What Is The Cost Of Fraud Prevention In Healthcare?

Posted on May 1, 2014 I Written By

Kyle is CoFounder and CEO of Pristine, a VC backed company based in Austin, TX that builds software for Google Glass for healthcare, life sciences, and industrial environments. Pristine has over 30 healthcare customers. Kyle blogs regularly about business, entrepreneurship, technology, and healthcare at kylesamani.com.

Among other things, credit card companies prevent enormous volumes of fraud. In exchange for their services, credit card companies typically charge about 2.5% of merchant revenue. The cost of fraud prevention for most merchants is no more than 2.5% of revenues.

But healthcare is rarely paid for by credit card. The vast majority of payments are directly transferred from payers to providers.

So what is the cost of fraud prevention in healthcare?

If providers were angels and never frauded payers, then the entire claims system would have no reason to exist. In this utopian world, providers would simply bill payers accurately and payers would gladly pay knowing that the claims were honest.

But that’s unrealistic. Payers are extremely skeptical of providers. There is an enormous amount of friction between payers and providers to ensure that providers aren’t overpaid: the technology vendors at every layer of the stack (provider, clearing house, payer), the billers, coders, claims departments, prior authorization departments, insurance agents, AR departments, etc. All of these people, processes, and technologies exist to ensure that providers aren’t overpaid.

Although I cannot find any explicit numbers, it’s not unreasonable that the sheer administrative costs of the claim system is greater than 10% of all healthcare costs.

In addition to compliance costs, actual Medicare Fraud is estimated at about $50B, which is about 9% of all Medicare payments.

The takeaway of the story is that providers can’t seem to stop frauding Medicare. The irony is that physicians – who are generally respected by the public – are those whom the system works most diligently to ensure aren’t overpaid.