Despite the growing awareness of the vast sums lost to healthcare fraud, most systems fail to allocate fraud control on the scale required by the flow of money involved. Fraud control in the US is under-funded by a factor of 20 or more.
A survey of fraud bureaus conducted in 2000 by the Coalition Against Insurance Fraud found that, while insurance fraud is a crime that costs an estimated $1000 per household per year, state spending to combat it amounts to only 43 cents per resident per year. Coalition Against Insurance Fraud 
When we look at the discrepancy between the amount of fraud in healthcare, the amount of fraud deterred or recovered, and the amount spent on fraud control, the underinvestment in fraud control is obvious.
Estimates of fraud range from 3-25% of healthcare spending, recoveries tend to be less than 1% and spending on fraud control is less than .2%. In 2001 Medicare fraud control spending was about 1.5% of their estimated improper payments, and they recovered about 11% of improper payments. In other words, about 90% of improper payments were not recovered and went unpunished.
Fraud control units often demonstrate a misplaced pride in their outrageously high returns on investment. According to a report prepared by New Directions for Policy for Taxpayers Against Fraud, “The federal government is getting a direct monetary return of at least $8 for every $1 it invests in health-related FCA  enforcement activities.” (Reducing Healthcare Fraud .)
In fact, the reason rates of return are so high is fraud control stops too soon. Money is only spent to find the most obvious fraud, while the vast majority remains hidden.
When you read such high rates of return on investment in fraud control, you should interpret that as evidence that the fraud control effort is drastically under-funded.
Since the goal is to reduce fraud, rate of return is a bad measure of success. We care about the net returns (reduced cost of fraud — cost of fraud control). As you can see in the graph, net returns would be many times higher with an adequate investment in fraud control.
|Economics of Fraud Control|
Why is fraud control so under-funded? Because we don’t know how big the problem is, and we’re afraid to talk about it. What can you do to get the funding you need to fight fraud? to demonstrate the size of your fraud problem and quantify the benefits of fighting fraud.
ReferencesA Statistical Study of State Insurance Fraud Bureaus. Washington: Coalition Against Insurance Fraud , 2001.
Reducing Health Care Fraud: New Directions for Policy for Taxpayers Against Fraud, 2001. Available: www.taf.org/publications/PDF/reducing.pdf .