Car insurance fraud statistics
- By the numbers: fraud statistics
- Fraud costs for insurers
- Insurer anti-fraud technology
- Public attitudes
- Public outreach
- Workers compensation
- Medical identity theft
- Cyber security
- THE TOPIC
- RECENT DEVELOPMENTS
- Key State Laws Against Insurance Fraud
- INSURANCE FRAUD
- Key State Laws Against Insurance Fraud
By the numbers: fraud statistics
Measuring insurance fraud is an elusive target. No single national agency gathers omnibus fraud statistics. Insurance fraud data thus are relatively piecemeal, making our understanding of insurance fraud an ongoing work in progress.
Insurance companies, associations and diverse state and federal agencies each gather fraud data related to their own missions. But the kind, quality and volume of data they compile vary widely.
Some data in this statistics section also includes non-fraud numbers as context for the larger dimensions of a listed issue.
|Fraud costs for insurers||Workers compensation|
|Contractors||Medical identity theft|
Insurer anti-fraud technology
- Conservatively, fraud steals $80 billion a year across all lines of insurance. (Coalition Against Insurance Fraud estimate).
- Fraud comprises about 10 percent of property-casualty insurance losses and loss adjustment expenses each year; and
- Property-casualty fraud thus equals about $32 billion each year. (Insurance Information Institute, March 2015)
- Want the big picture? See and share this infographic.
State anti-fraud efforts
- 48 states plus the District of Columbia make insurance fraud a specific crime;
- Virginia and Oregon are the lone states without an insurance-fraud law;
- 43 states and the District of Columbia require insurers to report suspected fraud to the state fraud unit or some other law enforcement or regulatory agency. (Coalition Against Insurance Fraud, October 2015)
- 41 states and the District of Columbia have a fraud bureau dealing with multiple lines of insurance, solely workers compensation or both;
- Nine states have enacted a law since 2013 making counterfeiting of airbags a specific crime; (Coalition Against Insurance Fraud, October 2015)
Schemes cross over
Fraud plots are getting more complex, and often involve multiple industries rather than solely insurance. An insurance investigation, for instance, might reveal evidence of financial fraud.
- 84 percent of insurance organizations say fraud cases they investigate involve more than one industry;
- 76 percent of cross-industry fraud cases have a moderate to high impact on insurance organizations;
- More than half say these cases (61 percent) have severe impact on responding insurance organizations;
- Fraud schemes of high concern: identity theft (49 percent), hacking (45 percent), employee-agent (37 percent) and claims (34 percent). (LexisNexis, June 2016)
Fraud costs for insurers
- Fraud accounts for 5-10 percent of claims costs for U.S. and Canadian insurers. Nearly one-third of insurers (32 percent) say fraud was as high as 20 percent of claims costs;
- 57 percent of insurers predict an increase in personal-property fraud by policyholders. Around 58 percent say the same for personal auto insurance, and 69 percent expect a rise in workers-compensation scams;
- 61 percent predict an increase in auto-insurance fraud by organized rings, and 55 percent predict an increase workers-compensation scamming;
- About 35 percent say fraud costs their companies 5-10 percent of claim volume. More than 30 percent say fraud losses cost 10-20 percent of claim volume;
- Detecting fraud before claims are paid, and upgrading analytics, were mentioned most often as the insurers’ main fraud-fighting priorities; and
- One-third of insurers don’t feel adequately protected against fraud. (FICO, August 2013)
Most contractors are ethical and honest. Yet unlicensed and dishonest operators try to exploit often-traumatized homeowners after storms.
Contractors may demand large cash down payments, then disappear without doing the needed work. Shoddy workmanship with substandard materials are other problems. Contractor schemes can cost homeowners thousands of dollars in uninsured bills.
- Poor workmanship (50 percent) and fraud (36 percent) are a homeowner’s biggest concerns about hiring contractors;
- Consumers are alert to these red flags of potential fraud: demands cash upfront (81 percent) ... hesitates to provide proof of insurance (79 percent) ... has no physical business location or permanent phone (73 percent) ... and doesn’t sign a contract (70 percent);
- More than half (56 percent) paid cash for their last home repair or improvement. (HomeAdvisor, July 2013)
Bodily injury claims
Staged-crash rings fleece auto insurers out of billions of dollars a year by billing for unneeded treatment of phantom injuries. Usually these are bogus soft-tissue injuries such as sore backs or whiplash, which are difficult to medically identify and dispute.
- Automobile claim fraud and buildup added $5.6 billion-$7.7 billion in excess payments to auto-injury claims paid in the U.S. in 2012;
- Excess payments represented 13-17 percent of total payments under the five main private-passenger auto injury coverages;
- 21 percent of bodily-injury (BI) claims and 18 percent of personal injury protection (PIP) claims closed with payment had the appearance of fraud and/or buildup. Buildup involves inflating otherwise legitimate claims;
- Buildup was the most common abuse. Claims with the appearance of buildup accounted for 15 percent of dollars paid for BI and PIP claims in 2012; and
- Claims appearing to have fraud and/or buildup were more likely than other claims to involve chiropractic treatment, physical therapy, alternative medicine and pain clinics.
(Insurance Research Council, February 2015)
Personal-lines auto insurers lose at least $29 billion a year in premium leakage. This involves missing or wrong information that drivers provide insurers, which inaccurately lowers auto premiums. These losses amount to 14 percent of all personal auto premiums. Among the sources of losses:
- $10 billion (unrecognized drivers);
- $5.4 billion (underestimated mileage);
- $3.4 billion (violations/accidents); and
- $2.9 billion (false garaging to lower premiums).
(Verisk Analytics, March 2017)
Medical expenses reported by auto-injury claimants continue increasing faster than inflation even though injury severity continues downward.
- Average claimed economic losses grew 8 percent annualized among personal-injury claimants from 2007 to 2012. That’s $14,207 per claimant in 2012, and includes expenses for medical care, lost wages and other out-of-pocket expenses.
- Average claimed losses among bodily-injury claimants grew 4 percent, reaching $10,541 in 2012. Measures such as claimants with no visible injuries at the accident scene suggest a continuing decline in severity of injuries. (Insurance Research Council, March 2014)
Premium rating errors
Dishonest drivers try to lower auto premiums by lying on their insurance application or renewal. Among the ruses: registering vehicles in states where premiums are lower; lowballing stated mileage; and saying a commercial vehicle is used mainly for personal use.
- Auto insurers lost $15.9 billion due to premium rating errors in private-passenger auto in 2009;
- Premium rating errors account for nearly 10 percent of the $161.7 billion in personal auto premiums written; and
- Misreporting vehicle garaging address and youthful drivers increased slightly, accounting for more than $2 billion in premium leakage. These most likely involved illicit efforts by policyholders to lower their auto premiums. (Quality Planning, now Verisk Insurance Solutions, November 2011)
- Insurers identified potential fraud in 7.4 percent of automobile claims within the first 125 days;
- The insurer couldn’t identify policyholders and/or place them at the stated garaging address in 21.5 percent of claims; and
- Fraudsters are beginning to use a “credit card” model to secure larger settlements. They file small initial claims to test the carrier and then lodge large multi-feature claims. (Inovatus, February 2013)
- Claimed losses for medical expenses, lost wages and other expenses related to injuries from auto crashes in the New York City area have risen 70 percent over the past decade. This surpasses the 49-percent increase in medical-care inflation over the same period;
- Nearly one in four claims (23 percent) involved the appearance of claim abuse — fraud, material misrepresenting of facts, or buildup;
- Claims from the New York City metro area were more than four times as likely to involve apparent abuse (35 percent v. 8 percent for the rest of the state); and
- More than half of apparently abusive claims (52 percent) stemmed from accidents in Brooklyn or Queens. (Insurance Research Council, November 2011)
- No-fault auto-insurance reforms (HB 119) enacted in 2012 helped reduce fraud and lower PIP premiums 13.6 percent; (Florida Office of Insurance Regulation, January 2015)
- No-fault fraud and abuse cost consumers and insurers about $658 million in 2011 in Florida alone; and
- The average two-car family in Florida pays nearly $100 more in auto premiums thanks to no-fault scams. (Insurance Information Institute, January 2011)
- Massachusetts launched task forces in 13 communities against widespread staged-crash rings amid public outcry after 65-year-old grandmother Altagracia Arias died in a setup crash in 2003.
- Drivers in the 13 communities have saved $875 in auto premiums per year;
- Drivers in Lawrence — the “worst hotbed of fraudulent claims” — have saved more than $68 million;
- Larger chiropractors in Lawrence have decreased in both clinic counts and billings by up to 90 percent. High-volume physical therapy clinics (billings exceeding $100,000 annually) have been eliminated, and attorney involvement in PIP claims has dropped; and
- Staged accidents in Massachusetts have been reduced dramatically as people around the state, who used to be involved in fraudulent activities, have taken notice of the crackdown and altered their activities. (Insurance Fraud Bureau of Massachusetts, April 2013)
- The state fraud bureau received 17,981 suspected fraudulent claims in FY 2012-13, assigned 721 new cases, made 401 arrests, and referred 304 submissions to prosecuting authorities. The potential loss amounted to $120.1 million;
- The fraud bureau assigned 231 new cases and made 222 arrests and 172 referrals to prosecuting authorities involving organized automobile activity in major urban areas. Potential loss amounted to $5.1 million; and
- District attorneys receiving grants in 10 counties prosecuted 204 cases involving organized automobile fraud activity. They included 448 defendants with chargeable fraud totaling $8.3 million. District attorney prosecution resulted in 180 convictions. (California Department of Insurance, August 2014)
Insurer anti-fraud technology
Insurance fraud is rising, and mounting pressure from schemes has ignited a surge of insurer anti-fraud tech deployment:
- More than 60 percent of insurers say fraud has climbed over the last three years;
- Nearly 75 percent of insurers use automated systems to detect false claims — a large increase over the 2014 and 2012 studies;
- Automobile premium evaders are growing targets of anti-fraud efforts.
- Insurer use of rate-evasion tech has jumped 40 percent since 2012;
- Use of predictive modeling and link analysis increased 21 percent in two years.
(Coalition Against Insurance Fraud, November 2016)
Data for insurance arsons are elusive. However, broader national arson figures provide some context for examining the trend of illegally burning homes and businesses for insurance payouts. In general, for example, fires and arsons have declined in recent years. The reasons are unclear.
- Declines in local house prices were associated with significant increases in a) total fires regardless of cause, and b) probability of fires due to misuse of material or product as determined by fire investigators;
- The results imply a 10-to-15 percent decrease in local house prices was associated with 3.8 more fires per 1 million MSA residents per month, and 2.2-percent increase in probability that a fire was due to arson or misuse; and
- A 10-to-15 percent decrease in local house prices coincided with an 85.5-percent increase in reported property damage due to fire, or up to $2.9 million per 1 million MSA residents each month.
(Michael D. Eriksen and James M. Carson, June 2014)
More insights on home arson trends.
- Insurance fraud was suspected in 8 percent of intentional fires;
- 5 percent of fraud cases were closed; and
- 1 percent of fraud cases were closed with arrest. (National Fire Protection Association, April 2014)
- 282,600 arsons were reported each year from 2007 to 2011. They caused $1.3 billion in direct property damages;
- Structure fires represent 86 percent of direct property damage caused by intentional fires;
- The bedroom was most common area of origin for intentional home fires (12 percent);
- The most common items first ignited for intentional fires were flammable or combustible liquids or gases, piping or filter (29 percent) and vehicle seats (28 percent); and
- The most common heat sources were matches (24 percent of fires), lighters (16 percent) and incendiary devices (13 percent). (National Fire Protection Association, April 2014)
- Arsons fell 5.4 percent in the first six months of 2015 compared 2014;
- Three of the nation’s four regions reported decreases in the number of arsons; and
- Arsons were down 14.6 percent in the Northeast, 7.1 percent in the South, and 4.4 percent in the West. Arsons in the Midwest, however, rose 0.5 percent. (FBI, January 2016)
- 19 percent of arson offenses were cleared by arrest or exceptional means in 2010. (Federal Bureau of Investigation, September 2011)
- An estimated 372,900 fires in residential buildings caused an annual average of 2,530 deaths, 13,125 injuries and $7 billion in property loss from 2011 to 2013;
- Cooking was the leading reported cause (48 percent) of residential building fires. Nearly all residential building cooking fires were small, confined fires (91 percent);
- Residential building fires occurred most frequently in the early evening hours. They peaked during the dinner hours of 5-8 p.m.;
- One- and two-family residential building fires comprised 65 percent of all residential building fires. They’re the largest subgroup of residential building fires; and
- Multifamily residential building fires comprised 28 percent of residential building fires.
(U.S. Fire Administration, June 2015)
Non-residential fires and arsons have steadily declined over the decade from 2004 through 2013.
- 9,100 intentional fires were set in 2013, second only to cooking as a cause (27,400). Intentional fires caused $190.3 million in losses;
- Fires of all kinds declined 14 percent;
- Intentional fires fell 24 percent; and
- Dollar losses from intentionally set fires fell 33 percent.
(U.S. Fire Administration, July 2015)
- 219,000 vehicle fires were reported in 2013, and 5.8 percent were intentional.
(U.S. Fire Administration)
- The most common items first ignited were flammable or combustible liquids or gases, piping or filters (29 percent) and vehicle seats (28 percent); and
- The most common heat sources were matches (24 percent of fires), lighters (16 percent) and incendiary devices (13 percent). (National Fire Protection Association, April 2014)
- Declines in local house prices coincided with increases in arson, the number of fires, and the probability that fires were due to arson and misuse; and
- The relation between declines in house prices and arson is stronger in states that allow mortgage lender recourse.
(Michael D. Eriksen, Texas Tech University & James M. Carson, University of Georgia, January 2015)
Tens of thousands of arsons may go unreported annually. Many likely are insurance arsons. Some unreported insurance fires also may have killed or injured the arsonists, innocent bystanders or fire fighters.
- Chicago reported 61 building arsons though it experienced at least 192;
- Houston reported 25 intentional fires while having 224;
- Indianapolis reported no arsons despite experiencing at least 216;
- New York reported 11 arsons instead of 1,347 it really had;
- Up to half of the 3,000 fire deaths each year should be treated as homicides; and
- Much of the $15.5 billion paid last year by insurers (and clients) should be contested because arson often involves fraud. (Scripps News, November 2013)
A relatively large number of consumers remain at risk of committing this crime. They believe it’s acceptable to increase insurance claims to make up for deductibles. Even so, those numbers have declined in recent years.
- 24 percent say it’s acceptable to pad an insurance claim to make up for the deductible — 33 percent said it’s acceptable in 2002;
- 18 percent believe it’s acceptable to pad a claim to make up for premiums paid in the past;
- Younger males were much more likely to condone claim padding. And 23 percent of 18-34 year-old males say it’s alright to increase claims to make up for earlier premiums. This compares with 5 percent of older males and 8 percent of females of the same age;
- 86 percent of Americans think “insurance fraud leads to higher rates for everyone;” and
- 10 percent think “insurance fraud doesn’t hurt anyone.” (Insurance Research Council, March 2013)
- More than half (55 percent) of U.S. consumers say poor service from an insurance company is more likely to cause a person to defraud that insurer;
- More than three-quarters (76 percent) say they’re more likely commit insurance fraud during an economic downturn than during normal times (up from 66 percent in 2003);
- More than two-thirds of consumers (68 percent) say they believe insurance fraud happens because people believe they can get away with it (up from 49 percent in 2003);
- Some 72 percent of consumers believe insurance companies can identify fraud (down from 83 percent in 2003). (Accenture Ltd., September 2010)
Young adults (18-24) are:
- More than three times more likely to inflate an insurance claim than adults over age 40 (7 percent vs. 2 percent); and
- More than twice as likely to lie to their spouse, boyfriend, girlfriend or partner about something significant (48 percent v. 18 percent).
Regardless of age, people who believe lying and cheating are a necessary part of success are more likely to lie and cheat. This belief is one of the most significant and reliable predictors of dishonest behavior in the adult world. Cynics are:
- Three times more likely to inflate an insurance claim (6 percent vs. 2 percent) or lie to a customer (22 percent vs. 7 percent); and
- One-and-a half-times more likely to cheat on their taxes (20 percent vs. 13 percent).
Regardless of age, consumers who cheated on exams in high school twice or more are far more likely to be dishonest later in life. Compared to consumers who didn’t cheat, high-school cheaters are:
- Three times more likely to inflate an insurance claim (6 percent vs. 2 percent) and lie to a customer (20 percent vs. 6 percent); and
- Twice as likely to lie to or deceive their boss (20 percent vs. 10 percent).
(Josephson Institute, October 2009)
Public-outreach can measurably increase people’s intolerance of insurance fraud, and decrease their likelihood of committing this crime. This was proven by a five-year public-outreach campaign by a state anti-fraud agency in Pennsylvania.
The social-market campaign centered around eight statewide TV and radio consumer spots working to encourage consumer attitude and behavior changes.
By 2013 the campaign recorded increases in consumers who:
- Believed they would be caught if they committed insurance fraud (8 percent);
- Knew the definition of insurance fraud (23 percent);
- Believed perpetrators deserve jail time (8 percent); and
- Would report scams (32 percent).
- The number of people who would consider committing fraud decreased (73 percent);
- The campaign cost slightly more than $18 per person to convince likely fraudsters to avoid committing this crime. Compare that with the IFPA’s average cost of $21,000 to $25,000 to investigate, prosecute and convict each insurance-fraud offender; and
- Nearly all attitude gains had regressed by 2015 after IFPA deployed campaign resources to other projects. Website visitors also declined by nearly half. (Pennsylvania Insurance Fraud Prevention Authority, 2015)
- More than one in 10 small-business owners are concerned an employee will fake an injury or illness to steal workers-compensation benefits;
- Nearly one in four owners also installed surveillance cameras to monitor employees on the job;
- One in five owners feel unsure how to identify workers-compensation scams; and
- More than half agree these are fraud flags: Employee has a history of claims (58 percent); no witnesses to the incident (52 percent); employee didn’t report the injury or illness in a timely manner (52 percent); and the injury coincides with a change in employment status (51 percent).
(Employers Holdings, July 2015)
Some businesses illegally try to avoid paying full state-required workers compensation premiums by misclassifying employees as independent contractors. Such schemes are spreading.
The number of employees and size of payroll are two important factors that workers-compensation insurers use to gauge a firm’s premiums. Typically such workers are paid off the books to hide the evidence.
Another scheme involves misclassifying employees in high-risk jobs as holding lower-risk jobs. A dishonest roofing firm, for example, might tell its insurer that its high-risk roofers are lower-risk sales staff or clerks.
Workers also are denied state-required workers compensation benefits.
And misclassification avoids taxes, wages and other expenses. Overall, this crime gives employers an unfair advantage over competitors.
The Obama Administration expanded the definition of “employee” under the Fair Labor Standards Act in July 2015 to crack down on employers that misclassify workers as independent contractors.
10-20 percent of businesses misclassify at least one worker as an independent contractor.
(Economic Policy Institute, June 2015)
25 states have signed Memorandums of Understanding with the U.S. Department of Labor to combat misclassification. (U.S. Department of Labor, August 2015)
Medical identity theft
Identity theft has spawned a costly offshoot: medical identity theft. Thieves steal a consumer’s personal information to lodge fraudulent claims against the victim’s health policy. This crime appears to be on the rise.
Medical thieves can heist your health-insurance number, Social Security number and other personal information. Often the information is stolen by employees at medical facilities, and resold on the black market. Thieves also may hack into medical databases or break into medical facilities.
Medical ID theft can cost a victim thousands of dollars and great stress. A victim’s life and health could be jeopardized if an ID thief’s incompatible medical information such as blood type or medicines becomes part of the victim’s permanent medical records.
- Incidents increased 21.7 percent in 2014;
- 2.3 million Americans were victimized in 2014;
- 65 percent of victims paid an average of $13,500 to resolve the crime;
- Victims learned their medical identity was stolen an average of three months after the incident; and
- Victims spent an average of 200 hours correcting their compromised data.
(Ponemon Institute, February 2015. Sponsored by the Medical Identity Fraud Alliance).
Few consumers know what medical identity theft is or how much this crime can damage their credit and health.
- Only one in six insured adults (15 percent) say they’re familiar with medical identity theft. Of those, only one in three (38 percent) could correctly define “medical identity;”
- About one in five (22 percent) believe the most likely impact is that their health insurance could be cancelled. In truth, their health can be compromised by hazardous changes to their medical records; and
- Nearly one in five consumers (19 percent) mistakenly believe it takes less than two weeks to restore their stolen medical identity. More than half underestimate or don’t how much it would cost.
(Nationwide Insurance, June 2012)
Cyber attacks are causing an epidemic of compromises at healthcare organizations around the U.S. The breach goals remain unclear, though stealing sensitive patient data could involve medical identity theft.
Many believe the healthcare sector is ill-prepared to deal with growing incidents of attacks. The healthcare sector also lags behind financial services, which has spent considerable time and resources hardening its infrastructure.
Healthcare breaches remain a major problem affecting millions of Americans annually.
- There were more than one health data breaches a day in 2016 — 450 total;
- More than 27 million patients were affected;
- Insiders caused 43 percent of breaches; and
- Hacking and ransomware caused nearly 27 percent of breaches.
(Protenus, Inc., January 2017)
- Nearly 70 percent of healthcare organizations think they’re more-vulnerable to data breaches than other industries;
- Data breaches cost healthcare organizations an average of $2.2 million;
- Half of healthcare organizations have little or no confidence they can detect all patient data loss or theft;
- Most healthcare organizations still don’t have enough security budget to curtail or minimize data breach incidents; and
- Criminal attacks are the leading cause of data breaches in healthcare. Half of healthcare organizations say the breach was criminal. (Ponemon Institute, May 2016)
Healthcare organizations ranked the lowest in cyber security of patient information among seven industries surveyed globally. This includes security in cloud environments, data centers, desktops, laptops, mobile devices and other factors. Most received a security grade of “F.”
(Tenable Network Security, February 2017)
Consumers are deeply concerned about the cyber safety of their personal information in the hands of medical providers.
- 70 percent of Americans distrust health technology, sharply climbing from only 10 percent in 2014;
- 89 percent of consumers with 2016 provider visits withheld health information during visits;
- 93 percent expressed concern over the security of their personal financial information. High-deductible Obamacare plans and co-pays involve more banking and credit card data passing from providers; and
- 69 percent of patients say their primary-care physician doesn’t have enough technology prowess for them to trust divulging their personal information.
(Black Book, January 2017)
Breaches of health insurers are rapidly increasing.
- Reported hacking and information technology breaches affecting healthcare records of 500 or more persons rose from 0 in 2010 to 31 in 2014, to 56 in 2015; and
- Healthcare records compromised for all reported breaches affecting 500 persons or more rose from 134,773 in 2009 to 12.5 million in 2014, to 113 million in 2015.
(U.S. Government Accountability Office, August 2016)
- Mobile medical and health apps are big security risks as cyber attacks continue surfacing.
- 38 percent of healthcare professionals say medical devices are at high risk.
- 56 percent say fishing, spearfishing and whaling are the leading type of attack;
- 39 percent cite insider threats;
- 16 percent of impactful breaches come from third-party partners; (SANS Institute, July 2016)
- More than four of five healthcare executives say their organizations were compromised by at least on malware, botnet or other cyberattack during the last two years;
- Only half believe they are adequately prepared to prevent attacks;
- 16 percent say they cannot detect in real-time if their systems are compromised; and
- Attacks are increasing. About 13 percent say they external hack attacks target them about once a day, and another 12 percent see two or more attacks a week. (KPMG, August 2015)
- Breaches of healthcare/medical facilities involving 176 million records were recorded for 2015 as of August 18, 2015; and
- They comprised nearly 35 percent of all 505 breaches —by far the largest portion of reported breaches.
(Identity Theft Resource Center, August 2015)
- 333 health/medical facilities were breached in 2014, including 8.7 million health records. Both totals were by far the largest among 783 breaches spanning several broad categories; and
- 42.5 percent of breaches in 2014 involved healthcare/medical facilities.
(Identity Theft Resource Center, December 2014)
- More than 40 million Americans suffered a breach of their health records from 2009 through 2014;
- There’ve been 1,170 large breaches of protected health information since 2009;
- 164 breaches of personal health information were reported to HHS in 2014 alone. The breaches affected nearly 9 million patient records. This was a 25-percent increase over 2013; and
- Criminal attacks are the leading cause of healthcare data breaches in healthcare. ... Criminal attacks on healthcare organizations are up 125 percent over the last five years. ... And 45 percent of healthcare organizations say criminal attacks are the root cause of data breaches;
- Half of healthcare organizations have little or no confidence in their ability to detect all patient data loss or theft; and
- More than 90 percent have had a data breach. ... 40 percent had more than five data breaches over the past two years. ... Healthcare data breaches cost more than $2.1 million apiece. (ID Experts, May 2015)
- More than 50 percent of the 2014 totals stemmed from hacking attacks. (Redspin, February 2015)
- Healthcare organizations recorded an average cost of $398 per breached record, compared to the overall mean of $217 per record for organizations across varied industries;
- Healthcare organizations experienced abnormally high churn rates (loss of customers); and
- 40 percent of incidents involved malicious or criminal attacks, which remain the primary and costliest cause of data breaches. Industries with the highest churn rates could significantly reduce breach costs by emphasizing customer retention, and preserving reputation and brand value.
(Ponemon Institute and IBM, May 2015)
Biometrics is a way of electronically confirming people’s identity by authenticating their unique physical traits such as iris, voice, face, veins, fingerprints and palm prints.
The worldwide market for healthcare biometrics is largely driven by growing concerns of security that have gripped the global healthcare industry. Preventing medical identity theft is a major concern.
- The global biometrics market will grow to U.S. $5.8 billion in 2019, up from $.2 billion in 2012;
- This means 25.9 percent from 2013 to 2019; and
- North America is the leading healthcare biometrics market.
(Transparency Market Research, February 2015)
The federal False Claims Act lets whistleblowers earn a portion of federal civil recoveries stemming from their exposing fraud against healthcare or other federal programs. The FCA also can lead to criminal charges. Whistleblowers tend to be insiders at the offending healthcare organizations, and thus have unique access to evidence.
- The federal government spent $574.6 million to recover $9.38 billion in federal civil healthcare fraud related settlements and judgments between 2008 and 2012. That’s a 16:1 ROI;
- The federal government collected more than $4.5 billion in federal criminal recoveries in False Claims Act cases. States collected $4.07 billion in civil recoveries. Overall, that’s a 20:1 ROI; and
- More than half of states such as New York, California and Virginia also have enacted state false claims acts. (Taxpayers Against Fraud Education Fund, October 2013)
- The federal government obtained more than $4.7 billion in whistleblower civil settlements and judgements involving fraud and false claims in FY 2016 (ending Sept. 30, 2016).
- This is the third-highest annual recovery in False Claims Act history. Recoveries have averaged nearly $4 billion since FY 2009, with $31.3 billion recovered during that period.
- Of the $4.7 billion recovered, $2.5 billion came from the healthcare industry. This includes drug companies, medical-device companies, hospitals, nursing homes, laboratories and physicians. (U.S. Department of Justice, December 2015)
- Healthcare whistleblower recoveries for Medicare and Medicaid reached $2.3 billion in FY 2014; and
- The Justice Department has recovered more than $15.2 billion in healthcare whistleblower cases since January 2009.
(U.S. Department of Health and Human Services, March 2015)
Scams against government and private healthcare insurers form by far the largest type of insurance fraud. The exact size of annual theft is unknown, and is the subject of considerable debate. Healthcare fraud likely steals tens of billions of dollars a year.
- 478 healthcare fraudsters were federally sentenced in FY 2015. That’s a nearly 14-percent decrease from FY 2013 to 2015;
- The median loss was $814,854, compared to about $500,000 in FY 2013;
- The average sentence was 31 months in federal prison — a decrease from 34 months in FY 2013; and
- Sentences were increased for bilking a federal healthcare program out of of more than $1 million (27.1 percent).
(U.S. Sentencing Commission, February 2017)
- The federal government earned more than $2.5 billion in healthcare fraud judgements plus additional administrative impositions in FY 2016;
- More than $3.3 billion was returned to the federal government or paid to private citizens. This includes funds from judgements in prior fiscal years;
- $17.9 billion was returned to Medicare from FY 2009 through 2016;
- Federal prosecutors filed criminal charges involving 802 healthcare-fraud defendants; and
- The FBI disrupted 555 criminal fraud organizations and dismantled the criminal hierarchy of more than 128 healthcare fraud enterprises.
(HHS & DOJ annual report, January 2017)
- Medicaid expects to recover nearly $1.9 billion lost to fraud, abuse and neglect in FY 2016; and
- Medicaid cases resulted in 18,730 investigations that led to 1,721 indictments or charges, 1,564 convictions and 998 settlements or judgments.
Click here for data by state.
(Office of Inspector General, March 2017)
- Healthcare expenditures in the U.S. are projected to reach $3.2 trillion in 2015 — or about $10,000 per person.
(Centers for Medicare & Medicaid Services, 2015) (See second table, NHE Projections 2014-2024)
- Medicare spending is projected to reach $616.8 billion in FY 2014. (Centers for Medicare & Medicaid Services, 2015)
- Financial losses from healthcare fraud are amount to tens of billions of dollars annually.
(National Health Care Anti-Fraud Association, 2015)
- Global healthcare fraud and error losses have risen 25 percent to 6.9 percent total since 2008;
- This means $487 billion lost in a year — one-fifth of total U.S. healthcare expenditures for 2011; and
- Reductions in fraud and error losses of up to 40 percent are possible within one year — freeing up to $195 billion globally. (BDO International, March 2014)
Medicare & Medicaid
Medicare is designated as a high-risk program because of its size, complexity and vulnerability to improper payments.
- The Health Care Fraud and Abuse Control program has returned more than $29.4 billion to the Medicare Trust Funds since 1997. That’s $6.10 returned for each $1 invested in the last FY.
- More than $2.77 billion of Medicare and Medicaid recoveries are expected from audits and investigations during the first half of FY 2016 (October-March);
- 428 criminal actions and 383 civil actions were reported during this period;
- 1,662 individuals and entities were excluded from Medicare and Medicaid. Most stemmed from criminal convictions, patient abuse or neglect, or revoked licenses;
- Strike Force efforts resulted in charges against 87 individuals or entities, 100 criminal actions and $116.8 million of investigative receivables;
- 75,050 OIG fraud hotline contacts were reported; and
- Civil recoveries have increased nearly five-fold over the last three years.
Medicare strike force
Defendants collectively have billed Medicare more than $7 billion since Medicare Strike Force operations began in 2007. During this time, the Strike force has:
- The Medicare Fraud Strike Force has charged more than 2,536 suspects involved in more than $8 billion in fraud since 1997. Many charges stemmed from coordinated, multi-district national takedowns.
- The Strike Force’s largest-ever takedown resulted in charges against a record 243 suspects for $712 million in false Medicare and Medicaid billing.
- The Medicare Fraud Strike Force has a 95-percent conviction rate and jail terms average four years; and (Centers for Medicare & Medicaid Services, February 2016)
Recoveries & improper payments
- The Department of Justice obtained more than $1.9 billion in settlements and judgments from civil healthcare fraud cases in FY 2015. DOJ has recovered more than $17.1 billion since January 2009. (Centers for Medicare & Medicaid Services, February 2016)
- CMS has deactivated more than 500,000 medical providers — billing privileges were stopped for these providers.
- CMS has barred more than 34,000 providers from re-entering the Medicare program for one to three years.
- Stronger screening and enrollment have saved Medicare more than $2.4 billion since 2010.
(Centers for Medicare & Medicaid Services, February 2016)
- Medicaid reports 1,553 criminal convictions in FY 2015. Seventy-one percent involved fraud, and 29 percent involve abuse or neglect. There were $744 million in civil and criminal recoveries.
- Personal-care attendants or other home-care aides accounted for 31 percent of reported convictions. This reflects an ongoing trend of extensive fraud in home healthcare.
- Medicaid convictions have increased over the last five years, from 1,235 in FY 2011 to 1,553 in FY 2015. (HHS Office of Inspector General, September 2016)
The federal health reform marketplace is vulnerable to fraud. CMS is at risk of granting eligibility to, and making subsidy payments for, ineligible healthcare enrollees.
- About 431,000 applications from the 2014 enrollment period, with about $1.7 billion in subsidies, had unresolved inconsistencies as of April 2015 — several months the coverage year closed;
- CMS didn’t resolve SSN inconsistencies for about 35,000 applications or incarceration inconsistencies for about 22,000 applications; and
- In undercover testing, the federal marketplace approved subsidized coverage for 11 of 12 fake GAO phone or online applicants for 2014. The GAO sent false or no documents to resolve application inconsistencies. (Government Accounting Office, February 2016)
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Insurance industry estimates generally put fraud at about 10 percent of the property/casualty insurance industry’s incurred losses and loss adjustment expenses each year, although the figure can fluctuate based on line of business, economic conditions and other factors.. Using this measure, over the five-year period from 2011 to 2015, property/casualty fraud amounted to about $34 billion each year. Also, the Federal Bureau of Investigation said that healthcare fraud, both private and public, is an estimated 3 to 10 percent of total healthcare expenditures. Based on U.S. Department of Health and Human Services’ Centers for Medicare and Medicaid Services’ data for 2010, healthcare fraud amounted to between $77 billion and $259 billion.
Fraud may be committed by different parties involved in insurance transactions: applicants for insurance, policyholders, third-party claimants and professionals who provide services and equipment to claimants. Common frauds include "padding," or inflating actual claims; misrepresenting facts on an insurance application; submitting claims for injuries or damage that never occurred, services never rendered or equipment never delivered; and "staging" accidents.
Forty-two states and the District of Columbia have set up fraud bureaus (some bureaus have limited powers, and some states have more than one bureau to address fraud in different lines of insurance). These agencies have reported increases in referrals (tips about suspected fraud), cases opened, convictions and court-ordered restitution.
Healthcare, workers compensation and auto insurance are believed to be the lines most vulnerable to insurance fraud. But the nature of fraud is constantly evolving. Shortly after the enactment of the 2010 healthcare reform law, the Health and Human Services secretary issued warnings about a proliferation of phony health insurance policies.
Auto theft, a related issue, is discussed in Insurance Issues Updates, Auto Theft. Estimate based on research conducted by the Battelle Seattle Research Center for the Insurance Information Institute in 1992 (Fighting the Hidden Crime: A National Agenda to Combat Insurance Fraud. Insurance Information Institute, March 1992) and other industry reports (including Insurance Fraud, Renewing the Crusade, Conning, 2001).
 Federal Bureau of Investigation, Financial Crimes Report to the Public, Fiscal Year 2007.
- The Coalition Against Insurance Fraud’s State of Insurance Fraud Technology report, issued in September 2014, found that about half (51 percent) of the 42 insurers who participated in the survey said that suspected fraud has increased to some degree. Seven percent said it increased significantly. The study was conducted in June and July 2014.
- Ninety-five percent of the respondents said they use antifraud technology, up from 88 percent in 2012. Seventy-one percent of respondents said that detecting claims fraud is the primary use of their antifraud technology.
- About half of the insurers (53 percent) cited lack of IT resources as the stumbling block in implementing antifraud technology.
- The Coalition’s report also discussed emerging fraud trends, identifying those that involve bodily injuries and suspicious activities by medical providers—especially in the workers compensation and auto lines of insurance—as becoming more prevalent.
- Insurers are also faced with cyber fraud as they collect a large amount of personal information, and the number of companies reporting attacks increased significantly since 2012.
- Attitudes Toward Fraud: Fewer people now believe it is acceptable to increase an insurance claim to make up for the deductibles they have to pay, according to the Insurance Research Council (IRC). Its online poll released in February 2013 found that 24 percent of the public thought it acceptable to pad an insurance claim to make up for the deductible, lower than the 33 percent who thought it acceptable in a 2002 telephone survey. The study also found that 18 percent of respondents believe it is acceptable to pad a claim to make up for premiums paid in the past, the lowest percentage since the same question was first asked in a 1981 survey.
- The IRC said that younger, male respondents were much more likely to condone claim padding. Twenty-three percent of 18 to 34 year-old males agreed that it is all right to increase claim amounts to make up for earlier premiums, compared with 5 percent of older males and 8 percent of females of the same age.
- The IRC study, Insurance Fraud, A Public View, 2013 Edition, also found that 86 percent of Americans think that “insurance fraud leads to higher rates for everyone” and 10 percent think that “insurance fraud doesn’t hurt anyone.”
- Almost half (45 percent) of 143 U.S. insurers surveyed by the Property Casualty Insurers Association of America and FICO (a predictive analytics provider) said that fraud accounts for 5 to 10 percent of their claims costs. However, almost one-third of respondent insurance companies (32 percent) in the August 2012 survey said that fraud was as high as 20 percent.
- Results of a survey released in September 2013 by FICO showed that one in three insurers does not feel adequately protected against fraud. The survey found that insurers feel most vulnerable in the areas of premium leakage and new applications, when policyholders often underestimate or leave out such information as annual auto mileage that would have an adverse effect on the cost of the policy.
- 35 percent of insurers estimated that insurance fraud costs represent 5-10 percent of their total claims, while 31 percent said the cost is as high as 20 percent. More than half (57 percent) of insurers expect to see an increase in fraud losses this year on personal insurance lines (mainly auto and home insurance), while only 5 percent of insurers expect to see a decline in dollar fraud losses on personal lines.
- Respondents said they expect the biggest fraud loss increases to hit personal property, workers’ compensation and auto insurance. 58 percent of insurers forecast an increase in personal property fraud, 69 percent forecast an increase in workers’ compensation fraud, and 56 percent forecast a rise in personal auto fraud.
No-Fault Insurance Fraud
No-fault auto insurance is a system that allows policyholders to recover financial losses from their own insurance company, regardless of who was at fault in the accident. However in many no-fault states, unscrupulous medical providers, attorneys and others perpetrate fraud by padding costs associated with a legitimate claim, for example by billing an insurer for a medical procedure that was not performed.
- Florida: A no-fault auto insurance reform bill that went into effect in 2012 (HB 119) has helped reduce fraud and resulted in rate reductions. In January 2015 the Florida Office of Insurance Regulation released an analysis of personal injury protection (PIP) rates covering 81 percent of Florida’s personal auto market among the top 25 insurers. PIP coverage rate changes that were approved by the Office of Insurance Regulation resulted in an average 13.6 percent decrease statewide in Florida between January 1, 2011 and January 1, 2015. The office noted that some benefits previously covered under PIP moved to other coverages such as bodily injury and uninsured motorist. Data showed that both of these coverages experienced increases in frequency and severity, and that these trends are expected to continue over the next year. According to the report, there was limited data available to determine the true impact of HB 119, but the data collected show a major impact on the personal auto market.
- HB 119 requires people injured in an auto accident to visit an emergency room or physician, chiropractor or dentist within 14 days in order to use PIP coverage. It also bans treatment for acupuncture or massage therapy and imposed a requirement that all entities seeking reimbursement under the no-fault law obtain licenses (except hospitals, entities owned by a hospital, doctor or other licensed healthcare professional). Penalties for doctors who commit fraud were strengthened to make convicted healthcare practitioners lose their licenses for five years and prohibit their receiving PIP reimbursement for 10 years. Insurers were allowed to extend the time spent on investigating fraud from 60 days to 90 days. Other provisions create standards for awarding attorney fees that are in line with prevailing professional standards.
- New York: In his 2014-15 Executive Budget (see page 28), Governor Andrew Cuomo said he would expand the ability of the New York Department of Financial Services (DFS) to audit healthcare providers participating in the no-fault auto insurance system in order to prevent fraudulent providers from receiving payment and fining providers who engage in illegal activities. The department will be authorized to make unannounced inspections.
- The Cuomo Administration had already taken several steps to curb fraud. In February 2013 the DFS adopted three amendments to Regulation 68, the law that implements the state’s no-fault law claim settlement procedures. The first amendment prevents billing for services that were not provided or billing more for services than the established fee. The second amendment sets a deadline for healthcare providers to respond to requests for verification that the treatment provided was medically necessary. The third amendment prevents immaterial paperwork errors from invalidating a denial of a claim or a request for verification. This last amendment should substantially reduce litigation and arbitration dealing with claim processing errors and speed up the resolution of no-fault claims, the department says.
- A January 2011 study on New York’s no-fault system by the Insurance Research Council (IRC, www.insurance-research.org ) showed how prevalent fraud is in the New York City area. About one in every five no-fault claims closed appeared to have some element of fraud and as many as one in three appeared to be inflated (built up). Over the period 2007 to 2010, the percentage of no-fault claims that were fraudulent or were inflated by excessive billing by unscrupulous medical care providers or by unnecessary medical services rose from 29 percent to 35 percent. In the fall of 2010 alone, fraud was found in 22 percent of all New York City metropolitan area no-fault auto insurance claims and buildup in another 14 percent. By comparison, outside the city fraud was found in only 4 percent of no-fault claims settled and build-up in another 4 percent.
- Additional findings released in November 2011 from the IRC’s closed claim study show that claimed losses for medical expenses, lost wages and other expenses from auto accidents in New York City rose 70 percent in the 10 years ending in 2010, well over the 49 percent increase in medical care inflation over the same period. The average claimed loss per PIP claimant in New York City was $15,086, more than double the $6,870 for claimants in the rest of the state. Claimants in New York City were much more likely to visit chiropractors, physical therapists and acupuncturists; to receive expensive diagnostic procedures and to be treated in pain clinics; and to hire attorneys.
- State and federal authorities have reported increases in fraud, such as identity theft, fraudulent billing and deceptive sales practices, after the Affordable Care Act was passed in 2010.
- The most prevalent complaints involve older Americans. Under the law, people age 65 and over, who are on Medicare, do not need to buy supplemental coverage. Nonetheless, some marketers are pushing expensive add-on policies by falsely claiming that such coverage is required, state authorities say. Others are telling people that the law means they need new Medicare cards—not true. And still others are charging fees as high as $100 to “help” people navigate the new insurance landscape.
- Federal filings for healthcare fraud cases grew 3 percent in the fiscal year ending October 2013 and almost 8 percent from five years ago, according to Department of Justice statistics obtained from the Transactional Records Access Clearinghouse, a nonprofit group that tracks federal spending.
Key State Laws Against Insurance Fraud
(As of August 2016)
(1) Workers compensation insurance only.
(2) Healthcare insurance only.
(3) Arson only.
(4) Fraud bureau set up in the state Attorney General's office.
(5) In the District of Columbia fraud is investigated by the Enforcement and Consumer Protection Bureau in the Department of Insurance, Securities and Banking which investigates fraud in all three financial sectors.
(6) Auto insurance only.
(7) Fraud bureau set up in the state police office.
Source: Property Casualty Insurers Association of America; Coalition Against Insurance Fraud.
Chart Notes: This chart defines laws that can effectively deter fraud. Also see Background: State Legislation. 1. Insurance Fraud Defined: Insurance fraud is specifically declared unlawful in the state's laws. A fraudulent act is committed if information in insurance applications is falsified in an attempt to obtain lower premium rates or to inflate the amount of loss in a claim. Defining the crime specifically helps educate law enforcers about insurance fraud and provides prosecutors with clear-cut cases. Raising the level of the crime from a misdemeanor to a felony not only increases the penalties but also acts as a deterrent to future crimes. Includes claims, underwriting and insurer fraud. (All jurisdictions but not all lines of insurance.) 2. Immunity Statutes: These laws provide protection for good faith exchange of information between insurers or others and state insurance departments or law enforcement officials. Individuals or organizations are exempt from libel or unfair trade practices lawsuits, which could be brought against them for releasing information on prior claims. (All jurisdictions but not all lines of insurance.) 3. Fraud Bureaus: Special units have been set up, generally, in state insurance departments to identify fraudulent acts, collect information on repetitive offenders and investigate cases. The main purpose of the bureau is to set up documented criminal cases that can be readily prosecuted. Some bureaus have law enforcement powers. (44 states and D.C. but not all lines of insurance.) 4. Mandatory Insurer Fraud Plan: Insurers are required by law to set up a specific program that identifies insurance fraud and outlines actions taken to reduce insurance fraud. (21 states and D.C.) 5. Mandatory Photo Inspection: Photos must be taken of used cars before collision or comprehensive insurance is issued. This is designed to eliminate claims for damage sustained prior to the issuance of a policy and the purchase of insurance for nonexistent vehicles. (Five states.)
Introduction: Insurance fraud can be “hard” or “soft.” Hard fraud occurs when someone deliberately fabricates claims or fakes an accident. Soft insurance fraud, also known as opportunistic fraud, occurs when people pad legitimate claims, for example, or, in the case of business owners, list fewer employees or misrepresent the work they do to pay lower premiums for workers compensation.
People who commit insurance fraud range from organized criminals, who steal large sums through fraudulent business activities and insurance claim mills, to professionals and technicians, who inflate the cost of services or charge for services not rendered, to ordinary people who want to cover their deductible or view filing a claim as an opportunity to make a little money.
Some lines of insurance are more vulnerable to fraud than others. Healthcare, workers compensation and auto insurance are believed to be the sectors most affected.
Insurance fraud received little attention until the 1980s, when the rising price of insurance and the growth in organized crime fraud spurred efforts to pass stronger antifraud laws. Allied with insurers were parties affected by fraud—consumers who pay higher insurance premiums to compensate for losses from fraud; direct victims of organized fraud groups; and chiropractors and other medical professionals who are concerned that their reputations will be tarnished.
In their fight against fraud, insurers have been hampered by public attitudes, which in some cases condone insurance fraud. In a 2008 report, the Coalition Against Insurance Fraud found that four of five Americans think that a variety of insurance crimes were unethical, and one out of five thought it was acceptable to defraud insurance companies under certain conditions. The Coalition report found that the public was consistently more tolerant of specific insurance frauds today than it was 10 years before. For example, 82 percent of respondents thought it was unethical to misrepresent facts on an insurance application in order to lower their premiums, down from 91 percent in 1997. Moreover, a 2010 Accenture survey found that most people think it is extremely important for insurers to investigate claims fraud (98 percent) and more than half (55 percent) think it is more likely that an insurer’s poor service will cause a person to commit insurance fraud against that company. Three-quarters of respondents said that people are more likely to commit insurance fraud during a recession (76 percent), up from 66 percent in 2003.
Studies by the Insurance Research Council show that significant numbers of Americans still think it is all right to inflate their insurance claims to make up for insurance premiums they have paid in previous years when they have had no claims or to pad a claim to make up for the deductible, although the proportion was found to be lower in the 2013 poll. According to a study (“See no evil, speak no evil: why consumers don’t report fraud”) published in the Winter 2012/2013 Journal of Insurance Fraud in America, five studies published between 2009 and 2012 strongly suggest that some portion of insurance fraud committed by consumers is driven by revenge or retaliation for a personal service exchange which they think is unfair. They may retaliate in order to “get a return” or “get their money’s worth.” Researchers classified respondents to a survey as reporters—those who observed an act of insurance fraud and reported it; nonreporters, who observed insurance fraud and did not report it; and those who neither observed nor reported insurance fraud. Among those who said they knew about a fraud, only 23.1 percent reported the crime. People were less likely to report fraud if they perceived fraud to be very prevalent, expressed greater acceptance of fraud or had stronger perceptions of the unfairness of insurer-insured relationships.
The authors suggest that in order to increase fraud reporting, insurers should develop broadly targeted campaigns focusing on raising concern, improving service quality and publicizing the abnormality of insurance fraud. In addition, a study entitled “A call to action: Identifying strategies to win the war against insurance fraud” by Deloitte Development LLC published in 2012 explored four major steps to combat insurance fraud: develop a fraud management strategy, implement the strategy by acquiring the resources needed, improve claim information quality and employ advanced analytics.
Auto Insurance Fraud: Auto insurance fraud and claim buildup added between $4.8 billion and $6.8 billion to closed auto injury claim payments in 2007, according to the Insurance Research Council's November 2008 study, Fraud and Buildup in Auto Insurance Claims: 2008 Edition. The study found that fraud and buildup in auto injury claims varied widely by state and by type of liability coverage. For example, among the 12 no-fault states, Florida had the highest rates of fraud and buildup in both bodily injury (BI) and personal injury protection (PIP) claims while North Dakota had the lowest for BI and Kansas had the lowest PIP rates. Since the study involved only claims closed with payment it most likely underestimates the incidence of fraud and buildup in all claims filed, since claims that included the most blatant examples of fraud would not have been paid.
Rate evasion, where policyholders misrepresent facts on applications, includes the use of a false Social Security number to avoid showing a bad credit score, misrepresenting the major use of a vehicle and giving a false address where rates are cheaper. Industry observers estimate that this type of fraud costs auto insurers about $16 billion a year. Another example of auto insurance fraud is owner give-up, where the owner abandons or sets fire to a vehicle.
Another common auto fraud involves vehicles damaged by storm flooding that later appear in used car lots and auction sales. In some states, vehicles that have been flooded bear the words “salvage only” on their titles, usually after damage to the vehicle has reached about 75 percent of its value. Unscrupulous sellers may switch or clone manufacturers’ serial number plates and put them on a flooded vehicle that has been repaired. They may also resell a car that has a salvage title in a state that has more lax title standards. This practice is called “title washing.”
Standardized state rules for titling vehicles are necessary to combat salvage fraud. In recent years some states in the hurricane-prone parts of the United States have adopted rules that require that the words “flood vehicle” be included on the titles of vehicles that have been water damaged and rebuilt. Before such a vehicle can be sold, the buyer must be notified in writing of the vehicle’s past flood damage. However, if one state in the region does not have such strict laws it can become a dumping ground for undeclared flooded vehicles.
After the hurricanes of 2005, the National Insurance Crime Bureau (NICB) created a database in which vehicle identification numbers (VINs) and boat hull identification numbers (HINs) from flooded vehicles and boats are stored and made available to law enforcers, state fraud bureaus, insurers and state departments of motor vehicles. The database (VINcheck) is online and can be accessed by the general public.
Another attempt to solve the problem of title washing is the National Motor Vehicle Title Information System (NMVTIS), a database that requires junk and salvage yard operators and insurance companies to file monthly reports on vehicles declared total losses. The program operates under the auspices of the U.S. Department of Justice and is administered by the American Association of Motor Vehicle Administrators. By January 2016, 96 percent of the U.S. vehicle population was represented in the system (based on 2012 Federal Highway Administration data), and 38 states were reporting data to the system.
One type of fraud involves reporting a vehicle as stolen when it has, in fact, been disposed of by the owner. Another type of fraud involves thieves using legitimate vehicle identification numbers for stolen cars of the same make and model cars.
Industry observers say that counterfeit airbags are being produced for nearly every make of vehicle. Unscrupulous auto body repair shops use these less expensive airbags and obtain reimbursement from insurance companies for legitimate airbags. In addition, stolen airbags are also used in repaired vehicles.
Workers Compensation Fraud: One type of workers compensation fraud involves employers who misrepresent their payroll or the type of work carried out by their workers to pay lower premiums. Some employers also apply for coverage under different names to foil attempts to recover monies owed on previous policies or to avoid detection of their poor claim record. Medical care abuse, such as "upcoding" (where providers exaggerate treatment provided to injured workers) and claimants over-utilizing medical care to keep receiving lost income (indemnity) benefits are common problems. Fraud investigators warn that more than one suspicious aspect of an employee claim may signal fraud. Common red flags are injuries reported on a Monday morning, after a delay, before or after a strike or layoff, without a witness or without treatment. Other warning signs are suspicious behavior before a claim, such as a claimant’s history of numerous claims, jobs, addresses or medical providers.
Health Insurance and Medical Fraud: According to the Federal Bureau of Investigation, healthcare fraud, both private and public, is estimated to account for between 3 and 10 percent of total healthcare expenditures, or between $81 billion and $270 billion in 2011. The Institute of Medicine said in a 2012 report that the U.S. healthcare system wastes $75 billion a year on fraud. The Institute, part of the National Academy of Sciences, is an independent government adviser.
Fraud and abuse take place at many points in the healthcare system. Doctors, hospitals, nursing homes, diagnostic facilities, medical equipment suppliers and attorneys have been cited in scams to defraud the system.
One type of fraud is the abuse and resale of legal narcotic and other prescription drugs. According to Prescription for Peril, a 2007 report by the Coalition Against Insurance Fraud, drug diversion costs health insurers up to $72.5 billion a year in fraudulent claims involving opioid abuse alone, including up to $24.9 billion annually for private health insurers.
Another concern is health identity theft, where criminals steal victims’ names, health insurance numbers and other personal data and then defraud insurers by making false claims. The Federal Trade Commission received nearly 22,000 complaints of health identity theft in 2010 (latest data available). To combat the problem, some medical facilities have limited employee access to data and require photo IDs for people seeking treatment.
The FBI, in its Financial Crimes Report, 2010-2011, (latest report available) said that the most prevalent types of healthcare fraud are: billing for services not rendered; upcoding services and medical items (where the provider submits a bill using a code that yields a higher payment than for the service or item that was actually rendered); filing duplicate claims; unbundling (billing in a fragmented fashion for tests or procedures that are required to be billed together at reduced cost); performing excessive services; performing unnecessary services; and offering kickbacks.
Private Healthcare Fraud: The Blue Cross and Blue Shield Association says its antifraud investigations saved or recovered more than $510 million in 2009 for an average return of $7 for every $1 spent in antifraud efforts. The $510 million includes preventing $318 million from being paid for fraudulent or erroneous medical claims (62 percent higher than in 2008) and $192 million in recoveries paid for fraudulent and abuse claims (28 percent higher than in 2008).
Federal Healthcare Fraud: The U.S. Department of Health and Human Services (HHS) Secretary and the Justice Department said that in the last three years, for every dollar spent on healthcare-related fraud and abuse investigations, the government recovered $7.90, the highest average return in the 16-year history of the Health Care Fraud and Abuse Program. The program’s healthcare fraud prevention and enforcement efforts recovered a record $4.2 billion in fiscal year 2012, up from almost $4.1 billion in fiscal year 2011 for a total of $14.9 billion over the past four years. The program targets fraud mainly in Medicare and Medicaid.
The Affordable Care Act of 2010 included fraud fighting efforts such as allowing the U.S. Department of Health and Human Services Secretary to exclude providers who lie on their applications from enrolling in Medicare and Medicaid and the Improper Payments Elimination and Recovery Act that requires agencies to conduct recovery audits for programs every 3 years and develop corrective action plans for preventing future fraud and waste. Other efforts were implementing an Automated Provider Screening system to review enrollment applications; allowing the Secretary of Health and Human Services to impose a temporary moratorium on newly enrolled providers or suppliers if necessary to combat fraud; authorizing the Centers for Medicare and Medicaid Services, in conjunction with the Office of the Inspector General, to suspend payments to providers or suppliers during the investigation of a credible allegation of fraud; and ensuring that providers and suppliers found guilty of fraud in one of the Centers’ systems, such as Medicare, cannot have service privileges in another area, such as Medicaid, or within state programs.
In 2012, the Department of Health and Human Services and the Department of Justice formed the National Fraud Prevention Partnership to combat health care fraud. The group also consists of private and public groups such as health care companies and their organizations, the National Association of Insurance Commissioners, the National Insurance Crime Bureau and the National Health Care Anti-Fraud Association. The groups will share information on claims from Medicare, Medicaid and private insurance to be administered by a third-party vendor.
State Healthcare Fraud: Medicaid programs also operate on the state level, where they are also subject to fraud. In Massachusetts the attorney general said that the office’s Medicaid Fraud Division had recovered more than $66 million in 2010, a record amount. In the past four years the division has recovered over $191 million for the state’s Medicaid program.
Catastrophe-related Property Fraud: The hurricanes of 2005, especially Hurricane Katrina, resulted in cases of insurance fraud where, for instance, homeowners or renters made claims for expensive home appliances that were never purchased and where homeowners inflated claims for items actually destroyed. Some of the fires that broke out in buildings in New Orleans and other affected communities after Hurricane Katrina were suspected cases of arson, committed by flood victims who did not have flood coverage, and thousands of flood-damaged cars were cleaned up and resold without disclosing their flood status.
In September 2005 the Department of Justice created the Hurricane Katrina Fraud Task Force, now known as the National Center for Disaster Fraud (NCDF). The expanded task force is designed to combat fraud relating to natural and man-made disasters such as the Deepwater Horizon oil spill. In addition to insurance fraud, the NCDF targets charity scams, identity theft and contract and procurement fraud. Since its inception the NCDF has prosecuted 1,360 people in cases related to Hurricanes Katrina, Rita and Wilma alone.
The increase in billion-dollar weather catastrophes in recent years and the propensity of claimants to commit opportunistic fraud has resulted in some insurers turning to forensic meteorologists. These experts can accurately verify weather conditions for an exact location and time, allowing claims adjusters to validate claims and determine whether more than one type of weather element is responsible for damage. Because they use certifiable weather records, their findings are admissible in court.
Another example of opportunistic fraud following natural catastrophes is contractor fraud. A handful of states have attempted to protect homeowners from contractor fraud, by enacting laws that provide for notices and contract termination rights and prohibiting rebating or other compensation to induce homeowners to sign contracts. According to the Property Casualty Insurers Association of America, Iowa and Kentucky have similar bills pending in their legislatures and Illinois, Indiana, Minnesota, Missouri, Nebraska and South Dakota have enacted these laws in the past few years.
Crop Insurance Fraud: Federally sponsored multiple peril crop insurance is sold and serviced by the private market but is subsidized and reinsured by the federal government. It covers crop losses as a result of all types of natural disasters and is a source of financial protection for farmers. The U.S. Government Accountability Office has found evidence of fraud in the federal crop insurance program and recommended a number of actions, including reducing premium subsidies to those who repeatedly file questionable claims, improving the effectiveness of growing season inspections and strengthening oversight of insurance companies’ use of quality controls. Government investigators are increasingly using satellite images to match actual crop planting and growing practices in suspicious cases with information submitted in claims. Federal prosecutors in Attorney General’s office said that a North Carolina tobacco farming case in 2013 involving farmers, insurance agents and claims adjusters uncovered about $100 million in fraud.
Insurers’ Antifraud Measures: The legal options of an insurance company that suspects fraud are limited. The insurer can inform law enforcement agencies of suspicious claims, withhold payment and collect evidence for use in a court. The success of the battle against insurance fraud therefore depends on two elements: the level of priority assigned by legislators, regulators, law enforcement agencies and society as a whole to the problem and the resources devoted by the insurance industry itself. To that end most insurers have established special investigation units (SIUs). These entities help identify and investigate suspicious claims. By 2001 about 80 percent of property/casualty insurers had SIUs, according to the Coalition Against Insurance Fraud. These units range from small teams, whose primary role is to train claim representatives to deal with the more routine kinds of fraud cases, to teams of trained investigators, including former law enforcement officers, attorneys, accountants and claim experts. More complex cases involving large-scale criminal operations or individuals that repeatedly stage accidents may be turned over to the National Insurance Crime Bureau (NICB), which has special expertise in preparing fraud cases for trial and serves as a liaison between the insurance industry and law enforcement agencies.
Insurance company surveys confirm that SIUs dramatically impact the bottom line of many companies. In the 1990s insurers said that for every dollar they invested in antifraud efforts, including in SIUs, they got up to $27 back, but these returns have become harder to achieve as many easy to root out cases of fraud have been eliminated and fraud schemes have become more sophisticated.
Insurers have also created a national fraud academy. A joint initiative of the Property Casualty Insurers Association of America, the FBI, the NICB and the International Association of Special Investigating Units, it is designed to fight insurance claims fraud by educating and training fraud investigators. It offers online classes under the leadership of the NICB.
Insurers may also file civil lawsuits under the federal Racketeering Influenced and Corrupt Organizations Act (RICO), which requires proving a preponderance of evidence rather than the stricter rules of evidence required in criminal actions and allows for triple damages. Since the late 1990s, some of the largest insurers in the country, especially auto insurers, have been filing and winning lawsuits concerning insurance fraud against individuals and organized rings. Since 2003, Allstate Insurance Company has filed 48 lawsuits and has sought about $237 million in damages in New York state alone.
New Technology to Combat Fraud: Advances in analytical technology are crucial in the fight against fraud to keep pace with sophisticated rings that constantly develop new scams. For example, in the past organized rings that must obtain policies before staging accidents and making claims found agents who did not ask probing questions. Direct insurance websites bypass agents and allow them to exploit loopholes in applications and underwriting. They can test the system by filing many applications and observing which ones are flagged for additional information. According to a company that develops insurance fraud analytics, insurers typically see evidence of organized staged accidents within 60 days of starting a direct Internet channel.
Traditional approaches that concentrated on detection after payments were made (pay and chase programs) have been improved by predictive modeling, claims scoring and other tools that attempt to uncover fraud before a payment is made. Newer strategies are employed when claims are first filed. Suspicious claims are flagged for further review while those with no suspicious elements are processed normally.
Data-mining programs, which scan many insurance claims, have been improved by the consolidation of insurance industry claims databases, such as ISO's ClaimSearch, the world’s largest comprehensive database of claims information. Systems that identify anomalies in a database can be used to develop “rules” that enable an insurer to automatically stop claims. An insurance technology expert said that this approach has produced 20 to 50 percent reductions in fraud loss for some insurers. Newer programs that analyze patterns and text, such as adjuster notes, can search various kinds of data formats for key terms and word patterns.
Insurance investigators are increasingly scanning social media sites such Facebook, Twitter and YouTube when they examine workers compensation claims. Software developers offer systems that scan publicly accessible sites for claimants who post activities from which they would be physically restricted due to their claims, according to an A.M. Best article.
State Antifraud Legislation: The realization that it is easier to prosecute cases of insurance fraud in states where it is identified as a specific crime in the penal code and where what constitutes insurance fraud is defined along with the penalties that can be imposed has prompted all states to enact these laws to some degree. See chart: Key State Laws on Insurance Fraud.
To successfully bring a fraud case to trial, insurers must be able to provide information to prosecutors on individuals suspected of fraud. Immunity laws that allow insurance companies to report information without fear of criminal or civil prosecution now exist in all states, but not all laws cover insurance fraud specifically or allow information to be reported to law enforcement agencies as well as to state departments of insurance. Many are limited in other ways, providing protection against libel suits or violation of unfair claims practices acts only in auto insurance fraud, for example. Some experts believe that immunity laws should be extended to include good faith exchanges of certain kinds of claim-related information among insurance companies.
Federal Antifraud Legislation: Federal laws that were enacted prior to the Affordable Care Act of 2010 include the Health Insurance Portability and Accountability Act of 1996, which focused on rooting out fraud in federal programs such as Medicare but also impacts private healthcare, especially in defining the crime of healthcare fraud. Although healthcare insurance is generally outside the purview of property/casualty insurance, healthcare fraud affects all types of property/casualty insurance coverage that include a medical care component, such as medical payments for auto accident victims or workers injured in the workplace. The act makes "knowingly and willfully" defrauding any healthcare benefit program a federal crime. The Violent Crime Control and Law Enforcement Act (1994) makes insurance fraud a federal crime when it affects interstate commerce. Insurance company employees, including agents, who embezzle or misappropriate any company funds can be punished similarly if their actions adversely affect the solvency of any insurance company.
OTHER SOURCES OF INFORMATION:
- National Insurance Crime Bureau https://www.nicb.org//
- Coalition Against Insurance Fraud http://www.insurancefraud.org
- Insurance Research Council http://www.insurance-research.org/
- Federal Bureau of Investigation http://www.fbi.gov/scams-safety/fraud
© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED
|Insurance fraud is a deliberate deception perpetrated against or by an insurance company or agent for the purpose of financial gain. Fraud may be committed at different points in the insurance transaction by applicants for insurance, policyholders, third-party claimants or professionals who provide services to claimants. Insurance agents and company employees may also commit insurance fraud. Common frauds include “padding,” or inflating actual claims, misrepresenting facts on an insurance application, submitting claims for injuries or damage that never occurred, and “staging” accidents. |
Insurance fraud may be classified as “hard” or “soft.” Hard fraud is a deliberate attempt either to stage or invent an accident, injury, theft, arson or other type of loss that would be covered under an insurance policy. Soft fraud, which is sometimes called opportunity fraud, occurs when a policyholder or claimant exaggerates a legitimate claim. A car owner involved in a “fender bender” who pads the claim to cover the policy deductible is committing soft fraud. Another example is exaggerating the number and value of items stolen from a home or business. Soft fraud may also occur when people purposely provide false information to influence the underwriting process in their favor when applying for insurance. To lower insurance premiums or increase the likelihood that the application for insurance will be accepted, people may underreport the number of miles driven, misrepresent where a car is garaged, fail to provide an accurate medical history when applying for health insurance, or falsify the number of employees and the nature of their work for workers compensation coverage.
The exact amount of fraud committed is difficult to determine. The proportion of fraud varies among the different lines of insurance, with healthcare, workers compensation and auto insurance believed to be the most vulnerable lines.
Questionable insurance claims rose by 16 percent from 100,201 in 2011 to 116,171 in 2012, according to the National Insurance Crime Bureau (NICB).
*Estimate based on research conducted by the Battelle Seattle Research Center for the Insurance Information Institute in 1992 (Fighting the Hidden Crime: A National Agenda to Combat Insurance Fraud. Insurance Information Institute, March 1992) and other industry reports (including Insurance Fraud, Renewing the Crusade, Conning, 2001).
In 2014 the Coalition Against Insurance Fraud and the SAS Institute published The State of Insurance Fraud Technology, to track how insurers deploy technology to combat insurance fraud. An online survey of 42 insurers compared 2014 results to a 2012 survey and found that by 2014, 95 percent of insurers reported using anti-fraud technology, up from 88 percent in 2012. These technologies focused on claims—71 percent of respondents said detecting claims fraud is the primary use of anti-fraud technology. Less than half use these tools for nonclaim issues such as underwriting and internal fraud.
Other findings of the Coalition study included:
- More than half of respondents to the study said the amount of suspected fraud against their company had increased over the past three years. Only 2 percent said it had decreased.
- When asked what benefits the insurers who use fraud-detection systems have received, the most-cited benefits were more and better referrals, uncovering complex or organized fraud activity and improved investigator efficiency.
- Compared to 2012, a larger share of referrals came from automated systems in 2014.
- One of the most common technologies used today are automated red flags, which automatically highlight suspected fraudulent activity. Eighty-one percent of respondents reported using automated red flags, followed by:
- Link analysis, a tool that enables insurers to unravel complex or organized fraud rings by recognizing the relationships between groups across multiple claims, used by 50 percent of respondents; and
- Anomaly detection, which warns investigators that information seems improbable, is used by 45 percent of respondents.
- Most insurers think that no single technology is sufficient to combat fraud. A combination of technologies is necessary to uncover both opportunistic and organized fraud.
- Eighty-five percent of insurers predict that funds for anti-fraud detection will remain the same or increase.
Key State Laws Against Insurance Fraud
(As of August 2016)
(1) Workers compensation insurance only.
Source: Property Casualty Insurers Association of America; Coalition Against Insurance Fraud.