If you are reading this publication, it is safe to assume that you already are concerned about insurance fraud. The cost of insurance fraud is widely reported to be in excess of $80 billion a year. To put that in perspective, it costs $80 billion each year to maintain all prisoners incarcerated in the U.S., according to a recent address by President Obama. It’s enough money to eliminate tuition at all U.S. public colleges and universities or to double the salaries for every high school educator. If distributed to all 318 million Americans, each would receive a $250 check. It is the estimated net worth of Bill Gates and is $8 billion more than Warren Buffett’s net worth.
Of course eliminating college tuition or Gates divesting his assets for our benefit is not likely to happen in our lifetime. So is wiping out insurance fraud just as unlikely? Probably. But with all of the attention the issue is getting, especially from our elected officials, we at least should be able to reduce it. While that certainly has become a legislative goal at both federal and state levels, are we making any headway?
“Questionable claims,” as they are classified by the National Insurance Crime Bureau (NICB), reportedly are rising by significant margins—an astonishing 27 percent from 2010 through 2012. An Insurance Research Council (IRC) study indicates that total excess payments attributable to fraudulent and inflated auto claims alone have increased $2.2 billion in the 10 years since the IRC began keeping track.
As recently as June 2015, 33 Californians were arrested for staged motor vehicle accidents; a Maine funeral director was charged with embezzling $375,000 from people who thought they purchased end-of-life coverage; and 250 Maryland spinal fusion patients were alerted that they may have fake hardware inserted into their spines in a scheme to use counterfeit items while getting paid for the real thing. (Imagine a $200 Louis Vuitton knockoff bag instead of a genuine $1,400 bag, only these fakes were inserted into spinal columns.) And then there is the Detroit-area oncologist who was treating an estimated 70 patients per day with high-dose chemotherapy to the tune of $225 million in insurance money, although none of the patients had cancer.
Tracking fraud by policy type reveals that personal auto claims decidedly lead the pack with a whopping 68 percent of all fraudulent claims. Bogus homeowners’ personal property claims take second place with about 15 percent, and workers’ compensation claims come in third. Tracking potentially fraudulent claims by location reveals that California leads the way with nearly 20 percent of all questionable claims. Florida is second, followed by Texas. Collectively, these three states account for more than 37 percent of reported fraudulent claims.
State and federal legislators in this country have grappled with the issue for over 100 years. In fact, the False Claims Act was enacted during Abraham Lincoln’s presidency to curb false claims submitted to the federal government by unscrupulous contractors.
How do you stop the fraudsters who are willing to prey on people’s most vulnerable moments for financial gain? Do we really need a statutory scheme to clarify that poisoning people for profit is wrong? Would imposing more state regulations stop the next morally bankrupt physician? How about the more prevalent, yet less dramatic, problem of personal lines claims fraud? How does the industry combat claims inflation when one in four U.S. adults believes that it is acceptable to pad a claim in order to recoup premiums paid?
Where most of us see an appalling waste of money, the criminal element sees an underutilized asset. The FBI suggests that the sheer size of the insurance industry is to blame. In a recent press release, the NICB noted that the industry consists of more than 7,000 companies that collect more than $1 trillion in premiums each year. The massive size of the industry significantly contributes to the cost of insurance fraud by providing more opportunities and bigger incentives for committing illegal activities.
So is the insurance industry somehow to blame for this mess? Perhaps it just isn’t reasonable to fix the problem without governmental intervention. That would explain why lawmakers are so focused on creating new statutory schemes designed to help the insurance industry help itself. But are they correcting the problem or just over-legislating an already overregulated industry?
Presently, all states have criminalized insurance fraud in some fashion. Forty-two states and the District of Columbia classify insurance fraud as a felony. Enforcement power, whether through the U.S. Department of Justice or state-level law enforcement, has proven immensely productive. But what about other legislation? Forty-one states statutorily mandate the creation of state insurance fraud bureaus. Twenty-one states and D.C. have enacted legislation that requires insurance companies to file a fraud plan with each state’s insurance department. That certainly seems like a good idea, but what of the remaining 29 states? Do carriers in those states not plan to curb fraud?
Fifteen states have statutes requiring insurance companies to staff and train special investigation units (SIUs), and some even dictate the number of SIU investigators that a carrier must have per number of issued policies as well as the number of ongoing education credits each investigator must maintain. Thirty-one states have enacted statutes that require fraud warnings on applications, claims forms, checks, and the like, lest an unwitting criminal “accidentally” lies on an application, submits a phony proof of loss, or cashes a wrongfully obtained check.
Perhaps it’s time to rethink the need for intense legislative scrutiny of fraud in the insurance industry. California and Florida, the unfortunate leaders in insurance fraud, have extensive statutory oversight of the insurance industry. Few insurance products are subjected to the level of state regulation that is applied to auto personal lines. At least for those states and that coverage line, state scrutiny is not producing satisfactory results.
It goes without saying that the industry bears the financial burden of compliance with the laws imposed upon it. With the dollars being lost to fraud, it certainly behooves the insurance industry to invest in countermeasures. That seems such a logical endeavor that one wonders if it requires legislation at all. Given the stunning lack of progress, perhaps it’s time for the states to back off and allow the industry to fund and direct fraud prevention as it sees fit, not as dictated by legislators.