providers are billing for services that are never provided, often under the names of people who have never been injured. It’s identity theft targeted at businesses, not individuals. In California’s $7 billion comp system (down from $21 billion just a few years ago), fraud is a significant cost driver.
Here is just one example of medical billing fraud, involving the Los Angeles Unified School District. In August of 2006 the district received a bill for lab services involving a principal injured in a fall the previous May. Unfortunately for the perpetrator, one James Wilson, the principal had died prior to the date of the lab test. (Comp is rarely interested in post-mortems.) Wilson was a financial rep at Cedars-Sinai Medical center – a highly reputable institution – and had access to patient medical records. He was convicted on five felony counts and sentenced to 4+ years in prison.
As we read in the LA Times, a task force of private and public employers, including the Walt Disney Co., came up with an intriguing solution: require insurers to send notices to injured workers to check whether they actually received all the medical services billed. To eliminate the suspense, I will tell you now that the bill died in committee, at the request of the insurance industry. As much as the Insider detests fraud, we’re with the carriers on this one.
Junk Mail?
The fraud problem is very real, but this particular solution is flawed. Too many assumptions are embedded in the approach. The bill assumes that:
– the carrier has a valid address for the individual
– the individual will read and understand the mailing, which is likely to contain technical information on treatments provided. (The claimant may be non-English speaking and/or illiterate.)
– the individual will take the time to fill out the form and respond, even though there is no direct incentive to do so
– the individual is not a willing participant in the fraud (having received a few bucks for the effort)
The fundamental flaw is that injured workers have no direct financial stake in fraud: they are held harmless in the comp system, with no co-pays, no deductibles and no premiums. The stake holders are the employer, who either pays for insurance or is self-insured, and the carrier/TPA, who under this bill is confronted with the significant cost of mailings (perhaps multiple mailings to individual claimants) and the arduous task of logging responses, which would be random: most would indicate no problems, while those pointing to fraud might well come from folks who simply did not understand the questions. This solution is equivalent to using a shotgun to eliminate a bunch of (very pesky and rather deadly) mosquitoes.
There may be a quick fix to make this approach somewhat more effective: send the confirmation of services to the employer. That way a vested stake-holder would be given useful information and would have an incentive to follow up on it. The employer could sit down with the individual and verify the treatments. Any problems could be relayed to the carrier. In this approach, the scale of the effort becomes more manageable, as the burden falls on hundreds of thousands of employers, as opposed to a few hundred carrier/TPAs.
A cost-benefit analysis would probably place this fraud buster where it currently resides, in the circular file. It’s always tempting to legislate solutions to intractable problems, but alas, mandated solutions often become a new set of problems. Administrators, employers and carriers need a variety of tools to tackle fraud. This aborted bill is not exactly what the prudent doctor would have ordered.

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