Measure the Cost of Health Care Fraud

Measure the Cost of Health Care Fraud

Healthcare Fraud Control Articles

Most healthcare organizations don’t know how much they are losing to fraud. They only know how much fraud they’ve found, but the real cost of fraud remains hidden. We just know about the tip of the fraud iceberg.

How can you find out how fraud is impacting your organization? You can measure. Payment accuracy measurement can help you estimate the impact of fraud and other improper payments.

What should you measure?

Any review which simply examines medical documentation for medical necessity or coherence will be fooled by fraudsters who manufacture coherent paperwork. To capture more sophisticated fraud, you need to actually interview patients, within a relatively short time after services are provided, and before contacting the provider.

Measurement is the first thing you should do to improve fraud control. The immediate financial reward of measuring is smaller than other steps you could take, but if you don’t measure first, you’ll be sorry. If you don’t measure fraud until after you’ve put in new protections, you won’t know how well your controls are working.

You need to create a baseline measurement before you create your state of the art fraud control system. Not only will you learn how much you should invest in fraud control, you’ll also have a benchmark for comparison. If you measure that fraud is 15% before your new control, then measure a second time (using the same methodology) after controls are implemented and find that fraud has been reduced to 10%, you will know that your efforts were very successful, but you have a lot more work to do. If you only measured after you implement new controls, you might think that 10% fraud was not a change and nothing had been accomplished. Similarly, if you measured that fraud was 5% before your new controls and only 1% after, you would know your controls are effective. But if you only measured after the controls, you might question whether fraud had ever really been a big problem.

Measuring before and after major changes can help you get a good picture of your overall effectiveness, that you can’t get through other types of analysis. For example, if your measurements show a very big problem with transportation fraud, and you focus on stopping transportation fraud, without additional measurement you can’t be sure what portion of fraud perpetrators have slipped into other fields to continue to defraud you.

The Centers for Medicare and Medicaid (CMS) is offering funding to States to measure Medicaid payment accuracy. Illinois, Texas and Kansas have published the results of their Payment Accuracy Measurement (PAM) projects. Illinois, which has a very active fraud sciences team, concluded that 95% of total dollars paid were accurately paid (plus or minus 2.3%). This works out to at least $113 million misspent in 1998. The review also identified specific areas with much higher error rates, including non-emergency transportation, which had a 31% error rate.(Illinois OIG 1998) The review confirmed that Illinois? fraud control efforts are pretty effective, and helped them to focus their efforts on particular problem areas.

In 1999 the Kansas Department of Social and Rehabilitation Services did a study to measure fraud in their Medicaid program. They calculated their overall accuracy rate to be 76% (plus or minus 9%).(Kansas Medicaid 2000) Texas Medicaid reported that their overall accuracy was 92%.(Texas Medicaid 2001)

These results show that fraud and payment problems vary greatly among payers. Would you know if you were losing 25% or 5% to fraud, abuse and errors? Unless you’ve measured, you probably don’t know. Can you afford to be losing even 3%?


Payment Accuracy Review of the Illinois Medical Assistance Program: A Blueprint for Continued Improvement. Springfield: Illinois Department of Public Aid, 1998. Available:

Payment Accuracy Review of the Kansas Medical Assistance Program Final Report: Kansas Medical Policy Department, 2000. Available:

2000 Health Care Claims Study. Houston: Texas Office of the Comptroller, 2001. Available: