Medicare Now Required to Check For Fraud Before Paying Claims

Beginning in January 2011, Medicare will have to start flagging suspicious bills under a new federal law passed last week that could save taxpayers billions of dollars a year in wasteful government health care spending.

The anti-fraud provision, which is part of the Small Business Lending Act that was passed into law last Monday, will force Medicare to end its 45-year-old policy of paying claims quickly without verifying them. (This policy is also referred as “pay and chase,” as Medicare pays the claims quickly and then “chases” after those providers or suppliers whose claims are later found to be fraudulent.)

Medicare’s billing system which is designed to keep the its health claims moving, has led to an estimated $60 billion-plus a year in Medicare fraud.

The Centers for Medicare and Medicaid Services, which pays out $500 billion yearly for elderly and disabled Americans, will have to adopt new billing software that has “predictive modeling” capabilities by January. Such capabilities is what the credit card industry uses to detect questionable charges, i.e. items purchased outside of a card holder’s immediate area.

Currently Medicare is losing one of every $7 to fraud. The cost of rolling out the new billing technology would reach an estimated $930 million over the next decade, but the anticipated savings would far exceed that expense.

As mentioned, under the new law, Medicare must start competitive bidding for “predictive modeling” software contractors by January and implement the billing technology in the 10 worst fraud states by July.

Medicare’s billing contractors will use the new technology for processing claims for both hospitalization and outpatient services, the bulk of the program’s costs.

After the first year of operation, the Department of Health and Human Services’ inspector general’s office will report to Congress on the actual savings. If the savings are significant, some of the money will be used to expand the program to 10 more states.

Pay and Chase Model is Ending
Health and Human Services and Justice Department authorities have acknowledged that the so-called “pay and chase” system that’s been used the past 45 years has largely been a failure.

HHS Secretary Sebelius said that with the amount of fraudulent activity Medicare sees, Medicare requires getting more stringent. It can no longer assume that everyone is on “the up and up” and that “everything is OK and then look back and find out that it really isn’t.”

Sebelius and others said that Medicare has previously adopted new technological tools to fight fraud, by screening Medicare providers, red-flagging certain claims and imposing payment restrictions in certain regions of the country, such as Miami-Dade, Florida. But those fixes haven’t gone far enough, and is one reason why this legislation was signed into law last week.

Health care reform’s Affordable Care Act will help as well. It includes tougher penalties for fraud offenders, expanded administrative powers for Medicare and $350 million to combat health care corruption over the next decade.

Under the Act, Medicare can suspend payments to a provider if there has been a credible allegation of fraud, including tips from consumers. The rules also require inspectors to visit more medical facilities to ensure they are legitimate and rating them by their risk for fraud.

For more information, see the 2 new fact sheets on Medicare fraud posted on They outline the new fraud prevention and detection tools  made available through health care reform, and discuss the higher penalties for fraud and the movement away from the “pay and chase” model.

  1. Fact sheet 1:  Summarizes the new tools to fight fraud.
  2. Fact sheet 2:  Focuses on prevention vs. pay and chase.

See our Health Care Reform section for more info on health reform in general.

This article was edited in part from a Miami Herald news article, 9/30/10.