This is Part 2 in a two-part series on automobile insurance fraud. Part 1 in the series appears here.
Who Participates In This Type Of Insurance Fraud?
Just about anyone. You'd be surprised. Even people who consider themselves upstanding citizens will get drawn into the business, because they see it as a victimless crime. One of the first cases I investigated involved a college-educated, former Farmers Insurance adjuster from Ohio. One day, he just decided to go to the dark side of the earth and started staging collisions from Ohio to California. He got away with $11 million before we caught him and put him in prison. He had so much activity going on that he carried a briefcase with him, and in that briefcase were 13 valid licenses from Colorado, Ohio and Texas — all valid — along with lots of crib notes from all of his activity. In an unlucky turn of events for the fraudster, he was stopped for speeding one night. As he opened his briefcase to get out a driver's license, that sheaf of crib notes was visible to the highway patrol officer, who reached right over his head and grabbed it. Lesson learned. Keep your crib notes to yourself.
People don't necessarily set out to go into insurance fraud as a career, but it's easy to see the attraction, said Borloff. "When you're first introduced to the people in this business, they say, 'This guy, he's in the insurance business,' and everybody understands he doesn't have an insurance company, he's in a different side of the business. But he's a well-to-do guy, with a house in Beverly Hills, with a car, with everything. And you ask yourself, 'Why can he do it and I can't?' And then you start to learn."
This is Part 1 in a two-part series on automobile insurance fraud. Part 2 in the series can be found here.
Traffic engineers would love to unblock the clogged arteries of Southern California's freeway system, where rush hour is anything but "rush" — more like gridlock.
But in a land where one's car is one's empire, one's freedom and personal statement, carpooling is a tough sell. The high-occupancy vehicle (HOV) lanes have scant occupancy.
In fact, cars carrying multiple passengers are such a rarity that this scenario alone raises red flags for auto insurance claims adjusters.
Operating under the radar is a fast-growing segment of the so-called "underground economy" — organized criminal enterprises that stage automobile collisions with the intent to defraud insurance companies of medical payments. In some cases, the entire incident is created on paper, with fictitious vehicles and false identities. In other cases, the perpetrators take real vehicles with legitimate insurance policies out to vacant lots or remote fields to crash them and then fill out a counter report. The most compelling cases are the ones where participants intentionally ram vehicles together on city streets — often a rear-end collision in a left turn lane — then dial 911 and wait for police and emergency medical services (EMS) to arrive. This approach triggers a police report and EMS records, which lend an air of legitimacy to the event. It really happened.
Based on instructions from a stager, the driver and two or three passengers — who are known as "stuffed passengers" — report neck and back injuries. The passengers later visit a physician or chiropractor who is in collusion with the criminal ring. The patients sign in and leave without receiving any treatment. If the insurance company balks at paying the specious claim, the claimant enlists the help of an attorney who is also party to the scheme. The attorney is tenacious, willing to go to court, generally able to bluff until the insurance company backs down and settles.
In the process, everybody except the insurance company gets easy money. Property damage to the vehicle is paid to the owner of the vehicle, while multiple players split the proceeds of the settlement for medical payments. In a typical case where the insurance company settles for, say, $6,000, each vehicle occupant might get $1,000, the lawyers and doctors collect their fees, and the enterprise leader retains 50 percent of the professional services fees plus the balance of the claimants' settlement, if any. If the enterprise leader successfully stages dozens of such incidents a month, it's a lucrative business.
This practice exploded in Southern California in the mid-1990s. If you are a Special Investigations Unit investigator, you are dealing with this every day. The average caseload for an adjuster or claims representative might be 150 or 200 a day, depending on the size of the company. At least 25 percent of that is some flavor of fraud. It's either a false claim or an embellishment to it. People are doing it. Even people who think of themselves as law-abiding are doing it, because they don't think of insurance companies as victims. This type of activity is so prevalent that our undercover investigators would hear paramedics on the scene saying, "Okay, which one of you is going to the hospital this time?"
Automobile insurance fraud is such easy money that the business is even creating unlikely bedfellows. For example, in South Central Los Angeles, the Bloods and Crips — gangs that have had an intense and bitter rivalry — are now cooperating with one another in organized insurance fraud, because it's more powerful and profitable to join forces.
The trucking industry accounted for nearly 20 percent of all days-away-from-work cases in 2011. Correspondingly, trucking was among the seven occupations which had an incidence rate greater than 300 cases per 10,000 full-time workers and who had greater than 20,000 days-away-from-work cases.
OSHA defines a Musculoskeletal Disorder (MSD) as an injury of the muscles, nerves, tendons, ligaments, joints, cartilage and spinal discs. They identify examples of Musculoskeletal Disorders to include: carpal tunnel syndrome, rotator cuff syndrome, De Quervain's disease, trigger finger, tarsal tunnel syndrome, sciatica, epicondylitis, tendinitis, Raynaud's phenomenon, carpet layers knee, herniated spinal disc, and low back pain.
The average cost of a work-related soft tissue injury in the trucking industry exceeds any other industry. According to the U.S. Bureau of Labor Statistics (BLS), Musculoskeletal Disorders nationwide typically account for 33% of work-related injuries, while the incidence of Musculoskeletal Disorders in the transportation industry is 60-67%. The Bureau of Labor Statistics also noted that there were 1.4 million total transportation workers, and each year 1 in 18 is injured or made ill by the job.
These higher rates of injury can be attributed in part to several factors. Due to the nature of their work, many drivers maintain a poor diet, rarely get enough sleep, and are sedentary. As a result, they find themselves more susceptible to heart attacks and diabetes, as well as a myriad of strains, sprains and various other Musculoskeletal Disorders.
Additionally, the percentage of older workers is higher in transportation than in most industries, with the Transportation Research Board estimating that up to 25 percent of truck drivers will be older than 65 by 2025, translating into more severe Musculoskeletal Disorder claims.
These factors are contributing to more workers' compensation claims for drivers which increase employers' costs. As part of the job, many truck drivers are required to unload the goods they transport, leading to serious sprains and strains. Heavy lifting after long periods of sitting can increase the likelihood of severe sprains and strains. In addition, drivers often rush at the delivery site in an effort to meet the demands of tight schedules. This combination contributes to 52% of the non-fatal injuries in this industry, with trunk and back claims accounting for 70% of these cases.
Due to its unique workplace circumstances, the commercial transportation industry is at higher risk for increased frequency of injuries and costs to the industry. The following describes the framework of this dilemma:
- Commercial transportation jobs expose workers to high physical demands and extended hours of exposure.
- The transportation industry experiences one of the highest work-related injury rates among all workplace sectors.
- The transportation industry experiences a high level of turnover on an annual basis, which results in a high number of newly hired employees exposed to unfamiliar and physically demanding tasks.
A big decline in both auto accident and severe injury frequency has not produced a corresponding decline in loss costs. The slack has been taken up by inflated soft tissue injury claims fueled by hospital cost shift. Financially savvy hospital administrators and new software that "enhances" billing techniques have overcome claim deterrents so effectively that the industry seems unaware. There is an answer, but the industry may be satisfied with the status quo for now.
A 2008 report by the Insurance Research Council (IRC) provides empirical evidence that since 2000, a significant decrease in auto claim frequency has been mysteriously offset by an equally significant rise in severity, leaving loss costs essentially unchanged. Of particular note, the Insurance Research Council report points to a study by the National Safety Institute showing that improved automobile safety engineering has been lowering the frequency of serious injuries and deaths. This makes the rise in bodily injury and personal injury protection claim severity particularly vexing.
The graph below is taken from the Insurance Research Council report and it depicts the described trends:
This paper is the result of research that was aimed at discerning the root causes of the three simultaneous trends and whether their relationships are coincidental or causal.
In summary, the findings were as follows:
- The decline in claim frequency was (is) primarily causally related to lower per-capita driving, which in turn is causally related to the combination of a significant rise in gasoline prices coupled with rising unemployment over the same period.
- The rise in property damage severity is largely causally related to an increase in vehicle repair and replacement costs that is in turn driven by the efforts to make vehicles safer, such as airbags. The rise in bodily injury and personal injury protection severity is the result of a significant shift of the total cost of national health cost burden from the government and private health insurers to the Property & Casualty insurance industry.
The Root Cause Of Medical Cost Shifting
The decline in claim frequency and the rise in property damage severity were considered transparent enough not to warrant further elaboration in this article. This turned our focus to unraveling the seemingly mysterious rise in bodily injury and personal injury protection severity, especially in light of the decline in the rate of severe injuries that can be causally related to the property damage severity rise.
Our findings in this regard are a confluence of causally related phenomena as follows:
- The government has been tightening payment controls and cutting reimbursement rates for medical providers under programs like Medicare and Medicaid.
- Private health coverage payments to providers have declined as fewer employers provide coverage; for those who do, the deductibles and co-payments have grown considerably.
- Hospitals and other significant medical entities have responded by appointing financially savvy administrators and implementing electronic medical record systems that have morphed from being efficiently focused to being revenue enhancement driven.
- These savvy administrators and their new software programs are defeating the government and private software tools designed to vet electronic billing submissions. They accomplish this via "diagnostic upcoding," a means of reporting an injury or illness as being more severe than in actuality.
- Though these tactics are aimed primarily at the government and private health plans, they have worked equally well at overcoming Property & Casualty company claim deterrents, driving up the cost of what were once considered small soft-tissue personal injury protection and bodily injury claims.
- While the tactics are effective against the government and private health insurers, those entities have mitigated their effects by lowering medical procedure reimbursement rates. Because the Property & Casualty industry lacks the means to do the same, it is absorbing an ever increasing share of total national health care costs, a phenomenon referred to as "cost shifting."
The Property & Casualty Insurance Industry claim automobile appraisal process is highly inefficient, resulting in hundreds of millions of dollars in annual leakage. This leakage is driven by both insufficient quantification of performance variation among appraisal resources and shortcomings in the assignment triage process. This article provides a path from today's genre-centered, mean-based, macro methodology to tomorrow's individual resource centered, and micro methodology. A comparison of the financial results produced by the old and new assignment methodologies with the same population of assignment data would empirically demonstrate the superiority of the new methodology and more than cost justify the transition costs.
Appraisal Genre Versus Individual Resource Driven
The term "genre" is used to describe the traditional high-level appraisal resource categories of Direct Repair Program, Desk Review, Staff, and Independent Appraiser. Within the industry the typical order of priority for each genre is:
- Direct Repair Program
- Desk Estimate (if within parameters)
- Staff Appraiser
- Independent Appraiser
The implicit assumption is that the mean performance within each genre is highest for Direct Repair Programs and lowest for Independent Appraisers, making independent appraisers the choice of last resort. Even if these assumptions were accurate, basic statistics suggest that more than one third of the assignments from such a system will be sub-optimal.
The graph below represents a statistical normal distribution which exists for most populations of similar phenomena. As an example, the height of all human beings would form a similar pattern as would the batting averages of all major league players for the last 100 years. For most populations, the majority of individuals fall around the mean (average) range and then tail off gradually in both directions.
Assuming a statistically significant sample size of Direct Repair Programs, desk estimators, staff, or independent appraisers, and reliable performance measures, each would produce a similar bell curve distribution. Companies that do a better job of managing their appraisal resources should have more compact distributions, but they would still form a bell curve, albeit taller and narrower.
The main point is that, while on average the current hierarchy of appraisal resource utilization might be accurate, using available information it is possible to do much better than that. As a specific example, a highly performing independent appraisal firm could be a better option than a low performing Direct Repair Program.
Taking this to its logical conclusion, the old paradigm about an ordered genre based assignment priority should be eliminated in favor of a best performing resource approach. Over a large population of assignments a best performing resource approach produces a much better financial outcome than does the genre based approach.
Insurance Research Council Findings
A 2008 study by the Insurance Research Council (IRC) identified that auto accident frequency has fallen significantly since gasoline prices began rising in 2000 and at the same time, increasing vehicle safety lowered the incidence rate of serious injuries.
In spite of such trends, loss costs were unyielding, sparking curiosity until further investigation identified that the cost of treating routine injuries had risen fast enough to eclipse what should have been substantial loss cost reductions. What is particularly vexing is that the Insurance Research Council also demonstrated that the nature of routine injuries has not changed, just the cost.
Medical Cost Shift
As the battle rages between medical providers and the government over Medicare and Medicaid reimbursement rates and private health insurance continues to decline, Property & Casualty claim departments have become the path of least resistance and are absorbing an increasing percentage of national healthcare costs. The Insurance Research Council estimates that the annual shift had reached 1.2 billion per year conservatively as of 2006. Inpatient emergency room billing practices reflect empirical evidence of a substantial upward rise in evaluation and management (E/M) billing levels occurring between 2002 and 2008.
The government and private health insurers have been far more effective at combatting these trends through negotiated fee arrangements than Property & Casualty claim departments who are over-reliant on automated systems that cannot detect upcoding. The billions in medical cost shift being absorbed by the Property & Casualty industry is akin to collateral damage to a bystander caught in the crossfire.
Property & Casualty claim departments rely on medical bill repricing software to keep medical costs in check through a combination of fee schedules, negotiated agreements, and where lacking, usual and customary charges. But there is one glitch — the software uses the providers; reported diagnostic code(s) as a baseline for vetting billing levels. Providers have learned to push back against government fee reductions by inflating diagnostic codes, and evidence of such activity is ubiquitous. Not only does diagnostic code inflation drive up medical bill repricing allowances, but the knowledge that it does so without any repercussion has many hospitals acutely aware of the opportunity presented by auto accident patients. A whole series of exploiting machinations have evolved to fully leverage the opportunity. This type of thing was once the domain of a few dishonest chiropractors, but the financial pressures heaped onto legitimate providers has caused it to go viral.
This is the fourth article in a five-part series on understanding the total cost of your insurance program. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 3, Part 5.
As an illustration of the principles discussed so far, we offer these service level guidelines which have been developed by InterWest Risk Control for both Property & Casualty and Workers' Compensation clients:
Property and Casualty Service Level Guidelines (not including Workers Compensation)
Due to the significant variable revenue levels generated from either a mono-line or multiple lines of coverage (fire, inland/ocean marine, boiler/machinery, general liability, products liability and completed operations, auto liability, etc.) any client generating at least $10,000 in revenue would qualify for risk control service.