Chapter 10: Fraud Management: Certificate in Health Insurance

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Chapter 10: Fraud Management

Certificate in Health Insurance

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tantamount to violation of the confidentiality agreement signed when joining TCS.

Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that may be appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.
Certificate in Health Insurance TCS Business Domain Academy

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Contents

Chapter - 10 Fraud Management .................................................................................... 4
Introduction ...................................................................................................................... 4
10.1 Healthcare Fraud Statistics .................................................................................... 5
10.1.1 Health Insurance Fraud (USA) ........................................................................ 5
10.1.2 Medicare Fraud (USA) .................................................................................... 5
10.1.3 Medicaid Fraud (USA) ....................................................................................6
10.2 Definition of Healthcare Fraud & Abuse .................................................................6
10.3 Difficulties in fraud control.....................................................................................9
10.4 Impact of Fraud on Individuals (beyond financial loss) ......................................... 10
10.5 Fraud Management Activities .............................................................................. 11
10.6 Key Characteristics of an Efficient Fraud Management System ........................... 14
10.7 Laws Regulating Fraud & Abuse .......................................................................... 16
Summary ........................................................................................................................ 18
References ...................................................................................................................... 20


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Chapter - 10 Fraud Management

Introduction
Fraud is an inherent problem for healthcare and health insurance. It is responsible for
substantial amount of losses to the insurers ranging billions of dollars annually across the
globe. Insurance companies are finding out ways and means to combat this problem. It
impacts all the stakeholders - for insurers by way of higher cost of financing, for providers
by way of stringent monitoring, for insured public by way of higher premiums. This chapter
tries to give insight into various types of fraud and methodologies to tackle them.

Learning Objectives
On completion of this chapter, you will understand the:
Various types of fraud
Characteristics of fraud
Technologies used in tackling fraud
Framework for handling fraud
Various laws regulating fraud


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10.1 Healthcare Fraud Statistics

10.1.1 Health Insurance Fraud (USA)
Based on a report by National Health Care Anti-Fraud Association 2008, US spends
more than $2 trillion on healthcare of which 3% of that spending, $68 billion is lost
on fraud.
Around 1415 individuals and organizations are banned from federal programs for
fraud and abuse, and about 293 criminal actions & 243 civil actions were taken, as
per the report of Department of Health and Human Services, 2009
Confusing Explanation of Benefits (EOB) is also considered to be one of the reasons
According to a survey, 70% of the EOB forms issued by healthcare providers
confuse people
Nearly 40% of Americans dont understand their medical bills or EOBs to
understand to what services they are paying and whether it is valid or not,
survey reveals.
Almost 16% of the people dont understand the description of procedures
that they received
Small businesses and individual consumers are the prime targets of fake healthcare
plans (insurance policies), several health plans were shut down by the state
insurance department for selling unlicensed coverage
On an average, private health insurers spend about $1.9 million annually for anti-
fraud investigative unit
Every $2 million spent on fighting healthcare fraud generates a return of $17.3
million in terms of recoveries, judgments by courts and other anti-fraud savings
10.1.2 Medicare Fraud (USA)
Medicare and Medicaid made an estimated $23.7 billion in improper payments
in 2007. These included $10.8 billion for Medicare and $12.9 billion for
Medicaid. (U.S. Office of Management and Budget, 2008)
Every $1 the U.S. government invests in combating Medicare and Medicaid
fraud saves $1.55. (U.S. Department of Health & Human Services, 2009)
Medicare paid dead physicians 478,500 claims totalling up to $92 million from
2000 to 2007. These claims included 16,548 to 18,240 deceased physicians. (U.S.
Senate Permanent Committee on Investigations, 2008)

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Nearly one of three claims (29 percent) Medicare paid for durable medical
equipment was erroneous in FY 2006. (Inspector General report, Department of
Health and Human Services, 2008)
Medicare and private health insurers pay up to $16 billion a year for needless
imaging tests ordered by doctors. (American College of Radiology, 2004)
10.1.3 Medicaid Fraud (USA)
The 50 state Medicaid fraud control units obtained a collective 1,205
convictions, and claimed total recoveries of more than $1.1 billion in court-
ordered restitution, fines, civil settlements, and penalties. (Annual Report, Office
of Inspector General, U.S. Department of Health and Human Services, FY 2007)
Of the 3,308 persons and entities excluded from participation in Medicare,
Medicaid and other federal health care programs in FY 2007, 805 were based on
referrals made by state Medicaid fraud control units.
The number of successful civil actions totalled 607.
More than 61 percent of medical providers (4,319) banned from state Medicaid
programs in 2004 and 2005 didnt show up in the federal database of state-
banned providers. This makes it easier for banned providers to set up shop in
other states and continue doing business with federal health-insurance
programs.

10.2 Definition of Healthcare Fraud & Abuse

Fraud refers to an intentional deception or misrepresentation made by a person with the
knowledge that the deception could result in some unauthorized benefit to him/her or some
other person. It also includes any act that constitutes to be fraud under the statute.

Abuse refers to provider practices that are inconsistent with sound fiscal, business, or
medical practices, and result in an unnecessary cost to Health programs, or in
reimbursement for services that are not medically necessary or fail to meet professionally
recognized standards for health care. It also includes recipient practices that result in
unnecessary costs to the Health program.


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10.3 Classification of Fraud

Healthcare fraud can occur from the provider side as well as the recipient side. Based on the
nature and motive of fraud, healthcare fraud can be classified accordingly.

Based on who is performing the fraud, it can be classified into:
Provider fraud: It refers to participating and non-participating providers who
indulge in fraud by submitting false claims. People involved in this type of fraud
include:
Providers
Hospitals
Agencies
Organizations
Institutional providers
Employee of provider
Billing service
Any person eligible to file claims

These participants commit fraud by multiple means, which include:
Multiple billing or billing for services not rendered
Misrepresenting the condition and performing diagnosis which is either
unnecessary or costly
Upcoding, which refers to submitting bills for services that costs more than
what is actually provided
Unbundling, which refers to separate bills for each phase of treatment
Ping-ponging, which refers to billing multiple providers for services
rendered to a single patient
Kickbacks, which refer to accepting monetary benefits for referring a
patient
Providers billing uncovered services as covered services
Luring unsuspecting citizens to clinics in the name of free checkups to grab
their health insurance information and using it for fraudulent billing
purposes

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Increasing the billing of patients by prolonging their stay at hospitals in the
name of observation
Medical equipment suppliers charging the insurance companies for
different and more expensive equipment rather than what is actually given
to the patient
Disproportionate billing in ambulance services

Subscriber fraud: It refers to the fraud committed by the subscribers of the
insurance by taking advantage of the policy terms and situation. Subscribers can
indulge into this type of fraud by many ways, which include:
Impersonation the policy holder and availing medical services under their
name
Taking a policy for an ineligible person and providing coverage
Submitting falsified receipts and alteration of claims
Claiming reimbursements for non-existent services and medication

Based on the type or nature of fraud committed it can be classified into:
Opportunistic fraud: It is generally performed by an individual who is in a position
to manipulate the claims which can be done either by inflating the services in the
claim or availing same services from multiple providers. Insider knowledge is not
essential in committing this type of fraud. Magnitude of losses in this type of fraud
is meager. Doctors, nurses, pharmacists with a temptation to increase their revenue
commit to this type of fraud either by billing for services not rendered or that are
exaggerated.

Professional fraud: It is usually performed by organized group by creating multiple,
fake identities targeting numerous organizations. They are completely aware of the
functioning of fraud detection systems and hence try not to get caught by the
system. They try to take assistance of insiders in committing this fraud. Magnitude
of losses in this type of fraud is huge. It is operated as a network with a lot of hidden
linkages.


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10.4 Difficulties in fraud control

Identification of fraud itself is difficult in health insurance and so is its difficulty in measuring
the magnitude of losses incurred. Because of the complexity in the nature of services
involved and the mode of transactions irrespective of the fraud management systems that
are put in place it is difficult to control fraud in health insurance. Some of the factors that
make it difficult are:-
Insurers are considered as socially acceptable targets by population: Insurers are
considered to be rich, anonymous and an easy target for fraud. Insurance
companies and government agencies are the primary targets and the ones that
encounter financial losses because of this healthcare fraud.

Most of the healthcare fraud schemes are non-self-revealing: Subscribers are
generally not educated enough about the Explanation of the Medical Benefits
(EOMB) because insurers try to sell policies that dont meet the requirements of the
subscribers. Hence EOMB do not have effects as expected for several reasons like:
Recipients of EOMBs have no financial incentive for paying attention to
them
Recipients cannot understand most of the terms mentioned in it
Most fraud schemes intentionally target vulnerable population who
generally are not able or willing to complain.

Distinction between the administrative budget & funds: Program administrative
cost refers to cost incurred in handling the claims which also includes investments
into fraud control measures. Program cost refers to expenditure incurred in paying
the claims. If distinction is created between these two then the program becomes
easily vulnerable to fraud. Hence a fair balance needs to be achieved.

Respectability of the healthcare profession: Society places a lot of trust on the
healthcare professionals which makes it even more difficult to control the fraud.
Policing the medical practitioners is an attack on the integrity of their profession.

Lack of clear distinction between criminal fraud and other kinds of abuse:
Criminal fraud is defined as a deliberate misrepresentation or deception for gaining

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an improper advantage. If deception or misrepresentation is for medical necessity it
is difficult to distinguish between fraud and abuse.

There are a lot of problems with this distinguishing ambiguity, like:
It reflects the reluctance of medical profession to explicitly condemn the
fraudulent practices
This makes it extremely difficult to assess the problem systematically, as
the assessment methodology need to clearly classify outcomes
Most of the payment agencies in order to protect their provider networks
handle such cases through administration instead of handling them through
investigative units

10.5 Impact of Fraud on Individuals (beyond financial loss)

The impact of fraud on individuals goes beyond the rise in the cost of medical services by
ways of:-
Falsification of patients' diagnoses and/or treatment histories: Most of the times
healthcare fraud is committed by falsifying a patients:-
Medical condition by expressing the severe conditions that they do not have
Treatment history by false diagnosis
If this is not discovered, this inflated diagnosis becomes part of the patients
medical history in the records of insurer.

Theft of patients finite health insurance benefits: In case of private insurance,
generally there will be a lifetime cap or a limit on the benefits of the policy.
Hence, if a false claim is raised under the patients name it would add to the limit
under the patients name which would create a problem when the patient genuinely
needs it.

Physical risk to patients: Certain fraud schemes deliberately put patients health at
risk by performing unnecessary surgeries, certain drug therapies, invasive testing
etc..,


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Hence, healthcare fraud can be considered as a serious crime that impacts all the
stakeholders in the healthcare system which includes insurers, healthcare providers,
subscribers, patients, concerned government agencies and tax payers. So it is a costly
reality which the society and government cannot afford to ignore.

10.6 Fraud Management Activities

There are two ways of handling fraud, one is curative and other is preventive.
Curative: In this case, fraud is detected only after its occurrence, based on the data
collected. When any suspicious claim is raised, investigation will be called for by
providing analyst with enough information to confirm fraud and a follow up process
is initiated through some legal actions or a redress process.

Preventive: It tries to prevent fraud from happening. Hence the insurer has to
identify fraud or abuse, do necessary investigation and prevent it from happening
so that claim is not settled. It includes an early detection, investigation prevention
and sanction. After identifying fraud and successful prevention insurer can proceed
with legal actions on fraudsters in order to prevent it from happening in the future.

Based on the British National Health Cares strategy, there are six activities an insurance
company must undertake in order to successfully combat fraud, which include:-
deterrence,
prevention,
detection,
investigation,
sanction and redress, and
performance monitoring

Hence the above mentioned ways of handling fraud in accordance with the British National
Health Cares strategy can be described in the following manner:


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Figure 1 British National Health Cares strategy

So the fraud management activities can be grouped into two functions. First being fraud
deterrence which tries to eliminate the reason for fraud to happen. This can be achieved by
launching necessary information that is captured through core fraud management
processes. This helps in detecting fraud and also decreasing it. Second being a continuous
activity that monitors the efficiency and effectiveness of fraud management processes.

Each of those activities is explained below.
Deterrence: Fraud deterrence deals with eliminating the reasons because of which
fraud occurs. Generally there are three reasons because of which fraud occurs:
Incentive/pressure: A persons need for money is out of reach of insurance
company and hence cannot be controlled. This depends of fraudsters
financial status and well being of the country as a whole.
Opportunity for fraud: Loop holes in the system would provoke this type of
fraud which includes inefficient control mechanisms and inadequate efforts
in fraud control. This can be controlled by employing efficient fraud
management system.
Rationale: The opinion a fraudster has got on the fraud itself. It can be
curbed by timely and efficient sanctioning of discovered fraud.
Hence, the insurance company will have to minimize the opportunity for fraud and
reduce the fraudsters rationale about committing fraud.

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Prevention: Fraud can be prevented if it is detected before the damage claim is
settled. The difference between detection and prevention being that there will not
be adequate data while trying to prevent fraud. Hence an early detection of fraud is
termed as prevention.
Fraud prevention is more advantageous to the insurance company as time, efforts
and money can be saved in legal proceedings, which is not the case in detection.

Detection: Fraud detection deals with detecting,
Known types of fraud
Abuse and irregularities
Anomalies that are not directly linked to fraud

An effective fraud detection methodology takes into account certain important
characteristics:
Data: In this electronic world, data is abundant and retrieving labeled data is
difficult. Moreover most of the labeled data is legitimate than fraudulent.
Exactly defining data as fraudulent is also difficult. Confirming a fraudulent
claim is a lengthy legal procedure, most of which end by the way of
settlements. Omission error is another characteristic of fraud detection
which means data which is considered not fraudulent manually might still
actually be fraudulent, this happens when expert is not aware of such cases
of fraud.
Fraudsters: They change their tactics regularly so as to not to get detected.
At times it becomes real difficult to distinguish legitimate cases from the
fraud ones.
Organization: In order to be attractive in the market insurers constantly
innovate their products, which gives newer opportunities for fraudsters.
Without proper evidence insurers cannot accuse people of fraud because if
not proven they might lose some good customers. This is the reason at
times insurance companies let away their customers who commit smaller
fraud. Because the opportunity cost of losing a customer is higher than
letting away a fraud.
Hence a fraud detection system must employ efficient tools that adapt to dynamic
environments and detect irregularities and claims which are economically sound.

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Investigation: All the suspicious claims comes into the purview of investigator who
decides whether it is fraudulent or not. Accordingly, company takes a follow up
action and gathers evidences to make the case strong.
Evidences include gathering data that is distributed across several data sources.
Few of them might not be in an electronic form. Hence it is essential to differentiate
true fraud from false alerts.

Sanction & Redress: Upon detecting any fraud it is essential to seek redress and
also create public awareness against fraud. Laws relating to healthcare fraud vary
from country to country and so do the prosecution. Accordingly insurance
companies proceed with sanctioning the fraudsters and reimbursing the losses.

Monitoring: Primary objective of any fraud management function is to minimize
losses due to fraud which can be achieved over a period of time by constantly
monitoring the counter-fraud efforts.

10.7 Key Characteristics of an Efficient Fraud Management System

In order to achieve goals set through fraud management activities there are certain
characteristics that a fraud management system should possess to be termed as efficient.

Each of them is described in detail below.
Provides efficient data for informing general public about fraud: Public must be
informed about the consequences of the fraud, the burden of which is going to be
translated to public through increased premium. Fraud deterrence can be achieved
through this.
Apart from that subscribers must be educated about the counter-fraud measures
which help in detecting and preventing all types of fraud. All the relevant
information must be stored in the fraud management system which includes case-
wise information, for instance details about fraudsters mode of operations,
statistical data of counter-fraud activity, and statistical data of the efficiency of a
fraud management system.


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Employing rapid fraud detection methods: A fraud detection system which
detects fraud quickly can successfully prevent it. This can be achieved by using state
of art applications that uses efficient algorithms which yields better results.

Use adaptive and incremental methods: As fraudsters evolve in their way of
functioning, fraud detection controls must constantly update to these newer types
of fraud and fraudsters. This adaption can either be manual or automated. Based on
supervised and unsupervised methods which detects anomalies and outliers,
investigators initially can detect frauds manually and can feed the logic into the
application.

Use methods that provide explanations: Insurance companies must justify their
decisions. So for every suspicion they need to explain the rationale behind it. Hence
the applications should not only yield better results but also need to have the ability
to explain them.

Possess good reporting capabilities: Efficiency of the fraud management system
lies in its ability to generate reports that retrieves data from various sources and
communicates them properly.
This data can be utilized in fraud deterrence, where it combines all the relevant
statistical data in generating knowledge and evidence that can be used in sanction
redress activities.

Enables knowledge and information sharing: Knowledge and information when
shared in the organization increases learning and also becomes easy to train the
new recruits. Also the organization should ensure that this knowledge will not pass
out of the organization. If this sharing is through internet then proper access
controls corresponding to role are put in place.

Supports appropriate redress and escalation processes: Redress and escalation
process should be part of a fraud management system which means:
Advice on the process to choose
Advise appropriate escalation
Support the processes

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A lot of constraints come into picture while choosing the right process, which
include:
type of fraud
cost of potential fraud
outcome of the prosecution
information or evidence available
other partys financial health
country specifics etc..,

The system should propose a process that generates reports with enough evidence
for the insurance company to confidently confront the fraudster.

10.8 Laws Regulating Fraud & Abuse

In USA, there are few laws that regulate fraud & abuse which are explained below.
False Claims Act: Under the False Claims Act (FCA), 31 U.S.C. 3729-3733, those
who knowingly submit, or cause another person or entity to submit, false claims for
payment of government funds are liable for three times the governments damages
plus civil penalties of $5,500 to $11,000 per false claim.

Stark Law: Self-Referral (Stark Law) Statutes, Social Security Act, 1877, pertains to
physician referrals under Medicare and Medicaid. Referrals for the provisions of
health care services, if the referring physician or an immediate family member has a
financial relationship with the entity that receives the referral, is not permitted.

Anti-Kickback Statute: Under the Anti-Kickback Statute, 41 U.S.C, it is a criminal
offense to knowingly and willfully offer, pay, solicit or receive any remuneration for
any item or service that is reimbursable by any Federal healthcare program.
Penalties many include exclusion from federal health care programs, criminal
penalties, jail and civil penalties for each violation.


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HIPAA: The Health Insurance Portability and Accountability Act (HIPAA), 45 CFR,
Title II, 201-250, provides clear definition for Fraud & Abuse control programs,
establishment of criminal and civil penalties and sanctions for noncompliance.

Deficit Reduction Act: The Deficit Reduction Act (DRA), Public Law No. 109-171,
6032, passed in 2005, is designed to restrain Federal spending while maintaining the
commitment to the federal program beneficiaries. The Act requires compliance for
continued participation in the programs. The development of policies and
education relating to false claims, whistleblower protections and procedures for
detecting and preventing fraud & abuse must be implemented.

The False Claims Act Whistleblower Employee Protection Act: Under this
legislation, 31 U.S.C. 3730(h),a company is prohibited from discharging, demoting,
suspending, threatening, harassing or discriminating against any employee because
of lawful acts done by the employee on behalf of the employer or because the
employee testifies or assists in an investigation of the employer.


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Summary
Around 1415 individuals and organizations are banned from federal programs for
fraud and abuse, and about 293 criminal actions & 243 civil actions were taken, as
per the report of Department of Health and Human Services, 2009
Medicare and Medicaid made an estimated $23.7 billion in improper payments in
2007. These included $10.8 billion for Medicare and $12.9 billion for Medicaid.
The 50 state Medicaid fraud control units obtained a collective 1,205 convictions,
and claimed total recoveries of more than $1.1 billion in court-ordered restitution,
fines, civil settlements, and penalties
Fraud refers to an intentional deception or misrepresentation made by a person
with the knowledge that the deception could result in some unauthorized benefit to
him/her or some other person.
Based on who is performing the fraud, healthcare fraud can be classified into:
Provider fraud
Subscriber fraud
Based on the type or nature of fraud committed it can be classified into:
Opportunistic fraud
Professional fraud
Factors hindering fraud control are:-
Insurers are considered as socially acceptable targets by population
Most of the healthcare fraud schemes are non-self-revealing
Distinction between the administrative budget & funds
Respectability of the healthcare profession
Lack of clear distinction between criminal fraud and other kinds of abuse
Fraud can have an impact on individuals which is beyond financial loss, like:-
Falsification of patients' diagnoses and/or treatment histories
Theft of patients finite health insurance benefits
Physical risk to patients
Fraud management activities are categorized into:-
Curative
Preventive

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Six activities an insurance company must undertake in order to successfully combat
fraud as per the British National Health Cares strategy are:-
deterrence,
prevention,
detection,
investigation,
sanction and redress, and
performance monitoring
Fraud can occur because of incentive/pressure, opportunity for fraud, rationale
behind committing fraud
Fraud detection methodology takes into account following characteristics:-
Data corresponding to fraudulent cases
Information about fraudsters
Organization activities
Key Characteristics of an Efficient Fraud Management System are:-
Provides efficient data for informing general public about fraud
Employing rapid fraud detection methods
Use adaptive and incremental methods
Use methods that provide explanations
Possess good reporting capabilities
Enables knowledge and information sharing
Supports appropriate redress and escalation processes
Laws Regulating Fraud & Abuse (USA)
False Claims Act
Stark Law
Anti-Kickback Statute
HIPAA
Deficit Reduction Act
The False Claims Act Whistleblower Employee Protection Act


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References
http://www.coburn.senate.gov/public/index.cfm?a=Files.Serve&File_id=4ad6b41c-9348-4395-
a64b-7d41a2f5d5c1
http://www.maine.gov/pfr/legislative/documents/BOI_Fraud_Report_Final_120909.pdf
tefan Furlan, Marko Bajec, Holistic Approach to Fraud Management in Health Insurance,
Journal of Information and Organizational Sciences
Susan P. Hanson, Bonnie S. Cassidy, RHIOsBuild in Healthcare Fraud Management
from the Beginning, Journal of Healthcare Information Management Vol. 20, No. 3
Fraud in insurance on rise, Survey 201011, Ernst & Young Report
David Ferguson, Fraud in Healthcare How technology supports this, SAS
A Study of Health Care Fraud and Abuse: Implications for Professionals Managing
Health Information, AHIMA Foundation, November 4, 2010
Annual Report, Office of Inspector General, U.S. Department of Health and Human Services,
FY 2007
US Senate Report on Medicare Vulnerabilities, U.S. Office of Management and Budget,
2008

Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that maybe appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.

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