Tag Archives: fraud prevention

Bitcoin Is Here to Stay and Will Transform Payment Systems

Since the digital currency known as Bitcoin came on the scene in 2009, much has been written about it, both good and bad.  However, it seems clear that Bitcoin’s underlying “protocol” has the potential to transform the global payments system. Entrepreneurs are flocking to the Bitcoin protocol. Private equity and venture capital, most notably in Silicon Valley, have also begun to make substantial investments in the technology.

The technology for “crypto-currencies” like Bitcoin may hold particular promise for opening up the financial system to the masses of individuals in the world’s poorest countries, the majority of whom do not have access to bank accounts. The technology also has implications far beyond the financial system and could have fundamental impact on voting, legal contracts and real estate transactions, to name just a few.

A debate is raging over whether Bitcoin should be regulated, and, if so, how far regulation should go, to minimize any dangers while not suppressing innovation as Bitcoin develops out of its “infancy.”

Several events have galvanized those in favor of more robust regulation. In October 2013, the FBI arrested Ross Ulbricht, a.k.a. “Dred Pirate Roberts,” who is alleged to have been the mastermind behind Silk Road, a website that was devoted to selling illegal drugs and other illicit items and services. The sole medium of exchange on Silk Road: Bitcoin. In January 2014, Charlie Shrem, a well-known member of the Bitcoin community and the CEO of BitInstant, one of the best-known and largest Bitcoin exchanges at the time, was arrested on money-laundering charges. Then, Mt. Gox, a Tokyo-based digital currency exchange, collapsed, and the loss of millions of dollars of customer Bitcoins spread through the news like wildfire. Taken together, these events have caused many fraud prevention professionals working in law enforcement, regulatory agencies, compliance departments and other institutions where digital currencies could conceivably be an issue to eye Bitcoin and other “alternative” currencies with a healthy dose of skepticism.

In spite of these events, Bitcoin has been gaining support commercially among merchants and retailers. The Sacramento Kings of the National Basketball Association, the Chicago Sun-Times and Overstock.com, among others, now accept Bitcoins as a method of payment. Thousands of small businesses scattered across the U.S., with notable concentrations in San Francisco and New York, also are accepting Bitcoins.

Because Bitcoin is a disruptive technology, there were no real applicable regulatory or enforcement mechanisms in place when Bitcoin came into existence in 2009. The nature of the Bitcoin protocol is such that regulations already in existence, in most cases, could not be easily adapted. The exchange, transmission, trade, securitization and commoditization of Bitcoins all have regulatory implications. Regulators are rightly concerned about such issues as consumer protection, anti-money laundering/countering the financing of terrorism, fraud prevention and other important issues.  However, because of Bitcoin’s disruptive nature, the application of existing regulations often places Bitcoin in a regulatory “gray zone.”

In March 2013, the U.S. Financial Crimes Enforcement Network, known as FinCEN, issued guidance that characterized Bitcoin exchanges in such a way that they must register with FinCEN and follow the Bank Secrecy Act’s (BSA) anti-money laundering (AML) regulations. Exchanges also must develop bank-level AML and Know Your Customer compliance standards for their businesses.

In July 2014, the New York Department of Financial Services (NYDFS) issued proposed regulations regarding “virtual currencies.” The proposal has entered a 45-day comment period. The proposal would require companies involved in virtual currency business activities to have in place policies and procedures designed to mitigate the risks of money laundering, funding terrorists, fraud and cyber attacks. At the same time, the regulations seek to impose privacy and information security safeguards on companies operating in this environment.

As the country’s leading financial center, New York has taken the lead in proposing regulations that seek to balance the need for anti-money laundering, fraud prevention and consumer protection safeguards against the desire to promote innovation within the nascent digital currency industry. Though it is unclear whether the proposed regulations achieve these ends, it might be argued that these regulations are preferable to a regulatory vacuum that leaves industry insiders and investors with more questions than answers. However, the danger of overregulation is that it could drive away legitimate industry actors and the innovation that would follow. Absent investment and innovation in the industry, the technology is largely left in the hands of those who wish to exploit it for nefarious purposes.

Only time will tell.

KEY TAKEAWAYS

1)  Digital currency technology is here to stay, and overregulation could stifle investment and innovation in the industry, leaving the technology in the hands of those who wish to exploit it for nefarious purposes.

2)   Bitcoin technology is still in its infancy, and venture capital and private equity elements are beginning to show real interest in the technology’s exciting potential to transform certain business practices across a wide range industries.

3)  Regulatory agencies have only recently begun to take notice of the potential issues that this disruptive technology presents.

Biometrics and Fraud Prevention: Seeing Eye to Eye

As more consumers opt for the flexibility of serving themselves, it has become essential for businesses to deploy strong systems to authenticate identity. The challenge is how to reduce fraud without frustrating consumers or compromising the customer experience.

Biometric technology has been seen increasingly as a solution in industries such as financial services, but is there a useful place in insurance? As technology becomes more convenient –and more secure — many are saying yes.

What’s What in Biometrics

By identifying individuals through their unique physiological or behavioral patterns, biometrics offers a higher level of security, ensuring that only authorized persons have access to sensitive data. Physiological biometrics include fingerprint, face, iris and hand geometry recognition. Behavioral biometrics identify signature and voice verification, including keystroke kinetics that identify a person’s typing habits.

As consumer-centric channels such as mobile and online applications continue to expand, so will the risk of fraud. And while many industries, including insurance, continue to deploy new technologies to stave off attacks, the reality is that the tools and methods by which professional fraudsters operate are becoming increasingly sophisticated.

“While insurers have applied some preventive measures against fraud, the industry as a whole needs to catch up,” says Steve Cook, director of business development, Facebanx. “They must be forward-thinking and recognize the benefits of biometric technology and how it can help in preventing fraudulent activities.”

Reducing Claim Fraud and Protecting Data

One area where biometrics has begun to take hold is healthcare insurance. A study by the Ponemon Institute found nearly 1.5 million Americans to be victims of medical identity theft. Healthcare fraud is estimated to cost between $70 billion and $255 billion a year, accounting for as much as 10% of total U.S. healthcare costs.

Many insurers are using biometrics to help reduce billing fraud by eliminating the sharing of medical insurance cards between patients, or by making it more difficult for a person to assume another’s identity. For example, as an alternative to paper insurance cards, a biometric iris scan can immediately transport proof of a patient’s physical presence at a healthcare facility.

Biometric technology is also assisting healthcare insurers with compliance and data integrity standards — in particular with those set by the Health Insurance Portability and Accountability Act (HIPAA). For example, in addition to adhering to requirements for automatic logoff and user identification, insurers must implement additional safeguards that include PINs, passwords and some method of biometrics.

Fraud Capabilities in Property and Casualty

According to a report by Aite Group, the war against fraud in property and casualty insurance is also escalating. The group estimates that claim fraud in the U.S. P&C industry alone cost carriers $64 billion in 2012 and will reach $80 billion by 2015. Customer contact centers have been hit particularly hard. While the focus on protecting consumer data has primarily centered on online channels, fraudsters are now targeting the phone channel, as well. Leveraging information obtained through social media networks, thieves are manipulating call center representatives and gathering customer information. 

For this reason, biometrics are being deployed. Representatives can cross-reference incoming calls against a watch list of known fraudsters, identifying unique voice prints. Advanced biometric techniques can also identify fraud patterns based on speech analytics, talk patterns and various “red flag” interactions.

Summary

The insurance industry is just beginning to scratch the surface when it comes to identifying areas of fraud management to which biometric science can be applied. 

“Insurance companies [that] are first to adopt this kind of technology will push the fraudsters over to the competition, because fraudsters don’t want their face or voice on a database that they can’t control,” Cook says.

Making the switch to biometric security measures can mean a substantial investment if done on a large scale. Even so, with the proliferation of online channels, consumer conveniences and ever-shifting tactics of fraudsters, deploying some degree of biometric technology will become a competitive necessity. And, as long as the insurance industry continues to expand consumer services because of e-commerce and m-commerce, no doubt new applications of biometrics will come about.

Speed To Detection: A Progressive And Strategic Concept Using Advanced Anti-Fraud Analytics

The recent natural disasters in Oklahoma and New Jersey, and the wildfire season in the western United States, have a lot in common when one thinks both of insurance risk — plus the intended and unintended consequences of these events.

The insurance industry knows natural disasters will happen. The industry thus creates and follows protocols and response plans. For the most part, the industry and public-safety officials handle the crisis, and restore calm and order in our communities.

The insurance industry knows these events will occur, and planning is generally pretty solid per the axiom, “If it’s predictable, it’s preventable.”

But in the world of insurance fraud, many sectors of the insurance industry seem to lack the same energy to mitigate this crime. Using the same acumen gained from restoring order after disasters, the key is to apply the same proven strategies of history, response, performance and mitigation of future risks. This approach will better help combat insurance fraud with equal success.

The modern strategy of “speed to detection” is a uniting principal and operating strategy for mitigating the epidemic of fraudulent claims.

Optimizing speed to detection involves synchronizing all layers of insurer personnel into informed, enterprise-wide fraud fighters. They are well-trained to spot warning signs of this crime, personally motivated, and encouraged to follow internal processes that allow open lines of communication about fraud leads, needed process improvements and action solutions.

Bogus claims thus can be discovered and mitigated faster. Quick detection also is an intimidating deterrent that can convince more fraudsters to avoid trying to breach that insurer. The risk of arrest and conviction is too high, and odds of financial reward are too low.

Speed to detection is a timely precept: Insurers today are confronting a persistent crime that is morphing, in many respects, to higher levels of sophistication and ability to steal insurance money.

Insurance fraud harms law-abiding consumers (higher premiums), aids the underground economy, facilitates other illegal enterprises such as trade-based money-laundering, and poses a public-safety threat (e.g., staged automobile collisions, arson, murder for life insurance, needless medical procedures).

Conservatively, fraud steals $80 billion a year across all lines of insurance.1 Some estimates rate the annual losses much higher.

And the problem is growing. Questionable property-casualty claims in the U.S. have increased 27 percent in 2012 over 2010, the National Insurance Crime Bureau (NICB) says in an analysis of its database of claims released in May.

That reflects 91,652 questionable claims in 2010 compared to 116,171 claims in 2012.2 Similarly, most consumer research reveals a disturbing public cynicism about this crime, and even a backslide toward higher consumer tolerance of fraud.3

Confronting this epidemic is a large network of organizations dedicated to minimizing fraud as a virulent national threat.

Insurance companies have teams of experts (the Special Investigation Unit, or SIU) trained to deal with suspicious claims.

State law-enforcement agencies have created specialized departments and bureaus dedicated to thwarting this crime.

State insurance departments have strengthened their processes for identifying, investigating and reporting suspicious claims for potential prosecution.

States also have enacted numerous fraud laws and regulations that further strengthen enforcement. More are being added or bolstered every year.

At first glance, these processes appear sound, prudent and presumably effective. A lot of money, personnel and effort have been thrown at insurance fraud. Shouldn’t schemes be going down instead of up? Or at minimum, leveling off?

Many of the following observations are guided by my 32 years of combating insurance fraud, including several years as a Bureau Chief, and one year as the Division Chief with the nation’s largest anti-fraud unit, the California Department of Insurance, Fraud Division. Some academic backup also is cited for added information.

Despite the large defense shield, growing numbers of insurance executives at the decisionmaking levels — inside and outside the anti-fraud ranks — are frustrated about how fraud persists as a costly national epidemic.

To illustrate: In recent years, I have provided consulting and analysis and review of first-party bad-faith cases involving fraud, the actions of SIUs in a claim or series of claims, and expertise for qui tam civil actions by insurance companies.

In these many interactions with insurance executives, anti-fraud directors and other colleagues throughout the industry, the frustrated question they ask most often about fraud is: “Why do we keep throwing money at a crime that never seems to go away?”

Typically they offer two reasons why fraud remains so vexing and persistent:

“The insurance system invites fraud.” Indeed, our insurance system is one of the best in the world. But the most skillful fraudsters effectively exploit weaknesses when the system is not synchronized and calibrated among partners to create a hardened shield.

“We need the best team to investigate these crimes.” Insurance companies and government entities are constantly working to create an elusive Dream Team for investigations. Key ingredients of team members are passion, creativity, and ability to wade through a series of complex conspiracies either to deny a claim, or have an offender arrested and prosecuted.

Many insurers are frustrated because qualified people with the acumen to investigate fraud are hard to come by. Time after time, when insurance carriers lose bad-faith lawsuits involving the SIU and fraud, some of the common denominators are training, unqualified people and bad leadership decisions.

An important reason fraud appears to keep rising is that insurance companies and regulators are slow to recognize the value and impact of anti-fraud technology leveraged with best business practices.

The anti-fraud community needs to rethink its strategies, and examine ways to identify problems and risks before they become crimes.

Resources should be synchronized to optimize speed to detection.

This requires insurers to have their anti-fraud operations well-aligned with their internal corporate structure, strategies and practices — and with external partners such as state fraud bureaus, law enforcement and NICB.

Reaching this goal must start with an honest discussion about technology and other best practices. A major problem is that too many insurers use outmoded methods of fraud detection. These methods have little impact on modern, sophisticated fraud rings that are a significant source of money outflow.

Meanwhile, insurance fraud is evolving and organized crime increasingly is infiltrating fraud. Such rings have been around for years, but their sheer number and growing sophistication are changing the criminal landscape. Many insurers aren’t equipped to counter this new breed of criminal, especially using indicators.

Recently, I gave a presentation at the Insurance Fraud Management Symposium (IFM). This is the largest annual conference of insurer anti-fraud directors, executives and other personnel.4 The presentation covered a major criminal investigation and prosecution involving a staged accident ring in Southern California.

This case illustrates two frequent insurer vulnerabilities: a) over-reliance on weak fraud indicators that allowed fraudsters to penetrate the insurer’s anti-fraud defenses relatively easily; and b) how vulnerable insurers become when they compromise their business processes by speeding up claims payouts by compromising vigilance.

The leader of this criminal enterprise joined me in the presentation. He was under court order to assist the California Division of Insurance in public education after his conviction.

He related how he ran the operation, who he involved, and how and why he targeted specific insurance companies with bogus injury claims from the setup collisions.

He made a chilling point:

“You will never win the war on fraud.”

He urged insurers to avoid over-reliance on the so-called “indicators” they use to identify fraudulent claims. Indicators are a relatively basic investigative tool. Insurers look for specific actions or behaviors that are red flags of possible fraud during the claims process. With staged accidents, for example, indicators might include flags such as multiple people in both vehicles, expensive treatment at the same clinic, and similar last names to suggest a possible family fraud ring.

This ringleader knew the indicators well, probably better than some claims staff. Thus he could rig his crashes and phony claims to easily avoid being detected by common flags. Just as important, he also relied on inexperienced and untrained claims representatives to give in and pay claims with little scrutiny.

“It is a game of poker: Who is going to bluff the best, and who will stay in the game with a winning hand?” he warned.

In a similarly illustrative case, Greg Foshee was educated, articulate and knew the insurance claims system well. He should have. Foshee was a claims representative for one of the nation’s largest property-casualty insurers. He saw large profit potential when his supervisor ordered him to “just process the claims.”

So Foshee went to the “dark side.” He started staging vehicle accidents and then helped process the ensuing bogus injury claims without insurer scrutiny.

He staged more than 82 vehicle collisions that stole $1 million worth of insurance money. During questioning after his arrest, Foshee said his supervisors told him: “Don’t ask too many questions, just get the claims off your desk.”

Foshee used multiple individuals with multiple valid drivers licenses from several states. He kept the operation simple to avoid detection. He had only 13 ring members, with just three cohorts working full time and controlling the group.

Nor did Foshee involve attorneys and physicians. They would have slowed the claims, and he would have had to split the ill-gotten insurance money with them.

He made smaller claims just for vehicle damage and minor medical treatments in order to stay under insurer radars. The treatments usually consisted of an emergency-room visit for subjective injuries such as whiplash that are typically associated with minor traffic accidents.

Foshee also knew that if his ring members went to emergency rooms too often in a given city, someone might notice and start asking questions. So instead he created false medical bills and treatment reports using letterhead and forms stolen from the hospital.

If the targeted insurance companies had simply called the hospitals to verify patient information, they would have discovered that the so-called patients were never treated there. This would have confirmed that the treatment reports and bills were false.

Foshee averaged $10,000-12,000 income per staged accident, and went undetected for several years. He knew how the claims process worked, and how to avoid scrutiny and detection. The California Highway Patrol’s Investigations Unit completed the investigation in 1988. Foshee was convicted of insurance fraud, conspiracy, grand theft, and was sentenced to several years in state prison.

Let’s think about this for a minute … These aren’t isolated cases. Over the last 30 years, large segments of the insurance industry, law enforcement and other government agencies have relied heavily on old-fashioned indicators of false claims, and similar basic tools. These indicators have been identified, written, promulgated, and used in the daily business of receiving and closing insurance claims.

Reality check, please?

The crime rings knew the insurers’ fraud indicators, and avoided them. The insurers also compromised their internal anti-fraud processes to turn around claims quickly. Many other organized fraud groups and bold criminal entrepreneurs like these are operating daily, skillfully compromising the insurer claims systems. Collectively, they likely steal millions of dollars everyday. Whether detected or undetected, usually it is too late to recoup the stolen money.

Rethinking The Fraud Fight
If speed to detection is to move from an energizing concept to transformative anti-fraud practice, fraud fighters must step out of the indicator box and rethink their entire approach to combating modern, emerging threats such as complex and organized crime rings.

Some insurers just seem to be going through the motions of fighting fraud, indicators and all. But the more progressive insurers are transforming their internal cultures and business practices to create a coordinated, enterprise-wide response to this crime.

They are taking the fight more directly to the criminal underworld instead of waiting for the underworld to come to them. As a result, these insurers are also far more resistant to schemers of all kinds.

Insurance companies and government agencies need the ability to change direction quickly to address emerging fraud schemes, trends and problems. Nimbleness is a key attribute of sophisticated fraudsters. It also should be a core trait of every insurer’s speed-to-detection process.

The goal is not to eliminate fraud indicators or other basic tools. These tools may play a role in the overall mix of anti-fraud business processes and strategies each insurer custom fits for its own anti-fraud challenges.

Several strategic best practices can help optimize speed to detection.

Advanced Analytics
Advanced analytics rank among today’s most transformative best practices for increasing speed to detection and allowing better-informed decision making.5

Analytics involves the discovery and practical use of meaningful patterns of anti-fraud data. Properly marshaled, advanced analytics can quickly move insurers miles beyond indicators. Analytics can reduce the ineffective pay-and-chase mindset of many insurer detection processes. Analytics also can put insurers quickly on the offensive, and thus dramatically increasing speed to detection.

Advanced analytics tools come in many flavors. Each organization must customize an analytics strategy to its unique challenges. Rarely is there one off-the-shelf software solution. Analytics solutions increasingly are being adopted by some insurers. Among the solutions that are gaining momentum:

Predictive analytics. Allows insurers to uncover suspicious activity in close to real time, and even to forecast the likelihood of potentially fraudulent behaviors.

Text analysis. Insurers can ferret out previously inaccessible data such as an adjuster’s field notes — even handwritten notes.

Social network (link) analysis. Helps an insurer examine relationships among organizations, people and transactions to discover suspiciously related claims that appear unrelated on the surface.

Social media analysis. More insurers recently have begun mining social media for clues. A workers compensation insurer, for example, might uncover a supposedly disabled worker posting photos of his Hawaiian surfing vacation on his Facebook page.

But analytics alone — whether advanced or more basic — cannot reverse the tide of fraud. Analytics must be supported by other best practices and processes.

Some insurers and smaller regulatory agencies believe the cost of advanced analytics platforms is too high, or that they do not have the data to support such robust systems.

But analytics can be affordable by starting small (don’t try to boil the ocean), and strategically planning to gradually layer in advanced analytics into the business process and technology platform. Start small, and build upon the new platform incrementally, first addressing immediate business needs and problems.

Marshall Big Data
Mobilizing big data is gaining wider attention in anti-fraud circles. Insurers are sitting on troves of data, hard and soft. Much is never accessed for fraud-fighting. Insurers can dramatically increase their anti-fraud assertiveness by insightfully accessing, analyzing and mobilizing their large volumes of untapped data.

But the terabytes and even petabytes can overwhelm an insurer’s analytical capabilities.

Insurers must invest in analytic expertise to retrieve, filter and use big data properly. Insurers also must know what questions to ask when mining for big data. This information will be more focused and useful, and avoid the confusion and fuzzy results that too much data can impose.

Limit Pay And Chase
Insurers must re-evaluate their reliance on the ineffective “pay-and-chase” model that drives the anti-fraud-strategies of so many insurers. Using this model, insurers routinely pay claims and then investigate afterward.

But the money is gone by then, and the trail is growing cold. It is rare for an insurance company, self-insured or government program to recover much or any stolen money. In fact, usually no money is recovered.

This is especially true of the larger, complex fraud rings that often operate internationally. They are adept at trade-based laundering of stolen insurance money through shell corporations.

Some insurance rings are learning from criminal brethren such as drug cartels in Mexico and South America. They are effectively laundering stolen money (e.g., proceeds from human trafficking, firearms and narcotics). They wash the money through sophisticated shell companies and corporations involved in global commerce. The money is difficult, if not impossible, to trace and recover.

In the public sector, Medicare once was the poster child for ineffective pay-and-chase practices. But the federal health program for seniors is replacing that approach in part by installing predictive analytics to uncover more false claims before payment.

Take On Difficult Cases
Simply going after safe, low-level frauds (i.e., low-hanging fruit such as an inflated claim from a home burglary) might look good on the anti-fraud unit’s statistics reports.

But this also may ignore the largest fraud problems and sources of claims-money outflow such as modern rings that steal safely and efficiently.

They often are organized like a classic cell network. Ring members do not know each other, nor do they know all activities in the enterprise. But advanced analytics can expose these complex groups and their crimes much faster and more efficiently.

Insurers must commit to taking on the difficult higher-dollar cases such as those perpetrated by organized crime rings, even if it entails considerable cost and personnel. This is essential to diminishing what for many insurers is a significant source of false claims payouts.

Collaboration
Better collaboration is essential to turning the corner on America’s fraud epidemic. This collaboration must include all stakeholder organizations and personnel.

Internal. Collaboration within an organization should be an enterprise-wide endeavor and operational commitment. For example, a) agents and brokers must speak with the claims staff; b) claims staff must communicate with the SIU team about suspicious claims; and c) employees at all levels must be encouraged to speak up and identify vulnerabilities, process breakdowns and needed solutions.

To underscore this point, visit another statement the fraud-ring member said at the IFM conference:

“We know when the insurance company will pay based on the actions and interaction with an inexperienced, and not properly trained, claims representative. And we also know which companies pay claims easily.”

External. Insurers must retain open lines of communication with state fraud bureaus, local law enforcement, state attorneys general, the FBI and other stakeholders.

Insurers in different lines of insurance also must collaborate. Auto, workers compensation and health insurers, for example, may find synergy by comparing best practices and exchanging case leads that may uncover hidden crimes.

Insurers in the public and private sectors also must better collaborate for the same reasons. Many organized crime rings, for example, defraud numerous insurance programs. A large Armenian crime ring in California, for instance, staged car crashes against auto insurers and also bilked Medicare. If public and private insurance programs share case leads, they can dramatically increase the joint knowledge base needed to more speedily break down that ring.

One promising collaborative effort is the new Fraud Prevention Partnership. It was formally announced last July by HHS Secretary Kathleen Sebelius and U.S. Attorney General Eric Holder.6

Medicare, private health insurers, automobile insurers and others are formalizing closer lines of cooperation. The partnership is building up its operating structure, and partnership members are beginning to share fruitful case leads. It could become a model for collaborative techniques.

The Payoff
Marshaling analytics and big data with current rules and indicators into a seamless and unified anti-fraud effort creates an expansive world of possibilities.

Imagine the ability to search a billion rows of data and derive incisive answers to complex questions in seconds.

Imagine being able to comb through huge numbers of claim files quickly.

Imagine more-quickly linking numerous ring members and entities acting in well-disguised concert. These suspects likely could not be detected with sole or even primary reliance on basic methods such as fraud indicators.

Ultimately, imagine analyzing entire caseloads faster and more completely, thus addressing the largest fraud problems and cost drivers in any of an insurer’s coverage territories.

Conclusion
Insurance companies are not in the anti-fraud business. They are in the business of managing a risk pool, mitigating those risks and returning a fair profit. Government law-enforcement agencies are specifically charged with preventing crime and disorder.

To prevent fraud, all involved organizations must scrutinize their systems with a fresh view and openness to evaluating how to better combat this crime.

Advanced analytics, coupled with sound business practices and preventive measures, will yield better anti-fraud results. For insurance swindlers, speed to detection should mean speed to jail.

1 Coalition Against Insurance Fraud, estimate of annual fraud losses.

2 U.S. Questionable Claims Report, National Insurance Crime Bureau, May 16, 2013.

3 Four Faces of Insurance Fraud, Coalition Against Fraud, 2007; Poor Service Leads to Fraudulent Claims, Accenture consumer survey, 2010.

4 An Insider’s Perspective on Automobile Insurance Fraud — Why It Is So Easy to Steal From Insurance Companies, and What To Do About It. White Paper by SAS, 2013.

5 Competing on Analytics, The New Science of Winning. Thomas H. Davenport and Jeanne Harris,
Harvard Business School Press. 2007.

6 New Anti-Fraud Partnership is a Force Multiplier, news release, Coalition Against Insurance Fraud, July 25, 2012.

An Integrated Strategy To Prevent Claimant Fraud In Workers’ Compensation

Workers’ compensation has become increasingly vulnerable to claimant fraud. In today’s stagnant economy, employers, insurance companies, and claim organizations face significant financial pressures, and the last thing they want is to lose additional funds to those aimed at cheating the system — either through outright fraud or opportunistic maligning.

Claimant fraud places additional strain on a benefit program that strives to provide injured employees with the medical care and compensation they need to recover from work-related injuries, so they may return to work quickly and safely.

Claims departments are on the lookout for new and more effective ways to detect and prevent fraud — and with good reason. Financial incentives typically increase during tough times for both “hard” and “soft” fraud. Hard fraud is a deliberate attempt to stage an accident or invent an injury, while soft fraud or opportunity fraud, occurs when a claimant exaggerates the severity of an injury to take additional time off from work or to continue to receive benefits.

Scope Of The Problem
The Federal Bureau of Investigation estimates that the total cost of insurance fraud (excluding healthcare) exceeds $40 billion per year.1 On average, insurance fraud costs the average U.S. family between $400 and $700 annually in the form of increased premiums.2

No doubt figures will continue to rise, since many consumers view fraud as a victimless crime. Nearly one of every four Americans says it’s all right to defraud insurers — with eight percent saying it’s “quite acceptable” and 16% saying it’s “somewhat acceptable” (Accenture Ltd. 2003).3

According to the National Insurance Crime Bureau (NICB), the number of questionable claims increased to 48,887 in the first half of 2011 from 46,766 in the first half of 2010 and 41,309 in the first half of 2009 — representing an increase of 18.3% over a two-year period.4

Specifically in regards to workers’ compensation, the National Insurance Crime Bureau estimates that up to 10 percent of claims are fraudulent, costing the industry as much as $5 billion a year.5 In the past, workers’ compensation fraud was singled out as the fastest growing area for insurance scams.

In fact, one of every three Americans say it’s all right for employees to stay off work and continue to receive benefits if they still feel pain, even if physicians say these employees are fully capable of returning to their jobs (Insurance Research Council, 1999).6

Solutions & Strategies
To snuff out fraud, claims organizations need an integrated approach that includes Human Resources policies, systematic procedures, timely reporting of injuries, advanced fraud detection technology, and expert claims professionals who document injury information from the onset of a claim and continue to tightly manage cases so there is no room for fraud and abuse to sneak into the system.

Providing A Personal Touch

Despite technological advances, human intervention remains a key component in an organization’s ability to detect and prevent fraud. To some extent, the proliferation of self-service options and the increased de-personalization of the claims process may actually have compounded the fraud problem.

For example, with electronic and online injury reporting, many claimants can report an injury without speaking to an actual person. With little to no human interaction, a suspicious injury can enter the system undetected and the case can progress to result in significant losses.

This is why organizations need the right blend of people, processes, and technology to combat fraud — with each element applied at the right time in the claims process to ensure the most success.

Timely Reporting Of Injuries
Fraud prevention must begin with the first report of injury. When injuries are reported late, lag times leave the door open for inconsistent accounts of the nature and severity of an injury to occur. Without a systematic and reliable process to ensure timely reporting, gaps in injury management create opportunities to bilk the system.

For example, a claimant may find that it’s easy to exaggerate the nature and severity of an injury to take additional time off from work, or they may attempt to visit their own physician — rather than a designated occupational clinic — believing their personal doctor will be more inclined to provide time off.

Instead, claims organizations must shore up injury reporting to ensure an almost failsafe prompt process. This process must be reinforced with written Human Resources policies that employees are required to sign. For example, many organizations use an injury hotline, train employees on the call-in injury reporting process, and mandate that employees sign agreements that they understand and will adhere to this procedure.

From there, the call center is so simple and easy to use that many organizations achieve virtually 100% compliance with same-day injury reporting.

Many injury hotlines actually employ triage nurses, who ask thorough, in-depth questions about the nature and severity of the injury and accident. These nurses carefully document and capture injury information upfront, and make notes if anything suspicious comes up during the intake process. Later in the life of the claim, this carefully documented record helps claims staff to monitor for inconsistencies with the original injury report — often an indicator of fraud or abuse.

Although an injury hotline was initially designed to improve service and response to injured employees, it has provided an added benefit of fraud prevention.

Another important aspect to prompt reporting is the fact that when dubious cases are identified early, organizations can actually take effective steps to discourage further escalation. For example, the sooner injuries are reported, the sooner organizations can begin the process of investigation, collecting information, and documenting cases. If suspicious cases are identified within one or two weeks of the claim being filed, then with diligent and rigorous inquiry, claimants will realize someone is watching, they’ll be held accountable to their stories, and further abuse of the system is immediately deterred.

Adhering To Medical Best Practices
Claimant fraud comes in many different forms. There are gray areas especially in terms of overutilization of medical services. Injured employees may seek unnecessary care to justify additional time off, but the use of triage nurses and medical treatment standards at the frontend of a claim can ensure quality care for injured employees — care that is simultaneously appropriate and cost-effective.

Based on jurisdictional rules and regulations, employers may be allowed to develop and utilize a provider network — and have their nurse injury hotline refer injured workers to facilities and clinics within this network. If a particular jurisdiction does not allow employers to utilize networks to direct care, they may still designate preferred providers.

Working in conjunction with the injury hotline and triage nurses, organizations can provide an injured employee with this recommended list of qualified occupational providers, conveniently located to the employee’s worksite or home. Even without a mandated network, most employees will follow a triage nurse’s referral to a suggested provider or recommendations for simple first aid or self care.

Spotting The Warning Signs
In the past, claims adjusters served as the first line of defense for fraud, bearing the burden of having to identify irregular activity, spot red flags, and alert special investigative units of questionable activity. Today, however, successful fraud prevention requires a commitment across the claims continuum — with all parties keeping a wary eye out for the warning signs.

There are no sure-fire indicators of fraud, but there are common markers that help staff to spot dubious cases. For example, many injuries — unrelated to work — are reported on Monday morning, directly following the weekend. Disgruntled workers — with a long history of personnel issues — may file false claims as a way to get back at their employers. Other signs include claimants with several prior injuries, individuals who avoid speaking with claims adjusters, and injuries that have no witnesses or have varying accounts of the accident.

Leveraging The Latest Technology
To quickly pay legitimate claims and avoid suspicious ones, many claims organizations leverage technology to capture, access, and analyze claims data. With billions of dollars at stake, some have invested in advanced fraud detection tools, such as predictive analytics to root out potentially fraudulent patterns in the data.

In addition, with the prevalence of social media, many investigators receive direct tips from claimants. For example, investigators often read Facebook postings from injured workers, who boast of a second source of income, while collecting disability payments for a work-related injury.

Training & Education
Probably the most important factor in combating fraud is education. Employers will have valuable insight on injured workers and the related accidents. As a result, claims organizations need to partner closely with employers in anti-fraud efforts, teaching them effective techniques to investigate worksite injuries. Many claims organizations will provide employers with a list of questions to ask injured employees, explaining how such inquiries can help alert them to potential fraud.

There are many opportunities for fraud to sneak in later in the life of a claim. A worker may begin to feel better, but continue to fake or exaggerate the nature or severity of an injury. As a result, it’s important that managers and supervisors continue to play an active role in communicating with injured employees. This personal communication lets injured workers know they’re missed at work and are expected to adhere to treatment, recovery, and return-to-work (RTW) plans.

Closing Gaps In The Return-To-Work Process
If injured employers have work restrictions, employers should be able to accommodate them with modified duty assignments and workers must understand that they are expected to return in this capacity — reinforced with training and signed Human Resources policies.

However, when visiting treating physicians, many employees exaggerate the nature of their jobs, so they may be granted time off from work. This is another form of opportunity fraud.

Claims organizations can partner with employers to build an online database of essential job descriptions and pre-defined modified duty assignments. In this way, treating physicians will have “ready” access to accurate job descriptions, so they can make more informed decisions on whether to release employees to full duty or modified duty assignments. This type of database tightens up return-to-work coordination and reduces the ability for opportunity fraud to enter at this juncture of the workers’ compensation process.

Conclusion: Shutting The Door On Fraud & Abuse
Today, human intuition, intervention, and intelligence remain critical to fraud prevention. The industry needs to rely on experienced claims, nurse, and investigative professionals to collect and assess injury information and effectively communicate with claimants — and to read between the lines in order to root out potential fraud and abuse.

Technology can help to detect fraudulent patterns, but organizations must continue to rely on human discernment at critical points of the claims process — especially at the front end of an injury to make sure a claim is set down the right path from the start. Systematic processes and procedures such as the use of injury hotlines, triage nurses, treatment protocols, and preferred providers can help to shore up opportunities for fraud and abuse to sneak into the system.

In addition, training, education, and signed Human Resources policies help to ensure employers and employees understand the expectations regarding their respective roles in the claim and return-to-work process. All of these components contribute to a comprehensive and integrated approach that helps to prevent fraud and abuse from ever entering the workers’ compensation system.

1 Madsen, Kirk, Claims Magazine, “Fraud Triage Programs: Strategic Decisions for Better Detection,” February 2010.

2 Madsen, Kirk, Claims Magazine, “Fraud Triage Programs: Strategic Decisions for Better Detection,” February 2010.

3 Hoelle, Tim, Florida Underwriter’s Magazine, “Arresting Workers’ Compensation Fraud,” May 2010.

4 Violino, Bob, Insurance Networking News, “Fighting Fraud One SIU at a Time: Special investigative units are increasing the use of analytic technologies to identify suspicious claims,” November 2, 2011.

5 Vowinkel, Patricia, Risk & Insurance, “Flagging fraud: spate of deals, partnerships shows how serious carriers are about fighting fraud,” June 1, 2010.

6 Hoelle, Tim, Florida Underwriter’s Magazine, “Arresting Workers’ Compensation Fraud,” May 2010.