Republicans and Democrats agree on one thing: Medical fraud is bad

Members of the U.S Congress are uniting to combat medical fraud. 

Pat Sullivan/AP Photo/file
Shirley Shupp sits in her Houston, Texas apartment Dec. 22 and talks about how she called Medicare to report receiving medical equipment she never asked for. The case was handed over to prosecutors and the perpetrators were charged with Medicare fraud – something Congress is hoping will happen more often.

Detecting cheating is difficult. You can't ask a sumo wrestler whether the non-linear payoff system he faces induced him to throw a match. He might eat you. But, shrewd economists figured out how to detect cheating in that important sector. Teachers cheating on standardized tests in order to receive promotions is an ugly problem but skilled economists figured out how to identify the Chicago cheating teachers.

The members of the U.S Congress, perhaps having read Freakonomics, are now ready to unite across party lines to catch Doctors, who are cheating Medicare through fraud, in the act.

"They could potentially devise further changes to the bill, adding Republican ideas even without Republican cooperation. One area of common ground to emerge at the forum was an idea put forward by Senator Tom Coburn, Republican of Oklahoma, to use undercover regulators posing as patients to root out fraud by doctors and hospitals. “That’s something that I’d be very interested in exploring,” Mr. Obama said. Senator Charles E. Schumer, Democrat of New York, called it “a great idea.”" source NY Times article

So, how would this work? Would the new "Fraud Cops" randomly choose which hospitals and doctors to test for Fraud? Or would they engage in a type of "profiling" such that they would focus on hospitals and doctors who bill out unusually high Medicare and Medicaid rates? Would the "fake patients" pretend to have medical conditions that give the unsuspecting doctors plenty of leeway in prescribing a treatment?

In an economics field experiment, some incentive would be randomized. Would the "undercover regulators" randomly choose to offer different doctors different opportunities to cheat and see whether doctors are more likely to cheat when they can steal more money (i.e whiplash versus a toe nail infection).

From a Law and Economics perspective, what I find interesting here are the following questions;

1. How much fraud is there in our current health system as medical care is billed for in cases when the patient didn't really need it?

2. If this new set of "Doctor ABSCAM patrol" raises the probability that a cheating doctor gets caught by 1% and if the cheating doctor is imprisoned for 3 years, how much of a deterrence effect will this have? Will this credible threat lead to a 30% reduction in medical fraud? Now my old graduate school teachers would say, "just shoot one cheating doctor" and fraud will plummet. But, we know that such draconian punishment (of having one salient punishment case) is not credible.

But, the Congress has spoken; "waste is bad" --- but the devil is in the details -- how do you detect it? How do you punish the "wasters"?

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