A Growing Nightmare for Corporate Risk Managers: Dereliction of ERISA Fiduciary Duty
Most of us think of fraud in healthcare as the domain of a few bad doctors similar to what can be found in virtually any human enterprise. I have since learned of the extent and magnitude of this fraud and it is staggering. The scale may seem overwhelming, yet it is remarkably straightforward to stop — but only if one is financially incented to stop it. Fig-leaf fraud protection that happens after the fact is like trying to stop fraud with a musket in an era of unmanned drones.
As I’ll detail in the follow-up to this piece, it’s even more alarming that much of the $300 billion in annual fraud (likely a conservative estimate) is going to foreign actors. In some cases, the connection to terrorism is quite clear. Stopping the fraud would be like providing the American economy with an annual recurring economic stimulus. Over two-plus years, that stimulus would be equivalent to the massive economic stimulus that saved America from another Great Depression. However, the reality is that the American middle class was left behind due in major part to healthcare fraud and remains in an economic depression longer than the Great Depression. Once you recognize this fact, it would be surprising if populist presidential candidates didn’t get massive traction in this year’s election.
Health Insurance companies acting rationally
David Goldhill beautifully debunked myths many in healthcare take as gospel in his book Catastrophic Care. There are two keys to understanding what drives the economics for a health insurance company:
- Anything that drives upward premium pressure is good whether that is overall prices going up or more things to insure (e.g., an auto insurance company would much rather cover four vehicles than one just as a health insurer likes to be “forced” to cover more healthcare services).
- Especially after the well-intentioned, but misguided, Medical Loss Ratio cap in the ACA, there is an even greater desire to see healthcare spending grow. That is, if one’s profit margin is capped, the only way to increase profits is to grow the denominator. It was shockingly obvious when I returned to healthcare after a dozen years and wrote my 1st healthcare piece — Health Insurance’s Bunker Buster in the Huffington Post. I think the highest level Economics course I ever took was Econ 201 and I could figure this one out. Headlines in recent weeks lay bare how this has played out exactly as predicted 6 ½ years ago.
Against that backdrop, I described the perfect storm that has put companies in a bad pickle. Employees are unhappy with unrelenting healthcare cost increases with no apparent improvement in benefits. This is causing increased legal risk from not managing health benefits with the same rigor as their retirement benefits.
Before getting into the massive fraud, it’s important to highlight how the existing only-in-healthcare dynamic set up perfectly for large scale fraud. For simplification, I’ll refer to the claim administration for self-insured companies done by health insurance companies as “ASOs” and those done by independent third-party administrators as “TPAs” (note: most of the workforce works for self-insured employers).
- Imagine a napping guard getting paid to chase after a criminal who’d just cleaned out the bank vault the guard was being paid to watch. You have to admire the chutzpah (well, not really) of health insurers being paid 30-40% of what they recover when they allowed the theft to happen.
- Opportunistic ASOs do something similar to fraud with out-of-network charges. They happily pay–with someone else’s money–an inflated out-of-network charge (more straightforward TPAs negotiate the claims before payment). That creates a terrific opportunity to then “renegotiate” to a more reasonable rate. After they complete the relatively trivial renegotiation, the employer pays the ASO a fee for that “renegotiation” that never should have been paid (occurred?). Even worse, there are a spate of lawsuits that Mark Flores has reported on that allege the ASO actually retained the “recovered” money.
These are two significant revenue streams that allow ASOs to charge “low administrative fees” and still have highly profitable accounts. That’s above and beyond the PPO networks offering dubious value such as allowing $444 boxes of Kleenex and $1000 toothbrushes. Presumably, these are legal (if nutty) ways of doing business but the “fun” doesn’t end with purely legal activity.
Fraud is good for business
“Healthcare fraud and waste is the secret $300 billion handicap on a $3.3 trillion healthcare marketplace, states Dave Adams, CEO of HealthcarePays (HCP), “and it has been perpetuated for too long by a system unwilling to embrace transparency and adopt fraud abuse technologies used by other industries.”
More fraud equates to more upward premium pressure. Good for health insurers. Bad for the middle class. The U.S. healthcare system’s current claims methodology is fraught with invisibility, disconnection, a lack of transparency and control between the employers, patients, providers, insurers and payers. In contrast, the financial industry recognizes the true cost of fraud and abuse and has been utilizing a preventive methodology for decades, giving the consumers both security assurances and control over their credit. The comparably large and equally complex healthcare industry has generally avoided the fraud and waste prevention methodology embraced by the financial industry, erroneously citing an inherently complex billing and payment system. The occasional and much-heralded, yet woefully incomplete efforts by healthcare systems, employers, lawyers, and the government attempting to solve the problem haven’t begun to address the massive resource-draining issue.
Employers are left with no recourse other than taking a reactive and largely ineffective approach to recovering their money after a claim has been paid. This “pay and chase” method of recovery delivers a dismal average return rate of only 2-4 percent.
For the first couple years of their existence HealthcarePays tried to sell into health insurance companies but hit a brick wall. Like many healthtech startups, it was only when they decoded healthcare’s perverse incentives did they realize they needed an alternative go-to-market strategy. As mentioned above, anything driving upward premium pressure was considered a good thing for the health insurer…including clearly fraudulent activity. Only when they began to sell directly to self-insured employers did HCP get traction.
HCP is an example of a solution to healthcare’s $300 billion fraud and abuse problem, and it involves adopting the framework of a solution devised by the financial industry some 30 plus years ago. In short, it prevents fraudulent actors from ripping off the healthcare system.
“Healthcare has no shortage of sizeable challenges. Together we can embrace a real solution with HealthcarePays to the growing fraud and abuse problem that is pulling money out of care and reducing our competitiveness,” said Tommy Thompson, HCP’s Chairman and Former Secretary of Health and Human Services during the George W. Bush Administration.
In HCP, Thompson saw an innovative approach to helping both private sector and public sector healthcare payers tame this growing threat. In the past year, HCP has been engaged by some of the largest companies in the country to help them control their healthcare spend by proactively reducing fraud and waste, while working with these companies to meet their obligations under the ERISA Act.
The basis of healthcare confusion: The data problem
No one; not payers, providers or even employers understands the myriad of healthcare payment systems, creating incredible chaos and confusion as to who owes what to whom. Historically, insurance companies have relied on sampling methodologies to determine whether or not the claims process is sufficiently secure. Healthcare claims reviews are done independently on a per-visit basis, and are largely a paper-driven process. Assessing claims data with this method allows fraud and waste to fall through the cracks because there is so much disparate data and no standard format for how the data is being analyzed and processed. If an employer changes to another insurance company, or a patient changes to another provider, the data formats change and the data gets lost in the system.
“The current work flow process is predicated on rapid processing of healthcare transactions with little real emphasis on the legitimacy and accuracy of the claims themselves,” states Scott Haas, Vice President of Wells Fargo Insurance Services USA, Inc. “The Department of Labor claim processing regulations emphasize the timeframe in which claim payors must either pay or deny claims. The regulations assume payors actually are diligent in assessing whether or not the claims require any form of audit or scrutiny.”
Such an antiquated, non-data driven process is ripe with interpretation of claims and their accompanying data, and the eventual reconciliation of plan coverage is often too late; this process is a costly failure for all parties involved.
Connecting the Data Points
Fraud and waste become visible only when you connect all of the participants and events. For example, there are cases of women undergoing multiple hysterectomies or men getting multiple circumcisions in a given week by different providers. These cases, viewed independently, meet all of the basic claims review and adjudication criteria. Therefore, they pass the (low) sufficiency test and the claims are paid.
Another case where 4 doctors provided the same service to the same patient during the same procedure meets all of the criteria when each provider is viewed independently for the procedure and passes the paid claims review test. But, the total amount of what they are all charging exceeds the total allowable amount for the contract. When you connect the specific participants of each of these cases, a major problem is exposed.
HCP’s platform analyzes all of the disparate claims data between the employer, patient, provider, insurer and payer simultaneously across all healthcare systems. HCP can connect the behavior of what has happened in a patient’s life and then connects that behavior with the series of doctors around that patient. This is similar to the banking industry which finds patterns of behavior both at the retailer level and the consumer level to determine if a purchase does not fit the consumer’s normal pattern of behavior.
The claims data in HCP’s engine is translated into a common language and format so machines can integrate and talk to each other and people can talk to people in the same language before any claim is released for payment and funds are released from an employer’s ERISA account. All claims transactions are standardized so the playing field is leveled for all healthcare system participants. HCP then analyzes the relationships between each of the participants in the healthcare system to establish a graded score for each claim. Based on the score given, a claim is either flagged as proper and the money owed moves seamlessly from the payer entity to the receiving entity or it is set aside and flagged as improper, is not paid, and is diverted for investigation. This process is very similar to the credit card companies who freeze a consumer’s account when they flag an anomalous purchase for investigation.
HCP has broken the reactive “pay and chase” approach with an innovative solution which is revolutionizing healthcare. Employers will no longer have to attempt to recover money spent from their ERISA accounts because HCP discovers the problem before the claim is paid. The HCP solution will play a critical role in reducing the exorbitant amounts of money lost to fraud and waste in the healthcare system every year.
Ignorance understandable but no longer valid excuse
One can understand how a CEO who is busy managing their business isn’t thinking about the minutiae of their health plan. One could make that same argument about the company’s 401-k plan and all of the investment options, fees, etc. one can put into a retirement plan. However, as cases that have gone all the way to the Supreme Court have demonstrated, fiduciary duty doesn’t allow for ignorance as an excuse. Typically two and a half times as much money is spent on health benefits as retirement benefits so it’s clear that the same scrutiny will be applied health benefits that is the norm with retirement benefits.
As the populist presidential candidate traction has demonstrated, there is palpable angst about the fact that the middle class has gone backwards the last 20 years (economically). This is especially true when it is easy to see that a women having 4 hysterectomies or a middle-aged man having 7 circumcisions isn’t right. You don’t have to be a doctor to figure that out and any rudimentary effort at stopping fraud would catch those items. Even without the fraud, employers are spending 20-55% less per capita with excellent health benefits following time-tested techniques.
As the populist presidential candidate traction has demonstrated, there is palpable angst about the fact that the middle class has gone backwards the last 20 years (economically). This is especially true when it is easy to see that a women having 4 hysterectomies or a middle-aged man having 7 circumcisions isn’t right. You don’t have to be a doctor to figure that out and any rudimentary effort at stopping fraud would catch those abuses. Even without the fraud, some employers are spending 20-55% less per capita with excellent health benefits following time-tested techniques.
In a follow-up piece, I share how the dereliction of duties is contributing to our greatest national security threats. In the future, I’ll also share specifics on the staggering sums of fraud that have directly contributed to wage suppression at heartland companies. After all I’ve seen in healthcare, I didn’t think I could be surprised. I was wrong. I was not only wrong, I was floored by the implications.