Saturday, July 02, 2011

Medicare's Coming Fraud-a-Palooza

Giant health insurer UnitedHealth settled with the federal government for a decade long period of stock option cheating by executives.  Consultants once touted stock option compensation as the "most pure" form of incentive compensation.  UnitedHealth CEO William McGuire personally profited until caught with his hand on the backdating pen.  AMED News reported:

William McGuire, MD, the former chair and CEO of UnitedHealth Group, resigned in 2006 after an investigation into stock option backdating. Though he never admitted wrongdoing, Dr. McGuire returned stock in the company and settled with the Securities and Exchange Commission and shareholders who sued him over the backdating scandal.
Bloomberg cited in 2006:

McGuire is the most visible CEO to leave his job in the continuing probe into options-granting practices at U.S. companies.

At least 144 companies are conducting internal investigations or are subject to government probes on the matter.  From 1994 through 2005, McGuire realized $333 million in option gains.
Nearly 30% of stock options were backdated, i.e. had executives cheating shareholders, the very owners of the company.  No program, no cheating.

Medicare is implementing at least three incentive programs, Value Based Purchasing, Accountable Care Organizations and Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS).  All reward providers who "perform."  Most performance is in relation to peers, which means not every provider can get the prize.

These programs have the same foundation as stock option compensation, people need to be extrinsically motivated to do a good job.  Extrinsic motivators are powerful drivers of behavior in the short run, slightly improving results in simple tasks able to be performed by an individual.  Add complexity and interdependence to the work and extrinsic motivators can make things worse than having no incentive scheme.  It's disturbing that board room compensation philosophy is infecting America's health care system.  If almost a third of executives can cheat, what will doctors and nurses do?

Combine management's obsession with results and heavy-handed consequences for failure, and cheating is bound to explode.  Both practices are epidemic in today's world, seemingly unnoticed by leaders.  The William McGuire's and executives at 144 other companies are seen as aberrant, instead of instructive.

Rick Scott's Columbia/HCA settled for $1.7 billion for upcoding case severity and paying physicians for referrals.  No investigation cited Scott's heavy handed, results obsessed management.  Leaders were told to achieve the targets or the company would "find someone who could."  Fear drives bad figures.  Threats of punishment produce unethical behavior from ethical people.

Fraud investigations rarely evaluate management philosophy and practices at the executive level.  They avoid the Board altogether, although this is the primary source of distorting incentive compensation practices.

Medicare expects more cheating, as they implement fraud producing systems.  Otherwise, why would they target executives?

US federal enforcement officials are now targeting corporate executives over alleged healthcare fraud as opposed to merely targeting companies and negotiating with corporate lawyers.

The government is bearing down on companies which actively engage in the healthcare industry with a specific focus on Medicare and Medicaid. 

Under the shift in enforcement corporate executive can be held on criminal charges for corporate actions, even if they were not directly involved. Further, they can be banned from working in the healthcare industry.

I conclude Medicare expects millions to billions in future fines, as the opportunity for cheating expands exponentially under pay for performance.  It's a new revenue source, not yet accounted for by the Congressional Budget Office.

Extrinsic motivators kill intrinsic motivation, the internal desire to do a good job   Medicare's plans will turn health care into a chore for providers.  Many will focus on incentive pay instead of the good work to be done.  When the short term adrenaline rush of the first few rewards pass, many will say "you can't pay me enough to do this job."

Complex pay schemes based on competition and scarcity is not the answer to health care's myriad of problems.  How long will it take the system to shed this growing cancer?  First, this deadly disease must be diagnosed.

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