Federal Health Care is the Easiest to Defraud
Tonight 60 Minutes reported on billions of dollars of Medicare fraud. Most people know that patients, doctors, and hospitals frequently overbill, but other government agencies, druglords, and private entrepreneurs have learned that bilking medicare out of money through false claims is safer, easier, and just as lucrative as selling cocaine.

Readers of my book will not be surprised. I spent several pages explaining why it is easier to defraud bureaucracies than face-to-face market transactions. The greater the centralization of healthcare, the more fraud can be expected. To the student of human nature, the idea that a federal healthcare system would be subject to less fraud and abuse is ludicrous.

Bureaucracies Rely on Impersonal Paperwork
Medicare payments rely on paperwork. Claims are filed and the payment processor has to process the claim based on what is on the form. Such a system tempts people to submit false claims.

It is not just medicare or government bureaucracies that are easy to defraud. The real estate scandals that brought the credit market and many banks to collapse, and the big bailout of AIG and other companies “too big to fail” were another example of the same problem. People learned that what one needed to get a loan from big centralized banks were properly filled out forms. Bureaucracies rely on impersonal measures of credit worthiness: credit scores, and loan applications. A banker on the 30th floor of a building in New York never sees the person or the property. Credit scores, loan applications, and property values can all be fabricated–and were fabricated–to get loans.

Large private health insurance companies are also bureaucracies. Like centralized government agencies and banks, they are also subject to fraud, relying on claim forms prepared by people they never meet.

Bureaucracies are Third Parties
Another reason why bureaucracies are ineffective in controlling cost is that they are third parties to the transaction. Heath care has suffered this problem since employers began paying into group plans for employees during World War II. When a third party like an employer is in the middle of a transaction, promising to pay the necessary cost, employees will seek more of their “free” healthcare and doctors and hospitals will feel more free to bill for any expense they can charge.

Governments, like employers, are third parties with respect to patients and providers. In the case of Medicare, they use one person’s tax dollars to pay for another person’s claims. The incentives of the bureaucrat are different from the incentives of the patient or the provider. The bureaucrat has the primary goal of following the law, not curing the patient or saving money. If the bureaucrat fails to discharge his duty, he may be fired. If there is a budget shortfall, the easiest way to discharge his duty is to raise taxes.

Bureaucracies are Extremely Expensive to Police
Bureaucracies have to rely on deterrence of fraud by catching and punishing the offenders they catch. But it is very difficult for people pushing papers to know claims are not legitimate. Considering that 430 billion in medicare claims were filed last year, the government would need thousands of claims inspectors in the field to verify that providers were legitimate, services were actually provided, and that the services provided were necessary.

When an individual patient sees his local doctor and pays directly, fraud is very difficult. If he fails to pay, the doctor will not treat him again. If the doctor charges excessively, the patient will not go back to him. However, when a bureaucracy wants to know if fraud is being committed, it has to send out an inspector. It costs money to hire inspectors.

In a normal market relationship between doctor and patient, there is no other person in the middle that has to earn his living from a fee. When you add an insurance company, the agent’s fees have to be added, in the case of Medicare, a government processors salaries have to be added, then you add the cost of inspectors to either type of bureaucracy and even more health care costs go to support people not providing medical services.

When a bureaucracy gets involved in market transactions, the costs of those services skyrocket. Third parties have a hard time to control costs and fraud, and they have to pay another group to police fraud.

Computers and Fraud
Employing computers to process transactions has eliminated many jobs of claims processors in governments and insurance companies, but computers rely even more on the information of forms than people. They are even another level removed from a personal relationship than a bureaucrat.

It is not difficult to imagine that the recent increase in the failure of large companies and centralized governments is related to the impersonal nature of computer processing of forms.

The Federal Government is the Worst Candidate to Process Health Forms
Face-to-face communities have little fraud. When everyone knows everyone, it is pretty hard for someone to drive up in a Mercedes without neighbors asking where he got the money. However, in an impersonal city such dynamics are less likely to apply. The further removed from the actual transactions, the less suspicious one becomes.

Washington D.C. is farther away from a doctor and patient in Rochester, Minnesota than the bureaucrat in St. Paul. A bureaucrat in St. Paul is more likely to know if a doctor is actually at the Mayo clinic than a computer in Washington, D.C. A bureaucrat in Olmsted county is even more likely to know the doctors at the Mayo Clinic by face. The more local the bureacrat, the less likely he will be defrauded.

The Federal Government, spending 430 billion dollars on health care in a year, is not likely to recognize 5 billion dollars fraudulently claimed as it is just over 1 percent of the budget. However, the state of Minnesota with 8.6 billion in claims would certainly be aware of 5 billion dollars lost. Olmsted County, with 100 million in claims, would be even more likely to recognize fraud. But, the doctor who bills the patient directly would be unable to miss it.

The principle of subsidiary, or the greatest responsibility to the local level, is an essential principle of good governance. The above is an example of why. In short, if government health care is required, it is best administered at the county level.