Association for Public Policy Analysis & Management

According to the Institute of Medicine, fraud, waste, and abuse in 2009 reached $750 billion (or 28% of total health care spending), and the Federal Bureau of Investigations estimated that health care fraud alone cost American tax payers nearly $80 billion per year. Of this amount, the Department of Justice recovered only $2.5 billion. Though seemingly small, this recovery reflects in part recent policy efforts—including the Affordable Care Act and Small Business Jobs Act—to weed out fraudulent providers and exclude them from participating in Medicare and Medicaid programs. We lack a comprehensive understanding of how such sanctions affect the behavior of potentially fraudulent providers who have not yet been caught.

We directly examine changes in physician behavior when their peers receive direct sanctions from the US Department of Health and Human Services’ Office of Inspector General (OIG). Specifically, we examine changes in billing patterns (e.g., total claims and charges, prices per service, and the use of low-value care) and physician organization sorting when a physician peer has been excluded from participating in the Medicare and Medicaid programs.

Our analysis relies on three datasets. First, we identify information on physician exclusions from the OIG's List of Excluded Individuals/Entities (LEIE). The LEIE data includes all excluded physicians and their dates of exclusion. We supplement this data with text searches from the Department of Justice to identify dates of indictment. Finally, we use 20% administrative Medicare claims data from 2002 to 2014 to identify physicians, their organization, and their services provided.

We focus on peer-responses within an organization, so our sample universe consists of physicians within organizations that have experienced an exclusion. Using a multivariate logit model, we predict which physicians are likely to be fraudulent. Then, we use event study and matched difference-in-difference approaches to analyze changes in physician billing and organization alignment among potentially fraudulent providers.

We find that Medicare exclusions have a significant deterrence effect on potentially fraudulent providers. Responses begin at the time of peer indictment and continue through the date of peer exclusion. Claims and charges fall and are driven by declines in both claims and charges per patient and the number per patients seen. We also find evidence that charges per service falls, suggesting that potentially fraudulent physicians are reducing billing for specifically more expensive procedures. Deterrence effects are highest in larger organizations, among hospital-based specialties, and they highlight additional savings from the prosecution of fraud and abuse cases.

Our results demonstrate that Medicare exclusions create a significant deterrence effect among providers who consistently over-bill for care. In addition to removing fraudulent providers, efforts at reducing fraud, waste, and abuse generate large spillover effects on other potentially fraudulent providers who are yet to be sanctioned and these physicians are those for which detection is potentially more difficult and costly.