Why Managed Care Hasn’t Solved Medicaid Fraud

A striking aspect of Medicaid fraud news is that it took so long for public officials to figure out that private companies have a profit motive.  Also notable is that Managed Care Organizations (MCO) are not only lax in addressing fraud committed by participants (beneficiaries and providers); some are active practitioners of fraud.

Since the implementation of the Affordable Care Act in 2012, the percentage of Medicaid spending going to MCOs has risen from 38% in 2012 to 70% in 2020.  In the same time period, criminal fraud recoveries as a percentage of Medicaid spending has decreased by 74%.

Legislators believed they were transferring risks, including fraud risk, onto the Managed Care Organization, or MCO.  For this they were willing to pay a premium and the MCO would have a reason to address fraud head-on.

This argument is badly flawed.  In fact, the MCO and its customer, the Medicaid Agency, both have a vested interest in increasing spending.  If MCO costs remain constant or fall,  the States risk losing ‘free money from the Federal Treasury.  Both States and MCOs benefit when adding fraud to the expense base- this means larger premiums and larger profits, and the State has a higher cost base for their next State budget and CMS appropriations request.  There is no check and balance.

The Medicaid funding formula is gasoline on this fire.  The FMAP (the percentage of Medicaid paid with Federal Dollars) has increased from the designed 50% to a national average of 70%.  For every dollar, a State allocates (often as a ‘provider tax’ on hospitals and physicians they are assured of getting back) the State receives $1.68 from non-resident taxpayers.  Fraudulent claims, undetected, become a permanent part of the ‘claims expense’ in subsequent budgets.  As further repellant, States must rebate their FMAP percentage of recoveries back to the Federal Treasury- 70 cents of every dollar.  By design or by neglect, this encouraged MCOs and their State customers to take minimal action against fraud (see the percentage decline in the first paragraph) and keep the money in the state.  In the Fiscal Year 2021, New York, the largest program in the country,  recovered $483,000 in Medicaid criminal fraud in a program with a $74 Billion budget.  This example can be extended to most States.  Addressing fraud/managing costs constrains what the Medicaid agency can request from its legislature, and outside taxpayers, thereby limiting what the MCOs can charge.  Both the State and the MCOs suffer financially from reducing fraud.  There is no shifting of risk and no urgency to oversee the efforts to prevent, detect or deter fraud.

Convinced they had transferred the fraud risk to the MCOs, States outsourced oversight and anti-fraud responsibilities to them.  Only now are they starting to realize the flaws in that policy.  Just recently authorities started to question the minimal number of fraud referrals from MCOs to law enforcement.  While ‘in -network’ providers bring patients and patients bring premiums, as well as fraud padding the expense base, this will remain substandard.  Fraud will not be pursued to the level it can and should be.

The recent actions of Centene, the largest MCO,  are also troubling.  Centene settled fraud claims with 14 states for overcharging for pharmacy benefit services.  This cannot be explained as a one-off case or aberration.  Yet, after these settlements, Centene continues to service its Medicaid contracts and no executive has faced any liability from any State or Federal authority.  Shockingly, Centene contributed $84,000 to Governor Brian Kemp’s reelection campaign one day after Kemp vetoed a bill that would increase legislative oversight of both the Department of Community Health, which runs the State Medicaid plans and the MCOs themselves.  Similar contributions were made to Mississippi’s Governor,  Lieutenant Governor, Speaker of the House and Commissioner of Insurance after Centene reached a $55 million settlement with that State.  Mississippi also has the greatest leverage and greatest disincentive to address fraud; its FMAP of 77.86% means that the Magnolia State gets $3.52 of Federal money for each $1 the State ponies up.

Further entanglements exist to explain why Managed Medicaid pays so little attention to fraud.  In State bids,  MCOs are graded on the breadth of their networks.  From the need to show robust networks, MCOs are loath to boot a provider from a network.  The MCOs are part of companies that sell Medicare Advantage, commercial plans, and State and local employee insurance.  This further reduces the incentive to address provider fraud. A provider may be in multiple profitable networks.  There have been recent cases where an MCO presented a network including providers that did not exist and/or were not part of the network.  The providers are the drivers of premium income

The belief that capitated Managed Medicaid would fight Medicaid fraud has proven to be misguided.  Neither MCOs nor their State customers who are supposed to oversee MCOs, have the incentive to address fraud, waste and abuse.  Doing so would merely increase the risk of budget tightening.

And the ultimate majority payer, CMS, who represents the US taxpayer, has been all too silent about the blatant abuses and conflicts of interest.

Can we expect State Legislatures or Congress to do better?  Only when the programs crowded out by this uncontrolled spending threaten to withhold campaign funds from those who enable it.

Authored by Jeff Leston, President and Founder, Castlestone Advisors LLC. exclusively for TDMR.

Jeff is an entrepreneur who developed the use of payment networks for identity protection and healthcare fraud prevention and detection. He conceived the first pattern recognition system for healthcare fraud detection in the US in the 1990s and pioneered the use of other financial industry technologies for payment processing in healthcare. Mr. Leston has significant experience in financial services, technology and healthcare- and at the intersection of those fields. He has spoken at industry associations, testified to State legislatures, and advised Congress on technologies to prevent, detect and deter fraud in healthcare programs. He created and implemented the technology behind HR 6690 Fighting Fraud and Protecting Senior Care Act, which passed the US House of Representatives in September 2018.

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