Insurance fraud

SIGNIFICANCE: Insurance fraud has been rated as the second-most costly crime in the United States. Heightened awareness of the many forms that insurance fraud can take and collaborative efforts among medical service providers, insurance companies, and law-enforcement agencies are essential to combating the crime.

Since its inception in the early seventeenth century, the insurance industry has thrived. As of 2022, more than six thousand insurance companies operated in the United States, controlling nearly $12 trillion in assets. However, both the nature and the prosperity of the industry have invited criminal enterprise. Insurance fraud is rated as the second-most costly crime in the United States, after tax evasion. According to Forbes in 2024, $105 billion annually is lost because of healthcare insurance fraud, $74.7 billion is lost for life insurance fraud, and $45 billion lost for property and casualty insurance fraud. These costs are ultimately passed along to American consumers in the form of increased annual insurance premiums.

The complex nature of insurance fraud and the vast number of subcategories it encompasses make a comprehensive definition of the term nearly impossible. In general, insurance fraud constitutes falsification of facts for the purpose of deceiving insurance providers, with the intent to obtain money to which one is not entitled.

Types of Insurance Fraud

Insurance fraud falls into two distinct categories: hard fraud and opportunistic, or soft, fraud. Opportunistic fraud is the more common type. A simple example is a car owner who lies about the number of miles the vehicle is driven each year in order to pay lower premiums on auto insurance. Most people who engage in opportunistic fraud do not regard their acts as fraud, instead dismissing their behavior as inconsequential “white lies.”

Hard fraud is the intentional misrepresentation of facts to win large monetary settlements. It is a lucrative field for organized crime rings that organize lavish schemes to misappropriate millions of dollars. Many types of insurance are targets of hard fraud, but three types stand out as the most common: auto insurance fraud, workers’ compensation fraud, and health care fraud.

It has been estimated that more than one-third of all auto insurance injury claims contain some type of fraud; 90 percent of these are instances of opportunistic fraud. The most common forms of these frauds are falsifying information on auto mileage and inflating repair costs to cover deductibles—a scam known as padding. Other forms of auto insurance fraud include staged accidents that involve vehicle damage and medical claims, exaggerations and falsifications of injuries, abandonment of vehicles for the purpose of filing stolen-vehicle claims, falsely making a claim of a hit-and-run in a one-car accident, and claiming injuries to persons not actually involved in accidents.

According to the US Chamber of Commerce, 25 percent of all claims for workers’ compensation are fraudulent. This type of fraud takes three forms: claimant fraud, provider fraud, and premium fraud. In claimant fraud, the most common form, employees often fake or exaggerate injuries in order to collect greater compensation awards. Another form of claimant fraud is claiming on-the-job injuries when the injuries actually occur elsewhere.

Provider fraud is perpetrated by medical professionals who do such things as report false or exaggerated injuries among their patients, submit false charges for services, itemize fees for single procedures, and withhold information on insurance coverage. Premium fraud is perpetrated by employers who intentionally mislead insurance carriers about the nature of their companies and employees in order to pay lower premiums. Employers may understate their payrolls, misclassify their employees’ job titles, or list salaried employees as independent contractors.

The health care industry is one of the hardest hit by insurance fraud, dealing with millions of fraudulent transactions annually. Health care fraud is committed, in varying degrees, by claimants and service providers alike. Claimant frauds include patients forging receipts, requesting doctors to falsify reports to cover desired procedures, and petitioning doctors to waive copayments. Provider frauds include billing for services never rendered, providing procedures that are not medically necessary, accepting kickbacks for referrals, billing for services costing more than those actually provided, misrepresenting noncovered treatments as covered treatments, and misrepresenting patients’ identities by the falsification of medical cards.

Medicare and Medicaid fraud is a particularly large area that provides enormous opportunities for organized crime. An example would be the creation of a phony clinic that generates fraudulent claims using authentic patient insurance and provider billing information that has been bought or stolen. Such schemes are sustained by teams of doctors and lawyers.

Investigation

Despite the growing magnitude of insurance fraud, law-enforcement agencies were long reluctant to pursue this type of crime. That fact has encouraged many criminals to switch from other types of crime to insurance fraud, which is typically both safer and more lucrative. The attitude of law enforcement toward insurance fraud began to change during the mid-1980s, when insurance premiums started rising rapidly. Public concern prompted lawmakers to begin developing plans to help keep health care costs under control.

Most states have created fraud bureaus, and insurance companies have their own special investigation units. Although some states still list insurance fraud as a misdemeanor, the majority rate it as a felony, with punishments of up to seven years in prison and fifteen thousand dollars in fines.

Insurance companies and law-enforcement officials face innumerable challenges in averting insurance fraud. While the public clamors for lower health care costs, most Americans believe it is acceptable to do such things as exaggerate their insurance claims to cover deductibles. One way to strengthen the effectiveness of the way the criminal justice system handles insurance fraud would be to list the crime as a felony offense in every state penal code. Otherwise, it will fall under the general category of fraud by deception and will hold lower penalties.

Bibliography

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