A sick business

Why are so many American health-care firms caught up in fraud scandals?

(The Economist / June 26, 2003) -- Crime no longer pays quite as well as it did—or at least, not for health-care firms involved in cheating the American government. On June 20th, AstraZeneca, a British drug firm, agreed to pay $355m to settle federal charges that, among other things, it gave free samples of its cancer drug, Zoladex, to American doctors, to curry favour, knowing that these same doctors were billing the government's Medicare health insurance scheme for unwarranted reimbursement.

This week brought further evidence of firms playing fast and loose with public cash. The Department of Justice said it would join civil fraud lawsuits against Medco, a pharmacy-benefits manager owned by Merck. These allege, among other things, that Medco's dodgy fulfilment of mail-order prescriptions may have led to excessive charges for drug orders for federal employees, whose bills are covered by the government. On June 24th, Pediatrix Medical Group, America's largest network of neonatal and maternal-health specialists, said it is under investigation for irregular billing of Medicaid, another government insurance programme.

Such developments are but the latest in a veritable rash of health-care shenanigans. In April, GlaxoSmithKline and Bayer, two large drug firms, agreed jointly to pay $345m to settle allegations of defrauding Medicaid through excessive pricing for certain drugs. Tenet, America's second-largest hospital chain, last month lost its chief executive on the back of a number of scandals, and faces a DOJ lawsuit for allegedly overcharging Medicare for certain procedures. HealthSouth, America's biggest provider of outpatient surgery and other health-care services, already buckling under accusations of accounting fraud, is also under scrutiny for allegedly billing Medicare and Medicaid for millions of dollars of services that it never delivered.

Although this is inevitably guesswork, the National Health Care Anti-Fraud Association, in Washington, DC—representing various private and public anti-fraud bodies—reckons that 3% of America's total health-care spending (which was $1.4 trillion in 2001) may be lost to fraud.

Why are things so bad? Of course, there is nothing new in firms trying to milk money out of massive government programmes. The federal government spent a hefty $249 billion on Medicare last year; it shared with state governments a comparable cost for Medicaid. Both programmes have byzantine billing systems that are ripe for fiddling.

What has changed is better detection of fraudsters, in part due to greater pressure to find them as health-care costs and government deficits both soar. While federal spending on fighting health-care fraud is under $100m a year, government recovery of ill-gotten gains rose to $1.2 billion in 2001, according to a new report by Taxpayers Against Fraud, a lobby group. The recovery trend is likely to continue upwards.

The government started small, pursuing medical laboratories, then moving on to hospitals (notably Columbia/HCA) and nursing homes. Drug firms are the latest target—and not the last. Erik Skramstad, of PWC's investigations division in Boston, expects the government next to pursue clinical research centres funded by the likes of the National Institutes of Health.

Whistleblowers are the government's secret weapon. Under the False Claims Act (FCA), a federal law revamped in the 1980s primarily to clamp down on fraud by defence contractors, whistleblowers can file a lawsuit without a defendant's knowledge, until the DOJ has decided whether to join the case.

This veil of secrecy may encourage employees of a guilty company to come forward without fear of immediate reprisals. But what is really bringing whistleblowers out of the woodwork, according to Mr Skramstad, are the generous rewards offered by the FCA: up to 20% of the total fine levied. Douglas Durand, a whistleblower in AstraZeneca's case, as well as in an earlier Medicare fraud suit against TAP pharmaceuticals, has netted himself $125m in awards. America's trial lawyers, seeing a juicy opportunity, are now aggressively soliciting whistleblowers.

Jack Meyer, head of New Directions for Policy, a Washington think-tank, argues that more states should pass a local FCA to help clamp down on fraud in Medicaid, where prosecutions lag behind Medicare. He also thinks that something like the FCA might help America's private payers—big employers and managed-care plans—that also suffer from dodgy billing, but can only fight back with other civil remedies. Even without that, it seems certain that there will be many more fraud scandals before health care is cured of its vices.