Insurance Fraud Increasing Costs for Employers, Workers and Public

Posted on Wednesday, March 27, 2019

Criminologists divide fraud cases into soft and hard categories.

How Much Does Fraud Cost per Family?

According to the FBI, the total cost of insurance fraud — apart from health care fraud — is estimated at more than $40 billion per year. That means, every year, the average U.S. family pays between $400 and $700 in increased premium costs. Adding in the cost of health care fraud (which brings the total to about $80 billion per year) would nearly double that amount.

In the insurance context, soft fraud is also called opportunistic fraud. It happens when people embellish the facts of a legitimate claim to obtain financial gain. For example, a homeowner filing a claim may exaggerate the actual value of a stolen item to get a bigger check from the carrier. Another form of soft fraud might be when an employer understates the number of employees in order to falsely minimize his workers' compensation premiums. In that situation, the business owner cheats and saves money — if he doesn't get caught. That puts business people who pay the required amount of workers' compensation premiums at an automatic disadvantage.

In both of these soft fraud examples, the perpetrator is not inventing the fraud out of whole cloth, but simply misleading the carrier or underwriters about the true insurable risk or loss.

Then there are hard fraud cases, wherein the perpetrators actually create a loss that never would have taken place without their efforts or invents a loss that never happened. Example: A dishonest person stages a vehicle accident to get a cash payment for a car he doesn't want anymore.

Fraud Occurs Both Ways

It's not just consumers who defraud insurance carriers. Occasionally, insurance agents defraud customers and the public. The elderly are particularly vulnerable, and unfortunately some unscrupulous agents have taken advantage of them.

A few problem insurance agents have also sold unsuitable medical plans or plans from unlicensed companies that don't have the resources to stand by their promises at claim time. There have been issues with fraudulent presentations of viatical settlements (which is when a terminally ill person sells his or her life insurance policy at a discounted price) as well as improper or unsuitable placements of complicated annuity products, especially with older Americans.

Insurance fraud can also happen, for example, when a medical office bills insurance for procedures and services not performed.

The High Cost of Insurance Fraud

Insurance fraud, which includes fraud in health insurance and all other lines of insurance, costs consumers about $80 billion every year, according to the Coalition Against Insurance Fraud. The Coalition states that this estimate is conservative because some fraud goes undetected or unreported.

These costs are ultimately borne by the public — the same people insurance policies are supposed to protect. Carriers must adjust premiums higher to cover anticipated fraud losses. Policyholders of course, pay those higher premiums. Those who are insured pay the price in the form of lower levels of protection than their premiums or their employer premiums would be able to purchase, had fraud levels been lower.

Workers' compensation premiums are rapidly increasing, putting more and more strain on employers, in large part due to widespread claims of fraud. However, the rise is also due to employers improperly conspiring or misreporting employment information to lower their premiums.

Meanwhile, the government must expend precious manpower investigating and prosecuting insurance fraud, adding another layer of cost to the taxpayer and diverting law enforcement officers from providing essential services. The Coalition Against Insurance Fraud reports that states conduct extensive anti-fraud programs that are funded by taxpayers and insurance companies. And state, local and federal law enforcement all must devote considerable time and resources to fraud investigation.

We All Pay

Clearly insurance fraud, regardless of who the perpetrator is, has far-reaching implications. Consumers always pay the price, either in higher insurance prices for less protection, or higher taxes and reduced government resources. We all need to keep our eyes wide open and be willing to speak up when fraud is suspected.

Posted in Tax Topics For Individuals

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