The Hidden Cost of Insurance Fraud


According to the insurance association, about one-fifth of all cases of health care fraud involve consumers. Only a small fraction of all cases involve providers. Greg Anderson, director for corporate finance investigations at Blue Cross-Blue Shield Michigan, says that consumer fraud is something Greg does not take lightly. “We have 4.5million customers, and if each one of them is doing $1 fraud, that’s $4.5million. This is something worth paying attention. Provider fraud is the biggest source of money.

This is not surprising, according to Mahon of the Anti-Fraud Coalition. A consumer may have a health plan, vision insurance, or car insurance. But a provider can see the entire patient population, perform all tests, and bill many third-party payers. He points out that even in managed care, providers can participate in several plans in addition to all fee-for-service plans.

Provider fraud is categorized in the indemnity industry as either the work of one doctor, an organized group, or a hospital. It can be either billing for services not rendered, such as tests not performed, surgery not completed, or care not provided. For example, a physician might spend a few minutes with a patient in the office but bill for a complete evaluation or foot surgery if he does little more than trim the nails of a patient in a nursing home. Anderson says that these are the main sources of fraud in fee for service plans.

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However, 85 percent of patients who have employer-based coverage are now enrolled in managed care plans. Even if the plan is not fully capitated many of the same frauds still apply. There are also new methods. Kirk J. Nahra is the general counsel of the National Health Care Anti-Fraud Association. He noted in a 1997 article published in Benefits Law Journal, that fraud still thrives the old-fashioned route. He explained that fee-for-service transactions still play a significant role in almost all managed care systems. These transactions will not disappear, even though some HMOs are reducing or eliminating the role of gatekeepers.

Providers who share financial risk have an incentive to offer less care, which can be difficult to spot. This could include inadequacies treatment or the “automatic” referral to sicker, more expensive patients to specialists outside of the capitated network. Nahra said that it could also include inconvenient services locations and appointment times for managed care patients. This is “designed to suppress patient flow.”

He predicts that fraud squads will initially detect these types of abuses using statistical analysis. He warns, however, that it will not be easy to prove legality. Prosecutors will need to prove that a provider provided reduced levels of care to capitated patients in a case.

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The HIAA was told by insurers that they had discovered a variety of fraud among managed care providers. Ripoffs included the embezzlement and falsification of capitation funds, falsifying new enrollee enrollments, falsely raising encounter rates in order to increase future capitated payment, illegally billing patients, and overcharging copayments. In an effort to attract more patients, doctors also overcharge copays to either collect more capitated payments or use false information to submit claims.

Another managed care plan allows the gatekeeper, or PCP, to accept kickbacks in return for referring specialists almost exclusively, and often more than is necessary, according to Greg Anderson, director for investigations at Michigan Blue CrossBlue Shield. While some plans offer incentives to doctors who keep referrals low, kickbacks may be able to compensate for any lost incentive. Anderson says that kickbacks can be difficult to prove.

Investigators suspect that private capitated plans may be being charged for unnecessary lab services or testing by certain hospital emergency departments. These charges can then be invoiced separately. To collect an additional day’s stay, routinely admitting patients at 11.55 p.m. rather than 12:05 a.m. is another variation.

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Higher insurance rates

According to the Canadian Coalition Against Insurance Fraud, insurance fraud is any act or omission that is done in order to illegally obtain an insurance benefit. In other words, it’s any action where a claimant walks off with money he or she does not have. There are many fraudulent acts that can be considered insurance fraud. Some examples include completely fabricated claims and inflation or padding genuine claims. False statements on insurance applications and internal fraud.

Fraudulent claims account for approximately 10% to 15% of all claims that are paid out. Canada’s general insurance fraud totals approximately $1.3 billion annually. This cost is paid by honest policyholders who pay higher premiums. Insurance fraud adds $1 billion annually to the cost of society resources. The police must investigate crimes where the details are altered. This can make the investigation more expensive and time-consuming or even impossible. Fire marshals examine the cause of fire; firefighters risk their lives to extinguish arson flames; and health care providers treat arsonists, staged accidents, and patients who claim they have suffered an injury.

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Higher costs for your health insurance

Americans spend approximately $ 1 trillion annually on health care. The United States General Accounting Office states that 10 percent of the health care costs are fraudulently billed. This includes services not rendered, duplicate charges, overcharges and other fraud schemes. This means that 100 billion dollars a year are fraudulently charged!

What amount of health care could be provided for $100 billion

$100 billion would provide every American woman, man and child with a comprehensive health exam and physical.

$100 billion would cover 20 million days of intensive care at a hospital.

$40 million CT scans would cost $100 billion.

Insurance companies should be aware of these common frauds

Employer Fraud

Two types of fraud are possible in workers’ compensation. One is related to claims and the other involves premiums. Premium auditors and others who are not involved in the claims function need to be alert for suspicious activity.

Employer claims fraud is when an employer intentionally misrepresents truth to avoid, deny, or receive compensation for its employees. Or knowingly lies about an employee’s entitlement to benefits in order to discourage or encourage them from filing a claim. In order to get workers compensation insurance at a lower rate, employer premium fraud is when an employer knowingly lies. :

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Incorrectly reporting the risk of exposure to a given insured. This includes: under-reporting and mis-classifying payroll. Reporting an injury under insured company A when the injured employee was actually an employee of uninsured company B. Also lying about company ownership in order to avoid high experience modification.
There are some red flags

A new hire is needed for an injured worker

The applicant was absent for an unexplained period of time prior to the accidentinjury.

The alleged injury occurred prior to or just following a strike, layoffs, plant closures, job termination, notice de company relocation, etc

Lawyer Fraud

This fraud occurs when lawyers are aware they are misleading their clients or themselves to obtain or deny compensation. E.g:

Assisting a client with a false claim

Inviting someone to file a claim

The lawyer is fraudulently trying to collect a lien.

Other criminal acts that can feed fraud include accepting or paying consideration from doctors, vendors, or other professionals for referrals or settlements of cases.
Red flags

Most claims involving a law frm are highly doubtable.

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Although a letter of representation has been received, the applicant denies representation or meets with the lawyer.

Solicitation fraud is when several employees of the same employer report similar injuries to the same lawyer.

Adjuster Examiner Fraud

This is when a claims representative deliberately misrepresents facts to deny or support a case; or offers or takes any form of compensation for the referral of a case or settlement. These frauds, which involve compensation in the form “kickbacks” as a reward to be given a contract/business, are especially difficult to detect because the compensation is paid directly and not through the company’s books. Sometimes, an employee may have an undisclosed interest that causes harm to the company by paying too much for a contract. E.g..:

In exchange for an implied promise of referrals, accepting a gift like a TV or a trip from the vendor.

Referring cases to vendors when they are not needed in return for consideration is a good practice.

To alter the evidence of a claim to support approval or denial.
Red Flags

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Inconsistently applying cost containment measures, or agreeing to pay more than the fee


Inadequate adherence to procedures for referrals to vendors outside of the company or an increase in the number of vendors using a particular vendor.

Relationships with contractors outside

Disclaimer: This publication is provided by Marwen Consulting Group Inc. as a service to customers. It is intended for informational purposes only. The author has done extensive research and assumes no liability for any errors, omissions, or accuracy of the information. For specific advice, readers should consult a lawyer or use their own judgment. This collection includes materials from various sources, including public resources, Insurance Institutes and claims forums. It also contains information from our files and sources.