Fraud, Waste, and Abuse: Feds Remain on the Defensive

The Federal government is losing billions of dollars every year to fraud, waste, and abuse. The IRS and the Department of Health and Human Services are among the most victimized in government. Overwhelmed by data and the speed of business, they are the favored targets of cheaters and thieves who hope to score quick payments and then disappear in the crowd.

Finding fraud is like locating the proverbial needle in a haystack. But now new analytic tools are helping to stop improper payments – by ferreting out the fraud, waste and abuse that hides like needles in a haystack among legitimate bills and requests.

At the IRS, voluntary compliance among citizens and trust on the part of the Federal government are the twin pillars on which the system is founded. To maintain trust with taxpayers, for example, the government pays out tax refunds before it can compare tax returns with W-2 wage and earnings statements. Fraudsters exploit that trust by acting quickly.

In May, the IRS acknowledged that it paid out about $50 million in refunds for fake tax returns filed by fraudsters who managed to gather enough information about real taxpayers to break through agency security.

Such identity theft will cost the IRS as much as $26 billion over five years, according to Michael McKenney, the Treasury Department’s deputy inspector general for audit. He estimated in an April 24 report that losses for the 2013 tax filing season alone reached $5.75 billion. That’s enough to build and equip an aircraft carrier, or to feed every American man, woman, and child for a day.

Fewer Resources

IRS Criminal Investigation Chief Richard Weber said budget cuts represented one of the biggest hurdles in the agency’s efforts to detect and stop fraud, waste, and abuse. His Criminal Investigation unit has nearly 1,000 fewer special agents than it did a few years ago.

“We’re at an all-time low,” Weber told Accounting Today. “We’re at the same levels we were at in the 1970s. We haven’t hired anybody this year, and it doesn’t look like we’re hiring anybody in the coming year, depending on what Congress does with our budget. Yet the crime problem is advancing and spiraling in terms of the Internet, cybercrimes and the darknet.”

IRS Commissioner John Koskonin told the Tax Policy Center in April that every $1 invested in the IRS produces $4 in tax revenue for the nation – and concluded that the cumulative effect of IRS budget cuts since 2010 have cost the treasury $7 billion to $8 billion per year.

“This amounts to a tax cut for tax cheats,” he said.

But analytics technologies are helping. Despite staff cutbacks, the IRS collected more than $57.1 billion in 2014, a 7 percent increase over the prior year. It also marked the fifth consecutive year the IRS exceeded $50 billion in enforcement revenue.

Medicare Fraud, Waste, and Abuse

Like the IRS, Medicare also is predicated on a basic assumption of trust: In exchange for prompt payment, doctors accept lower fees. Medicare has policies and safeguards in place to guard against improper payments, but that doesn’t mean criminals and fraudsters don’t find ways to exploit the system.

Two healthcare programs alone account for nearly $80 billion in improper payments identified last year:

  • Improper payments by Medicare amounted to $60 billion in 2014, according to a 2014 report from the Government Accountability Office (GAO)
  • Improper payments by Medicaid reached $17.5 billion in 2014, according to the same report

The Health Care Fraud and Abuse Control (HCFAC) Program, a joint effort of HHS’s Office of Inspector General (OIG) and the Department of Justice that roots our healthcare fraud more broadly than the Fraud Prevention System, has recouped $14.8 billion over the past three years relying on data-driven analytics.

Another anti-fraud system using predictive analytics at the Department of Health and Human Services stopped $133.2 million in Medicare waste, fraud, and abuse in 2014. The program recouped $2.84 for every $1 invested.

Congress boosted investment in HCFAC for 2015 by $40 million, said Gary Cantrell, deputy inspector general for investigations at HHS’s Office of Investigations. The increase allowed the office to end a three-year hiring freeze and add up to 200 staffers.

“This will allow us to increase our enforcement efforts in high fraud locations and increase audit and evaluation staff to fill key gaps in overall OIG oversight efforts,” Cantrell said. Additional funding support also went to the Department of Justice and the Centers for Medicare and Medicaid Services (CMS). “We are coordinating our efforts to ensure maximum impact across the HCFAC program,” he said.

Yet despite those moves, the fraud challenge continues to grow faster.

“Even with the increased resources, we will not be able to keep up with the increasing number of fraud complaints coming our way,” Cantrell said. “Likewise, with Medicaid expansion, we will see greater Federal exposure to fraud, so we anticipate a growing portfolio in Medicaid-related fraud.”

A Problem of Volume

The scale of fraud grows with the size of Federal programs. According to the Wall Street Journal, “CMS doesn’t have the resources to deal with the sheer volume of providers flooding the system. … Every month, some 45,000 new providers, from doctors and physical therapists to nursing homes and ambulance operators, apply to enroll in Medicare.”

This is where data analytics comes into play. When it comes to identifying fraud and hunting down abusers, data analytics tools are critical for identifying anomalies and patterns that people alone would never see, according to a July 2013 report from the Government Accountability Office, Data Analytics for Oversight and Law Enforcement.

Adds Cantrell: “We’re working much more with urgency today … and we have big data that we can utilize to help focus our resources in the right places.”

Federal healthcare fraud prevention and enforcement efforts recovered $3.3 billion in 2014, said HHS Secretary Sylvia Burwell, when the agency released its annual report on healthcare fraud in March.

Analytics “prevent fraud before money ever goes out the door,” she said.

CMS is now using a fraud prevention system to apply advanced analytics to all Medicare fee-for-service claims, according to an HHS statement in March. “The Fraud Prevention System identifies aberrant and suspicious billing patterns, which in turn trigger actions that can be implemented swiftly to prevent payment of fraudulent claims. In the second year, the system saved $210.7 million, almost double the amount identified during the first year of the program.”

Another success story: At the Office of Personnel Management, inspector general staffers use a statistical analysis tool to identify fraudulent claims and administrative problems. Officials estimate a 50 percent time savings on analyses.

Yet despite such evidence, only 42 percent of agencies are aggressively trying to stop fraud with proactive analytics programs, according to a survey of Federal executives conducted by MeriTalk in late 2014.

Tackling the problem

Experts suggest that agencies start small – pick a specific program and begin a data analytics program on a small scale. Learn from the experience, and then tackle a bigger problem.

While analytics is much more mature in private sector industries, especially retail and online businesses, data science is catching on with government agencies.

“One thing that’s really interested me: how much our government has embraced data science,” said DJ Patil, chief data scientist in the U.S. Office of Science and Technology Policy, at Strata+Hadoop World, a big data conference in San Jose earlier this year. The Federal government is “more data-driven than most companies are right now,” Patil added.

The Affordable Care Act, also sometimes called “Obamacare,” included a number of programs designed to further reduce healthcare fraud. The law increases Federal sentencing guidelines for healthcare fraud by up to 50 percent for frauds greater than $1 million in value, established enhanced screening procedures for higher-risk providers and suppliers, and provided funding for advanced predictive modeling technology to try to help identify high-risk services and service providers.

Technology alone cannot stop fraud, waste, and abuse. But by strategically applying technology, agencies have successfully proven that technology is a valuable tool in rooting out questionable bills and tax claims from the mass of legitimate ones that stream into Federal agencies every day.

Bill Glanz is the author of Noteworthy, a blog on He writes about the intersection of government and technology.

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