A new take on an old saw: when one person rips you off, he has a problem. When 100 people defraud you, you have a problem.

That’s what came to mind when I read about the 107 hucksters, slime, and low-life involved in a $452 million Medicare fraud reported yesterday. The crooks made false billings, billings for drug-addicted homeless people, billings for improper care, and billings for care that never happened. They falsified notes, forged signatures, and when one scam was shut down, they opened a new one just around the block.

It took place around the country, in seven cities. It was systemic and pervasive. And while we can applaud the Justice department for taking down the crooks, we need to take a hard look at a system where “Medicare Fraud” has its own Wikipedia entry.

Medicare Fraud has been estimated to total some $50 billion—10% of the total payments. Medicare and Medicaid are based on an honor system, and they’re designed to pay claims quickly and smoothly. But there are few safeguards, and most of the payments are automated with few if any actual human eyes ever seeing a bill. And the fraud we detect is surly just the tip of the iceberg: the vast majority remains under the surface.

An honor system so prone to abuse is structured wrongly. Most people are basically honest, but temptation can be difficult to resist. Income tax evasion is less common in the US because most people know that their payroll information is independently reported to the IRS, who can use computerized records to check their reporting.

“Trust but verify” is a good system. Somehow Medicare and Medicaid need to make confirmation easier. Then the system will be healthier.

Douglas R. Tengdin, CFA
Chief Investment Officer
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