Health Insurance is a booming industry across the world and in India it is the most rapidly growing insurance vertical having reached twenty five thousand crore rupees worth of premium in the year 2015 – 2016. With advanced medical technologies and rising costs of medical diagnostics such CT, MRI, MR Angiography, PET Scans, advanced treatment modalities such intervention radiology and cardiology techniques and endoscopic surgeries including robotic surgeries and other therapies such as Stem cell therapies the cost of medical treatments is only going to increase drastically in the future making Health Insurance mandatory for every person. However Health Insurance industry is also plagued by the growing menace of Frauds and Abuse involving both, stake holders within the healthcare industry as well as fraudsters from outside the industry eating away into the profitability and further raising the premium for honest insurance customers. ‘Insurance Frauds’ has become a top white collar crime in many countries and even in India.
It is interesting to note some facts about frauds in Health Insurance industry in India and globally:
A survey conducted by one of the leading Third Party Administrators, showed that the estimated number of false claims in the health insurance industry to be around 10-15 per cent of total claims, amounting to approximately INR 600 crores across industry. According to the Centers for Medicare & Medicaid Services (CMS), national health expenditure Frauds in the U.S. reached $2.6 trillion in 2010 — 17.9 percent of GDP.
It is common to find that medical bills are the most commonly forged documents.
Research reports claims say that 20-30% customers overstate their loss since they believe that insurance companies will always pay lesser than what one claims. Misunderstanding product features is the root cause of this customer attitude. Deductibles and Co-pays are applied in product design to make the product appear cheaper and to reduce small size claims and reduce claims frequency, thereby reducing claims processing cost. If this is not explained to customer, upfront while selling the product or at claims stage, it is very natural to cause a heartburn as customer thinks that the whole claim amount will be settled by the Insurer and is in for a rude shock when deductions make the payable amount much lesser than expected by customer. An act of commission or omission leading to unjust financial gain can be considered to be a fraudulent activity. Before any financial gain happens, it can be called as Intent to Fraud. Both are punishable offenses by law.
Obviously, the motive behind any fraud is primarily to be able to make an unjust financial gain or to get quick money albeit by cheating and deceit.
There are different theories put forth as to the reasons for perpetration of frauds. Two of the most popular theories of fraud perpetration are the Fraud Triangle and the Fraud Diamond Theories.
In the theory of Fraud Triangle, there are three main reasons for committing a fraud, namely, Pressure, Opportunity and Rationalization.
Pressure: The first leg of the fraud triangle is pressure. Examples include need to meet target at work or desire for status symbols such as a bigger house, nicer car, drug or gambling addiction etc.
Opportunity: The second leg of the fraud triangle is opportunity The person must see a way that he can use his position to solve a financial problem with low risk of getting caught.
Rationalization: Fraudsters committing Health Insurance frauds may not have any past criminal records and they do not see themselves as criminals. They justify their act, making it an acceptable decision in the current situation. This is known as rationalization. Several examples of common rationalizations are: I was only borrowing the money, I had to steal to provide for my family, I was underpaid/my employer had cheated me, everybody does it, its common act and other such justifications.
Fraud Diamond has one more leg in addition to the above three factors, namely eligibility or capability of the person. Only the right person with the right capabilities can implement the details of the fraud. The fraudster usually has an Authoritative position or function within the organization or has an authoritative accomplice who can protect the fraudster if things go wrong for obvious beneficial reasons.
Incidence of frauds increase directly proportional to the level of unemployment, More frauds are seen shortly before festival seasons to make cash available for the festive seasons especially in Group insurance business or Employee Benefit policies and towards the end of the policy year in retail business when customers who have not claimed during the year try to recover the premium paid by putting in fake claims.
Just as frauds have been perpetrated since the beginning of all business, Insurance fraud has also been present ever since the beginning of insurance as a commercial enterprise, both in India as well as globally. It is an interesting fact that Frauds and Deceit have been cited in epics such as the Ramayana and Mahabharata.
Fraudulent activity is a direct function of pathological mindset and originates from a psychiatric anomaly which does not see anything wrong in committing a fraud.
Frauds can take place at all stages of insurance business right from sourcing of business & filling up of the application forms to claims decisioning and claims payouts.
No stakeholders are exempt from the list of probable parties to frauds and abuse in health insurance. Anyone who has an adequate knowledge of the product and process of Insurance companies and can identify gaps or inadequate control points and has the capability and low level morality and integrity can be a culprit. Customer, Agents, Medical Centers, Doctors, Hospitals, Chemists & Druggists and Pharmaceutical Companies, Middlemen, Group Policy Holders, employees of the insurer as well as TPAs, singly or in any combination of the above mentioned parties. Latest addition to frauds perpetrators are fraud rings whose main source of earnings is through frauds in insurance. These are groups having members from all categories of professionals with expert knowledge including medical, legal and insurance and law enforcement who support getting money from insurance companies despite of the claims being not payable and offer a blanket protection to the fraud ring. Some fraud rings also have insurance employees included in them for safety and surety of claims payments.
There are different types of frauds and frauds can be classified in many different ways such as Hard and Soft Frauds, or Internal and External Frauds, or Provider and Consumer Frauds.
Hard fraud occurs when someone deliberately plans or invents a loss, such as a collision, auto theft, or fire that is covered by their insurance policy in order to receive payment for damages. Criminal rings are sometimes involved in hard fraud schemes that can steal millions of dollars. In health insurance, insurance cover is purchased with the intention of putting a claim to make profit.
Soft fraud, which is far more common than hard fraud, is sometimes also referred to as opportunistic fraud. This type of fraud consists of policyholders exaggerating otherwise legitimate claims. For example, when involved in a collision an insured person might claim more damage than was really done to his or her car. Soft fraud can also occur when, while obtaining a new insurance policy, an individual hides history of past ailments or existing conditions in order to obtain a lower premium on their insurance policy and have the condition covered under insurance.
Internal and External Frauds:
Internal frauds are those perpetrated against an insurance company or its policyholders by agents, managers, executives, or other employees. Some examples of insurance employees’ frauds are waiving of deductibles and/or co-payments, payouts in non-payable claims and payouts in excess of payable amount, including double payments, recovered later from claimants in cash or kind.
External fraud schemes are directed against a company by individuals or entities as diverse as medical service providers, policyholders, beneficiaries, medical consumable vendors etc.
Policyholder’s Fraud: Now-a-days, consumers have become aware of the norms, features and rules of the insurance and have started getting benefited by being involved in abuse or frauds. Policyholder frauds are divided into 3 categories – eligibility fraud, claim fraud and application fraud.
Eligibility Fraud -generally constitutes the falsification of the information provided about the insured’s employment status, pre-existing diseases or information concerning the dependent. Here, the beneficiary is paid benefits illicitly, for example, if a person submits claim for the dependent or relative who is not covered under the policy. Another case is when a part-time employee is not covered under some health plan provided by the company for full-time employees but, my generating false records with any HR employee he is successful in receiving the benefits.
Application Fraud is generally committed in the health insurance sector where the consumer knowingly enters forged information in its application related to the pre-existing diseases, claim or important dates. For instance, a policyholder might not enter the details related to his pre-existing diseases or serious medical conditions in order to get an extensive cover and have problem free claim filing. Even, at times, the employer plays with the joining date of the employee by getting things approved from the insurance company. Some applications for insurance cover may be made on non-existent persons or fictitious persons and some may be applied with identity thefts. At times, the age may be under reported with an intention to get lower premiums of the lesser age slab. Previously, age used to be under reported so that a person of non insurable age could get insured. This has largely been reduced due to introduction of KYC documents at application stage.
Health Non Disclosures: Non-disclosure can be deliberate when it is done with a deliberate intention to defraud the insurer entering into a contract, which the insurer would not have issued had the insurer been aware of that fact. A proposer does not disclose that he is under treatment for cancer.
Mis-representation can be innocent which occurs when a person states a fact in the belief or expectation that it is right but it turns out to be wrong. Intentional misrepresentation is a deliberate misrepresentation arises when the proposer intentionally distorts the known information to defraud the insurer. Such a misrepresentation would be material as it would affect the decision of the insurer.
Non-Disclosure can be innocent when a person is not aware of the facts or when even though being aware of fact does not appreciate its significance e.g. A proposer at the time of effecting the contract has undetected cancer therefore does not disclose it or a proposer may have suffered from Rheumatic fever in his childhood but he does not disclose this not knowing that people who have this are susceptible to heart diseases at a later age.
Claim Frauds: When an illegitimate claim is lodged by any consumer who, for any reason, is not entitled to the benefits he or she is claiming for, whose benefit he is not entitled for, the fraud is called claim fraud. It may be a case of claim maternity benefit, which is not covered but the expenses are attributed to any of the covered conditions by provider and member in collusion and thus, benefiting the involved physician and the member. Another example would be when a policyholder may create an insurance speculation, by purchasing several health insurance policies without letting the insurance companies know this fact and enjoy claim settlement from all.
Moreover, the agents or hospitals generate higher medical bills related to hospitalization, treatment etc. to cheer their pockets.
Provider and Consumer: Fraud can be committed both by the insured member or the provider and at times are a concerted effort of agents, brokers, insurance employees, insured member and the provider of services and other stakeholders of the healthcare system. One of the largest single sources of fraud is the healthcare providers. They usually have the detail knowledge of the policy condition, re-imbursement process which makes it very difficult to detect such frauds. Examples of such frauds are treatments for pre-existing ailments, billing for services not rendered, billing for a non-covered service as a covered service, billing for conditions not treated, misrepresenting dates of service, misrepresenting locations of service, misrepresenting provider of service, waiving of deductibles and/or co-payments, incorrect reporting of diagnoses or procedures including unbundling, treatments in waiting periods, treatments for multiple conditions, overutilization of services, corruption including kickbacks and bribery, false or unnecessary issuance of prescription drugs, covers on non-existent person/s, identity thefts, requests for inflation of bills, up-coding and cross Coding, Over-utilization, prolonging stay in ICU or on ventilators till the sum insured is exhausted, charging for medicines/disposables not used or double charging, inflating bills / over charging, bills from nonexistent hospitals and / or doctors, fake documentations, false or unnecessary issuance of prescription drugs, billing for excess medicines by hospitals and pharmacists, cross reference over charging and identity theft.
Certain fraud claim triggers or red flags can alert the insurers regarding the high probability of a fraudulent activity, due to common profile and pattern. These can either be manually checked in all suspicious claims or better still, built into the system so that systems can pop up red flags in strongly suspicious cases, such as early claim, multiple claims from small hospital, one man show hospital, chemist bills from hospital/near hospital, chemist bills from distant locations, timing of claim, condition treated – gastroenteritis/fever ordinarily not requiring hospitalization, hospitalization for multiple conditions so as to inflate the bill easily with long list of investigations and treatments drugs, expensive medicines out of line with treatment protocol billed treatment costs are higher as compared to the etiology, costlier investigations which may be unwarranted are performed, investigations performed or billed are not related to the diagnosis or the ailment, length of stay in the hospital is out of proportion to the severity of the condition shown on the medical papers, post-operative histopathology reports may not be made available in surgical cases, documentations submitted at the onset are in perfect order, higher claims frequency of member re-imbursement claims from the partner providers of the TPA and insurance companies, treating doctor, hospital, diagnosis, treatments agents, pharmacists, symptoms and ailments are the same, medicine bills may be in serial order, patient residence and the hospital, chemist address, are not geographically same. Fraud claims usually result from short term policy holders with lower sum insured, higher per-patient cost as compared to similar claims from other providers, excessive per-doctor patients, higher per-patient average visit numbers, higher per-patient average medical tests, fluctuating monthly claim count from the providers and many more.
Some of the commonly utilized frauds and abuse tactics used by TPAs and Healthcare providers are, billing for services not rendered, billing for a non-covered service as a covered service, misrepresenting dates of service, misrepresenting locations of service, misrepresenting provider of service, waiving of deductibles and/or co-payments, incorrect reporting of diagnoses or procedures (includes unbundling), overutilization of services, corruption (kickbacks and bribery), false or unnecessary issuance of prescription drugs, covers on non existing person/s, identity thefts, requests for inflation of bills, up-coding and cross coding, over-utilization, charging for medicines/disposables not used or double charging, bills from non-existing hospitals and / or doctors and fake documentations
Health Insurance frauds should be considered as a type of financial frauds and the punishments both by the insurance companies and the legal machinery in accordance with any other financial crimes or financial offences. Many a times, Insurance Companies are afraid of lodging police complaints against the fraudsters as they are sure that the external parties to the frauds could not have committed the frauds alone, without the involvement of insiders or the employees of the insurance companies and that their processes are inherently weak and full of gaps, which may be deliberate, for the fraudsters to commit fraud against the insurance company, as some employees stand to benefit from the fraudulent claims.
One of the major gaps that the fraudsters know about the processes of the Insurance companies is that most of the Insurance companies do not maintain data in electronic or digital form due to under the pretext of cost control and manpower crunch. They also do not outsource data entry under the pretext of Data Confidentiality and for the fear of data leakage to competitors.
Certain geographical locations predisposed to increased fraudulent claims, such as Gujarat, Bihar, Orissa, Jharkhand, Nasik, Satara, and some North Eastern parts of India.
Certain Medical Conditions more prone for Fraud Claims such as Diarrhea, Acute Gastro enteritis, Dysentery, Dehydration, Acute Febrile conditions, Giddiness and vomiting, Acute Food Poisoning, Severe Abdominal pain, Fissure in ano and Piles.
Fraudulent claims account for a significant portion of all claims received by insurers, and cost the global insurance industry, billions of dollars annually. Types of insurance fraud are diverse, and occur in all business verticals of insurance. These range in severity, from slightly inflating bills by exaggerating claims to deliberately causing accidents or damages. Fraudulent activities affect the lives of innocent people, both directly through accidental or intentional injury or damage, and indirectly as these crimes cause the insurance premiums to be higher. Insurance fraud poses a significant problem, and governments and other organizations should make strong efforts to deter such activities.
However it is not only claims area which is prone to frauds which lead to insurance losses and leakages. Some of the other areas where frauds commonly take place are:
Business sourcing & Application stage: Identity thefts, covers on non-existing customers, Mis-statements and Non Disclosures, Policies may be purchased towards end of financial year for tax benefits and policy cancelled in the beginning of new financial year with a refund of premium under Free Look Cancellation after availing tax benefit on Health Insurance.
Medical Examination & Underwriting, where medical reports are issued without performing medical tests or favorable and clean medical reports are issued by some diagnostic centers basis which cover is issued to non-healthy and poor risk customers who would have not been offered covers or offered on modified terms and conditions. Underwriter may be pressurized to issue a policy despite of high risk against the company’s underwriting guidelines, which would not ordinarily be issued
Policy Servicing such as change of address, change of nominee, change of Sum Insured without re-underwriting, to favor an intermediary or customer.
Claims stage such as inflated bills, up-coding, unbundling of treatment components to enable double charging, submission of bills from non-existent hospitals and non-existing doctors, Billing for services not rendered, billing for covered conditions where treatment has been provided for not covered conditions or treatment for conditions in waiting periods. Claims team may make payments on a non-payable claim or pay more than the payable amount and then demand the refund of excess component of payment in cash or kind.
Some corrupt claims investigators with or without collusion with claims team, may influence the claim decision by issuing an investigation report favorable to the customer and may also indulge in destruction of evidence of pre-existing ailments or other negative findings detrimental to claims outcome.
Third Party Administrators may collaborate Hospitals and have bills inflated in advance so that the excess amount can be shared between the TPA and Service Provider. TPAs may also ignore over-utilization and over charging to be able to get a share of the excess charged.
Healthcare providers are just one of the parties to perpetrate frauds in Health Insurance. The providers usually have in-depth knowledge of the terms and conditions of the policy along with the fine print and are in the best possible position to indulge to make an unjust gain. Customers and policy holders should understand that any inflation in their bills by the service provider immediately reduces the balance Sum Insured by the amount of the inflated bills or over utilization of services.
Insurance companies may add features such as Co-pay and Deductibles in the policy to make it appear cheaper than competitors’ products and intermediaries may not explain the features to customers and how co-pay and deductibles will affect the claims payout when the claim happens.
Insurance companies also may not ask specific questions to make sales process easy and then decline claims basis non-disclosure of material facts.
Claims payout cheques may be deliberately prepared payable to wrong party or NEFT payments made to wrong parties or fictitious accounts and the money siphoned out of the system before the rightful claimant comes with a complaint
The chief motive in all insurance crimes is financial profit. Insurance contracts provide both the insured and the insurer with opportunities for exploitation.
Often, those who commit insurance fraud view it as a low-risk, lucrative enterprise. Many fraudsters find insurance fraud safer and more profitable than working. Insurance companies rarely take legal action against fraudsters and even if taken, compared to those for other crimes, court sentences for insurance fraud are usually light reducing the risk of extended punishment. Some insurers pay suspicious claims despite of knowing that the claim is fake as settling such claim is often cheaper and faster than repudiating and getting involved in litigation and penalties if legal action does not end in conviction of the fraudster. Some insurers may not initiate legal actions fearing that some employees may be exposed if fraud cases are investigated by the investigation authorities such as the police in India. Currently, Insurance companies in India investigating fraudulent claims by the use of services of private investigators that may not be up to the mark but have to use for want of better qualified and experienced investigators and private detectives are too expensive for routine health claims. Many of the private investigators may also have doubtful integrity and readily may join hands with fraudsters either on basis of getting kickback in return for a favorable investigation report or threat, hence may not be a good idea to make use of such investigators. Use of in-house investigators has been started by some insurers with extremely good results, but some insurers avoid having in-house investigation teams deliberately for obvious reasons. The FBI investigates large sum assured fraud claims in USA. In India, we do not have any government agencies to investigate such fraudulent claims except for some claims from PSUs.
Health insurance is a booming but bleeding sector with very high claims ratio. So, to make health insurance viable, there is a need to focus on eliminating or reducing fraudulent claims.
It is a serious matter of concern that in India, Insurance frauds were not taken seriously till recently.
It is also a matter of concern that ‘insurance fraud’ is not defined under the Indian Insurance Act. Insurance Regulatory and Development Authority of India recently quoted the definition provided by the International Association of Insurance Supervisors (IAIS) defining fraud as “an act or omission intended to gain dishonest or unlawful advantage for a party committing the fraud or for other related parties.” Other instruments within the Indian legal system, such as the Indian Penal Code (IPC) or Indian Contract Act, also do not offer specific laws.
Sections of the IPC which deal with issues of fraudulent act, forgery, cheating etc. are sometimes applied but none of them are specifically targeted at insurance fraud and are inadequate for purpose of acting as an effective deterrent. In absence of specific laws and harsh punishments, prosecution will rarely be successful and if successful, the penalty inadequate to deter others. As social health insurance grows the central and state governments will become one of the largest victims of health insurance fraud and that may be the catalyst that leads to the development of a comprehensive legal framework to tackle health insurance fraud.
Abuse as differentiated from Frauds can be defined as practices that are inconsistent with business ethics or medical practices and result in an unnecessary cost to claims. The billing of services that may not be fraudulent, but may be of marginal utility, are inconsistent with acceptable business and/or medical practices, and are intended for the financial gain of a particular individual or corporate can be classified as abuse. Few examples of common health insurance abuse would be – excessive diagnostic tests, extended Length of Stay, conversion of day procedure to overnight admission, admission limited to diagnostic investigations etc.
Health Insurance Fraud has become a very lucrative White Collar Crime with very little or no punishment for the offender, due to leniency of many insurers who treat these frauds and abuse as cost of doing business and avoid taking strong actions against the perpetrators which encourages the fraudsters further, with slight change of modus operandi if the fraud is detected.
Health care crooks inside and outside the industry include patients, payers, employers, vendors and suppliers, and providers, including pharmacists.
Organized crime rings and computer hackers also play roles in committing health care fraud.
The main purpose of fraud is financial gain for the fraudster. However, it not only creates a hole in the insurance companies’ pocket, but affects all the stakeholders. It not only invites higher premiums, but also leads to restricted benefits, higher insurance co-payments, potential of denial for future coverage, higher service taxes and also impacts on the quality of care. Customers should therefore realize that ultimately, it is the customers who suffer if frauds are perpetrated by some of the customers and hence they should refrain from any malpractices and be a strong whistle blower in case they find that there is any element of fraud on part of the other stakeholders such as the service providers or the TPAs or any employee of the insurance company itself.
Some of the challenges faced by insurance companies are non availability of morbidity data, health industry data, frauds data, data analytics, standardized treatments, standardized treatment costs, limited use of ICD 10 codes by hospitals and TPAs, limitations in identity check, issuance of PAN Card on-line – without checks and balances, and operations of Organized Fraud Rings.
IRDA initiative of Fraud Reporting and Database of frauds will help a long way to curb insurance frauds in the future.
The insurance companies should investigate each suspected fraud in great details and only close the file when it is proved that there is fraud or there is no fraud, and the initiate strong action against the fraudster, be it internal or external.
To ensure that the employees do not indulge in any form of fraudulent activities, the Human Resources department of the insurer should ensure that there is a ‘Zero Tolerance Policy’ of the employer which is made clear to all the employees as soon as they are recruited by the organization and follow the ‘Zero Tolerance policy’, irrespective of the grade of the employee.
The hospitals and TPAs should also implement a robust whistle blower policy and the government should take strong actions to form a legislation equating insurance frauds in significance as any other financial frauds such as banking frauds and corruption.
The insurers should train the police and lawyers on the basics of insurance and its principles so that they can understand the significance of insurance frauds and how the frauds ultimately affect the society as a whole.
Currently, many insurance companies shy away from detailed investigations in suspected frauds for fear of exposing weaknesses in internal controls in business process system defects and employee integrity such as employees being involved in nexus with external parties committing frauds and weaknesses in systems and business processes. This needs to change and investigations need to be carried without any reservations or favoritism.
- Fraud in insurance on rise – Survey 2010–11– Ernst & Young
- FICCI Working Paper on Health Insurance Fraud
About the Author
Dr. B. S. Powdwal
MS (Surgery), MBA (Risk Management & Insurance) FIAGES (Fellow-Indian Association of Gastro-intestinal Endoscopic Surgeons), FLMI (Fellow – Life Office Management Institute (USA), Six Sigma Black Belt.
The author is a freelancing Fraud Investigator, Private Consultant & Advisor – Fraud Prevention & Loss Mitigation Services in the fields of Health and Life Insurance Industry with 30 years of experience in the field.
He is also a practicing surgeon in Mumbai.
He has been an investigators for the four Public Sector Health Insurance Companies since 1986 and has held several senior positions in Private sector companies such as Tata AIG Life Insurance Company and Bajaj Allianz Life and Bajaj Allianz General Insurance Companies, in various capacities as Head of Claims, Head of Underwriting, Head of Health Insurance business and In-house TPA in one of the leading private non-life company and Head of Fraud Prevention in a Life Insurance Company.
He has super-annuated from Bajaj Allianz Life Insurance Company as Vice President and Head of Fraud Prevention Department.
Dr. B. S. Powdwal is a visiting faculty at Symbiosis International University, National Insurance Academy and Insurance Institute of India and has also authored several course materials for various institutes and on ‘Medical Tourism – India & Global Perspective’.