The regulatory speed trap

Why fraud sells

There are good reasons that the very idea of health care fraud provokes a visceral reaction in most of us.  First, fraud is dishonest, deceitful, and illegal.  Especially at a time when the costs of health care are skyrocketing, anything that takes money out of the health care system, money that is supposed to be used for caring for the sick, is particularly reprehensible. 

Also, fraud is expensive. Ten percent of what the government spends on health care, the government argues, is being siphoned off by fraud.  Even if the actual proportion is not actually ten percent, fraud is still contributing to the threatened bankruptcy of Medicare, among other things.

Finally, there’s an even more compelling reason for much of the angry talk about fraud – namely, the idea that if we don’t root out this fraud, we may have to ration health care.  This notion follows directly from the fact that, as we saw in Section 1, there are only two ways of reducing the amount of money we spend on health care; eliminating waste and inefficiency (e.g., eliminating fraud), or rationing.  So if we don’t want to ration, we’d better find lots of fraud to eliminate.

In fact, because finding fraud and rationing are inversely proportional (i.e., the more fraud we find, the less rationing we’ll have to do), we have a deep and abiding need to find fraud under every rock.  We are more than ready to believe there is a lot of fraud out there, and more than ready to use drastic measures to find and punish it.

When the Reagan Justice Department began its attack on fraud in the defense industry, that industry was slow to realize what was happening to it.  The industry did not understand for a year or two that the government had suddenly become deadly serious about regulations it had always treated quite benignly.  “Business as usual” had suddenly become felonious behavior.  Formerly tolerated activities were pursued relentlessly by federal prosecutors, who liberally applied sweeping new federal statutes – such as mail fraud and money laundering statutes – that were originally aimed at stopping racketeers and drug pushers.  By the time the defense industry had fully awakened to the danger – and began protecting itself by instituting expensive “compliance programs,” and spending billions on lawyers, consultants and accountants – the government had gained criminal convictions on more than 60 firms and individuals in the defense industry. 

In this effort the government recovered a lot of money in fines and penalties that, it said, had been misused.  But the defense industry simultaneously began spending huge amounts of new money on regulatory compliance, and that cost was quickly passed on to the consumers (i.e., to that same government). How much the feds actually “saved” at the end of the day is questionable.

Clearly there was fraud in the defense industry, and clearly it needed to be investigated and prosecuted.  Is there less corruption now?  Perhaps.  But it’s instructive to note that the famous $450 hammer incident that set the whole thing off resulted from a silly accounting practice rather than graft.  The Army actually paid only $5 for that hammer.  The other $445 was a standard unit charge for administrative overhead that the Army bookkeepers added to every item they purchased, whether a $5 hammer or a fifty million dollar tank. Likewise, a good bit of the fraud and abuse that was uncovered during the government’s crackdown on the defense industry was not fraud in the classic sense, but rather was misinterpretation of, ignorance of, or simply ignoring regulations that didn’t make much sense in the first place.

The Regulatory Speed Trap -

1) Over a long period of time, regulators promulgate a confusing array of vague, disparate, poorly worded, obscure, and mutually incompatible rules, regulations and guidelines.

2) Individuals or industry, faced with the necessity of having to provide a service despite difficult to-interpret regulations, necessarily render their own interpretations (usually with assistance from attorneys, consultants, and the regulators themselves), and act according to those interpretations. 

3) By their apparent concurrence with (or at least by their failure to object to) the providers’ interpretation of the rules, over time regulators allow de facto standards of behavior to become established. 

4) After substantial time passes, regulators reinterpret (or “clarify”) the ambiguous regulations in such a way that the de facto standards now constitute grievous violations.

It is my contention that this five-step Regulatory Speed Trap represents an easily recognizable blueprint, a virtual modus operandi, for Clintonians (whatever their political party).  At the moment, it is the chief methodology by which they are attempting to wrest back control of the health care system. 

Basic to the Regulatory Speed Trap is an underlying set of complicated and often contradictory rules and regulations. This requirement, of course, is virtually a given, since regulations over time naturally evolve away from clarity and toward complexity.  Societies have functioned reasonably well despite complex regulations only because traditionally, bureaucrats allow de facto standards to form under their purview, thus preventing paralysis and allowing society to function within the bounds of normalcy.

Fundamentally, what the Clintonians have discovered is that the tangle of vague regulations underlying this “business as usual” provides them with an ample opportunity to achieve an end that otherwise might be unachievable.  By suddenly enforcing strict new interpretations of inherently confusing and traditionally ignored rules (“here is what we meant all along, and you should have known it”), they have found a powerful means of pressing their own agenda – and a means of doing it without all the inconvenience of having to advance a platform,  pass a legislative program, or engage in public discourse.

The Clintonians know that when people have learned to survive within a system of complex and contradictory regulations, then everyone is always guilty of something.  All they have to decide is whom they would like to be guilty, then go get them. Whether you’re a solid citizen or a felon, therefore, depends largely on whether the controllers of bureaucratic arbitrariness have decided to look in your direction.