Fraud and Abuse

Definition of Terms

The term fraud and abuse refers to two kinds of illicit behavior. Fraud is the misrepresentation of material facts to obtain financial gain. For a [Page 421]representation to constitute fraud, it must both be false and known to be false by the party making it. Common kinds of fraud in healthcare involve claims for reimbursement submitted by providers that either fabricate services that were never rendered or exaggerate the intensity of services that were rendered to obtain a higher level of payment, a practice known as upcoding. Since all health insurance, both public and private, requires that goods and services be necessary for medical treatment or diagnosis to be eligible for reimbursement, submission of claims for goods and services that are not necessary can also constitute fraud.

Abuse occurs when providers take advantage of their position of trust to promote inappropriate or unnecessary use of healthcare goods or services. Most commonly, this involves the exchange of payments in return for referring a patient for a product or service. Such payments can take the form of kickbacks, as when a portion of the reimbursement received is sent to the referring provider, or less obvious schemes to bestow a reward indirectly. They are considered illegal and unethical, because the opportunity for financial reward could cloud a referring provider's judgment concerning what is clinically best for the patient.

While payments in return for referring business are forbidden in healthcare, the opposite is true in many other industries. In various contexts, they are not only permitted but actually constitute common practice. For example, real estate agents receive commissions from the sellers of homes in return for arranging sales, as do stock brokers for securities and car salesmen for vehicles. The difference between these businesses and healthcare is that, unlike buyers of homes, stocks, and cars, patients are buffered by insurance from the financial consequences of their purchasing decisions. This removes the incentive to be economically prudent, a situation known as moral hazard. The ability of unscrupulous providers to steer patients to purchase unneeded goods and services is thereby enhanced considerably, which creates a risk to payers of overutilization that will escalate costs. Patients also must rely on the expertise of their physicians to determine which goods and services they will obtain to a much greater extent than buyers in other contexts.

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