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Saturday, June 21, 2003

Throughout history, plundering the public exchequer for private gain has been the favourite pastime of unscrupulous crooks. No society, or no age is an exception to this. Sometimes such fraud is by misrepresentation and deceit, but often in collusion with officials entrusted with the responsibility of protecting public good.

Recent media reports of fraudulent claims by several Hyderabad hospitals from Central Government Health Scheme (CGHS) are an example of such frauds. According to government's audit reports, private hospitals showed fictitious patients whose names were drawn from CGHS rolls; expensive investigations like MRI were supposedly  carried out several times a day (four times on one patient on a single day); abnormally large doses of costly drugs (sometimes fatal doses) were 'administered' – all these were billed to CGHS, and the claims were promptly paid by corrupt and incompetent officials without even minimal verification. Such disgraceful daylight robbery must be going on all over India.

Now, the governments in India spend only 0.9% of GDP on public health; 83% of health expenditure is from private sources; and 90% of this is out-of-pocket, mostly by the poor who are in need of health interventions. In this appalling situation, there is nothing more criminal and cruel than looting the limited public health funds.

But apoplectic rage does not get us anywhere. We need to channelize that anger constructively, and prevent future frauds. It is not enough to blacklist the swanky private hospitals which looted the exchequer. The corrupt officials should be removed, and all those who colluded – in government or outside – should be prosecuted and jailed and their properties confiscated. But then we have neither the unambiguous laws, nor an effective legal system. Rogues often frustrate the system and escape punishment, and enjoy the loot.

Typically, public purchases, contracts for government projects, and payments for services rendered or welfare and subsidy claims account for nearly half of the total public expenditure. It is well-known that there is rampant corruption and fraud in government procurement of such goods, public works and services; or subsidies and direct transfer of resources to the poor.

In countries like India, where corruption is systemic, the cost escalation in public procurement may be at least 25% or more. In some cases like the false claims from CGHS, fraud probably accounts for 80 – 90% of the cost!

Several global efforts are being made to improve procurement procedures. The adoption of a model law on public procurement of goods and construction by the UN Commission on International Trade Law, and the WTO procurement rules which came into force in 1996 are two such examples. But good laws and rules are not enough. We need innovative approaches, sensible and simple mechanisms for easy enforcement, and effective justice system for speedy redressal.

For instance, in the US, many public agencies adopt a simple rule in procurement: the contractor must supply goods and services at the most favourable terms to the government – i.e. the price cannot be higher than that charged to any private customer. Admittedly such a regulation can be enforced only in respect of standard goods and services, and cannot apply to customized goods and services, or sophisticated items for which the government is the sole buyer. In any case, rules still do not preclude corruption or fraud.

The False Claims Act in the US is an excellent example of innovation to prevent and detect fraud and corruption. In 1986, successful amendments were brought in to strengthen the Act by Senator Chuck Grassley, the current chairman of the Committee on Finance. Under this law, any person can unearth fraud or false claims, and file suit on behalf of the US against those who have falsely claimed federal funds for any procurement of goods, works or services. Such a whistleblower is called a ‘relator’, and the False Claims Act litigation is called Qui Tam litigation. Persons who file successful Qui Tam suits can recover 15 – 25% of any settlement or judgment reached in a case if the government intervenes in the action, or up to 30% if they pursue it on their own. Private citizens thus have an enormous incentive to detect false claims and corruption and file suits. Consequently, a huge industry of unearthing false claims has sprung up, and hundreds of Qui Tam suits are filed every year.

The 1986 amendments to False Claims Act enhanced Qui Tam provisions, increasing the financial incentives and reducing the jurisdictional hurdles to filing such suits. Since then, 4000 Qui Tam suits have been filed, resulting in $6 billion recovered. In addition, $4 billion was recovered in government-initiated claims. In all such cases, a person making false claim is liable to 3 times the amount of damages sustained by the government, plus a civil penalty.

It is high time we enacted similar laws providing incentive to citizens to unearth fraud and corruption. There are practical, simple, effective methods to set things right. Sensible laws and effective legal system to enforce them are crucial to prevent public fraud which has become endemic in our society.