The Hidden Incentives for Fraud
March 27, 2018

The Hidden Incentives for Fraud

Your benefits plan could contain hidden incentives which unintentionally encourage abuse and even fraud.  The resulting costs drive up benefits plan premiums for everyone. The Canadian Life and Health Association estimates between 2% and 10% of healthcare dollars are lost to fraud. Patterns of abuse and fraud in benefits claims persist, even though people consistently rate themselves as honest and fair (in fact people tend to rate themselves as more honest than they rate others) while at the same time abusing their benefits plan.  The question is why do people act this way?

It’s All About Incentives

Traditional benefits plans are structured with reasonable maximums in many different categories (i.e. $500 for chiropractic, $400 for orthotics, etc.).  The underlying assumption is that costs will be controlled because while some employees will submit some claims in some of the categories some of the time, not all employees will use up all of their maximums every year.  Fraudulent claims and patterns of abuse skew these numbers.  

Employees who are trying to “get the most” out of their plan have an incentive to try and use all of their maximums in each category, which is abuse of the plan when those expenses aren’t medically necessary.  Dental office signs suggesting that you “use this year’s benefits before they’re gone” are actually encouraging this kind of abuse.  If you’re keeping up with oral hygiene and regularly going to the dentist as recommended, should it matter that it’s December? (and let’s point out that not every plan’s maximums reset in January!).  

When an individual feels entitled to claim as much as they can, they may be tempted by services they don’t actually need, and some medical providers will exploit this attitude.  For instance, to keep a patient returning for treatment after a plan maximum is reached, an unscrupulous practitioner might issue receipts in the names of different family members even though knowingly falsifying claims in this way is considered fraud.  Another recent high-profile example of healthcare fraud involved a scheme in which an orthotics provider and its customers split the proceeds of false claims.

Whose Money Is It Anyway?

The idea of “easy money” can be tempting, and some service providers might try take advantage.  Because employees can often be persuaded to spend more when benefits coverage is available, practitioners may have an incentive to offer unnecessary products or services with high dollar values.  When it seems like you’re spending someone else’s money, there’s less motivation to shop around.  That’s why a TENS machine available for $150 through a medical supply company can be sold for $500 at a rehabilitation clinic.

There’s an assumption that excess claims are just being paid by the big insurance company.  But in fact, these costs are borne by each employer, and when cost-sharing is in place, co-workers bear the brunt of fraud and abuse as well.  Insurance companies are not in business to lose money so the impact of fraudulent claims is reflected in higher premiums at renewal each year.

How Can You Protect Your Plan?

Employers may be tempted to react to rising benefits costs by drastically curtailing or even cancelling their benefits plan.  However a properly designed and reasonably funded plan, including strategic options like a healthcare spending account, can enable employers to provide good coverage for their employees while protecting their plan from the risk of fraud and abuse.  

Healthcare spending accounts (HSAs) provide an excellent alternative by putting the employee in charge of their own budget.  Each employee's HSA is limited to an overall annual maximum set by the employer for each class.  As employees claim throughout the year, their remaining balance decreases.  With an HSA there is less incentive for abuse, as fraudulent claims would only reduce the amount an employee has left for legitimate expenses.

Unlike a traditional plan, HSA plan funding assumes that each employee will claim 75% to 100% of the dollars available – but will claim for those items their family genuinely needs rather than trying to spend as much as possible across many categories of maximums.  The funds committed to an HSA plan can therefore be based on average claims.  Employers gain cost control, with the built-in flexibility to better respond to the needs of a diverse workforce.

Strategic plan design can help by changing the incentives to commit benefits fraud.  The key is to look for ways to link the impact of spending decisions to the direct interests of the individual employee.

Talk to us about plan designs that will help to remove incentives for abuse and keep your benefits plan affordable over the long term.