We have all heard the argument from conservatives about the benefits of relying on the private sector rather than the government. Private companies are fast moving and can respond more quickly to changing conditions and technology. By contrast, the government is slow and bureaucratic. And, there is more than a bit of truth to this story.

So what happens when we have the slow-moving bureaucratic government making payments to fast moving dynamic insurers in a program like Medicare. Well, all good believers in the superiority of the private sector will expect the insurers to rob the government blind. And this seems to be the case.

The NYT reported the allegations of a whistle-blower at United Health, the country's largest insurer. According to the whistle-blower, Benjamin Poehling a former finance director at United Health, the company had a policy of altering patient's medical conditions to put them in groups for which Medicare provides higher compensation.

The issue here involves Medicare Advantage program, which now includes roughly one-third of the people receiving Medicare benefits. People enrolled in Medicare Advantage get their health care covered by a private insurer. The insurer gets compensated by Medicare, with the fee adjusted depending on the patient's health condition. The insurers get more money for enrolling a less healthy person than enrolling a more healthy person.

According to Mr. Poehling, United Health would find ways to have patients be labeled with conditions that came with higher reimbursements. He claims that other insurers engaged in the same practice. According to the piece, this could have meant billions of dollars in overpayments over the last 15 years. While this is not a large amount relative to Medicare's total budget (the program will spend over $600 billion this year), it is a large amount for one company to steal.

This sort of gaming of a government program is exactly the sort of behavior that would be expected in this situation. Since insurers stand to gain large amounts of money by making their insurees appear sicker than they actually are, we should expect that they would engage in this sort of gaming.

While there is no easy way to prevent this sort of practice (the insurer will always know more about the health of the patient than the government), the best route is to have an effective deterrence. Since most cases of this sort of fraud are likely to go undetected, it is important that when individuals are caught, they face serious penalties.

If the higher-ups at United Health could look forward to spending most of the rest of their lives in jail, then it may discourage this sort of fraud in the future. Alternatively, we could look to go back to a single-payer system similar to the traditional Medicare program. Since neither of these outcomes seem likely at the moment, look forward to a lot more taxpayer dollars going into the pockets of corrupt insurance company executives.


Note: Typos corrected from earlier version, thanks to Robert Salzberg.