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New Jersey Gears Up to Fight Healthcare Fraud

The more the state and insurers spend on fraud detection and protection, the more cons and schemes they're likely to uncover -- and derail.

Healthcare fraud siphons off tens of millions of dollars a year in New Jersey -- and billions nationwide. Fighting it is a collaborative effort that calls on the resources of law enforcement agencies and fraud units at insurance companies.

Now, both these groups are gearing up for a potential spike in fraud in 2014. That's when federal healthcare reform will extend coverage to thousands of currently uninsured New Jerseyans, provided the Supreme Court doesn't overturn the Affordable Care Act this June.

Along with these newly insured healthcare consumers comes millions in federal subsidies to pay for their coverage -- potentially upping the ante for con artists looking to get their hands on cash.

There is a debate in the industry as to whether expanded coverage will yield more fraud. Nevertheless, while they await reform, investigators have plenty of healthcare fraud to keep them busy right now.

Healthcare fraud takes many forms. One is known as "up-coding," which is when a healthcare provider bills for a higher level of service than was actually provided -- essentially padding the bill. Another scheme involves criminal rings that stage phony car accidents and then submit bills for medical care that was never provided.

In a major Medicaid fraud dubbed Operation PharmScam that involved 25 people, Medicaid was hit with millions of dollars in phony prescription claims, according to the state Attorney General's office, which in January announced the sentencing of two Bergen County pharmacists. And the state Department of Banking and Insurance (DOBI) is seeing an increase in fraud cases involving "personal injury protection" or PIP claims, which are medical bills resulting from vehicle accidents that are already covered by car insurance policies. The state's insurance companies referred 444 PIP fraud cases to DOBI in 2011, up from 276 in 2010 and 199 in 2009.

Douglas Falduto is chief security officer in the special investigations unit at the state's largest health insurer, Horizon Blue Cross Blue Shield of New Jersey. His team recovered $27 million in fraudulent claims in 2011, and a total of $142 million from 2006 to 2011. (These represent recoveries for the company's commercial insurance business).

Falduto is looking ahead to 2014, when the ACA requires states to have health insurance exchanges, online marketplaces where individuals and small businesses will shop for health plans. He is concerned that the migration of healthcare markets to the web poses a risk for application or enrollment fraud. This is when someone living outside the state fraudulently uses a New Jersey address to get coverage.

But Falduto isn't so sure that the extra money that will flow into healthcare in 2014 will by itself generate more fraud. Rather, he said, the level of fraud that is uncovered is directly related to the level of resources that government and insurance companies devote to the problem.

"The more work we do," according to Falduto, "the more we are going to find: it doesn't mean the problem is getting worse -- the fraud may just have been out there all the time," waiting for someone to uncover it.

Medicaid is poised for a major expansion in 2014, when some 234,000 currently uninsured New Jerseyans will join the 1.3 million now covered by Medicaid, according to an estimate by the Rutgers Center for State Health Policy.

The expanded coverage is good news for the uninsured, but, according to Mark Anderson, director of the Medicaid fraud division in the Office of the State Comptroller. It will also require increased vigilance on the fraud front.

"More people will have health insurance, and more [unscrupulous] healthcare providers will jump in," he said. "Most providers will do the right thing, but there will also be more opportunities for fraud and abuse. And we are getting ramped up so that we are ready."

The ACA seeks to bolster states' antifraud efforts by requiring them to contract with "recovery audit contractors" (RACS) who earn a contingency fee to recover fraudulent Medicaid claims.

The federal government already employs RACs to target Medicare fraud. The federal Department of Health and Human Services estimates that Medicaid RACs will save $2.5 billion nationwide over the next five years, of which an estimated $900 million will be returned to the states.

Medicaid is a state and federally funded program; in New Jersey about half the $10 billion in annual Medicaid spending is paid for with federal funds. New Jersey has had a RAC in place since this past April, and Anderson said it is a "resource extender -- the state's resources are limited, and this allows us to do more [investigations] than we could have done on our own."

Anderson's office recovered more than $116 million in improperly paid Medicaid claims in the fiscal year that ended June 30, 2011. (This doesn't include any contributions by the RAC, came on board April 2011. In addition, the state avoided $210 million in Medicaid losses by refusing to make payments on questionable claims.

"If we can stop the money going out in the first place, that's a cost we've avoided," said Anderson. The 2011 recovery is up from $88.8 million in fiscal 2010, when the cost-avoidance figure was $190 million.

To detect and uncover fraud, investigators use software analytics tools, known as data mining, to hunt for suspicious patterns of claims. And they also depend on individuals to tip them off to illegal activity. A tip may come from a health insurance client who reads the explanation of benefits form and sees a bill for a surgical procedure that was never performed. Investigators also get tips from former employees, spouses and significant others with knowledge of illegal activity who decide to blow the whistle.

In its investigations of PIP fraud, DOBI is finding "repeated instances of services not being rendered," said Joseph Brennan, assistant commissioner. "We see chiropractors, neurologists, pain management doctors, billing for services that were not rendered, or for procedures that were more expensive that the ones actually performed."

Brennan said a common scam involves a pain management test called a needle EMG, in which a fine needle is inserted into a muscle. He indicated that it's not unusual for providers to substitute a less expensive test, then bill for the more expensive needle EMG. The patient may have been on his or her stomach the entire time, and have no idea exactly what was done.

Ralph Carpenter, director of the special investigations unit for Aetna, heads a team that investigates fraud all over the country. "If we find a scheme in Michigan, that will tip us off to look for [similar activity] in other states. Schemes go viral very quickly."

Carpenter noted that identify theft is on the rise. A health insurance ID card may be stolen, borrowed or sold. Carpenter has seen cases where individuals loaned their insurance card to a friend or relative who needed surgery. He said the move to electronic health records has fraud investigators concerned: "We have to be cognizant of the fact that this is one more way for people to get their hands on information."

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