Fraudulent Argument On Health Reform

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Fraudulent Argument On Health Reform

By John Hood

Sep. 28th, 2011

RALEIGH – President Barack Obama and like-minded liberals here in North Carolina weren’t wrong in 2010 when they said that it was impossible to solve government’s budgetary problems without tackling the issue of health care. The road to fiscal solvency does, indeed, run through Medicare and Medicaid.

Unfortunately, the creators of ObamaCare chose not to take that road. In their view, our health care problems don’t lie primarily with government programs – which they would expand – but with private markets. After initially flirting with single-payer government insurance, Obama and his congressional allies opted instead for a pay-or-play model that essentially nationalizes the health insurance industry, transforms it into a set of heavily regulated public utilities, and then compels everyone to participate in it.

The assumption is that Medicare and Medicaid are more “efficient” than private health plans because of low administrative costs. The assumption is false on two levels.

First, the administrative-cost comparisons are rarely valid. While private insurers report virtually all expenditures other than claims payments as administrative, Medicare and Medicaid’s administrative costs are underreported. Not typically included are the cost of external governance, the administrative costs imposed on health providers by Byzantine federal rules, the cost of acquiring capital (interest payments and the cost of tax collection), and fraud-detection and enforcement programs.

The second problem is that both Washington and the states actually do far too little fraud detection and enforcement, leading to massive Medicare and Medicaid fraud. While improper payments and unnecessary procedures occur in the private sector, as well, insurers have far more extensive programs for policing them – and a strong financial incentive to succeed. The public sector lacks both. Policing Medicaid fraud, for example, is primarily a state function, but most recovered money goes to Washington.

While a good rule of thumb is that around 3 percent of all U.S. health care expenditures are fraudulent, the proportion is thought to be much higher in the public sector – 10 percent or more for Medicare and Medicaid, according to many analysts.

The Pacific Research Institute’s Jeffrey Anderson puts it another way: the amount of fraudulent payment in Medicare alone is more than four times the combined profits of the nation’s 10 largest health insurers. And if you do the math on insurance administration – comparing the costs and benefits of fraud detection and enforcement in the private and public sectors – you will discover that Medicare and Medicaid’s apparently lower “administrative costs” are more than offset by their higher “fraud costs.”

That is, private health insurance more efficient than government insurance when measured properly.

The best response to the problem of soaring costs in Medicare and Medicaid would be to transform them from government monopolies into premium-support programs that assist retirees, the poor, and the disabled access competitive networks of insurers and providers. Those who have paid payroll taxes into Medicare for decades would still receive medical coverage upon retirement. Those who live in desperate poverty or develop debilitating and expensive conditions beyond the capacity of their families to address would still receive medical assistance.

But no longer would we pretend that shepherding tens of millions of people into government-run health care is a policy consistent with fiscal solvency or our constitutional traditions of individual liberty and free enterprise.

Although such a fundamental change in the structure of entitlements will be politically difficult, I do believe reform will come. In the meantime, however, states such as North Carolina can still improve on the efficiency of programs such as Medicaid by adopting best practices from other jurisdictions.

The latest Governing magazine, for example, describes successful Medicaid-fraud initiatives in Florida, New York, Ohio, and Texas. These programs have saved taxpayers hundreds of millions of dollars. North Carolina should copy them. And in the Medicaid chapter of a new book from the Center for Health Transformation, Stop Paying the Crooks, several former Clinton and Bush administration officials propose changing state law to toughen penalties for Medicaid fraud. Let’s do that, too.

Creating government programs riddled with fraud and abuse was never wise. Now, given our fiscal and economic problems, their perpetuation is impossible.

Hood is president of the John Locke Foundation.