“Reducing Waste, Fraud and Abuse in U.S. Health Care through Lean Thinking and Better Policies”


Special Thanks to Kevin Lehigh for his contribution on this Post

Description of Core Problem:

Past efforts at Health Care Reform (since 1994 under President Clinton) and continuing efforts under current President Barack Obama to reform lead to the view of most in this country that the system is broken and beyond repair. In the past decade health care costs in America have risen to 15% of GDP whereas in Western European countries, Canada, Australia and Japan they are under 10%. In addition, health care costs rise in this country over 10% additionally per year, at an unsustainable rate for small businesses and the American public to absorb. Anecdotally, many healthcare workers and government officials believe that much of the additional cost structure in this country is due to a combination of wretched policies that enable and hide excessive waste, fraud and abuse on the order of at least 3% and possibly approaching 10% of total system-wide delivery costs.

This paper examines stopping Health Care fraud and abuse with policies as well as reducing waste with time-tested methodologies whilst attempting to assess the potential impact of each.

First, we must agree on the definition of terms; waste, fraud and abuse.  Webster’s defines these three terms:

Waste: damaged, defective, or superfluous material produced by a manufacturing process

Fraud: a fraud is an intentional deception made for personal gain or to damage another individual; an act of deceiving or misrepresenting

Abuse:  a corrupt practice or custom

Eliminating Fraud, Abuse through Enforcement

Structural ‘features’ of the U.S. Health care system that make it particularly vulnerable to fraud and abuse as well as being difficult to control are:

  • Fee-for-service payment system
  • Fragmented nature of private health care insurance and delivery system
  • Highly complex high volume claims processing system with over 1,000 payers and billions of annual claims paid to hundreds of thousands of providers.
  • Inadequate funding that frustrates government efforts to detect and prosecute fraud.

In the past few years, Health and Human Services (HHS) has performed evaluations, investigations, and audits on a wide variety of issues, including fraudulent activity by health care providers; excessive payments for medical services, equipment, and prescription drugs; and financial conflicts of interests within the institutions charged with protecting the health of the American public[i]. HHS has recovered billions of dollars in fraudulent and abusive payments and also raised awareness of these critical issues among policy makers, government agencies, and the health care community at large. In addition they have recommended improvements to program safeguards and payment methodologies to prevent fraud and abuse and to ensure health care quality and beneficiary safety.

Daniel Levinson, Inspector General, describes OIG’s unique role in combating waste, fraud and abuse in Medicare and Medicaid:

“OIG’s investigative receivables averaged $2 billion per year and our audit disallowances resulting from Medicare and Medicaid oversight averaged $1 billion per year. The result was a Medicare- and Medicaid-specific return on investment of $17 to $1 for OIG oversight. In addition, in FY 2008, implemented OIG recommendations resulted in $16 billion in savings and funds put to better use.

Further, as reflected in OIG’s Semiannual Report to Congress released earlier this month, OIG’s expected recoveries for the period of October 2008 through March 2009 include $274.8 million in audit disallowances and $2.2 billion in investigative receivables, which includes nearly $552 million in non-HHS receivables resulting from OIG work (e.g., the States’ share of Medicaid restitution).”

It comes as no surprise that the large Federal Government expenditures on health care programs attract individuals and entities seeking to exploit the health care system for their own financial gain. The National Health Care Anti-Fraud Association estimates conservatively that at least 3 percent of health care spending is lost to fraud. In FY 2009, Medicare is expected to cover an estimated 45.5 million beneficiaries at a total cost of $486 billion to the Federal Government and Medicaid is expected to cover an estimated 51 million beneficiaries and cost the Federal Government over $217 billion.

The Health Care Fraud Prevention and Enforcement Action Team (HEAT) is building on the successful OIG-DOJ Medicare Fraud Strike Force model used in south Florida.  The Strike Force uses advanced data analysis techniques to identify criminals operating as health care providers and detect emerging or migrating fraud schemes. HEAT is also focusing on prevention strategies to combat health care fraud. HEAT is investigating in south Florida durable medical equipment (DME) suppliers to ensure that applicants are legitimate businesses, not criminals. HEAT also plans to enlist health care providers in the fight against fraud by increasing training about program requirements and effective compliance measures that help ensure integrity of billing practices.

Areas of frequent fraudulent abuse:

  1. Durable Medicare Equipment
  2. Home Health/Personal Care Services
  3. Prescription Drugs
  4. Medicaid-specific Services
  5. Other Outpatient Services
  6. Inpatient Services

Each year, the OIG consolidates significant unimplemented monetary and nonmonetary recommendations that if adopted would result in cost savings, improved program integrity, and/or greater program efficiencies. These recommendations require legislative, regulatory, and/or administrative action. While implementation of monetary recommendations would have fiscal impacts, implementation of nonmonetary recommendations would improve program operations in other ways.

Affect a Five-Principle Strategy to Combat Health Care Fraud and Abuse

For Federal health care programs to best serve beneficiaries and remain solvent for future generations, the OIG believes that the government must pursue a comprehensive strategy to prevent, detect and remediate fraud, waste, and abuse. OIG pursues the following five principles for development of national health care integrity strategy:

  1. Enrollment – Scrutinize individuals and entities that want to participate as providers and suppliers prior to their enrollment in health care programs.
  2. Payment – Establish payment methodologies that are reasonable and responsive to changes in the marketplace.
  3. Compliance – Assist health care providers and suppliers in adopting practices that promote compliance with program requirements, including quality and safety standards.
  4. Oversight – Vigilantly monitor programs for evidence of fraud, waste, and abuse.
  5. Response – Respond swiftly to detected fraud, impose sufficient punishment to deter others, and promptly remedy program vulnerabilities.

Consistent with these principles, OIG offers the following recommendations to strengthen the integrity of Federal health care programs.

  1. Reward quality care by changing the Medicare and Medicaid reimbursement models to take into account the quality of the care delivered and incentivizing beneficiaries to seek out facilities that deliver the best care at the lowest costs.
  2. Stop health care fraud by moving from a paper-based system to an electric one. Health care fraud accounts for as much as much as 10 percent of all health care spending, according to the National Health Care Anti-Fraud Association. That’s more than $200 billion a year. Compare this to the 0.1% fraud rate in the credit card industry thanks to its high-tech information analysis systems.
  3. Inform patients and consumers of price and quality so they can make informed choices about how to spend their money on care. Patients have the right to know this information, but finding it is virtually impossible.
  4. Invest in research for health solutions that are urgent national priorities. Medical breakthroughs–ones that prevent or cure disease rather than treating its symptoms–are a critical part of the solution to long-term budget challenges.

Eliminating Waste via Employing Lean Methods

In the near future after fraud and abuse are controlled via policy, the most important element of improving our nation’s health service delivery systems is to enhance quality while reducing costs directly attributable to waste.  Elimination of waste responds most effectively to interventions based on lean principles and methods.

Typical methodologies and approaches that have shown success in delivering on this score in the health care field are[ii] :

  • Lean/Toyota Production Systems (TPS)—a process redesign strategy developed in manufacturing. Lean/TPS is a method for eliminating waste—defined as any activity that consumes resources without enhancing value to those being served by the process.
  • Transactional Lean Six Sigma (TLSS)—a more comprehensive methodology that performs lean functions such as reduce waste and cycle time to improve baseline performance first followed by monitoring and controlling defects and errors that remain when common cause variation have been eliminated.
  • Theory of Constraints (TOC)—a highly effective but specialized methodology that delivers great impact but applies to very few real life situations.  Best application in health care have to do with situations involving limits in capacity to provide beds, procedure turnover rates, delays in billing processing, etc. where it is necessary to find the constraint.  Most of these situations can also be assessed, modeled and improved using lean six sigma methods.

Some key findings and observations:

  • Implementation of Lean was reported in more than 50 locations across every geographic region in the United States and three foreign countries.
  • Internal impetus for adopting Lean/TPS was described more frequently than external impetus. Internal pressures included the need or desire to improve a given error rate, untenable organizational circumstances leading to clinician and staff frustration, or an internal “crisis” (e.g., a medical error resulting in patient harm).
  • Most projects aimed at improving efficiency and quality at the departmental level, but a few organizations sought to use Lean to drive system-wide change.
  • Lean projects were implemented in both clinical areas (e.g., laboratories, surgical units, emergency departments, endoscopy, gynecology, and intensive care) and administrative areas (billing, central scheduling, and medical records). Processes with linear workflows were targeted more frequently than nonlinear processes
  • The most commonly cited activities were value stream (i.e., process) mapping and 5S (an organizing tool); Kaizen events (weeklong events to manage a specific process) were frequently cited as well
  • Impact was assessed using efficiency measures (cycle or turnover time, specimens per hour, cases per day/week, reductions in practitioners’ walking distances, cost savings); measures of quality and safety (number of adverse events, bloodstream infections, overall rates of infection, medication errors); and measures of patient satisfaction

Our nation’s health service delivery systems face growing challenges to enhance quality while reducing costs.  Both TPS and TLSS can assist health care delivery systems in meeting these twin challenges. Lean is a method for eliminating “waste”—defined as any activity that consumes resources without enhancing value to those being served by the process.

Toward Lean Healthcare

The essence of Lean is to eliminate waste through understanding how the patient defines value and how to deliver that value. Lean focuses on creating an efficient, waste-free continuous flow built on a pull vs. ‘batch and queue’ approach aligned with the continual pursuit of a perfect system[iii] .

Some examples of healthcare waste:

  • Redundant capture of information on admission
  • Multiple recording of patient information
  • Excess supplies stored in multiple locations
  • Excess time spent looking for charts
  • Slow turnover in waiting rooms
  • Excess time spent waiting for equipment, lab results, x-rays etc.
  • Excess time spent dealing with service complaints

Hospitals are made up of a series of processes with diverse lines of business. As a consequence, they need to build their delivery systems with these lines of business in mind. Hospitals need to know the businesses that drive 80% of their value proposition. They need to streamline their organization systems and processes to fully support the process required to deliver high quality care.

Commitment and support for any lean initiative needs to not only come from top healthcare management but, even more critically, from the ‘bottom up’ for implementation. Decision making and system development need to be pushed down to the lowest levels of any healthcare organization.

Management consultants are normally engaged as Lean change agents rather than as Lean facilitators. Healthcare staff should lead any Lean implementation program. These people are best equipped to understand the work environment, issues, challenges, what will work and what won’t. An empowered and knowledgeable team is therefore essential to achieve sustainable improvements and long-term success in any Lean initiative. Put simply, Lean will not work without an educated workforce.

Examples of Lean Healthcare Performance Metrics:

  • Improved patient satisfaction
  • Increased operating room utilization
  • Reduced time between procedures
  • Lower tools and supplies inventory
  • Reduced laboratory space
  • Improved cost effectiveness

Role of Effective Policies on controlling Medicaid and Medicare costs

As the nation’s largest health insurance program, Medicaid plays a huge role in the current health care reform debate. The program serves over 50 million people and has total outlays equaling over $280 billion. Medicaid is much more than simply a program for the poor. It may also serve those who qualify for Supplemental Security Income (the elderly, blind and disabled), working parents, and the medically needy and mandatory groups with incomes above the poverty line. The program operates jointly within the federal government and the states, but the states have the main responsibility for funding the program and making sure that it is operating smoothly. Medicaid typically operates as a vendor payment program where states directly pay health care providers on a fee-for-service basis[iv].

States may also pay for services through prepayment arrangements such as health maintenance organizations. To improve quality, most states use a managed care system. One of the main questions in this debate is what to do with public programs like Medicaid and Medicare. If the private insurance market truly reforms, then will there be a need for these programs? The House Leadership Bill and the Senate Leadership Bill, which are the two main bills that are being considered, both seem to think that there will be. Both of these bills advocate for the expansion of Medicaid. Proponents of expansion generally state that Medicaid would be a simple way to extend comprehensive coverage. On the other hand, opponents are concerned about denying certain populations access to private insurance. Some states worry about their ability to pay for the program in the long run. But it seems like at least in this round of debates, expansion has won and now the issue is how that should happen.

Two central characteristics of reforming the Medicaid system are reducing waste, fraud and abuse within the system, as well as controlling costs while maintaining if not improving quality. Spiraling costs are one main reason for reform in the first place, and both of those characteristics tie into the high cost that our country pays for the program. Policies that will reduce fraud and abuse, as well as create other ways to lower costs will positively impact the Medicaid program, as well as the health care system overall. If quality can be improved in addition, the United States will have a much stronger and more sustainable program than the costly, inefficient one that dominates the system today.

Demonstrated policies That Make a Difference in Lowering Costs[v]

  • Fixed Dollar Contributions Lower Employer Health Care Costs
  • Competition Among HMOs Lowers Consumer Prices
  • Managed Care Mental Health Carve-Out With Parity Mandate Lowers Cost

Policies with mixed results:

  • Minor Change to FSA Exemption Could Improve Cost Efficiency
  • Cost Sharing Hits Vulnerable Groups Hardest
  • Cost Effect of Mergers Varies by Competitiveness of Market

Reducing Fraud and Abuse through Better Policies

The reduction of fraud and abuse in the Medicaid program is an important component of the health care reform debate. Because of our highly fragmented health care system, there are a huge number of providers and suppliers who operate independently, and it is imperative that the government have some sort of a method to make sure that all the business being done is legal, efficient and effective[vi].

Program integrity in general is the responsibility of the individual states, and Medicaid Fraud and Abuse Control Units are under state authority. Also, the Medicaid Integrity Program (MIP) was established by the Deficit Reduction Act of 2005. This program was the first comprehensive federal strategy to prevent and reduce fraud, waste and abuse. The MIP increases federal resources, as well as requires the Centers for Medicare and Medicaid Services (CMS) to devise a national strategy to combat Medicaid waste, fraud and abuse.  Appropriations for the program are now at $75 million per year. Both the House Leadership Bill and the Senate Leadership Bill deal with this issue, and they support a continued effort to eliminate waste, fraud and abuse from Medicaid.

The House Leadership Bill discusses this issue in great detail. The bill requires providers and suppliers to adopt compliance programs as a condition for participating in Medicaid. It requires contractors that carry out audits to conduct effectiveness evaluations on a regular basis and to provide annual reports. Other measures include enhanced oversight periods or suspended enrollment in areas deemed to be at high risk of fraudulent activity, new penalties for submitting false data on applications, false claims for payment, or for hindering audits or investigations.

The Senate Leadership Bill strives for the same goals as the House Leadership Bill, so many of the proposals are very similar. The Bill requires additional data reporting to Medicaid Management Information Systems to detect waste, fraud and abuse, as well as establishing procedures for screening, oversight and reporting requirements for providers and suppliers that participate in any public programs. It permits states to impose a moratorium on enrollment of providers or suppliers identified to be at a high risk for waste, fraud and abuse. It also increases funding for health care fraud and abuse control programs by $10 million per year and requires states to implement waste, fraud and abuse programs by 2011.

In summary what can be done to reduce fraud and abuse via policy[vii]:

  • Increase funding for fraud and abuse control
  • Spread funds recovered from federal and state fraud and abuse control efforts for further enforcement activities
  • Prioritize spending on fraud and abuse control activities to yield the greatest impact
  • Increase transparency to earn the trust of patients and the public
  • Reduce conflicts of interest for providers
  • Establish clinical practice guidelines for overused services
  • Restrict industry marketing practices
  • Take a balanced approach to fraud and abuse control activities to avoid negative effects on patient health care

Controlling Costs and Improving Quality through leveraging metrics, best practices and by reducing need and demand

One of the most obvious problems of the United States health care system as it functions today is the exponentially growing costs. Cutting these costs is a huge part of reforming the system. But if costs are drastically cut following reform, quality is another sector that must be looked at. If cutting certain costs is directly related to a decrease in quality, perhaps lower costs would not be a viable solution in that situation. Currently, there are a few measures that try to cut costs whilst improving quality in the system. States are now allowed to perform health care reform demonstrations in order to test methods of covering uninsured populations and to test new delivery systems without incurring new costs. In regards to quality, the Centers for Medicare and Medicaid Services recently developed a Medicaid/CHIP Quality Strategy. Included in this strategy are evidenced-based care and quality measurements, quality-based payments, health information technology, partnerships, information dissemination, technical assistance, and sharing of best practices. This strategy involves specific ways that the CMS will assist states to improve the quality of their services although it is quite obvious that these areas need much improvement. Both the House Leadership Bill and the Senate Leadership Bill discuss the topic of cost control and improved quality extensively.

Another approach[viii] is to focus efforts on reducing the need and demand for medical services is theoretically plausible and practically documented, and there is a funding mechanism in place, through the savings accruing to the present payers. The approach complements multiple proposals for the reform of health care financing that are now under consideration, and indeed it is essential to any such plan, for all face the question of costs. The Health Project Consortium believes that widespread implementation requires ever broader collaboration among business, labor, the insurance industry, government, and the university. This approach does not directly address many other important issues in medical reform, including access, overspecialization, and the development of a two-tiered system, although it may provide indirect help in some of these areas. Nor does it, as now conceived, adequately address the issues of health promotion and reduction of demand.


[i] Testimony Statement by Daniel R. Levinson Inspector General OIG U.S. Department of Health and Human Services on Health Care Reform: Opportunities to Address Waste, Fraud and Abuse before The House Energy and Commerce Committee Subcommittee on Health United States House of Representatives, April 11, 2011

[ii]Reducing Waste and Inefficiency in Health Care Through Lean Process Redesign. Publication No. AHRQ 09-M028-EF, May 2009. Agency for Healthcare Research and Quality, Rockville, MD. http://www.ahrq.gov/qual/leanprocess.htm

[iii] Lean Health care: reducing waste and increasing efficiencies in US hospitals, by Joe Aheme on 19th May 2011 Chief Executive Officer, Leading Edge Group, jaherne@leadingedge.ie; www.leanscm.com; www.leanhealthcareservices.com

[iv] Lean Health care: reducing waste and increasing efficiencies in US hospitals, by Joe Aheme on 19th May 2011 Chief Executive Officer, Leading Edge Group, jaherne@leadingedge.ie; www.leanscm.com; www.leanhealthcareservices.com

[v] Reducing Costs in the Health Care System, Learning From What Has Been Done, Research in Action, Issue 9, by Mark W. Stanton, M.A. http://ahrq.gov/

[vi] Health Care Reform: Reducing Waste and Improving Efficiency in Today’s Medicaid by Alina Saminsky, 2011in Student Pulse an online academic student journal

[vii] Reducing Waste Fraud and Abuse in Healthcare, AARP Public Policy Institute.  Fact Sheet 158, July, 2009

[viii]Reducing Health Care Costs by Reducing the Need and Demand for Medical Services, by James F. Fries, C. Everett Koop, Carson E. Beadle, Paul P. Cooper, Mary Jane England, Roger F. Greaves, Jacque J. Sokolov, Daniel Wright, and the Health Project Consortium, N Engl J Med 1993; 329:321-325 July 29, 1993

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2 Comments

Filed under Health Care, Lean Six Sigma

2 responses to ““Reducing Waste, Fraud and Abuse in U.S. Health Care through Lean Thinking and Better Policies”

  1. Dorina Grossu

    Thank you for starting the discussion, but the question that I have is why people who work in healthcare or perform an activity that impacts directly the healthcare do not have a higher aim for ethical values?
    Although some mistakes made are sometimes inevitable, if we will transform a society into a punishing society-system, we will educate people through the “policing” attitude rather than learning, engaging, etc.
    If people truly count, then why don’t we try to make people healthier and introduce those policies as first steps. Counting and measuring every gesture etc. has a tremendous impact on people’s stress.
    Simultaneous work should be done in the pharmaceutical industry, food industry regarding the genetically modified food, food additives, water quality and inspection etc.
    Reducing environment stress and improving on management style of work, revising the total number of hrs that a person is allowed to work in a week etc.

  2. we cannot except to return services to their pre-recession levels. This is known as an austerity program. It seems to me that in times of crisis, sacrifices should be broadly shared. However, Massachusetts’ response similar to most states is to have the most vulnerable residents make the greatest sacrifice losing services that were not adequate at peak funding levels. While our wealthiest residents, have had enormous tax breaks for the last 10 years. The Commonwealth needs to figure out a way to hold those living lives of excessive luxury Tiffany reported earnings up 27 percent in the last quarter to act responsibly and share the sacrifice. Shelter, food, health care, education are necessities that government is charged with ensuring. It takes revenue to do that. Today, the gap between the wealthiest, highest income people (the top 1%) and the bottom 60% is at its highest since 1928. Epidemiologists Richard Wilkinson and Kate Pickett, in their book The Spirit Level document the broad range of societal problems that correlate with economic inequality. Government rules (e.g., tax laws) and policies (e.g., spending decisions) drive inequality. Changing the rules can address the gap; it was done in the 1930s under the New Deal; it was done in the 1960s under the programs of the Great Society; we need a similar program for the second decade of the 21st century.

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