A prolonged and deep recession has created a fiscal crisis within many state governments and has contributed to record federal deficits, in part due to skyrocketing Medicare and Medicaid program expenditures. The governments' ability to fund existing health care programs is at a critical crossroads. Tens of millions of retiring baby boomers and lowincome families (more than 50 million individuals) will soon stretch Medicare1 and Medicaid2 programs to the breaking point. Without drastic reductions in program fraud and errors, they are a ticking time bomb that may explode in the near future. Medicare and Medicaid service provider fraud and errors are estimated to represent 23 percent of total annual expenditures3 or more than $140 billion annually.4
To help defray the cost of covering millions of uninsured Americans, the proposed U.S. House Healthcare Reform Act5 would cut Medicare reimbursements by $362 billion over the next decade, while states such as North Carolina are proposing to cut nearly $1 billion in Medicaid reimbursements to help balance its fiscal budget. If this legislation is passed, reduced reimbursement rates may lead to increases in Medicare fraud and abuse.6
The proposed U.S. House Pay for Performance Act7 would reimburse physicians based on meeting patient health care outcomes instead of based on -the extent of services provided. If this legislation is passed, physicians whose patient pools are significantly less healthy than the general population and thus qualify for fewer reimbursements may be more likely to engage in Medicare and Medicaid fraud.
Conducting appropriate health care audits can help reduce Medicare and Medicaid costs. Such audits can result in significant cost savings through the enhanced detection of service provider fraud and errors. Reliance on Medicare administrators and Medicaid in-house claims experts to detect fraud has not worked as planned. In fact, Medicare administrators detect only about 1 percent of service provider fraudulent claims.8
Since 2005, federal and state governments have provided additional resources to investigate Medicare and Medicaid fraud cases through its Health Care Fraud Prevention and Enforcement Action Team (HEAT) and Strike Force programs. This collaborative effort between several federal and state agencies9 recovered more than $2 billion in health care fraud in 2008 and has already exceeded this total in 2009 through the use of numeric analytic software such as IDEA and ACL and text analytics.10
Beginning with Texas in 2004, many state legislatures have begun creating Medicaid Inspectors General (IG) offices that employ dozens of IT auditors, nurses and pharmacists who scrutinize numeric data and patient records to better detect fraud and errors. In 2005, the Texas Medicaid IG office recovered $441 million in erroneous and fraudulent billings.11
The remainder of this article provides an overview of the Medicare and Medicaid environment and a discussion of a health care audit approach including common findings and fraud and error detection techniques.
Overview of the Medicare and Medicaid Health Care Environment
It is necessary for a health care auditor to be familiar with the various groups impacted by Medicare and Medicaid to fully understand where fraud and errors may originate. Four parties substantially affected by Medicare and Medicaid include: service providers, commercial insurance companies such as CIGNA (hereafter referred to as Medicare administrators), Medicaid in-house claims experts, and Medicare and Medicaid beneficiaries. The remainder of this section discusses the role of the above four parties and identifies where problems may occur.
Health care service providers may include physicians, hospitals and pharmacies. The process flow within physician clinics and hospitals where the majority of health care dollars are spent includes: