Opinion and Economic Analysis

Hicks: Medical firms are largest perpetrators of fraud

March 29, 2014

Fraud or misuse of government programs is an issue that ebbs and flows with the size of the budget deficit.

Following the 1996 Welfare Reform Act, the research center in which I worked tracked caseload characteristics of families through the reforms. The big finding of several studies, including my own, was how many families quit the program because they were unwilling to meet the participation requirements.

The new law required adult family members to work or attend school. That proved onerous to many, most likely because they were already working in the shadow economy. While the 1996 reforms were imperfect, the evidence suggests a very low level of fraud and abuse of the system in the years since.

This should not be surprising. The benefits are modest and brief and the requirement to go to school or work is unpleasant to shirkers.

Substance abuse among welfare recipients runs between 8 percent and 20 percent in the studies I have read, but most of this is not abuse of illegal substances, but alcohol dependency or misuse of drugs prescribed for mental illness. Abuse in this program is small enough that it should rank low as a policy concern.

The Supplemental Nutritional Assistance Program (formerly Food Stamp Program) has expanded dramatically since the beginning of the Great Recession and is now used by just under 50 million people. Several studies fairly consistently found that the total loss due to fraud is less than 1.5 percent. This is large in dollar amounts, maybe $3 billion, but small as a proportion of users.

Disability payments are susceptible to fraud, and growth in such areas as musculoskeletal disorders have plagued the system over the past decade or longer. Part of this may be due to a large number of baby boomers aging into their 50s, but the total growth in disability over the past decade composes about 0.5 percent of all Americans.

Medicaid and Medicare fraud is where the real money lies, costing taxpayers some $100 billion a year, or 10 percent of total costs. This is many times more than the highest estimate of fraud in all other programs combined.

But here’s the surprise: Nearly all of this fraud is perpetrated by health care providers. Rural ambulance services and home health care services offer the most spectacular recent examples.

If we really want to crack down on fraud in government programs and save money, recipients are not the place to start.•

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Hicks is director of the Center for Business and Economic Research and a professor of economics at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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