Welcome to the Pondera FraudCast, a weekly blog where we post information on fraud trends, lessons learned from client engagements, and observations from our investigators in the field. We hope you’ll check back often to stay current with our efforts to combat fraud, waste, and abuse in large government programs.
At Pondera, we are often asked whether fraud detection algorithms will ever completely replace human investigators. And while I can’t address the “ever” part of the question, I can confidently state that it will not happen in the foreseeable future. One of the major reasons for this? Prediction models, like many people, struggle to distinguish between cause and effect.
A Stanford University professor recently shared her studies on this topic which support many of our own findings. She noted that while prediction algorithms are excellent at finding patterns in large data sets, their effectiveness is limited because they struggle with determining causation. An example she used is that algorithms have been shown to help identify patients who should not receive hip surgery because they would likely die of other causes. However, the algorithms are unable to prioritize those patients who should receive the surgery.
In several cases, the professor notes that correlation can be as low as 50%. And she properly notes that while this may be fine in certain situations, governments simply cannot conduct such high-risk experiments with social welfare, economic policies, and other important matters. And unlike controlled environments, such as those that use placebos to test medications, the real world is simply too messy and unpredictable to control all factors.
This problem of causation identifies an important intersection between human reasoning and prediction algorithms. We believe that in complex, rapidly changing environments like fraud detection, effective detection systems combine the power of modern detection algorithms with experienced human reasoning.
By leveraging the individual strengths of both machine and human learning, we can analyze massive data sets and make sense of the findings. We regularly use the system to find the problem and ask the human experts to help explain the problem. This makes the results actionable, which ultimately is what our government partners require.
A recent arrest in New York City illustrates a common fraud method that Pondera has been talking about for years: falsifying an identity (of an individual or business) and using it across multiple states, or in this particular case, across multiple subsidy programs within a state.
In February of this year, the New York State Attorney announced the arrest of several individuals allegedly involved with a fraudulent medical supply company. The company’s owner operated under a false social security number and billed the State Medicaid system for an expensive nutritional formula required by patients with feeding tubes. In actuality, when they delivered the service at all, they dispensed lower-priced Pediasure to dramatically increase their profits—apparently ignoring the health consequences to the patient.
But, as is often the case with bad actors, they didn’t stop there. In addition to their fraudulently obtained Medicaid profits, the fraudsters also used their fake socials and claimed income of less than $800 per month in order to qualify for Welfare payments. This despite the fact their medical “business” incomes were over $180,000 per year. It would not surprise me to learn that these same people were operating in other subsidy programs or in neighboring states.
This is a disturbing, but somewhat logical, pattern that we see again and again. When someone goes to the trouble of creating a fake identity or business, they use it to generate as much income as possible. They “fly below the radar” of each individual program (or state) to avoid detection, but the fraud can be very lucrative in aggregate.
The obvious solution to this is increased cooperation and data sharing across programs within a state and across states. The federal government has made significant efforts to support data sharing including the List of Excluded Individuals and Entities (LEIE), the Death Master File, and the Prisoner Update Processing System (PUPS) which can help identify claims that are fraudulently made by ineligible, deceased, or incarcerated identities.
Our hope is that these efforts expand, including at the state level, where multiple agencies cooperate to identify cross-program fraud schemes. It is not enough to detect and then stop individual incidents of fraud. Many of these incidents are too small, when viewed as discrete occurrences, to warrant prosecution. Knowing this, enterprising fraudsters “sprinkle” their claims across multiple jurisdictions to avoid attention.
Unfortunately, as was the case in New York, even these smaller, distributed fraud efforts can have an impact on patient health. The good news is that New York detected and put an end to this incident. But we all know there are thousands of similar cases each year.
Earlier this year, four government agencies – Commerce, Health and Human Services, Energy, and the Environmental Protection Agency—received letters from congress directing them to provide documents and comments detailing their efforts to “identify waste and… to achieve budget savings in the next five years.” The letter referenced a report from the Pentagon that identified a “clear path” to saving over $125 billion over five years, which was subsequently suppressed because of the dramatic findings.
The Washington Post, which was mentioned in the letter from Congress, exposed the Pentagon’s internal study in December 2016. The Post explained the reason the Pentagon buried the study was that they feared Congress would cut their budget if they knew of the waste. Incredibly, the “clear path” to savings did not even require layoffs. Rather it would use attrition, early retirements, reductions in expensive contractors, and modern technology to streamline operations.
To put the size of the problem in perspective, the study showed that the defense department paid over 1 million back-office staff to support 1.3 million active duty troops (the smallest number of troops since 1940). Thanks to these large numbers, the savings from streamlining could have led to reallocating up to $125 billion for troops and weapons and rebuilding the nation’s aging nuclear arsenal. But apparently, some Pentagon officials decided that protecting against budget cuts was more important.
The four agencies who received the letter from Congress have until March 10th to respond. Their response must provide a copy of their internal reports similar to the Pentagon report, lessons learned for their department if they do not have a similar report, and any efforts the department has made to combat waste. Given that these four agency budgets total over $1 trillion, twice that of the Department of Defense, there should be ample opportunities for savings.
Shortly after Tom Brady led the New England Patriots to the greatest comeback in Super Bowl history, he noticed that his game jersey had been stolen from his bag. Asked if it was still missing hours later, he responded "Yeah, it's going to be on eBay at some point."
This got me thinking about the market for high profile stolen items like sports memorabilia and famous artwork (yes, Pondera people think a little differently than the average sports fan). How, after all, could someone hope to profit from selling such a famous jersey—certainly not by selling it on eBay.
As it turns out, the markets for stolen items like sports memorabilia and artwork are quite mature and well-defined. Stolen art obviously has a longer history and much can be learned from it. For example, pricing for stolen art is typically around 10% of the estimated value. Interestingly, this means that many of the most famous paintings are less likely to be stolen because even 10% of $100 million is a lot to pay for an item that you can’t even show to friends!
While there are notable exceptions, including the 1911 theft of Da Vinci’s Mona Lisa (recovered two years later), the large majority of art thefts are of less than $10,000 items from private homes. The items are often sold after a period of time to legitimate galleries by “owners” who claim to have inherited them. Most estimates state that only about 5% of art thefts are ever truly solved. A recent seizure of famous Dutch art on the Ukrainian black market, for example, focused on recovery versus deciphering the 10 year “chain of custody” since being stolen.
Back to Tom Brady’s jersey. While not as expensive as a famous painting, many experts estimate its value at around $500,000. This would translate to a $50,000 value on the black market. And because it is such a famous item, it certainly wouldn’t be wise to display it openly.
While $50,000 is a great deal of money, I’m not sure many of us would take the risk of avoiding the Texas Rangers for that payday.
For those who need more impetus to stay on the straight and narrow, remember that O.J. Simpson’s 33-year prison sentence stemmed from a Las Vegas robbery over sports memorabilia that he claimed was stolen from him. And while Tom Brady’s 5th Super Bowl win is sure to ease the pain of his stolen jersey, I’ll still be rooting for the Texas Rangers and Houston P.D. in their efforts to recover this important piece of sports history.
The USDA recently announced a pilot program, starting this August, to offer online access to groceries for Supplemental Nutrition Assistance Program (SNAP) recipients in seven states. Groceries will be delivered to the recipients’ homes by seven participating retailers including familiar names such as Amazon, Safeway, and Shoprite.
For many SNAP participants, this is both a tremendous convenience (saving them time) and a potential necessity (providing access to healthy foods in rural and urban “food deserts”). In fact, America’s poor have higher access to the Internet than they do to cars: 88% to 79.6%. And no one can argue that time spent with family, working, or seeking work is more valuable than time spent commuting to and shopping in grocery stores.
Of course, online transactions often lead to more opportunities for fraud. And for their part, the USDA is mandating stricter controls than those required for non-SNAP transactions, including the use of a secure PIN number on all SNAP transactions. They have also provided funding in recent years to help states address benefit card trafficking problems.
It is also known that when large sums of money are distributed through online transactions, bad actors will innovate new ways to defraud the system. In 2014, while the improper payment rate in SNAP was relatively low at 3.66%, this still represented over $2.5 billion. Perhaps more concerning is that for 2015, after the USDA worked with all 50 states to assess their payment accuracy rates, they were not able to provide an overall improper payment rate for the SNAP program because data from 42 of the 53 reporting agencies could not be validated.
In many ways, this situation encapsulates the challenges facing government organizations. While their main directive is to provide important services to citizens – which I believe includes online access to nutritious foods—they also must protect the taxpayers’ money and make sure benefits go to those who are qualified to receive them. We wish the USDA luck with this new pilot and stand ready to assist our state government clients in their program integrity efforts.
In a recent Texas senate hearing, it was revealed that in 2015, the state’s 22 Managed Care Organizations (MCOs) had recovered only $2.5 million of fraudulent payments out of $12.5 billion in claims. That’s about two-hundredths of a percent. Not one of the MCOs recovered even 1% of payments and most reported less than $20,000 in recoveries per full time investigative resource.
These numbers are stunningly low considering the actual amount of managed care fraud, estimated by the American Bar Association to be over $17.5 billion per year. There are dozens of ways to commit fraud in managed care programs including enrolling ineligible, deceased, or incarcerated individuals, collusion and kickback schemes among providers, and billing across MCOs.
In fact, many instances of managed care fraud can be even more insidious than the fraud found in fee-for-service programs. For example, rather than billing for unnecessary services which is common in fee-for service, fraudulent managed care providers are more apt to deny necessary procedures to increase their profits. They also recruit healthy members to bill capitation fees while incurring smaller expenses than those for less healthy members.
As states move more of their Medicaid populations into managed care, it is critical to not pass the responsibility of fraud detection to the MCOs. The current situation in Texas, whatever the causes, should not be tolerated. It is clear that not all MCOs will “play by the rules” and this will inevitably lead to higher capitation rates and less effective care. This is pretty ironic considering that lower costs and improved care were two of the main drivers behind moving to managed care in the first place.
A common topic on Pondera’s blog is the seemingly endless acceleration in the number of drug overdose deaths. And based on recently released data from the CDC, this will likely be a topic into the future as well. In fact, the CDC points out that drug overdose deaths nearly tripled between 1999 and 2014, and increased an additional 11.4% last year to 47,055.
Of particular concern to Pondera is the growth in opioid-related addictions which now account for 63% of drug overdose deaths. Opioids include heroin, prescription drugs like oxycodone and hydrocodone, and synthetic opioids like fentanyl. Each of these drugs, some legal, others illegal, can offer a similar high to those who use them without medical supervision. This is why you read stories of users who “graduate” from prescription medications to heroin when the prescription is no longer available or affordable to them.
Another tragic consequence of opioid abuse is the growing number of babies born with drug withdrawal systems. This problem is especially prevalent in rural areas of the country where 7 out of every 1,000 babies enter the world with drug withdrawals. This represents a 700% increase over the past decade.
So now that we agree that this is problem, what can we do about it? In my opinion, we can stem this dangerous tide through increased media coverage, more patient and doctor education, the use of less harmful drugs, and technology to track abuses. As patients, it is important to ask questions of your doctor, to safeguard pills at home, and to dispose of them safely. And as citizens, it is important to demand education for medical professionals and the use of technology to track illegal “pill mills” and imports from other countries.
It’s clear that curbing opioid abuse is going to require a difficult and sustained fight. However, I’m confident that by working together, we can make a difference.
As a company, Pondera is closely following the comments coming from the incoming administration about how they are approaching government efficiency and entitlement reform. Paul Ryan, in particular, has made several statements about the Affordable Care Act (Obamacare), Medicare, and Medicaid. This post provides some of our thoughts around how these changes may affect fraud, waste, and abuse.
While changes are clearly coming to Obamacare, this week Speaker Ryan also hinted at potential changes to Medicare and Medicaid. In Medicaid, where Pondera works with multiple states to detect fraud, Ryan hinted that the administration would consider offering tax credits in place of expanding the number of Medicaid recipients. This is necessary because Medicaid expansion, a byproduct of Obamacare, shares its fate with Obamacare.
While the tax credit idea is interesting, it is certainly not without its own problems. Tax credits, which unlike tax deductions offer dollar-for-dollar savings off bottom line taxes owed, are an attractive target for fraudsters. In fact, the Earned Income Tax Credit (EITC), which offers tax breaks to low income Americans, suffers from a 23.8% improper payment rate in 2016. This is one of the highest rates for any government program translating to $15.6 billion in waste.
On the surface, it seems the administration’s idea may shift much or all of the fraud problems in Medicaid expansion from health departments to state tax collection agencies. Here is one thing we can be sure of though: as long as there are large amounts of money in these programs, there will be bad actors who will attempt to defraud the system. And experience shows us that they will create innovative and technologically-advanced methods to support their efforts.
It’s only been a few hours since the election of Donald Trump, and we are already fielding questions about what this all means to Pondera. And while I must confess, like most Americans the election result was a bit of a surprise to me, we have been preparing for change no matter who won the election. This is because any change in administration leads to changes in priorities.
If I think back only a decade or so, active government program initiatives included Real ID laws for driver licenses, modernizing voter systems, and prison offender management systems. The Obama administration shifted a lot of focus and funding to Medicaid systems, insurance exchanges, and other health and human services programs.
What will the Trump administration mean to a fraud detection company like Pondera? While it’s still too early to tell, President-elect Trump has certainly provided some clues. For example, in one campaign speech he proposed funding his childcare initiatives by targeting fraud in state Unemployment Insurance Programs. And anyone who has been paying attention to the news recently could reasonably expect that voter fraud and the Affordable Care Act will receive some attention over the coming months.
Here is one thing that I know for certain. Come January, fraud will continue to be perpetrated against government programs no matter what party or which candidate is in charge. To fraudsters, large government programs are considered a target-rich environment too large to ignore.
While shopping for groceries this week, my wife turned from her cart when a man stumbled and fell in the aisle. Less than 30 seconds later, she noticed that her wallet was missing from her purse which was sitting in the cart. Total distance from her wallet: 5 feet.
Within 3 minutes, she’d called me and alerted the store about what had happened. Within 15 minutes, I’d blocked our ATM card, our credit card, and a specialty retailer card. Total Time: 18 minutes and 30 seconds.
What had the robbery netted? A $1,000 gift card purchased at a kiosk at a nearby retailer with our credit card. A second $1,000 gift card purchased at the same kiosk with our ATM card (I was under the mistaken impression that this would require the PIN number). And a $5,000 gift card purchased with the specialty retailer card. Total take: $7,000. In just 18 1/2 minutes.
Of course, the thieves also got away with about $150 in cash and my wife’s driver license. She was worried that we were going to be robbed that evening “because they now had our address” but I convinced her that “having our address” made us no more likely to be robbed. We also freeze our credit which offers us some protection from identity theft. So this gave us some comfort.
After this incident, I wondered just how much “old fashioned” credit card fraud still exists in the United States. As it turns out, quite a bit, as 23% of the $3 billion in annual credit card fraud is still the result of lost or stolen cards. I was surprised at this number given today’s more sophisticated identity theft and forgery schemes.
As often is the case with fraud though, the aftermath can be even more costly than the initial theft. Financially, even though we were not directly responsible for the fraudulent transactions, in the end, we pay through higher fees and rates. And of course, it’s very difficult to assign a cost to the trauma of being robbed at your neighborhood grocery store.
The lesson in all of this for me? While it’s important to protect your identity online, don’t forget that thieves still snatch wallets, look for credit card offers in your mailbox and trash, and call your home to try to trick or intimidate you into providing sensitive information.