Updated on: June 22, 2012

Reduce Federal Debt by Preventing Medicare Fraud Through Predictive Modeling

Original story posted on: July 29, 2011

sparente100President Obama and Congress need to find a reasonable passage to safe harbor through the debt ceiling crisis by tomorrow. Ideally, the debt ceiling will be increased as a condition to generate serious savings in federal outlays. The use of predictive modeling to prevent Medicare fraud could present a solution that would save hundreds of billions of dollars over 10 years.


With passage in 2010 of HR 5297, Section 4241, Medicare now has statutory authority to use predictive modeling to prevent fraudulent payments to providers. This approach moves fraud mitigation away from the “pay and chase” strategies practiced by Recovery Audit Contractors and towards fraud prevention prior to payment. If such technology could be deployed on time as indicated by the 2010 bill, tens of billions of dollars could be saved by the end of 2011.

The federal government has been sticking to a tight timetable by awarding Northrop Grumman the right to produce fraud prevention infrastructure for Medicare, with a demonstration slated to take place by the end of 2011. This will be part of a five-year effort to use technology already proven in the financial services industry to prevent healthcare fraud before payments are made.


While the investment in such technology by CMS should yield substantial results in the way of fraud mitigation, the technology’s true value will be gauged by its ability to prevent fraud prior to payment. There may be an understandable reluctance to use such powerful technology, yet it may be one of the few immediately available tools in the federal government’s arsenal with the ability to stop the hemorrhage of federal debt financing fraudulent payments.


Consider the alternative if Medicare fraud prevention cannot substantially reduce program outlays. One path is federal default in short order, something that could become a reality in a matter of days if the debt ceiling is not raised. Without a debt limit increase, the U.S. government’s subsequent default will lead to credit rating agencies lowering the nation’s sovereign debt rating, meaning significantly higher interest rates not only for the government but for the entire economy.


Small and medium-sized companies that already are struggling to access credit would be forced to lay off workers. Consumer spending would decline, unleashing even more layoffs. One could expect mortgage interest rates to skyrocket as well, delivering another crippling blow to the floundering U.S. housing market.


And with global capital markets more nimble and interconnected than ever, the impact the downgrading of U.S. securities would have on “repo” markets would be devastating, since many investors and companies use U.S. Treasury bills to smooth over liquidity shortfalls and pay bills (many banks are, in fact, required to hold them as collateral).


When the market for mortgage-backed securities collapsed in 2008, the U.S. Treasury stepped in to add liquidity, allowing normal economic activity to continue. But with securities downgraded, there would be no rescuer of last resort for the economy – and the Great Recession easily could turn into a rerun of the global Great Depression.


Thankfully, there is an opportunity to aggressively reduce federal Medicare outlays using fraud prevention measures. While this technology may have produced untenable risks to CMS in the past, the current U.S. debt crisis has created a new sense of “normal” for leaders at the agency, prompting the reassessment and execution of strategies to keep costs within expenditure growth targets. Furthermore, application of fraud prevention to the Medicaid market could yield even greater savings that ultimately approach $ 1 trillion.


President Obama recently declared that now is the time for bold solutions to put the nation’s fiscal house in order. He has statutory authority wielded by no other former president to be aggressive in Medicare fraud mitigation. Hopefully this or another prudent strategy will be chosen before the U.S. loses its triple-A credit rating.


About the Author


Stephen T. Parente, Ph.D. is professor of finance, the Minnesota Insurance Industry chairman and health finance director of the Medical Industry Leadership Institute in the Carlson School of Management at the University of Minnesota. He was a senior health adviser to Sen. John McCain (R-Ariz.) during the 2008 presidential election race and a legislative fellow for Sen. John D. Rockefeller (D-W.Va.).


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