The $25,000 sore throat test: list price permissiveness as a possible racket

A bigger pie

In a recent video, Dr. Zubin Damania (aka “ZDogg M.D.”) points out a healthcare system fraud created by exploitation of a simplistic Obamacare rule.

“Insurance companies are supposed to LOWER healthcare costs by fighting inappropriate price gouging, right? WRONG. Here’s why.”

A patient’s throat swab was sent to an out-of-network lab. The doctor’s employer owned the laboratory. The insurance company paid the entire bill of over $25,000 and did not charge the patient.
Why? Damania points out that Obamacare requires insurers to spend 80% of their premium dollars on healthcare costs. If they allow unreasonably high charges, then he surmises that the insurer can subsequently raise premiums and make more income from the same maximal 20% of a larger premium pie.
Thus, one way we can classify this outcome is as an unintended consequences of overly simplistic legislation. (For another example, see our recent comment on preventing Presidential federal IG dismissal by merely setting a seven-year term limit.)
This subversion of the intent of the law – if in fact it actually occurs at high enough frequency to be a cause of rising premiums – has serious ramifications, as Damania notes, because given the size of healthcare spending in the U.S., it might be quite destructive to the overall economy.

From the perspective of systemic fraud, could this exploit hint at something more? 

We can try to think about this sort of extreme list price tactic from the point of view of fraud and it’s deterrence.
While there are probably several ways to view such a problem under fraud principles and statutes, if one looks at the increased premium as the proceeds from “illicit” activity, the behavior could constitute a racket.
The insurer could benefit from rising premiums, as Dr. Damania asserts. The hospital or other healthcare provider might get benefits in kind from the insurer, for example by tolerance of the many other extreme list prices the provider might put forward to the insurer.
So basically, by the insurer permitting list price permissiveness, the provider makes more income from the same negotiated payment rate, which is based on percentages of list prices. The providers can make even more from weaker parties who cannot negotiate the lower percentage discounts from list that insurers can.
The insurer cooperated in this scheme, according to Damania, because they benefit from the rising premiums resulting from the unnecessarily large outlays.
Therefore, what this system does in effect is shake down the ultimate source of the funds: the taxpayer or other insurance purchaser. The insurer is not really negotiating a “discount” from list price with the provider, but rather largely giving the provider higher prices which also benefit the insurer in the form of higher premiums.
If so, such a system could be termed a racket. Basically, racketeers create the need for their own payment, in this case by allowing the payment or other use of excessive list prices.
If list price permissiveness (“LPP”) could be considered a racket, then it might not necessarily only affect, or result from, “Obamacare” (the Affordable Care Act). Conspiring to make excessive payments could violate Medicare, Medicaid, or licensing statutes. We’ll do a deeper dive in an upcoming post.

Robert Bauchwitz

Robert Bauchwitz is a biomedical research scientist and certified fraud examiner. His research expertise is in behavioral neuroscience and molecular genetics. He was the relator (plaintiff acting on behalf of the government) in a U.S. federal False Claims Act qui tam case involving scientific research fraud. He has obtained additional fraud investigation training from the John Jay College of Criminal Justice and operational audit training from the Institute of Internal Auditors. He also has certifications in litigation support from the Widener University Law School's Legal Education Institute and in network security from CompTIA.

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