An economic explanation for fraud and abuse in public medical care programs

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, patients, 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.