Sickness Plagues the Health Sector

Published on 11th April 2006

The hospital sector represents a significant risk for corruption, in both developing and developed countries alike. In the United States alone, fraud and abuse in health care has been estimated to cost US $11.9 to 23.2 billion per year; much of this expense is attributable to hospital-based care.

Corruption in hospital administration

The size and complexity of hospitals allows the possibility for many kinds of corruption. As many economists have pointed out, corruption is a ‘crime of calculation’ and is more likely to occur where budgets are large and ‘rents’ or possibilities for people to gain from decisions made by officials are high. Hospitals meet these criteria for vulnerability. Globally, hospitals account for 30–50 per cent of total health sector spending (public and private); in some regions, such as Eastern Europe, the percentage may be as high as 70 per cent. Hospital spending may also include large investments in building construction and purchase of expensive technologies, areas of procurement that are particularly vulnerable to corruption. The need to manage multiple stakeholders with different interests and asymmetries in information at many levels (between medical personnel and patients, doctors and administrators, and procurement specialists and clinicians, to name just a few) also creates an environment that is susceptible to corruption.

Corruption in hospital administration has a direct negative effect on access and quality of patient care. Employee theft of supplies can leave patients without medicines, and extorted, under-the-table payments create anxiety and reduce access to care. As resources are drained from hospital budgets through embezzlement and procurement fraud, less funding is available to pay salaries and fund operations. This in turn leads to demotivated staff and greater absenteeism as medical personnel seek private income from outside jobs, again lowering access and decreasing quality of services. Financial arrangements between hospitals and doctors intended to increase hospitals’ and doctors’ profits can lead to waste of public money, or medical decisions that are not in the patients’ best interests. Persistent corruption in the hospital sector makes it harder to reduce hospital spending as a proportion of overall health expenditures, a goal in many developing countries where needs can be met more cost-effectively in primary care settings, such as health centers and maternal and child health clinics. If officials in power are gaining personally from the current patterns of spending in the hospital sector, why would they favor changes to expand primary care, an area where there is less opportunity for private enrichment?

Hospital procurement: a hotbed for corruption

Procurement fraud is a large risk in hospitals, as virtually all capital spending involves procurement, and medicines and supplies are often the next largest recurrent expenditure item after salaries. Procurement agents may seek bribes or kickbacks from supply companies, or contractors may engage in collusion or offer bribes to hospital officials in order to win contracts.

Evidence from Argentina, Bolivia, Venezuela and Colombia suggests that these practices drive up the price of supplies purchased. For example, estimated overpayments in 1998 for seven specific medications in 32 public hospitals in Colombia were valued at more than US $2 million per year, an amount that would have paid for health insurance coverage for 24,000 people.

Small hospitals face special challenges in reducing vulnerability to procurement abuse. Where there are only a few doctors in a specialty, they have more power over the decisions made by administrators. The doctors may demand that the hospital purchase certain equipment or supplies for them, or they will move their practice elsewhere. Some may not consider this corruption but merely an economic driver of medical inflation.

In addition, hospitals may be pressured by consultants to buy more technology than the hospital can afford to maintain, because the additional equipment enables the specialist doctors to demand higher fees. This is particularly true in private hospitals, but may also take place in public hospitals where doctors use public facilities for private practice (officially or not), or are able to demand under-the-table payments from patients.

While essential drug lists and hospital formularies can help by restricting procurement to pre-approved drugs meeting efficacy, cost and quality standards, private drug manufacturers or their agents may still try to bribe officials to see that their medicine or formulation appears on the list. For example, in Albania, a Ministry of Health official claimed in 2003 that offers had been made to purchase the not-yet-approved list of new members appointed to the national committees for drug nomenclature and drug reimbursement. Presumably the bribers wanted the list so that they could individually approach the new members to try to influence their selection decisions, perhaps by offering financial incentives for decisions favorable to the bribers. In a similar bid to influence medicines purchasing and use decisions, TAP Pharmaceutical Products was charged with giving inducements directly to Lahey Clinic, a 259-bed US medical center and primary care practice, allegedly agreeing to pay some US $100,000 for a Christmas party, golf tournaments and seminars if the clinic agreed to continue prescribing its cancer drug Lupron instead of a less expensive rival drug. TAP had already paid a record US $885 million fine in 2001 to settle similar charges. 

Procurement agents may also turn a blind eye when vendors substitute lower-quality building materials or deliver goods that do not meet contractual expectations for quality, as in Malaysia, where the Anti-Corruption Agency recently launched a probe into irregular construction of the Sultan Ismail Hospital. Risk of corruption is higher if a hospital lacks systems for documenting and controlling contractor performance.

Kenyatta National Hospital in Kenya reportedly lost over US $12 million to procurement fraud between 1999 and 2002.Problems cited by the press included failure to control quality of purchases (obsolete items substituted for the modern equipment described in the bid, or fewer supplies delivered than contracted) and hidden charges or construction overruns not included in the original procurement contract, as well as non-competitive bidding processes resulting in higher prices. Hospitals may not have adequate systems for recording receipt and use of drug orders, leading to situations where they pay for orders that are never received.

Better administrative systems for procurement and inventory control can help to prevent corruption by reducing discretion; however, anti-corruption efforts that rely heavily on administrative controls can be stymied by the problem of collusion. In Venezuela, researchers suspected that collusion between hospital administrators and purchasing officers was feeding the corruption by reducing the probability of detection and punishment.

Transparency and accountability measures must be used to hold hospital administrators accountable. In Argentina, the government adopted a strategy of monitoring how much hospitals were paying for medical supplies and disseminated this information among them. Purchase prices for the monitored items immediately fell by an average of 12 per cent. Prices eventually began to rise again, but stayed below the baseline purchase prices for the entire time the policy was in place. The WHO and Health Action International have also developed a drug-price monitoring tool that could be used for transparency initiatives.

In Bolivia, researchers found that increased citizen health board activism and supervision of personnel played a role in deterring overpayment for drugs by procurement agents, while in Uganda, health unit management committees with community representation began to enforce accountability, particularly in the area of hospital drug management. Of course, if community board members accept kickbacks or collude with hospital officials, the committees will not be effective.

To increase transparency in procurement of medicines, hospitals can channel decision-making through expert pharmacy and therapeutic committees, or procurement committees. The committee structure helps to balance the influence of clinicians with strong personal interests. Pooled procurement decisions for groups of hospitals may help to increase competition and dissipate power of individual physicians. Some countries, like Albania, have moved to centralise hospital procurement as a way to reduce opportunities for corruption. Chile’s centralised health procurement agency, CENABAST, has prevented collusion and lowered prices by introducing computerised, auction-style bidding.

Centralized procurement may bring other problems, however, if it is poorly designed and controlled. And even with effective centralized procurement systems, the risks of bribery and collusion remain, and must be dealt with through transparency and review.

Embezzlement and theft

Embezzlement involves the theft of cash payments or other revenue from a hospital by employees charged with revenue collection. Hospitals with weak financial systems that are not computerized, or are cash rather than accrual-based, are more vulnerable. In developing countries, embezzlement often involves user-fee revenues collected from sale of drugs or diagnostic tests, and registration fees paid by patients.

One study found that workers pocketed an estimated 68–77 per cent of revenues from formal user-charges in Uganda’s sub-hospital clinics. Researchers compared expected user-fee revenue based on recorded utilization in 12 facilities, to actual recorded revenue. Although Ministry of Health guidelines allowed some fee exemptions for the poor, the study found that in practice those unable to pay were actually turned away, and estimated that most of the ‘gap’ in revenue was taken by collectors.

Theft of supplies is another common problem in public hospitals. Although not all theft can be categorized as corruption, the line is crossed when those entrusted with power systematically abuse their position to deplete a hospital’s resources. There are indications that the problem is significant. In a study in Venezuela, two-thirds of surveyed medical staff knew of cases where medical supplies had been stolen, while in Costa Rica over 80 per cent of nurses reported ‘a lot’ or ‘some’ theft. Uganda has huge problems with drug leakage from hospitals and sub-hospital health facilities, where researchers estimated losses of two-thirds of the purchased drug supply. In interviews with 53 health workers in Mozambique and Cape Verde, about half of whom worked in hospitals, researchers reported frequent misuse of pharmaceutical supply for personal gain.

Misappropriation of drug supply and embezzlement of user-fee revenue in poor countries are seen by some as a personal coping strategy for deteriorating work conditions, including falling salaries and irregular pay. Approaches to prevention and control therefore need to include not only monitoring and control systems for detection and punishment, but also reforms to payment systems and reforms to strengthen professionalism. One suggestion, based on fieldwork in Mozambique and Cape Verde, is to ‘introduce legislation that makes the head of an organization or department legally responsible for the actions of that body’ as a way of increasing peer pressure and accountability. Performance contracting is another way to increase accountability and provide incentives for performance.

Unhealthy personnel practices

‘Stealing time’ is another common abuse. A total of 32 per cent of health professionals interviewed in Peru thought absenteeism was common or very common among hospital staff, while in Venezuela respondents reported that doctors and head nurses were absent during 30–37 per cent of contracted hours. Absenteeism has been linked to low salaries and dual-job holding, which some consider a ‘coping mechanism’ rather than corruption. Many doctors are also active in the private sector, driven in part by the inadequate compensation available in the public sector.

To reduce absenteeism, institutional controls must be introduced to increase detection, including personnel supervision, performance measurement systems, and community participation in hospital management. Researchers noted that while control mechanisms can help, ‘one size’ doesn’t fit all. The success of strategies to reduce absenteeism in public facilities will also depend on pay differentials between the public and private sectors, and whether there are barriers to entry into the private sector. Larger reforms to civil service policies and public human resource management systems may be needed, such as shifting from civil service appointments to contractual payment for time and services rendered. If an employee does not perform, the contract would not be renewed. This also permits one to pay a higher hourly rate for hours actually worked.

Informal payments

Informal payments – defined as payments made by patients for services that are supposed to be provided free of charge – are a serious problem in many middle- and low-income countries. Under-the-table remuneration has also been documented in some higher income countries including France and Greece. In addition to causing anxiety and uncertainty among patients, informal payments can cause poor people to forgo or delay seeking care, and can have negative effects on the quality of clinical services. Some patients go into debt or sell assets in order to make informal payments, thus impoverishing themselves. Others seek to keep informal payments low by skipping levels of care – going straight to specialists or the hospital, for example, instead of using primary care services or general practitioners.

Patients report making informal payments to all kinds of health workers, from guards and cleaners, to mortuary attendants and lab technicians, to the doctors and nurses involved in diagnosis and treatment. Some studies have found that patients who are hospitalized are more likely to make informal payments, and to pay higher amounts, than patients seeking ambulatory care.23 In the foreboding words of one Albanian informant: ‘The most important thing is that you should pay the doctor, because he will never forget the face of someone who has not paid him for the rest of his life.’

The fact that it is hard to distinguish informal payments from tips, or gifts given by patients to express gratitude, makes the problem more difficult to address. While informal payments may be seen as a coping mechanism for survival when the salaries of doctors and nurses fall below a living wage, other payments are clearly bribes extorted by workers, a practice detected in a Kenyan mortuary and decried by officials. Mortuary attendants have also been implicated in bribery and other corruption schemes in South Africa and Zimbabwe.

Involving ordinary citizens in oversight or transparency initiatives may be a useful complement to regulatory and bureaucratic reforms to address informal payments. One hospital in Cambodia has had success in reducing informal payments by formalizing user fees and promoting professionalism among staff. The hospital created individual contracts with personnel and increased pay scales while enforcing accountability and sanctioning poor performance.

As in other sectors, private interests may also affect the selection and promotion of staff to fill hospital positions, with posts going to the highest bidder or most connected individuals, rather than to candidates with the best qualifications. One study found that auxiliary nurse-midwives pay bribes of six or seven times the monthly salary to obtain positions in Uttar Pradesh state, India. Also in India, the Delhi High Court found that the president of the Indian medical council had accepted bribes to allow medical colleges to ‘sell’ seats to local students. The cost of this type of corruption can be very serious, affecting both the clinical practice of medicine, and the management of hospital systems and performance. To reduce vulnerability, hospitals can try to open up the hiring and promotion decision-making process, making criteria more transparent. Performance monitoring is also essential to provide accountability. ‘Just what the doctor ordered’: corruption in payment systems Other forms of corruption – including insurance reimbursement fraud, treatment decisions based on financial motivation rather than the medical need and improper referral relationships between doctors and hospitals (sometimes involving kickbacks) – can be traced to various forms of payment systems.

Reimbursement-system fraud may occur in countries with social insurance funds or a sizeable private health care insurance market. Losses can be substantial: the US government has estimated that improper Medicare fee-for-service payments, including non-hospital services, may be in the range of US $11.9–23.2 billion per year, or 6.8–14 per cent of total payments. This sum must be interpreted with caution as it may include unintentional mistakes or controversial decisions about what is labeled ‘necessary’ care, but it gives a sense of the magnitude of the problem. Health care fraud includes false billing of insurance funds or governments for medical services that are not supposed to be covered, services that were not actually delivered (sometimes because the person is dead or does not exist, so-called ‘ghost patients’) or services that were not medically indicated. It also includes the practice of ‘upcoding’ diagnosis related groups (DRGs), that is, classifying a case as more complicated or as having co-morbidities in order to obtain reimbursement at higher rates. 

Whether insurance systems are involved or not, hospitals and doctors may have financial incentives to use increased resources in providing patient care. This is referred to as provider-induced demand. Where services are needed, increased demand can be good; however, financial incentives sometimes cause doctors to provide unnecessary treatments, or marginally useful diagnostic tests. Fee-for-service payment systems have been associated with increased utilization of resources, sometimes to the point of inappropriate use, as providers try to maximize their revenue by providing more care. For example, researchers in Peru documented excessive caesarean section rates in the Social Security Institute and private hospitals where doctors were paid on a fee for- service basis. It is important to note that while demand may rise due to financial incentives, it may still fall within the range of normal medical judgment. Where provider-induced demand becomes abuse is when it is excessive and outside the range normally considered medically indicated, yet this is far from simple to determine. 

Less recognized but equally harmful from the viewpoint of patients may be the risks introduced by managed care capitation payments, where hospitals and doctors may engage in fraud resulting in underutilization of care in order to maximize profit. Again, it is hard to determine where underutilization falls outside the normal range and becomes abuse.

Another area of concern is when hospitals enter into financial relationships with physicians to increase hospital referrals. Where hospitals are reimbursed by the state or private insurers based on patient admissions or days of care delivered, it can be advantageous for them to increase the number of patients admitted and to maintain high occupancy. One way to do this is to offer advantages to physicians who refer patients to the hospital. Yet introducing financial incentives for referrals can present a danger: even if the hospital is not best suited to meet a particular patient’s medical needs, the physician may still refer the patient there in order to gain the financial advantage.

Financial incentives are sometimes used to promote medically needed care offered at the most appropriate level, so it is not the use of financial incentives per se that creates the danger for corruption. But the situation must be monitored and controlled to prevent abuse. US federal law prohibits physician self-referrals, and a federal statute proscribes kickbacks. Applying these laws in Nebraska, one hospital was charged with underwriting a loan, paying consultants and providing free drugs and medical equipment to a doctor in exchange for referrals. 

The definition of corruption in other situations is not so clear, as when a private 231- bed hospital in the United States owned by Tenet, a large for-profit hospital corporation, was charged with using ‘relocation agreements’ to bribe doctors. Over a period of several years, the hospital paid US $10 million to doctors who agreed to relocate their practices to the area. Although federal law specifically prohibits hospitals from paying or otherwise compensating doctors for referrals, the question was whether the ‘relocation agreements’ were devised to get around this law. The court case ended in a mistrial as the jury could not agree on whether this was a violation of the law.

Payment system reforms are important to reduce vulnerability to this type of corruption. In northern European countries, such as Finland, Sweden and the United Kingdom, health reforms have shifted health care provision from fixed-budget bureaucratic institutions to contract payments based on performance. While this increased operating efficiency, it also required the state to play a more sophisticated role in regulating services. Because it is difficult to detect and control where utilization falls outside the range of normal practice, regulators may have more success with approaches that reward providers for quality improvement. 

Excerpted from Global Corruption Report 2006 Pg 48-57


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