The traditional fee-for-service healthcare system practically invites unethical providers to defraud health insurance companies by overbilling and performing expensive, unnecessary services. While capitation eliminates incentives to provide excessive care, fraud investigators fear it might give rise to new, and perhaps more insidious, forms of deception.
"Under capitation, the incentives for fraud are almost exactly the opposite," said Steve Wiggs, director of the Arizona Health Care Cost Containment System, the state's Medicaid managed-care plan. "When you have that kind of up-front cash flow, a kind of hypnosis sets in and you don't necessarily have the assurances that (the money is) going to be used properly."
However, drawing conclusions from the available information on capitation fraud is difficult because much of it is speculative and anecdotal. Managed-care advocates claim capitation must be an effective fraud deterrent because few cases have been reported. Investigators counter that there may be other explanations for the dearth of information.
"One problem with managed care is that the programs police themselves, and it's like the fox guarding the hen house," Wiggs said. "The real reason so few (fraud) cases have been reported is because our current detection apparatus is inadequate."
On the basis of the limited figures that do exist, capitation seems to be an effective deterrent: Fraud loss under capitated systems is only 3% to 5% of total expenditures, according to calculations by Louis Lovatto, special investigations manager for Blue Shield of California. Under fee-for-service plans about 10% of annual healthcare expenditures are lost to fraud, according to a 1992 report by the General Accounting Office.
Two-thirds of fraud cases are perpetrated by providers, according to a 1992 survey by the Health Insurance Association of America. Under traditional plans, provider fraud usually involves falsifying diagnoses or dates and billing for services not rendered.
But under capitation, because providers receive the same fee regardless of the service they supply, unscrupulous physicians may deny patients access to services in order to fatten profit margins.
"Providers can also discriminate against capitated patients by limiting office hours, moving facilities or making it difficult to schedule timely appointments," said Kathleen Fyffe, director of payment systems at the HIAA.
Another common scheme under traditional plans involves gatekeeper physicians collecting kickbacks for giving referrals to certain specialists. But under managed care there are kickback incentives for withholding referrals. Because of this, Arizona is amending its kickback statute, Wiggs said.
"Providers can inflate encounter numbers in order to negotiate higher capitation rates," Wiggs said. "They can also manipulate encounter data to conceal underutilization and improve quality reviews."
Wiggs, in his capacity as an assistant attorney general, is one of the few people who actually has tried fraud cases against managed-care systems.
The first case involved Healthcare Providers, an Arizona health plan started by a doctor and a nurse in the late 1980s with a $75 investment. They "provided care" out of an office equipped only with phones and extension cords. Tried in Maricopa County Superior Court, they pled guilty in 1992 to intentionally depriving service and fraudulent schemes.
A second case revolved around APIPA, a plan started by a group of Arizona physicians in the late 1980s. At one point APIPA was a major player in Arizona, but some of its contractors turned out to be dubious businessmen who set up shell companies and skimmed money. Two of the businessmen settled civilly; a third is set for trial in March 1996.
Patient complaints are the primary means of discovering abuse related to undertreating, Lovatto said. Blue Shield of California, for example, sets up local medical review committees composed of non-Blue Shield employees to review service complaints.
Fyffe estimates that only about 10% of private fraud investigations are turned over to police.
"The legal environment is unfriendly to insurers investigating fraud. Providers accused of fraud can sue for defamation of character, and many states have weak laws protecting private insurers with immunity during these investigations," Fyffe said.
Furthermore, plans are concerned about protecting the image of their network. So instead of reporting abuse to authorities and risking public scandal, "they'll simply absorb the costs and kick the provider out of their network," Wiggs said.
Another reason fraud under capitation may be so difficult to detect is because nobody can agree on how to define it.
"Billing for services not rendered, upcoding, overbilling cannot occur under capitated systems," said Maureen O'Haren, director of legislative affairs for the California Association of HMOs. "If providers were doctoring the medical records of patients, that would be fraud. But delaying appointments..........It's a problem, it's breach of contract, but I wouldn't call it fraud."
Fyffe agrees that "underprovision of care is a judgment call. If you see it from a law enforcement perspective, it's fraud. If you have an administrative perspective, then it's a management issue."
But some insiders believe existing fraud statutes need to catch up with the new technology.
"As the incentives change, they will shift the focus of where the crime actually occurs," Wiggs said. "We need to take a look at the law. Does it need to be changed? If we move wholesale into managed care, then we will need to. We're going to have to figure out the new schemes, how to detect them, and how to prosecute them."