The high cost of medical insurance fraud continues unabated, raising premiums and reducing coverage for insureds in need. Whether no-fault auto insurance, health coverage or workers-compensation systems, the pernicious effect of medical fraud is felt by insureds and insurers alike.
As insurance-fraud schemes are identified and prosecuted criminally and civilly through affirmative actions, the methods and means by organized rings and individuals to defraud continuously evolve. The individuals executing the schemes are fluid manipulators and adapters who seek to exploit vulnerabilities in payor systems.
New schemes have emerged and expanded into yet more-sophisticated versions. They include, for example, lucrative durable medical equipment, fraudulently incorporated and owned medical clinics, sophisticated laundering of ill-gotten profits, illicit claims for compound medical pain drugs, and false nerve testing. In pursuit of fraudulent claims, the care of patients, with actual injuries or other medical conditions, often is compromised.
This article discusses the trends in the context of no-fault coverage, yet the same trends are prevalent across the full spectrum of insurance coverage and regulatory frameworks.
Enduring durable medical equipment cons
Durable medical equipment (DME) schemes have increasingly become a focus of no-fault organized crime rings. Expensive back braces, and other medical goods, are well-tailored income generators for these fraudsters.
Certain DME suppliers routinely fraudulently over-bill for expensive DME and orthotic supplies. These participants in no-fault auto rings also have improved how they conceal the DME schemes to keep the insurance revenue stream flowing. Once insurers or law enforcement discover a corrupt clinic or medical supplier, for example, they merely close their doors and open under a new name. Insurers thus are increasing their sensitivity to, and awareness of, emerging fraud trends such as these.
“The wholesalers provided invoices that generically described the DME and grossly inflated the wholesale price.”
In response, DME retailer suppliers are refining their blueprint for being reimbursed for false claims. Retailers used to bill inflated claims mainly for items not included on insurer fee schedules. These retailers used to buy (or claimed to buy) inexpensive DME from local wholesalers, which in many instances may not even exist. The wholesalers provided invoices that generically described the DME and grossly inflated the wholesale price. This allowed retailers to submit inflated claims for expensive DME, and insurers rarely could confirm the fraud from the documents submitted with the claims. The retailers issued checks to the wholesalers for the full inflated invoice. The wholesalers, in turn, converted them to cash, remitting the money to the suppliers as profit while retaining two-percent fees (or other sum) for providing the inflated invoices.
After uncovering the scheme, insurers forcefully and successfully prosecuted the DME providers (retailers, wholesalers and owners of record), reducing the amount of fraudulent claims. As a result, many retailers pivoted by exclusively billing for DME under insurer fee-schedule codes, pursuant to preset reimbursement under given insurance plans.
Instead of buying cheap DME from local wholesalers and submitting claims for expensive DME, with the inflated invoice as purported “proof” of the cost of the expensive DME, retailers have developed new tactics such as:
• Photocopying of referring doctor signatures onto pre-printed prescriptions the doctors did not write;
• Adding up to as many as five or six pieces of DME to prescriptions the doctors did not prescribe;
• Adding DME to prescriptions that the referring doctors did not recognize and never prescribed as part of their medical practice;
• Filling DME prescriptions that were written for generic cheap DME with expensive DME, such as custom-fitted back braces that were not prescribed;
• Billing for expensive DME that is complex, rigid and restricts a patient’s movement when the treatment plan set by the doctor was designed to increase a patient’s mobility and allow for more, not less, mobility;
• Billing for DME under fee schedule codes with expensive reimbursement rates for DME that no longer exists; and
• Billing for expensive DME designed for patients in wheelchairs yet who are not wheelchair-bound.
These newer schemes create elaborate paper trails intended to deceive insurers into paying claims seemingly for legitimately prescribed items. The new tactics and schemes have made discovering fraud more difficult. Yet insurers are uncovering discernible patterns that enable them to identify and avoid paying fraudulent claims. Some doctors confirm multiple aspects of the scheme when confronted. They deny, for example, ordering items in prescriptions that bear their name, providing affidavits as to the fraudulent use of their names on DME prescriptions.
Owners disguised as employees
Fraudulently incorporated medical practices have developed new ways to disguise how they siphon ill-gotten insurance profits from the medical clinics and direct the money to the illegal lay owners. These unscrupulous multidisciplinary medical clinics have refined how they launder money and pay (or receive) illegal kickbacks for patient referrals. In many instances, the schemes are fronted by seemingly legal medical practices that are fraudulently owned and controlled by non-physicians in violation of state licensing laws, such as in New York.
In the past, the true owners might disguise income through complex management, billing and collection agreements. Insurance payouts also were camouflaged as exorbitant office-lease and equipment fees. Today, lay owners are abandoning the management-company model for new tactics to better mask the paper trail of insurance money diverted to them when they are sued.
The true owners now become clinic employees. They give themselves innocuous titles such as bookkeeper or office manager, yet pay themselves salaries that far exceed the fair market value of their services. This installs them in a superior financial position than even the paper doctor owner, and maintains their control over the medical practice that should, by law, remain with the doctor.
Owners adopting new laundering tactics
Paper owners have also started, in some cases, converting large portions of their paychecks to cash, paying kickbacks to the true owners and/or diverting the clinic profits back to the true owners. And medical practices pay exorbitant fees to fake or dishonest consulting firms, transportation companies and other payees found on practice’s general ledger.
Yet when questioned, the supposed doctor-owners cannot explain the vendors, did not hire them, and do not know about the services the ledger payees provide. They also know little or nothing about the day-to-day clinic operations, capital investments or contributions made to the clinic, or how the clinic location was selected, sources and uses of funds, and how the practice obtains and sustains a patient base.
“Following the money trail thus requires insurers to make deeper inquiries into the clinic’s and doctor’s financial records ...”
The lay owners who recruited the doctors thus are being more careful with how they launder and/or siphon money from their practice. Instead of funneling money to so-called management-company of the clinic, some owners now divert the money to themselves via third parties to whom the clinic issues checks and returns the money in cash.
Following the money trail thus requires insurers to make deeper inquiries into the clinic’s and doctor’s financial records through forensic investigation and discovery in affirmative litigations. Evidence of money-laundering schemes are becoming manifestly apparent under this heightened scrutiny.
Expanding into illegal compound drugs
Some DME providers have altered their business model. They have shifted from billing for DME to expanding into pharmaceuticals, especially topical compound pain-relief drugs and pain patches. Several local businesses masquerade as legitimate neighborhood pharmacies. They bill for compound pain medications and pain patches that are medically unnecessary. The amounts can exceed 50 times the cost of over-the-counter drugs that are, in many cases, are available in the same formulation with the same active ingredients. These ruses may violate federal, state and local licensing requirements.
The pharmacies enter into kickback arrangements with licensed physicians and medical clinics that write the fraudulent prescriptions for insurance reimbursements that far exceed legitimate payments under the relevant fee schedule. Nearly every prescription is written for generic drugs that cost hundreds or thousands of dollars more than cheaper over-the-counter alternatives. The prescriptions are submitted on preprinted forms, in set amounts the pharmacy pre-determines. These prescriptions violate clear regulatory requirements on how prescriptions must be written. And the drugs themselves are medically useless. Several examples of the recent trends in pharmaceutical fraud include:
• Billing for non FDA-approved generic compound pain cream products in pre-set formulations that are mixed in high-volume amounts not tailored to the individual patient’s needs;
• Billing for expensive, non-proprietary pain patches containing the same or largely the same ingredients as cheaper, commercially available, FDA-approved products;
• Filling prescriptions via bogus protocols, such as having the patient sign an assignment-of-benefits form before the prescription is issued, or issuing a prescription before the prescribing doctor even evaluates the patient for medical need;
• Dispensing mass-produced, largescale batches of uniform medications, transforming the pharmacy from a legitimate neighborhood business to an unlicensed and unregistered drug manufacturer;
• Filling prescriptions only for compound creams or pain patches without first dispensing cheaper over-the-counter medicines that are generally more effective; and
• Inflating bills beyond the maximum allowed under the pharmacy fee schedule.
The mass quantities of pain medications dispensed by crooked pharmacies rarely help patients. The medical records and evaluations indicate no change in condition and a lack of improved health. This evidence suggests the medicine is provided for a fraudulently predetermined protocol without medical necessity. The goal is to increase bogus insurance billings instead of provide personalized patient care.
For insurers, data analytical tools used with predictive analysis that help identify changes in billing patterns can reduce the time between a DME provider’s launching a new DME scheme and its detection. This reduces exposure and payouts of fraudulent claims.
An insurer’s ability to timely identify and investigate reasons for sudden shifts in billing patterns is imperative to avoid loss payouts based on fraud. This is true whether a DME provider (or collection of providers billing an insurance plan) shifts from billing for non-fee-scheduled items to fee-scheduled items, starts billing for compounds and/or medications not previously billed in significant volumes, or starts billing for other anomalous items.
False nerve tests on the rise
Expensive diagnostic testing often provides an attractive target for nefarious providers to exploit. Electrodiagnostic testing (EDX) consists of nerve-conduction velocity studies and electromyography. The tests generate large reimbursements under most health-insurance plans, and thus are ripe for fraud and abuse. When a physician detects symptoms that may affect the nervous system, or when the exam suggests a nervous-system disease or injury, the physician generally needs to rule out neuropathy with an EDX test.
While EDX testing is essential to diagnosing nervous-system conditions or diseases, dishonest providers perform the test (or bill for phantom tests) using a predetermined protocol, irrespective of medical necessity. The motivation is greed, not patient care.
Investigators can discover fraud by manually reviewing medical charts and records in conjunction with analytical tools. Patterns can be identified such as: matching wave forms, unreported abnormal findings, impossible data values, and mathematical mistakes in data that the EDX equipment could not have made. Wave forms, especially, are similar to fingerprints and snowflakes. They never can be identical, even for the same patient, let alone across multiple patients. A direct match is irrefutable evidence of billing fraud. Moreover, wave forms now can be entered into computer databases to identify suspicious matches.
Insurers are alert for another sign of fraud: a crooked provider often fails to report computer-generated EDX tests that suggest real nerve disease such as diabetes, kidney failure, cancer, AIDS and systemic inflammatory disease of the small arteries. This suggests the test was not performed as billed, and/or the provider did not report the abnormal finding. The test also was not medically necessary. The provider knew the results were irrelevant and ignored them, even if they revealed serious or even life-threatening health problems for trusting patients. As for invalid data, when the supposed computer-generated data values are incompatible with the values the EDX equipment can generate, such incompatibilities often suggest billing fraud and require more investigation.
“The provider knew the results were irrelevant and ignored them, even if they revealed serious or even life-threatening health problems. ...”
EDX records may contain evidence of fraud that escapes independent insurer medical doctors. They often work under tight deadlines to meet regulatory and/or policy requirements for timely claim processing. This can limit their focus mainly to whether the medical records submitted to justify the EDX tests reveal such tests are medically necessary. The independent doctors generally do not review whether the test was properly performed, performed as billed, or show other fraud indicators. All of this requires a different type of review beyond that typically performed or expected of peer-review doctors. Nor are these doctors generally trained to identify fraudulent billing. For review purposes, they generally accept the tests as facially valid.
Medical providers make extensive efforts to conceal EDX misconduct. Identifying matching wave forms, undiagnosed nerve conduction blocks, and invalid data all require analysis beyond a basic review of a patient’s records. Data analytics, pattern analysis and manual reviews can help identify suspect providers. Insurers have successfully filed civil-recovery actions against such providers based on fraud. As insurers continue strengthening their fraud-detection techniques and commitment to prosecuting wrongdoers, the opportunity to identify and deter EDX schemes can catch significantly more false claims.
Courts uphold insurer action rights
Dishonest medical providers periodically challenge an insurer’s well-established right to bring affirmative civil actions to recoup fraud-based payments. Civil RICO actions, for example, provide treble damages and recovery of attorney fees. Such attempts to shut down and thwart insurer common-law rights or statutory mandate to combat and prosecute insurance fraud are especially prevalent in New York. Yet medical providers there have sought dismissal on grounds such as:
• Attempting to preclude insurers from suing fraudulently incorporated professional corporations. They claim the suit could not proceed because it sidestepped and disregarded a state regulation giving insurers just 30 days to pay or deny a no-fault claim;
• Attempting to dismiss lawsuits on the grounds that insurer affirmative-relief claims must be resolved through arbitration initiated by providers; and
• Attempting to stay insurer civil RICO actions alleging fraudulent incorporation of a clinic or other medical practice, claiming that only the state may determine whether the provider or providers are properly licensed.
Still, the New York courts uniformly and resoundingly reject these subterfuges. Judges firmly recognize an insurer’s right to recoup payments based on fraud.
Insurers can successfully detect and prosecute medical fraud rings by isolating data and billing patterns, and being more cognizant of fast-shifting fraud trends. Identifying provider, individual and familial relationships is an important part of the investigative mix.
Scammers continually shift tactics. They try to exploit gaps in the insurance system to maximize payouts and disguise their schemes. Nimble insurers have stepped up the counter-pressure with effective affirmative civil and criminal actions. It’s a hunt-and-be-hunted environment, one that insurers increasingly are well-adapted to mastering as they seek to turn the corner against these expensive schemes.
About the authors: Robert A. Stern is a partner and James A. McKenney is of counsel at Morrison Mahoney LLP. They represent insurers in, among other things, affirmative recovery actions to recoup payments obtained through organized fraud schemes. The views expressed herein are solely those of the authors, and do not reflect the opinions of Morrison Mahoney LLP and its principals. Contact Mr. Stern at firstname.lastname@example.org and Mr. McKenney at email@example.com.
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