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30 J. Legal Stud. 569 (2001)
An Economic Explanation for Fraud and Abuse in Public Medical Care Programs

handle is hein.journals/legstud30 and id is 577 raw text is: AN ECONOMIC EXPLANATION FOR FRAUD AND
This paper comments on David Hyman's theory of fraud and abuse in medical
care. It agrees with Hyman that preventing fraud is difficult because providers, pa-
tients, and program administrators usually have weak incentives to do so. It extends
Hyman's work by arguing that the root cause of fraud in public-sector medical
programs is distorted prices (usually too high), coupled with limitations on efficiency-
seeking activities that normally would occur when prices are distorted. The theory
is illustrated with examples from Medicare, kickbacks and fee splitting, and a model
of the behavior of fraud-control officers.
EVERYONE is against fraud and abuse-until they actually encounter it. As
David Hyman's informative paper illustrates, addressing the problem of fraud
and abuse is more difficult than condemning it.
The problem arises in part because an act of medical fraud usually involves
four parties, either directly or indirectly. The first party is the provider, who
regards his or her primary interest to be fidelity to patients. This is especially
true of physicians, who are trained not only to represent patients but also to
resist the interference of nonmedical personnel in regulating their profes-
sional conduct. Hyman reports that a particular type of fraud-manipulation
of reimbursement rules-is seen by a sizeable percentage of physicians as
necessary to maintain high-quality care for patients.
Patients are the second party involved in medical fraud. Hyman points out
that patients are of two minds about fraud. Although they disapprove strongly
of raw fraud, their feelings change as soon as the issue involves their own
medical care. I am sure that many readers of this paper know of a doctor
who has upcoded a visit to secure third-party reimbursement to avoid the
prying eyes of a managed care reviewer. I would guess that most patients
do not want to know what goes on inside the black box of medical re-
imbursement policy, but if they did, they would support this type of fraud
on the part of physicians if it affected their own medical care.
* Blue Cross Professor of Health Insurance, University of Minnesota. This paper was pre-
pared as a comment on David A. Hyman, Health Care Fraud and Abuse: Market Change,
Social Norms, and the Trust Reposed in the Workmen, in this issue, at 531.
[Journal of Legal Studies, vol. XXX (June 2001)]
© 2001 by The University of Chicago. All rights reserved. 0047-2530/2001/3002-0012$01.50

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