Medicaid Fraud Control

By Taylor, Jim | The FBI Law Enforcement Bulletin, October 1992 | Go to article overview
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Medicaid Fraud Control

Taylor, Jim, The FBI Law Enforcement Bulletin

Until recently, few people paid much attention to one of the most lucrative crimes inflicted on American society--health care fraud. It wasn't until investigations of this crime began to take place across the country that the criminal justice system realized how widespread and profitable this crime is. Today, experts estimate that health care fraud costs taxpayers $50 to $80 billion a year. (1)

This article centers on the issue of Medicaid fraud and the various schemes used by those in the health care profession. It then covers the State of Tennessee' s efforts to bring these criminals to justice and the problems encountered in Medicaid fraud investigations.


Health care fraud investigations typically center around six main schemes--upcoding, phantom billing, billing for unnecessary services, double billing, unbundling, and giving or receiving kickbacks. Investigators should recognize that Medicaid providers often engage in several such schemes, even though investigations may begin with indications of only one scare.


For the most part, upcoding occurs when health care providers bill for a more expensive service than the one they provide to the patient. However, upcoding can also come in the form of generic substitutions--filling a prescription with a less expensive generic drug, while billing Medicaid for the more expensive form of the drug.

Medical fraud investigators for Tennessee initiated one such case, "Operation Rx," because of a pervasive problem across the State with generic drugs being substituted for prescribed medicines. Investigators were concerned that health care providers were defrauding the State, since generic drugs tend to cost less than brand name drugs. However, an even greater concern was that these substitutions could seriously affect the health of the patients.

Therefore, investigators developed an investigative profile that targeted those pharmacies that did a given dollar amount of business with Medicaid each year and also obtained a certain percentage of payments from some 50 brand name drugs also available in the generic version. In most cases, the generics had not yet been approved for use in the State's Medicaid Program.

Once investigators decided which pharmacies to target, they obtained valid Medicaid cards for the areas in which the pharmacies were located, as well as valid prescriptions for the targeted brand name, noncontrolled drugs. Then, agents, posing either as patients or as friends or relatives of the patients, attempted to fill the prescriptions at the targeted pharmacies. After receiving the drugs, these agents checked the pharmacies' Medicaid billing information for any discrepancies.

As a result of the first phase of this operation, 33 pharmacists were convicted of Medicaid fraud. Each case involved a minimum of 10 felony counts gained through 4 months of undercover work. Each case also involved at least two different Medicaid "recipients."

At the conclusion of the first phase of Operation Rx, which covered middle and east Tennessee, the Medical Care Fraud Unit applied the same selection criteria to pharmacies in west Tennessee and found virtually no generic drug substitutions. Either the problem did not exist in that area of the State, which is unlikely, or the grapevine and resulting publicity proved to be an effective deterrent.

Phantom Billing

Phantom billings--billing for services not performed--also occur frequently in health care fraud cases. To address this fraud scheme, investigators revised the original investigative profile to identify a number of pharmacies in each part of the State that exceeded the State average cost per prescription by $4 to $20. Each of these stores dispensed a high number of expensive antibiotic, anti-inflammatory, or ulcer medicines. While not all of the pharmacies billed for medicines they did not dispense, several billed for more medicine than they dispensed.

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