Medicare’s New Fraud Prevention System Begins to Yield Savings

This summer not only marked the 50th anniversary of the birth of our national Medicare and Medicaid programs; it also marked the fourth anniversary of the launch of Medicare’s experiment with predictive analytics, and it delivered some report cards on the system’s third full year of implementation and use.

The Fraud Prevention System (FPS), as it’s called, was legislated into existence by the Small Business Jobs Act of 2010, which directed the Department of Health and Human Services to use predictive analytics to analyze claims in real time, identify improper ones, and prevent their payment. See 42 U.S.C. § 1320a-7m. The Department’s Centers for Medicare & Medicaid Services (CMS) then contracted with Northrop Grumman and others to develop and implement the FPS, and CMS has been reporting on the results since. The law also directed the Department’s Office of Inspector General (OIG) to certify the system’s actual and projected savings as well as its return on investment.

In July, CMS reported that the FPS had identified or prevented $454 million in improper payments in 2014 and $820 million in total for its first three years. According to the agency, the $454 million tally in 2014 represented a nearly ten-to-one return on investment for the year. The 2014 tally was also more than 80% higher than the savings from the second year and nearly quadruple the savings from the first year.

The OIG, however, certified that we can reasonably expect to realize only $133 million of the $454 million in 2014 savings: $86 million from investigations that the FPS initiated and $47 million from its contributions to existing ones. The rest represents potential savings that we may not see and shouldn’t wait on with bated breath.

But that shouldn’t reflect poorly on the FPS. According to the OIG’s report, nearly all of the reduction in savings comes from cases that resulted in one of three actions: a referral to law enforcement for criminal prosecution (which accounted for over 40% of the savings that we may never see); a revocation of a provider’s billing privileges (which accounted for nearly 19% of such savings); or an attempt to recover an overpayment (36%). The first two categories tend to include more egregious cases where the money may already be gone, but that doesn’t mean the FPS wasn’t useful. The third category, overpayments, is one in which the government’s recovery rate should improve over time, as we’ve touched on before.

Overall, even the OIG’s adjusted savings of $133 million reflected a return on investment of $2.84 for every dollar spent on the FPS in 2014, and that ain’t bad. The ROI also improved significantly from the year before, when it returned only $1.34 on the dollar.

Ultimately, the OIG gave the system and its prospects a thumbs-up.

Still, not everyone’s happy. Some bemoan all the fuss over the FPS when the government has recovered far more by using outside auditors who hunt for improper payments and take a percentage of what they recover.

But then again, we’re just getting started with this stuff.