JIFA - Summer 2010 online-reduced · ‘Obamacare’ fake health plans seem amateurish. 10 3 20 27 35 40 ... If you hate baloney so much why don't you ask your ... Summer 2010 3 No

Summer 2010Volume 1 • Number 1

Insight

Analysis

Ideas

INAUGUR AL ISSUE

No Baloney: Stronger Ethics an Anti-Fraud Antidote From the perspective of an ethicist, the prevalence of insurance fraud is far more

than an economic problem for insurers. It’s a reflection of a shifting moral compass, and things look like they may get worse. By Michael Josephson

No-fault fraud: cash register for insurance crooks? No-fault auto insurance faces considerable pressure from large amounts of fraud

in at least several of the 12 no-fault states. New York, Florida and Michigan are among the hard-hit states. New laws may be on the way. By James Quiggle

Fraud and health reform: Public boon, private swoon?Passage of health-care reform signifies a growing recognition of the importance of

combatting health-insurance fraud, and of the need for more resources. What impact will HCR have on private insurers’ anti-fraud efforts? By Kirk J. Nahra

Whistleblower laws: Sounding an alarm or plain alarming? Half the states have enacted a False Claims Act. Should other states do the

same as a weapon to combat health care fraud? A pro and con discussion. By Jonathan L. Diesenhaus and Thomas V. Russell

Health-policy rescissions defused; questions remain Health insurers say they rescind polices for fraud and misrepresentation on the

application. But consumer groups have argued that insurers have used rescissions to avoid paying legitimate claims. By Howard Goldblatt

Trend briefs: New developments about fraud in AmericaA stagnant economy continues to drain anti-fraud resources . . . States get tough

on auto rate evaders . . . Insurers develop new strategies to deal with drug diversion . . . ‘Obamacare’ fake health plans seem amateurish.

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Published quarterly by the Coalition Against Insurance Fraud

PublisherDennis [email protected] • 202-393-7333

EditorJames [email protected] • 202-393-7331

Production/DistributionKendra [email protected] • 202-393-7330

The Journal of Insurance Fraud in America is published quarterly by the Coalition Against Insurance Fraud, 1012 14th St., N.W. Suite 200, Washington, D.C. 20005. Phone: 202-393-7330. On the Internet at www.InsuranceFraud.org. © 2010. All rights reserved. For republishing information, contact Kendra Smith.

From the publisher

elcome to the inaugural issue of the Journal of Insurance Fraud in America. Our goal with this publication is to explore big issues, put forth new ideas and provide insight

and analysis on the key fraud issues of the day.

Our targeted readers are leaders in industry, government, the consumer community and academia — key decisionmakers who can help advance new strategies to counter the growing damage caused by insurance fraud. Yet, the focus of this publication should help to inspire and educate anyone who has an interest in combatting fraud.

We hope to attract some of the best minds in a variety of fields to author articles and share their ideas, insights and analysis with the fraud-fighting community. We also invite you to suggest ideas for articles. Contact information is below.

Thanks for reading, and for being part of the solution to the fraud problem.

Summer 2010Volume 1 • Number 1

2 The Journal of Insurance Fraud in America

By Michael Josephson

Two fellows were on a construction job break for lunch. One removes a sandwich from a bag and takes a bite. He spits it out,

declaring, “Baloney! I can't believe I have baloney again. I hate baloney!” His friend says, “Calm down. If you hate baloney so much why don't you ask your wife to make you something else?” The angry man answers: “My wife didn't make the sandwich. I did.”

The insurance industry has been dealing with a pretty big baloney sandwich for years — somewhere between $80 billion-$120 billion in fraudulent claims each year. Perhaps it is time for a different approach.

From the perspective of an ethicist, this much dishonesty is far more than an economic problem. Though credible estimates of the number of people who participate in fraudulent behavior don’t appear to exist, the number has to be in the millions to reach $80 billion to $120 billion year in and year out. There is obviously a hole in our moral ozone, and unless we do something to revitalize the integrity of

this country we can expect a lot more baloney sandwiches.

Despite the high stakes and dramatically enhanced efforts by the insurance industry to reduce insurance fraud over the last decade, the problem continues to persist and, like an oncoming tidal wave, it threatens our economy and every one of our social structures that rely on the fundamental honesty of ordinary citizens. But insurance-industry efforts to change public attitudes about insurance fraud simply aren’t succeeding. In fact, they may be making things worse.

In the youth-serving field, there is a saying that if you keep finding bruised and battered bodies of kids at the bottom of a cliff you can either get more ambulances and build more hospitals — or you can build a strong fence at the top of the cliff. Obviously, prevention is more effective than treatment.

This also applies to the problem facing the insurance industry. The fence at the top of the moral cliff is made of values — core ethical values that comprise character and provide individuals with a

Summer 2010 3

No Baloney: Stronger Ethics an

Anti-Fraud Antidote

Abstract: Efforts to turn the corner on the large and persistent crime of insurance fraud have proven largely ineffective, both in terms of enforcement and public-outreach efforts. Research by the Josephson Institute of Ethics reveal a widespread cynicism among American youth. In fact, they are three times more likely to inflate insurance claims than adults over age 50. Research by other groups also shows Americans are increasingly likely to tolerate insurance fraud. This cynicism creates the conditions that allow insurance fraud to thrive. Much of the solution resides in teaching good character to adults and school-age children. People of good character don’t lie, cheat or steal, or defraud insurance companies. An ethics-based outreach campaign to complement traditional enforcement efforts can reduce fraud, and produce a desirable ROI in lower claim costs to insurers. It also will improve the quality of life for the people that insurers serve, and improve the public belief that participating insurers are responsible community members.

moral compass to know right from wrong, and a strong conscience to give them the courage to do what's right despite temptations and pressures.

Both the problem of and the solution to insurance fraud reside in a single concept: character.

Quite simply, people of good character have integrity and people with integrity don’t lie, cheat or steal. The good news is there are things the insurance industry can do to strengthen the character of the nation: Remind Americans of their core values they want for themselves and their children. Also, help the next generation develop a sense of right and wrong that is strong enough to resist temptation, and a conscience wise enough to reject the kind of rationalizations often used to justify fraud.

Many people and institutions in the last decade have begun to combat deteriorating ethics with bold and effective efforts to teach character and reinforce ethical values in schools and other contexts.

Who can deny that the massive insurance-fraud problem is simply a piece of a much larger societal problem? Consider the tremendous economic losses and social disruptions caused by unprecedented amounts of other forms of corporate and individual fraud and irresponsibility including Enron, HealthSouth, WorldCom and the virtual collapse of the mortgage industry.

In 2009, the Josephson Institute of Ethics conducted research to discover if there was a relationship between high school attitudes and behavior and later adult conduct. We learned that cynicism — the belief that one has to lie or cheat to succeed — is prevalent, especially among young people, and that this attitude directly causes and predicts dishonest behavior. The research shows that young people are much more cynical than prior generations, and that this cynicism makes them much more likely to commit insurance fraud and other dishonest acts.1

Young people 18 and under are five times more likely than adults over age 50 to hold the cynical belief that lying and cheating are necessary to succeed (51 percent vs. 10 percent) and those who believe that they have to lie or cheat at least occasionally in order to succeed are:

! Three times more likely to inflate an insurance

claim (6 percent vs. 2 percent);

! Three times more likely to inflate an expense claim (13 percent vs. 4 percent);

! Three times more likely to lie to a customer (22 percent vs. 7 percent);

! More than twice as likely to conceal or distort information when communicating with their boss (24 percent vs. 10 percent); and

! One-and-a half-times more likely to cheat on their taxes (20 percent vs. 13 percent).

These data are best understood in the context of other studies conducted by the Josephson Institute of Ethics. Since 1992, the Institute has issued a biennial report on the ethics of American high school students. The reports reveal significant erosion of values demonstrated by high levels of dishonesty (cheating, lying, and theft). The 2008 report showed that during that year, 64 percent cheated on an exam, 42 percent lied to save money, and 30 percent stole something from a store.2

Since cynicism is a major cause of dishonesty, anything that can be done to reduce the number of people who believe they have to cheat can have an immediate and dramatic impact on the amount of fraud. This is not that difficult because the belief is clearly and demonstrably false.

It is one thing to believe that many people lie and cheat and get away with it; it is quite another to conclude that one cannot succeed unless one lies or cheats.

The point is, a well-executed pro-integrity campaign including elements that engage school- age children can dilute cynical, fraud-breeding beliefs. The effort can replace cynicism with the belief that, despite the prevalence of cheating, most people don't cheat and success is absolutely attainable by honest people.

The integrity campaign would focus on:

• School-age youths. Teach youths solid ethics early in life, before they reach fraud-committing age; and

• General adult population. Work to change negative attitudes and fortify positive attitudes of adults still amenable to ethical ideas.

This bifurcated approach also will have several


collateral benefits: It will improve the general ethical quality of society, and enhance the reputation of the insurance industry as an advocate of good character.

The merit of this proposal becomes more obvious when one examines why current strategies are not working — at least not well enough.

There are many sound reasons to believe that a national two-pronged pro-integrity initiative to complement anti-fraud enforcement efforts could be much more effective than current anti-fraud outreach campaigns based on fear or invoking people’s economic self-interest.

C U R R E N T S T R AT E G I E S A R E N OT W O R K I N G

here are two major threads to the current fraud-fighting strategy: 1) Increasing enforcement so that more criminals are

apprehended and incarcerated; and 2) Decreasing fraud through education by increasing awareness of the scope of the fraud problem (“Insurance fraud costs everyone money.”) and the seriousness of the consequences (“You’ll get caught and go to jail.”).

Have these strategies worked?Let's start by recognizing that the targets of these

strategies involve two distinct categories of insurance fraud: hard and soft fraud:

Hard fraud encompasses serious criminal conduct as part of a fraud scheme (e.g., arson, staging accidents, large-scale Medicare thefts, and workers compensation medical mills).

Soft fraud includes lies and false claims by ordinary people who do not think of themselves as criminals, or their actions as criminal.

Beefing up enforcement isn’t succeedingFirst, it is important to point out that most anti-

fraud efforts have focused on hard fraud. The problem with this strategy is that both in terms of people and dollars, hard fraud accounts for only a portion of annual fraud losses. Thus, even if these anti-fraud educational efforts were spectacularly successful (and they aren’t), a large portion of the problem would remain.

A large portion of anti-fraud resources designed to deter hard fraud have been spent beefing up enforcement by advocating tougher laws and funding more aggressive investigations and prosecutions.

These efforts doubtlessly have resulted in the apprehension and punishment of more-serious crooks, but it would be imprudent to conclude that enforcement is a sufficient solution. At best, success is moderate in terms of the size of the overall problem.

Take for example the experience of New Jersey’s Office of the Insurance Fraud Prosecutor (OIFP), which was created in 1998. Though the Office has good reason to be proud of its activities and accomplishments described in its 2008 annual report, a close look at the results reveals the inherent limits of the law-enforcement strategy.

There is no estimate of the dollar losses from insurance fraud in New Jersey, or the number of people likely involved in dishonest actions. But losses most certainly run into well into the hundreds of millions of dollars or more, and the number of people lying to or cheating their insurance companies must be in at least the tens of thousands.

Why is this important? Well, according to the report, only 182 defendants were convicted of

Summer 2010 5

Courtesy of M

cKendre Jay

insurance fraud in 2008.3 Though this is a solid increase of nine percent over 2007, this number represents a tiny fraction of the fraud committed in New Jersey. That means almost all instances of insurance fraud went undetected and unpunished. But there's more. As hard as it must have been to put together 182 successful prosecutions (and that is a fine achievement), only 100 of those convicted received any jail time (and most were short sentences likely to result in early release on parole).4

It is also relevant to know how costly it was to apprehend and punish even this small proportion of offenders. The OIFP’s budget was $28 million in 2008.5 So even if we ignore the millions of dollars spent by the courts and police agencies relating to these cases and the cost of incarcerating the hundred sentenced to prison, each conviction cost New Jersey an average of more than $150,000, with only 55 percent ending in incarceration.

Use of the term “only” is not meant to demean the accomplishments of New Jersey. Actually, enhanced efforts to bring as many defrauders to justice as possible are quite valuable. But the quality of their efforts proves that it is hopeless and irrational to rely solely on enforcement efforts to eliminate or even substantially reduce the massive amount of insurance fraud. It is like trying to empty the ocean with small buckets.

A similar result can be seen in relation to federal expenditures to reduce insurance fraud. In 1996, Congress provided an added $548 million over seven years for health-care fraud enforcement (the largest segment of the fraud pie).6 That definitely has helped, but not enough to seriously impact the massive problem.

While federal convictions for health-care fraud rose 400 percent from 1992 to 2001 this data give no cause for rejoicing. The total number of convictions in that 10-year period was only 560. That is a tiny fraction of people committing health-care fraud (and

there is no data on how many actually went to jail). What is more, the total amount of fraud dollars “saved” by convicting these criminals does not carve out a large hole into the insurance fraud mountain.7

As of 2006, 80 percent of states sponsor insurance fraud bureaus with a combined budget of at least $134 million annually.8

Nevertheless, nearly 60 percent of the insurers polled by the Insurance Research Council-Insurance Services Office in 2002 said they think their anti-fraud efforts have been no better than moderately effective; some think they have not been effective at all.9

These data suggest that creating and expanding anti-fraud efforts by insurance companies, and state and federal criminal-justice agencies, can be an important piece of an overall strategy. But too much emphasis on this aspect of the solution could distract fraud fighters from much-larger opportunities and more-effective strategies advocated in this paper.

Education about fraud is not workingAn energized insurance community has taken the

fraud-loss challenge head-on, and mounted sometimes significant public-education campaigns designed to supplement enforcement efforts.

These educational efforts focus primarily on two distinct messages: 1) If you commit fraud you will be caught and go to jail, and 2) Fraud is extensive and expensive, and costs everyone a lot of money.

The first message is designed to persuade anyone considering fraud — hard or soft — to refrain for purely self-interest reasons. Recent adaptations add the message that being convicted will damage the families of the criminals.

This approach is a classic deterrence strategy, the success of which would be measured by its effectiveness in preventing fraud by causing potential offenders to willingly decide not to commit this crime. It is based on their belief that the likelihood of being caught and imprisoned is too great to justify


Unfortunately, there is

pretty clear evidence that these

public-education efforts have not

had sufficient impact and there are

some clear reasons why.

the potential benefit.The second message

focuses on the social costs of fraud and is designed to raise awareness in a manner that mobilizes public disdain for, and action against, those who commit insurance fraud.

Unfortunately, there is pretty clear evidence that these public-education efforts have not had sufficient impact and there are some clear reasons why.

A study by the Coalition Against Insurance Fraud offers data showing that neither message has had the desired effect. Instead, it seems that efforts to deter criminality through the threat of punishment, and to inform the public of the high social costs of insurance fraud, have been overwhelmed by the forces of cynicism, rationalizations and distrust of the insurance industry.10

The Coalition's study compared a series of critical behaviors predicting attitudes and beliefs about insurance fraud from 1997-2007. The result: More Americans believe several common forms of insurance fraud are prevalent than did 10 years ago, but they are less concerned.

It is clear from this data that the vast majority of Americans believe that “soft” insurance fraud is commonplace, and that the proportion of people who believe this has increased significantly over the last decade. Whether the increase is the result of more fraud or just proof that public-education efforts have worked to make people more aware of how much fraud there always was, these attitudes reveal that Americans have accepted as a reality that millions of people are lying to, and trying to cheat, their insurance companies every year.

Are education efforts making fraud worse? While this perception hopefully will motivate

people to action, scores of studies of human motivation suggest most people are more likely to believe the problem is too big to tackle, that their personal conduct would contribute little if anything to a solution, and that insurance fraud — like bad weather — is just a fact of life.

If this is so, anti-fraud education efforts may well

have made things worse, not better.Successful campaigns dealing with world hunger and global environment tend to focus on individual aspects of the problem

that can be realistically addressed. The bigger a problem appears, the less likely an individual will believe personal action (e.g., in our case, a decision to report fraud or refrain from committing it) will have any meaningful impact — hence, the personal sacrifice involved is inconsequential.

Despite the major increase in consumers who believe insurance fraud is prevalent, less than half (49 percent) say they are very or extremely concerned about insurance fraud. And the number concerned actually went down slightly from 1997 (when 52 percent expressed concern).

Distrust of insurance companies is a significant contributing factor. Most Americans believe insurance companies won't lower their rates even if fraud losses are reduced.11

Some 91 percent of consumers believed “insurance premiums are higher because of inflated or false claims” in 1997. This number dropped to 83 percent in 2007. In other words, fewer people believe fraud affects their premiums. So, why should they worry? In fact, shouldn't they consider joining millions of fellow citizens who are “getting their share?”

But what about the part of the outreach effort that warns people they will get caught and go to jail if they commit fraud?

This message has failed to prevent fraud in any significant amount for two reasons: 1) Most “hard fraud” criminals don't believe they will be caught (many refuse to even think about potential consequences) and 2) The statement is probably false for hard-fraud criminals and certainly false for soft-fraud criminals — and most people know it.

Let's focus on the contention itself: “You will get caught and go to jail if you commit fraud.”

The news media (with the impetus of the anti-fraud movement) have increased awareness of the scope and nature of insurance fraud, and publicized

Summer 2010 7

Type of Fraud Considered Prevalent 1997 2007

Inflating a claim to cover deductible 73% 82%Misrepresenting facts to get at a lower rate 63% 78%

Misrepresenting the nature of an incident 66% 77%

Submitting claim for prior damage 54% 71%

Falsifying receipts or estimates 63% 70%

extreme cases of fraud (along with associated criminal behavior such as arson and murder). The problem is that the “average” soft defrauder won't identify with this behavior, and the hard-fraud types may simply be inspired and educated to be more clever.

What's more, a potential crook might be encouraged by looking closely at the consequences actually suffered even by these extreme crooks who were caught, convicted and sentenced. The penalties have not been uniformly severe, even in the highly publicized cases. In several instances, the result was probation or a minor penalty.

The message that “You will be caught and punished if you commit fraud” is contradicted by the data. In fact, the more that consumers know the real facts concerning the chances of getting caught and suffering a meaningful consequence, the more likely they are to conclude that insurance fraud, especially soft fraud, is a low-risk activity.

Insurance fraud safer than drugs or burglary?People willing to commit hard fraud could well

conclude that insurance fraud is a much safer and surer way to make money than selling drugs or committing robberies or burglaries. And those who are considering soft fraud — ordinary people whose consciences and values are not strong enough to help them overcome the temptations — could justifiably conclude that fraud is a virtual free-crime zone.

These facts have been obscured by a tendency to overstate the efficacy of anti-fraud efforts by reporting gains in detection and enforcement only in percentage terms. Since the baseline levels of detection and enforcement are so very low, significant

percentage increases may, in fact, be insignificant in terms of the true impact on reducing fraud.

Though estimates of the total annual cost of insurance fraud ($80-$120 billion) are generally accepted, there are no credible estimates of the number of people who commit either soft or hard fraud. It is likely, however, that hundreds of thousands and possibly millions of separate instances of fraud are committed each year.

If the statement: “you will be caught and put in jail” is to be a credible deterrent, the vast majority of frauds would have to end in arrest and conviction. This simply isn't close to being true. When there are more detailed data, the results are dismal. For example, the National Fire Protection Association says that only 5-7 percent of arson cases resulted in conviction in 2007.12

There is another intrinsic reason this aspect of the public-education strategy is not likely to succeed: Threats of future bad consequences do not work well, especially on people who may lack the ethical principles or moral character to resist the temptation. For example, highly publicized efforts to reduce juvenile delinquency and drug use through programs like Scared Straight and DARE have proven ineffective in changing attitudes and behavior.13

In fact, the Scared Straight strategy (involving the visiting of prisons by low-level juvenile offenders and the use of aggressive confrontation and stories about the horrors of prison told by inmates serving life sentences) actually increased delinquency.

C Y N I C I S M A N D S O LU T I O N S

ther research about attitudes toward fraud and pervasive cynicism echoes the Josephson Institute’s findings, and further

demonstrates the need for stepped-up efforts to strengthen societal ethics. A study by Accenture Ltd yields concrete evidence that attitudes about honesty are a root cause of fraud:14

! Nearly one of four (24 percent) of U.S. adults say that overstating the value of claims to insurance companies is acceptable;

! More than one of 10 (11 percent) say it is acceptable for people to submit claims to their


Threats of future bad consequences do not work well, especially on people who may lack the ethical principles or moral character to resist the temptation.

insurance companies for items that are not actually lost or damaged or for personal injuries or treatments they actually have not experienced;

! Eleven percent said they know at least one person who inflated the value of their insurance claim;

! Forty-nine percent said that people commit insurance fraud because they can get away with it; 24 percent said people who commit fraud do so because they believe they pay too much for insurance, and 20 percent said they believe that the offenders commit fraud to compensate for their deductibles.

! A study by the Insurance Research Council in 2000 adds more evidence of the values and attitudes that underlie fraud:15

! Nearly one of 10 Americans said they would commit insurance fraud if they knew they could get away with it;

! More than one of three said it’s ok to exaggerate insurance claims to make up for the deductible;

! One of three Americans said it is ok for employees to stay off work and receive workers compensation benefits because they feel pain, even though their doctor says it is ok to return to work.

So in this context, let us return the point made earlier about new character development and ethical decision-making strategies to increase moral consciousness, commitment and behavior both in adults and school-age children. These initiatives can be enhanced and expanded with concerted anti-fraud outreach efforts supplementing or re-directing current educational programs.

An investment by insurance companies in a comprehensive pro-integrity campaign is likely to be highly cost-effective. If the number of people who commit insurance fraud can be reduced by only 10 percent, the ROI is potentially billions of dollars in reduction of fraudulent claims — every single year!

Protecting shareholder value and lowering premiums instead of simply passing along fraud costs to honest policyholders also will be among the other tangible benefits to insurers and their policyholders.

An investment in the character of America also is justified by the core values most insurance companies espouse. Thus, improving societal ethics is both good citizenship and good business.

Finally, an ethics-outreach effort will most certainly enhance the quality of life for the people and communities that insurers serve. And in an age of widespread public cynicism about corporate motives, teaching better ethics also improves public belief that participating insurers are responsible community members — who are worthy of consumers’ business. It also diminishes the likelihood of kneejerk punitive legislation and regulation when insurer practices are called into question.

It really is time we stopped making baloney sandwiches we don't want to eat.

About the author: Michael Josephson, a lawyer and former law professor, is president and founder of the Josephson Institute of Ethics.

Summer 2010 9

endNOTES

1 Josephson Institute of Ethics (2009)2 ibid3 2008 Annual Report, Office Insurance Fraud

Prosecutor. http://tiny.cc/yzdrw4 ibid.5 ibid.6 FBI 2001.7 Ibid.8 State Fraud Bureaus: A Progress Report, Coalition

Against Insurance Fraud (2007). http://tiny.cc/kjygp9 Insurance Research Council-Insurance Services Office

(2002).

10 Four Faces: Why Americans Do — And Don’t — Tolerate Insurance Fraud, Coalition Against Insurance Fraud (2007).

11 ibid.12 Intentional Fires, National Fire Protection Association

(May 2009).

http://www.nfpa.org/assets/files//PDF/IntentionalExecSum.pdf

13 Feinstein, Sheryl “Another Look at Scared Straight,” Journal of Correctional Education, (March 2005).

14 Accenture survey, conducted by Taylor Nelson Sofres Intersearch (2003). http://tiny.cc/8tz1k

15 Insurance Research Council (2002).






By James Quiggle

arauding cars packed with passengers trolled neighborhoods around Queens, N.Y, hunting for Asian drivers who were

just minding their own business. Asians are lousy drivers who can easily be maneuvered into setup crashes and blamed for the dustups, the assailants believed.

More to the point, the passengers were paid about $1,000 apiece to pretend they were hurt so larcenous medical clinics could carpet-bomb insurers with fake injury claims.

So contend prosecutors, who have arrested 61 suspected members of a sprawling staged-accident ring that allegedly looted New York auto insurers of $1.6 million.1

Now zoom down to Tampa, where at least 22 people recently were issued arrest warrants for staging wrecks in West Florida’s coastal region.

Suspected organizers jammed up to five passengers into cars, which collided with vehicles driven by fellow ring members, prosecutors say. Drivers often damaged cars before the vaporous crashes even took place. Many passengers jumped out before vehicles crunched each other, but scooted back in when police arrived.

The passengers — uninjured — then went to suspected sham clinics and signed blank forms for treatment they never received. Insurers faced barrages of illicit injury claims, prosecutors say. When investigators raided the clinics, the only medical staffers on hand were massage therapists.

Both cases illustrate a persistent and draining

No-Fault Fraud: Cash Register for Crooks?

Abstract: No-fault auto insurance faces considerable pressure from large amounts of fraud in at least several of the 12 no-fault states. New York, Florida and Michigan are among the hard-hit states. Staged-accident rings are a primary source of fraud, and a common denominator. Adaptive and persistent, these criminal gangs have learned how to exploit no-fault’s soft spots. Each state has different dynamics, but crash rings prey upon no-fault’s general requirement that claims be paid upfront, and promptly. Rings tend to bombard auto insurers with bogus claims for soft-tissue injuries, which are hard to challenge medically. Frivolous suits clog the courts, and the threat of lawsuits can force insurers to make hard decisions about whether to reluctantly pay claims they know are bogus, or whether to fight in court. Fraud fighters have had varying levels of success over the years. Legislation, regulations, law-enforcement sweeps, task forces, insurer lawsuits and other strategies all are being deployed. But crash rings are persistent and likely to remain imposing forces for years to come. A motivated anti-fraud community also remains squarely in the game. But auto premiums continue rising, at what point will a premium-weary public start asking if passing along fraud costs to consumers is fair, and whether fraud fighters simply are making excuses for ineffectiveness and inaction?

fraud trend that has bedeviled auto insurers, regulators, legislators and policyholders for years: No-fault insurance is a well-intended system that hastens claims payments to accident victims, but it also can be a cash register for crooks. Significant fraud sprees have for years infested at least several of the dozen states that offer or require no-fault auto insurance.

Staged-accident rings primary engines of fraudLoosely organized and often large staged-

accident rings are a major drain on no-fault systems.

Through continuous trial and error, gangs have learned to effectively exploit no-fault’s soft spots. Many have mechanized large volumes of bogus claims with great efficiency, and turned the well-meaning insurance system against itself.

Fraud fighters, meanwhile, still are searching for corner-turning strategies against these highly adaptive cabals of crooked medical providers, lawyers, fake passengers and their recruiters. Their sheer numbers, staying power and ability to steal large amounts of insurance money in short periods of time reinforce that they’ll remain an imposing collective force indefinitely.

None of the hardest-hit no-fault states has found a silver bullet. Nor is there even a clear definition of success. For the short term, perhaps the best definition is “steady progress,” given the intransigence and sheer size of the fraud problem. However success is defined, it depends on gradually degrading the capabilities of schemers by marshaling an adroit blend of tough fraud laws and regulations, fraud prosecutors, funding, force-multiplying task forces and other resources that vary with the unique dynamics of each state.

S C O P E O F T H E P R O B L E M

bout 20 percent of no-fault claim costs stem from fraud and abuse, says the Insurance Information Institute (III) in

an analysis of fraud in the system. The average no-fault claim soared nearly 60 percent to $8,862 between 2004 and 2009.2 It’s difficult to precisely

separate out other factors such as rising medical costs, however, but such figures are suggestive signposts.

The no-fault systems in New York, New Jersey, Florida and Michigan “are under stress due to rising fraud and abuse, which ultimately will lead to higher premiums for drivers,” III says.

Claim severity rose more than 48 percent in New York during this time. And fraud added a projected $1,644 to the average no-fault claim this year — an increase of more than 300 percent since 2006, says III. Claim severity spiked nearly 42 percent in New Jersey, nearly 35 percent in Michigan and almost 19 percent in Florida.3

Florida and New York also led the nation respectively in questionable claims involving staged accidents among every state in the Union between 2007 and 2009, says the National Insurance Crime Bureau (NICB). The top four cities for questionable claims are located in no-fault states (New York City, Tampa, Miami and Orlando), NICB says.4

All told, hundreds of millions of insurance dollars or more likely are stolen each year through bogus injury-treatment claims, though no aggregate figures have been compiled.

This thievery increases upward pressure on premiums. In New York alone, the $729 average premium is the third highest in the nation and well above the nearly $476 national average, says the Property Casualty Insurers Association of America (PCI).5 No-fault fraud cost New York policyholders slightly more than $229 million in added premiums in 2009, adds III. That is fully

Summer 2010 11

. . . fraud added a

projected $1,644 to the

average no-fault claim this year

— an increase of more than

300 % since 2006 . . .

s

90.3 percent higher than 2007. Fraud will cost Empire State policyholders an added $241.2 million in 2010, III projects.6

Fraud’s exact impact on no-fault premiums, however, hasn’t been precisely measured systemwide. But auto premiums in several hard-hit Massachusetts cities eventually began dropping, sometimes sharply, after strike forces began rolling up deeply entrenched crash rings in those cities in 2003.

Fraud also appears to hit some no-fault states harder than others; there doesn’t seem to be one crime spree rolling like a fog bank across the no-fault landscape. New York, Florida, New Jersey, Michigan and Massachusetts are among the system’s hot spots.

“There are pockets of fraud that can be abused, and each no-fault state has its own issues,” says Peter Foley, Vice President, Claims Administration, for the American Insurance

Association (AIA). “You put a dam up in one area and the water goes into another area.”

Most of the pilfering happens in urban areas, where often imposingly large numbers of crash rings line the streets with sham clinics. Some gangs stage crashes with each others’ cars, maneuver innocent motorists into wrecks, make injury claims for crashes that happened only on paper, or try to recruit victims of real crashes for bogus treatment.

H O W N O - FA U LT W O R K S , A N D I S B I L K E D

n simplified narrative, here is how no-fault works, plus several primary ways swindlers loot the system, and profiles of

the mounting challenges facing Florida, New York and Michigan.

States began adopting no-fault in the early 1970s. The system is intended to simplify claims, speed up medical payments, free up the courts and


Courtesy of M

cKendre Jay

reduce often-high litigation costs.

If policyholders are involved in an accident, their own insurers must promptly pay reasonable and necessary medical expenses plus lost wages of injured occupants of the crashed vehicle, no matter who causes the crash.

The insurer pays up to a dollar limit that varies with each no-fault state under the personal injury protection (PIP) portion of no-fault policies. Depending on the no-fault state, injured motorists generally can sue the negligent driver only if their medical bills exceed a certain dollar amount (called a monetary threshold) or if their injury is severe enough (verbal threshold). In return for giving up some lawsuit rights, drivers are supposed to receive fast payment of their most-immediate medical expenses.

But incentivized by large insurance payouts, the highly adaptable criminal underworld makes a lucrative science of exploiting soft spots in the no-fault system. Broadly, gaming the claim pipeline and legal system are the main pathways to illicit profits. In the process, swindlers delay of filing claims, invite fraud and clog the courts with needless lawsuits — everything no-fault was created to avoid.

Criminals typically carpet bomb insurers with fake injury claims for phantom or worthless treatments stemming from phantom or minor crash “injuries.”

Fabricated injuries almost always involve supposed soft-tissue trauma such as whiplash. Diagnosing aching necks and backs — unlike cuts and broken bones — involves subjective medical judgement. Insurers thus can have a hard time successfully challenging suspicious soft-tissue claims in the face of no-fault’s dicta that reasonable claims must be paid. Compounding the insurer dilemma is no-fault’s requirement for prompt payment. Depending on the state, it’s usually 30 to

90 days after insurers receive the claim. Thieves saturate insurers with piles of densely detailed medical bills from each setup crash. Insurers can have a hard time combing the encyclopedic paperwork for fraud in time. In New York, rings have so inundated insurers with claims that three small insurers went insolvent in

part because they were targeted by no-fault rings in recent years.

Insurers bombarded with illicit paperworkSwindlers may dump yet more paperwork on

insurers just before the payment deadline. With their backs to the wall, frustrated insurers pay up despite knowing the claims are sham. The illicit windfall reaches hundreds of thousands of dollars or more when “injured” passengers from dozens of setup accidents cash in.

“Where you have mandatory no-fault limits — a contract with the insured — it’s very difficult to go into court and call the insured a thief,” says AIA’s Foley.

Manipulating the legal system is the next point of attack.

Exaggerated injury claims can quickly exhaust a policyholder’s no-fault limits (though Michigan has no limits). At this vanishing point, some forms of no-fault allow policyholders or medical providers to sue the supposedly at-fault driver’s insurer for things such as pain and suffering, plus certain medical expenses such as rehab. Crooked lawyers, who often are a ring’s masterminds, will sue for these expenses. Fraud-driven lawsuits can pour in, sometimes for dozens of shady claims.

Insurers face another legal gauntlet if they dispute even flagrantly shabby claims: Crooked lawyers sue the insurer for bad faith. Irate insurers must decide whether to fight in court or reluctantly settle instead of risking large judgements from a jury potentially sympathetic to a limping crash “victim.”

Summer 2010 13

Criminals typically carpet bomb insurers with fake injury claims for phantom or worthless treatments stemming from phantom or minor crash ‘injuries.’

Are no-fault states uniquely more prone to fraud than fault-based systems? Lack of detailed, comprehensive data make decisive conclusions difficult to draw. Staged-accident rings also operate widely in certain fault-based states such as California. Soft-tissue trauma also is the standard-issue injury in fault-based states. Lawsuits and the threat of lawsuits are common bullying tactics as well. Which system is the easier target is a debate for another day.

At bottom, no-fault looting imposes a huge drain on auto-insurer and state resources. Motorists also have died: A grandmother named Alice Ross was killed in Queens during a botched staged crash;7 a family of three was burned to death in a crash gone wrong on the Long Beach, (Calif.) freeway.8

This crime wave has ignited large-scale law-enforcement crackdowns, pushes for tougher anti-fraud laws, considerable public debate and news

coverage, and urgent calls for reforms in hard-hit no-fault states in recent years.

Fraud fighters motivated but have varied successConfronting this theft spree is a motivated

anti-fraud apparatus. Insurer investigative units, state fraud bureaus, multi-agency task forces, plus networks of regulations and laws apply continuous pressure. Some insurers increasingly are suing cheaters in a move to reduce the financial incentive of this crime. Allstate also has released two national TV ads warning consumers to be wary of staged accidents; one ad was released just this spring. State fraud bureaus promote their fraud hotlines and have launched public-awareness efforts.

But fraud fighters have had varying success over the years. Sometimes no-fault rises and falls cyclically, depending on factors such as the economy, available resources and how well crooks


Courtesy of M

cKendre Jay

adapt to anti-fraud tactics. Crooks also arguably possess numeric

superiority. Sham medical clinics line the urban landscapes of key no-fault cities. There’s also no end to the low-income recruits for crash rings, easily lured by a few hundred dollars in cash for easy work. No-fault’s vulnerabilities also are easy to exploit to great effect. And attracted by easy insurance riches, platoons of cheaters quickly replace brethren who are busted.

Drug dealers even have entered the no-fault game because the money is better and risks of getting caught are smaller.

Meanwhile, fraud fighters often struggle for resources to uncover, investigate and prosecute crash rings. Substantive state laws can take years to crawl, even piecemeal, through legislatures. The unsteady economy has made resources and fraud legislation harder to come by in the last three years.

A glimpse at Florida, New York and Michigan highlights in localized detail key dimensions of the no-fault fraud problems, the difficulty of fighting this crime, and how fraud fighters are responding.

P R O F I L E : N E W YO R K

he Empire State is one of America’s epicenters of no-fault conniving. Fake injury claims by shady medical providers

appear to be spiraling, as are lawsuits (and threatened lawsuits) designed to extract maximum compensation for illicit claims, the data suggests.

No-fault fraud is not a new crime to New York, but seems to come in waves every few years beginning in the mid-1990s.

New York’s average PIP claim soared nearly 55 percent between 2004 and 2009. This far outstrips the combined 24.8-percent growth of claims in all other no-fault states, says PCI.9 Suspected cons reported to the state fraud bureau grew by nearly a third between 2006 and 2009 after dropping for about five years, III adds in its analysis of fraud in no-fault.

“We’re seeing an increase in fraud. It follows a cyclical pattern,” says Steve Nachman, deputy superintendent for fraud and consumer affairs for the insurance department. “The problem we’re seeing is wide-scope and pervasive. The reimbursement process is so susceptible to manipulation that regulatory and legislative reforms are necessary to complement law enforcement.”

Most of the action takes place in downstate New York City, where sham medical clinics abound. Downstate no-fault claimants averaged 2.6 times more medical visits than upstate claimants through 3Q 2009, PCI says.10

“I think most of it is excessive treatment and unnecessary treatment. Providers are just racking up treatment and running up bills and leaving insurance companies to try and figure it out,” says Ellen Melchionni, executive director of the New York Insurance Association.

Trend: Real crash victims being solicitedOne newer trend making the rounds of the

City: Attempted solicitation of real crash victims. Emergency room staffers at city hospitals are selling information on crash victims with minor injuries to middlemen for bogus treatment, Nachman says.

Summer 2010 15

New York also is a lawsuit-riddled state. More than 40 percent of all no-fault claims are litigated in New York State, PCI says. Most lawsuits are filed in Brooklyn, The Bronx and Queens, where medical-provider fraud is highest and consumers pay the most for insurance, PCI adds. Notably, nearly all plaintiffs (99.7 percent) in no-fault lawsuits are medical providers, not injured motorists. It’s unknown, however, how much of the action involves bogus suits.11

Regulators, insurers, legislative leaders and others appear to be moving steadily toward a consensus on needed reforms. There also appears to be a shared sense of urgency to act this year or next. In particular, turnover in the legislative leadership appears to have broken years of stasis caused largely by turf wars and feuding in Albany.

Several proposals repeatedly have surfaced in diverse circles, suggesting the makings of a united front. Some reforms require new or amended legislation, and others don’t.

“Unfortunately it almost takes the issue to become a crisis before legislation takes action,” says Melchionni.

Among the reform proposals gaining traction:

! Allow insurers to defend against fraudulent or abusive injury-treatment claims when they pay no-fault claims beyond 30 days of receipt. New York now requires payment within 30 days of receiving a claim, thus encouraging crooks to flood insurers with claims. But a notorious court decision (Presbyterian Hospital v. Maryland Casualty) forbids insurers to deny claims or assert any court defense if they pay after 30 days while investigating.

! Make it a specific felony to hire recruiters (also called “runners”) or be a recruiter, for staged-accident gangs. Penalties would be strong. A bill already in the state Senate provides one workable vehicle.

! Give more teeth to current laws decertifying medical providers convicted of fraud. SB 3552 and AB 7128 would authorize the insurance department to decertify crooked providers and impose large fines. There’s general agreement that authority belongs with the insurance department.

! Require that claim disputes be arbitrated to speed up claims resolution, and avoid costly lawsuits that suffocate the courts with suits

involving bogus injuries. “I think this shows a general interest in getting

something passed this session. Over the last year or two I think there’s a very good chance that the odds have increased very significantly,” says Melchionni. “Between the different companies and different trade associations and different players in this market, we’re pretty much on the same page on this issue.”

P R O F I L E : F LO R I DA

lorida was the second state to adopt no-fault, in 1971. Nearly 40 years later, authorities launched a statewide dragnet

against crash rings this spring. The sweep is another telling signal that no-fault gangs continue creeping upstate from their traditional redoubt in South Florida.

It also speaks to a strengthening grip that fraud rings have gained despite decades of counter-insurgency by anti-fraud agencies and insurers, and by a gauntlet of fraud laws designed to thwart the large fraud industry.

Tampa, St. Petersburg, Jacksonville and Fort Myers are among the upstate cities where sham medical clinics have set up shop in force more recently.

“We know fraud is a very large insurance cost driver. Florida has some of the highest premiums in the country despite having some of the most fiercely competitive insurance markets,” says Sam Miller, executive director of the Florida Insurance Council. “Fraud is clearly, clearly a major cost driver down here. It’s clearly a crisis.”

Florida far and away leads the U.S. in complaints related to staged crashes between 2007 and 2009, according to NICB.12 Insurers reported


Suspected fraud reports involving no-fault claims in N.Y.

Source: New York Frauds Bureau

3,006 suspect claims compared to runnerup New York’s 1,680. Suspect no-fault claims more than doubled in the Sunshine State during this period.

No-fault arrests totaled 40 percent of the state fraud unit’s busts in FY 2008/2009. Convictions formed more than a third of the load, that agency reports.13

The pattern is familiar, though the numbers are daunting: Thousands of sham storefront clinics have been erected around the state, says John Askins, director of the Florida Division of Insurance Fraud. Their only purpose is to illegally manufacture injury claims. A large population of Hispanic, Caribbean and other immigrants offers up a swindler’s paradise of fake crash victims and their recruiters. The clinics hit up insurers with a large menu of illicit claims stemming from bogus crashes.

Deceitful lawsuits clog courts and drain insurersLawyers in league with the crash rings then sue

insurers over disputed claims, hoping to force large settlements. Large legal fees also are an incentive. Lawyers often file suits for unusually small amounts, just a few dollars. Some small-dollar suits involve legitimate crash injuries; the actions are abusive fee grabs but don’t stem from no-fault cons. But many low-dollar suits do stem from bogus injuries involving sham clinics, says Askins.

“Behind every frivolous claim is a lawyer, and lawyers who file frivolous lawsuits. It may be for $5 or $500,000, but they’re a large part of the fraud problem,” he says. “You can’t perpetuate this fraud without lawyers going into court. Some are getting $400 or $500 an hour in court-approved fees in Miami-Dade and Broward counties. It’s pretty outrageous.”

United Automobile Insurance Company has a blog devoted to PIP fraud. The insurer regularly posts updated fraud news, often laced with strong opinions.

Notes one of United Auto’s recent postings: “PIP fraud continues to be a widespread problem in Florida. Reports say that many PIP insurance claims are padded and some are totally fraudulent. Those unjustified overcharges are a large reason that Florida drivers pay some of the highest auto

insurance premiums in the country. PIP-related lawsuits cost taxpayers and drivers money, as plaintiff attorneys file court claims seeking as little as $1.19 for their clients and tens of thousands of dollars for themselves in legal fees.”14

Florida has responded on many fronts over the years. In fact, Florida created its fraud unit in 1976 in response to the no-fault epidemic, Askins says.

The legislature also has passed numerous no-fault laws intended to stay ahead of persistent swindlers over the years.

Among the more-recent provisions passed after a 2000 statewide grand jury report detailed a state besieged by no-fault fraud: Make it a specific crime to solicit crash victims and stage accidents as part of no-fault cons, and to present false auto insurance cards...stiffen penalties for auto-related crimes...increase the mandatory minimum penalty for taking part in a setup no-fault crash...create a reward program...and fund more prosecutors and investigators.

Kickbacks, inflated costs, sham transactions and abused diagnostic tests mean that “number of greedy and unscrupulous legal and medical professionals have turned that $10,000 (PIP coverage limit) into their personal slush fund,” notes the grand jury report, which echoes even today.15

But the state has only seven prosecutors tasked primarily for no-fault cases in select hotspot cities around the state, and anti-fraud officials are trying to fund more, Askins says. “There has been a good concerted (law-enforcement) effort and we’ve had good laws passed but we’re being overwhelmed by the numbers,” says Askins.

Summer 2010 17

Florida far and away leads

the U.S. in complaints related to

staged crashes between ‘07 and

‘09, according to NICB.

Better disciplining of wayward chiropractors and lawyers by their professional societies will help, Askins says. Yanking cheaters’ licenses deprives them of their practice. “We haven’t seen much of this,” Askins cautions.

A promising reform bill was introduced this year but never gained momentum. It died this spring, but fraud fighters quickly began planning a push for 2011. The measure won’t be a fraud crusher but will close several loopholes. Here are several of the key provisions this year’s measure contained, and which could form a platform for next year’s effort:

! Make an act of insurance fraud the falsifying of information on the licenses of clinics that treat accident victims;

! Allow insurers to withhold payment of suspicious claims to investigate further; and

! Fund more fraud prosecutors for areas of Florida not currently staffed.

Regulations requiring that clinics must be licensed, owned and operated by doctors also must be tightened, Askins says. Typically swindlers own bogus no-fault clinics, but pay shady doctors to be paper owners to sidestep state rules. “There are way too many exemptions for licensing...” Askins says. “There are no teeth in the regulations.”

P R O F I L E : M I C H I G A N

alfway across the U.S. from Florida lies Michigan. No-fault fraud appears to be a large money drain here. But Michigan is

one of the few states without a state anti-fraud agency to help centrally measure auto conniving and help marshall statewide anti-fraud efforts.

“We know fraud is out there. We suppose it’s at least as prevalent as other states that have no-fault standards. It would be naive to think fraud isn’t there. We look at the numbers that insurance companies keep and say, ‘Holy cow.’ It’s pretty astounding,” says Pete Kuhnmuench, executive director of the Insurance Institute of Michigan (IIM), the voice of insurance companies doing business in the state. One telling sign is that

Michigan’s average claim of $37,489 is by far the largest among no-fault states, and well ahead of runnerup New Jersey’s $17,727, says III in its analysis of no-fault fraud.

Michigan’s 34.4-percent increase in claim severity ranks third, yet another signal.

“When you see attorneys advertising for something, you know that there is going to be a return on their investment when they represent a no-fault plaintiff,” says AIA’s Foley.

In fact, Allstate sued a medical billing company in Michigan late last year. The insurer alleges Global Medical Billing stole more than $680,000 by using police reports and hospital records to recruit crash victims for phony injury treatment at clinics. Some of the clinics were sham operations, Allstate charges in the racketeering suit.16

An especially worrisome trend involves bogus no-fault claims for attendant care of seemingly injured crash victims, says AIA’s Foley. Swindlers often fraudulently label family members as caregivers to illicitly haul down insurance money.

Despite the lack of data-based fraud measurement, no-fault swindles are considered a serious-enough problem that IIM is working to build momentum for anti-fraud reforms as part of its larger agenda for retooling the state’s no-fault system next year. Proposed anti-fraud provisions include:

! Requiring bills for treating crash victims be submitted to auto insurers within 90 days;

! Outlawing the use of recruiters who bring real and fake crash victims into no-fault schemes; and

! Creating a central anti-fraud authority. It would help fund more investigators and prosecutors, and gather much-needed data to help define fraud’s scope in the state.17


CO N C LU S I O N :

P U B L I C PAT I E N C E M AY G R O W T H I N

bsent significant reforms, no-fault fraud likely will remain a persistent and costly leach of insurers, regulators and

policyholders for years to come. Fraud is so entrenched in some no-fault states that it may stay ingrained even with better-funded efforts.

Steady progress in rolling up staged accidents will portray fraud fighters as effective and committed advocates of the public interest. One of the best success metrics will be the material reduction of auto rates for premium-weary drivers.

But fairly or not, and accurately or not, continually raising auto premiums to help offset fraud costs risks being publicly perceived as collective failure and inaction despite highly motivated anti-fraud efforts on many fronts.

A standard insurer strategy of passing fraud losses onto honest drivers could be perceived as taking the easy way out. People may start asking, why don’t the insurance industry and public

servants do more to fight fraud instead of forcing innocent drivers to take the fall for everyone’s perceived failure to clamp down hard enough? Continually blaming fraud as a prime contributor could be perceived simply as making excuses for ineffectiveness and inaction.

For the most part, the public seems to accept crash rings as leading villains in today’s no-fault premium dramas. But public opinion also can be volatile, especially with an important pants-pocket issue such as high auto premiums in a down economy. If rising auto premiums and thinning patience reach a flashpoint, increasingly critical questioning of anti-fraud efforts of insurers, regulators and legislators could be the next fault line in the no-fault debates.

About the author: James Quiggle is director of communications for the Coalition Against Insurance Fraud and

editor of THE JOURNAL OF INSURANCE FRAUD

IN AMERICA

Summer 2010 19

endNOTES

1“NYPD slams brakes on insurance fraud ring targeting Asians,” New York Daily News, October 30, 2008. http://tiny.cc/1yl74

2 “Fraud & the P/C Insurance Industry: Focus on No-Fault Auto Insurance.” Slide presentation, Insurance Information Institute, April 2010.

3 ibid.

“NYPD slams brakes on insurance fraud ring targeting Asians,” New York Daily News, October 30, 2008

4 “Staged Accident Questionable Claims Up.” News Release, National Insurance Crime Bureau, May 10, 2010.

5 “A Hidden Crisis: The Impact of Fraud on New York’s No-Fault Insurance System.” Report, Property Casualty Insurers Association of America.

6 “Fraud & the P/C Insurance Industry: Focus on No-Fault Auto Insurance.” Slide presentation, Insurance Information Institute, April 21, 2010.

7 “Brooklyn Man Charged With Murder and Conspiracy to Commit Insurance Fraud,” News Release, Queens District Attorney, April 12, 2003. http://tiny.cc/nctrr

8 “Staged Auto Accidents: Fraud Turns Deadly,” Sunday Press-Telegram, February 1, 1998.

9 “A Hidden Crisis: The Impact of Fraud on New York’s No-Fault Insurance System.” Report, Property Casualty Insurers Association of America.

10 ibid.

11 ibid.

12 “Staged Accident Questionable Claims Up.” News Release, National Insurance Crime Bureau, May 10, 2010.

13 Florida Department of Financial Services, Division of Insurance Fraud, 2008/2009 Fiscal Year Stat Pack Report.

14 “Latest PIP fraud crackdown leads to arrests in Tampa, Miami,” United Auto Courts Report, April 22, 2010

http://www.unitedautocourtsreport.com/blog/

15 “Statewide Grand Jury Report on Insurance Fraud Related to Personal Injury Protection,” 2000.

16 “Allstate Uncovers Alleged Insurance Fraud Scheme By Global Medical Billing,” Allstate news release, December 23, 2009. http://tiny.cc/2p2qm

17 “Driving Michigan: An Agenda to Reform Michigan’s No-Fault System,” Insurance Institute of Michigan. http://tiny.cc/lz2z5



“Every dollar we can save by stopping fraud can be used to strengthen the long-term fiscal health of Medicare, bring down costs and deliver better services to Medicare beneficiaries.”

— HHS Secretary Kathleen Sebelius (June 2009)

“We can’t do it alone. It’s important to utilize all of our partners, including the Centers for Medicare and Medicaid Services, the Department of Justice, other Inspectors General, state and local leaders, provider partners, as well as the media.”

— HHS Inspector General Daniel Levinson, quoted in Bureau of National Affairs newsletter (February 10, 2010)

By Kirk J. Nahra

ow that the health-care reform legislation has passed, we can begin to review the impact of the numerous anti-fraud

provisions included in the legislation. These provisions reflect several critical facts.

First, the federal government — including both Congress and the Administration — continues to believe the fight against health-care fraud is important and that new tools and resources are needed.

Second, there is an increasing recognition that devoting more resources to fighting fraud can result in significant cost savings.

Third, while there is a recognition of the importance of the fraud fight, the debate has become almost entirely one-sided — with the discussion and new resources and tools focused exclusively on government health-care programs.

This change departs dramatically from some of the earlier efforts in this area, most noticeably the HIPAA provisions that specifically and in significant detail describe both the private sector’s role in the fight against health-care fraud, and the need for a strong public-private partnership to effectively fight fraud.

But this new legislation shows that the government, for the most part, has moved away from


Fraud and Health Reform: Public Boon

or Private Swoon?

Abstract: Passage of health-care reform signifies a growing recognition of the importance of combatting health-insurance fraud, and of the need for more resources. But at the same time, the reform law focuses new tools and funding almost entirely on fraud against government health-care programs, not on fraud against private insurers. This reverses the focus of the 1996 HIPAA law, which was a watershed in public-private cooperation. The 2010 health-care reform law contains a number of provisions to fight fraud against publicly funded health programs. There is additional funding for anti-fraud activities. A variety of provisions also generally are designed to put new federal health-care programs and related programs being established by this legislation on the same footing for anti-fraud purposes as other federal programs. Among the new anti-fraud provisions are added screening of medical providers, requirements for providers and suppliers to adopt compliance programs, expanded data matching, and enhanced penalties for various activities.

this idea of a partnership, to focus almost exclusively on the impact of fraud on government health-care programs. This is a disturbing trend, and one that creates significant risks for private health insurance programs.

Therefore, the challenge for the private sector will be to redouble its anti-fraud efforts and reassert its role as an effective partner to the government in the overall fight against health-care fraud. Because the focus of attention has shifted almost entirely to government programs, this will be a significant challenge for the private insurance industry.

The HIPAA ProgramThe anti-fraud provisions of the 1996 Health

Insurance Portability and Accountability Act (HIPAA) were a watershed in public-private cooperation. Despite good intentions, many of these provisions suffered from lack of attention, and have largely disappeared. In fact, few Congressional staffers discussing health-care fraud during the reform debate knew about these provisions or of the goals of enhancing the public and private partnership for fighting health-care fraud. The new reform legislation may seal the fate of these earlier efforts.

The specifics of HIPAA were important and created substantial opportunities. For example, as a result of the HIPAA statute, the Department of Justice (DOJ) and the Department of Health and Human Services developed guidelines for operation of the Coordinated Health Care Fraud Program1 established by HIPAA, building on the general language of the statute.2 These provisions recognized the importance of a coordinated anti-fraud program

that brings together both the public and private sectors in the organized fight against health-care fraud.

The Department of Justice also issued its “Statement Of Principles For The Sharing Of Health Care Fraud Information Between The Department Of Justice And Private Health Plans.” (Available at http://www.justice.gov/ag/readingroom/hcarefraud2.htm)

As its first principle, the Department of Justice indicated that it:

“recognizes that fraudulent activity in the health care system can affect both public and private sector health plans, and that often cooperation between the public and private sectors can assist in the detection, investigation, prosecution and prevention of fraud. The Department of Justice considers information from private health plans as an important and valuable tool in the fight against health-care fraud. The Department of Justice also considers the investigation and prosecution of fraud against private health plans as integral to its overall effort to combat health care fraud. The Department of Justice considers the exchange of information between it and private health plans to be a valuable means to improve those efforts.”

To implement this program, the DOJ also committed to:

1) Sharing of information by private health plans

In this statement, DOJ “encourage[d]” private health plans to provide information concerning suspected health-care fraud to the Department of Justice whenever possible. The Department of Justice further encourages private health plans to share with it information concerning useful investigative resources and services developed or offered by particular private plans or associations of private health-care payers. Private health plans should provide this information to a Department of Justice Information Exchange Coordinator designated to coordinate the sharing of information pursuant to these guidelines.

2) Health-care fraud task force participation DOJ also pledged “[w]henever practicable,

authorized by law, and consistent with ongoing law enforcement activities,” that it would “make its best

Summer 2010 21

. . . the challenge for the private sector will be to redouble its anti-fraud efforts and reassert its role as an effective partner . . . in the overall fight against health-care fraud

http://www.justice.gov/ag/readingroom/hcarefraud2.htm




efforts to include private health plans in local, regional and national health care fraud task forces, and in task force activities.”

3) Sharing of information by Department of Justice

To complete the information-sharing process, DOJ also instituted a “best efforts” provision “to provide general information concerning health care fraud to private health plans, and specific information concerning specific health care frauds to those private health plans that the Department of Justice believes likely are affected by the fraud (‘affected private health plans’), whenever such an exchange is practicable, permitted by law, and will not jeopardize ongoing law enforcement activities.”

This is extended, in some circumstances, to “non-public information,” when a disclosure to private health plans was “practicable and permitted by law, and whenever the disclosure of such information will not jeopardize ongoing law enforcement activities.” In those situations, DOJ would: “provide affected private health plans with available information concerning fraudulent health care schemes. Where consistent with these principles, the Department of Justice will make its best efforts to provide certain ‘followup’ information to private health plans and associations of private health-care

payers that have provided the Department of Justice with verified information concerning a particular provider. Such additional information shall include any information appropriate for disclosure concerning the scope or nature of the fraud, the outcome of an investigation, the nature of any enforcement action and a summary of any facts underlying such enforcement action.”

4) Sharing of information to support restitution claims

DOJ also supported private efforts to receive restitution, noting that “(v)ictims of health care fraud have a right to receive restitution as part of the federal criminal law enforcement process.” To support this “right,” DOJ agreed to “make available to private health plans relevant investigative information including, but not limited to, information concerning the nature and scope of the fraud, the outcome of the investigation, the nature of any enforcement action, and the procedures for an affected victim to make a claim for restitution.” DOJ also pledged to support efforts to receive shares of forfeited assets.

5) Lawsuits concerning disclosures by private health plans

DOJ also pledged to support insurers that were sued by providers or other fraud targets as a result of fraud investigations. In the event of such a suit, DOJ, “upon written request with reasonable notice, will provide the tribunal with available factual information regarding such disclosure to assist the tribunal in determining whether the private health plan was acting within the scope of the provision creating qualified statutory immunity from civil liability for certain information disclosures.”


6) Protecting confidentiality of private health plan disclosures

In addition, DOJ agreed to take steps to ensure the confidentiality of information provided by private insurers, “[p]rovided such efforts are consistent with obligations imposed by law, and its statutory mandates.” In those situations, DOJ agreed to “make every reasonable effort to protect the confidentiality of the sources of information provided by private health plans in connection with the coordinated anti-fraud program, including treating this information as provided by a confidential source whenever appropriate.”

R E F O R M P R O V I S I O N S

As previously discussed, there is very little in the new reform legislation that deals directly with the private sector’s role in the

fight against health-care fraud or that otherwise addresses fraud in connection with private health-insurance programs.

There is additional funding for government health-care anti-fraud activities. And though in some circumstances, some of this money could be used in support of private-sector cases, in general these provisions are directed at fraud involving government health-care programs. Moreover, a variety of provisions generally are designed to put the new federal health-care programs and the related programs being established by this legislation on the same footing for anti-fraud purposes as other federal programs (e.g., by ensuring that the False Claims Act

will apply to these new programs).

A — H.R. 3590The primary anti-fraud provisions of H.R. 3590

(one of the two pieces of legislation that comprises the overall anti-fraud package) are contained in Title VI, beginning with Section 6401. The key elements are:

! Added screening of providers (Section 6401)The legislation creates the opportunity for

additional and enhanced screening of providers who are participating in Medicare and Medicaid. Specifically, the HHS Secretary is to determine by regulation the “level of screening” for provider enrollment “according to the risk of fraud, waste, and abuse...with respect to the category of provider of medical or other items or services or supplier.” This permits the Secretary to impose additional burdens for particular areas where there are more significant fraud concerns. The legislation also creates some additional requirements related to ongoing licensing and oversight of these newly enrolled providers, for both Medicare and Medicaid.

! Require providers & suppliers to adopt compliance (Section 6401)

While many health-care providers have developed compliance programs, this legislation would now mandate, for the first time, an appropriate compliance program as a condition for enrollment in the Medicare program. The HHS Secretary is directed to develop the “core elements” for such a compliance program.

! Expand data matching (Section 6402(a)) The legislation mandates an expanded

“Integrated Data Repository” at CMS that will (apparently) incorporate data from all federal health-care programs, and that the additional data “shall be a priority.” This appears to be an “all-claims” database that is limited to government programs.

! Beneficiary involvement in fraud schemes (Section 6402)

The legislation dictates that the HHS Secretary impose an administrative penalty where “an individual has knowingly participated in a federal health-care fraud offense or conspiracy.” It also creates additional requirements related to how these

Summer 2010 23

. . . in some circumstances, some of this money could be used in support of private-sector cases . . .

individuals shall be treated for their participation in a fraud scheme.

! Return of overpayments (Section 6402)Consistent with the new False Claims Act

amendments, where a failure to return an overpayment in light of a legal obligation can now constitute a “false claim,” the legislation makes clear that providers and insurers participating in federal health-care programs have a legal obligation to return overpayments from Medicare and Medicaid. This was a necessary step to bring Medicare, as a general issue, in line with the goals of the False Claims Act amendments.

! Modifying of exclusions & civil penalties (Section 6402(d))

The legislation makes various changes to the exclusion and civil monetary penalties provisions, to incorporate specific kinds of fraud activities (e.g., making false statements or misrepresentations of material facts).

These provisions will give the federal authorities more ammunition in connection with specific activities. This includes, for example, false statements on provider or supplier enrollment applications (including extending the false statements prohibition to false statements in any application, agreement, bid or contract to participate or enroll as a provider of services or supplier under a federal health-care program, including managed-care organizations, Medicare Advantage organizations, prescription drug plan sponsors and entities that apply to participate as providers of services or suppliers in such managed-care organizations and such plans).

! Kickbacks as false claims (Section 6402)The legislation clarifies a source of ongoing

debate by making clear that a claim that involves an illegal kickback can be pursued under the False Claims Act.

! Suspension of payments (Section 6402)The legislation creates the ability of the HHS

Secretary to “suspend payments” to a particular provider “pending an investigation of a credible allegation of fraud, unless the Secretary determines there is good cause not to suspend such payments.”

! Increased funding (Section 6402(i))

The legislation creates significant additional funding for the overall anti-fraud effort. The original legislation (H.R. 3590) added $10 million to the Health Care Fraud and Abuse Control Account for each year from 2011-2020. Additional funding (discussed below) is provided in the reconciliation bill. There also are “indexing” increases in the amounts appropriated to individual agencies for their anti-fraud efforts.

! Elimination of duplication (Section 6403) The legislation requires specific steps to

“eliminate duplication” between the Healthcare Integrity and Protection Data Bank and the National Practitioner Data Bank. Essentially, this legislation will result in a merger of these two databanks, with the ultimate elimination of the HIPDB.

! Deadline for submitting Medicare claims (Section 6404)

The legislation reduces the available submission period for Medicare claims to 12 months, from the current standard of 36 months.

! Changes for DME supplies and home-care


Summer 2010 25

servicesThe legislation makes a number of specific

changes related to the provision of DME supplies and home health-care services:

Section 6405. The legislation makes clear that providers who order DME supplies or home health-care services must themselves be enrolled in the Medicare program before they can order those supplies or services for Medicare beneficiaries.

Section 6406. The legislation requires providers to maintain specific documentation in connection with “high risk areas,” primarily DME supplies and home health services. These providers can be disenrolled from Medicare if they fail to maintain this documentation.

Section 6407. The legislation requires a “face-to-face” encounter with a patient before a provider can issue “eligibility certifications” for home health services or durable medical equipment.

! Enhanced penalties (Section 6408)The legislation increases the penalties for various

activities. For example, for some provisions, penalties increase for each violation to $50,000, from amounts as low as $10,000. There also are efforts to increase the “damages” element of these claims (for example, by permitting recovery of “not more than 3 times the amount claimed for each item or service.” While many of these provisions apply primarily to health-care providers, there also are specific provisions of direct relevance to Medicare Advantage and Part D Plans (e.g., marketing violations and improper transfers of beneficiaries).

! Medicare self-referral disclosure protocol (Section 6409)

The legislation requires HHS and the HHS inspector general to develop a self-reporting protocol for violations related to the Stark “self-referral” provisions. Note that this issue may be an especially important one for some providers because of the recent changes to the False Claims Act that make failure to return overpayments into a “false claim.”

Under the provision, the protocol should permit the HHS Secretary to reduce the amount owed for Stark violations, relying on these factors:

• Nature and extent of the improper or illegal practice;

• Timeliness of such self-disclosure; • Cooperation in providing additional

information related to the disclosure; and • Other factors the HHS Secretary considers

appropriate.

! Expansion of Recovered Audit Contractor Program (Section 6411)

The legislation expands certain aspects of the Recovery Audit Contractor program, primarily by authorizing this program for Medicaid and for Parts C and D of Medicare.

! Medicaid Integrity Program (Subtitle F, Section 6501 et seq).

The legislation makes a variety of changes to the Medicaid integrity program, including new provisions dealing with data reporting, exclusions from Medicaid, a prohibition on payments to certain entities outside of the United States, and the creation of an extended period for collecting fraud-related overpayments.

! Creation of uniform NAIC referral form (Section 6603)

The legislation requires the HHS Secretary to “request” that the National Association of Insurance Commissioners develop a “model uniform report form” for private insurers to use in referring suspected fraud and abuse to state insurance departments.

! Additional criminal sentencing provisions (Section 10606)

The legislation requires the U.S. Sentencing Commission to review the sentencing guidelines for criminal convictions related to health-care fraud offenses. The Commission is instructed to review the relevant policy statements, mandates that the “aggregate dollar amount of fraudulent bills submitted to the Government health care program” constitutes prima facie evidence of the intended loss, and increases the guideline amounts based on the amount of the fraud. In addition, the legislation instructs the sentencing commission to: “ensure that the Federal Sentencing Guidelines and policy statements (i) reflect the serious harms associated with health care fraud and the need for aggressive

and appropriate law enforcement action to prevent such fraud; and (2) provide increased penalties for persons convicted of health care fraud offenses in appropriate circumstances.”

B — H.R. 4872The reconciliation legislation (the second bill that

constitutes the health-care reform package) includes a smaller number of anti-fraud provisions.

! Additional fundingThere is a significant increase in anti-fraud

funding, which appears to be on top of the additional funding ($10 million) from the original legislation. The reconciliation legislation appears to add these amounts:

• $95 million for 2011 • $55 million for 2012 • $30 million for each of fiscal years 2013-2014 • $20 million for each of fiscal years 2015-2016

At the same time, there is additional funding provided for the Medicaid Integrity Program, which has the general effect of increasing the funding and expanding the years for which funding is authorized.

! Oversight of durable medical equipment (DME) suppliers

The reconciliation legislation increases the opportunities for oversight of DME suppliers. While the details are somewhat confusing, the legislation permits the HHS Secretary (after January 1, 2011) to withhold payments to these suppliers for 90 days if the Secretary “determines that there is a significant risk of fraudulent activity among suppliers of durable medical equipment.”

CO N C LU S I O N S

With this set of anti-fraud provisions, there’s concrete evidence of an ongoing concern about health-care fraud, and a

continuing process to close loopholes, increase resources and provide additional enforcement tools. While this may be much ado about nothing, the Administration has continued to review its overall anti-fraud operations, and likely will continue to do so with these new tools. At the same time, the overall fight against health-care fraud would be improved if the fundamental principles of the HIPAA statute were revisited, so that the true public-private partnership that is essential to the fight against fraud can be reinvigorated.

About the author: Kirk J. Nahra is a partner with Wiley Rein LLP in Washington, D.C., where he specializes in privacy, information security and overall compliance and anti-fraud litigation and counseling for the health care and

property/casualty insurance industries and others in the financial services industry and elsewhere facing compliance obligations in these areas. He is chair of the firm’s Privacy Practice and co-chair of its Health Care Practice. He can be reached at 202.719.7335 or knahra@wileyrein.


endNOTES

1 See United States Attorneys’ Manual, Title 9, Criminal Division, Criminal Resource Manual 978, Health Care Fraud and Abuse Control Program and Guidelines, available at http://tiny.cc/i2n6b

2 See Public Law 104-191, Health Insurance Portability and Accountability Act of 1996, at http://tiny.cc/3hf6p

Summer 2010 27

Whistleblowers: Key Weapon Against Fraud and Abuse

By Thomas V. Russell

Abstract: The whistleblower is one of the strongest and most cost-effective ways to detect and prosecute complex and sophisticated schemes that defraud government agencies and entitlement programs such as health care. While persons who alert their employer or an outside entity to fraud and other criminal activity against government programs may be motivated by the public interest, long-standing federal law — the False Claims Act — provides another incentive for financial reward for successful prosecutions. Protecting a source of credible inside information also greatly expands the government’s ability to expose and redress criminal fraud. Strong whistleblower provisions like qui tam reinforce the public interest with enough private benefit that those with inside information and deep understanding of the agency or business — and fraud scheme — will come forward. In addition to the federal statute, more than half of states now have False Claims Acts. These acts have helped both expose fraudulent billing and other schemes, and recover many millions of taxpayer dollars. Frivolous or malicious lawsuits also are prevented by large penalties. Another important public benefit of whistleblower protections is that entities are taking more active responsibility for enforcing internal compliance in an effort to prevent fraudulent behavior.

Continued on next page

Point-counterpoint

Whistleblower laws: Sounding a needed

alarm, or plain alarming?

High Cost of Qui Tam Laws: More Litigation

By Jonathan L. Diesenhaus

Abstract: Congress has provided incentives for states to pass laws based on the federal False Claims Act. While well-intended, state proposals with qui-tam provisions haven’t fully considered the practical consequences of these measures. In fact, proposed laws would entitle whistleblowers to increase shares of state and federal Medicaid recoveries for doing little more than they do under the federal False Claims Act. Funds also are diverted from federal Medicaid fraud recoveries to reward states for enacting qui tam provisions. Often, relators also sue suspected wrongdoers in federal court and multiple states to maximize their recoveries. This imposes procedural and practical complexities of investigating, defending and litigating Medicaid fraud allegations. Multiple suits threaten the rights of defendants who may face parallel criminal investigations. Filings under multiple state statutes often impede progress of investigations of suspected multi-state fraud schemes. Thus, while qui tam laws promise large rewards, they imperil government, judicial and defense interests.

Continued on page 31


False Claims Acts: PRO

n an era of increasingly complex and sophisticated schemes designed to defraud government agencies and

entitlement programs of millions of taxpayer dollars, the whistleblower has emerged as one of the most potent and cost-effective elements of fraud detection and prevention.

As commonly understood, the “whistleblower” (derived from the practice of the English police, who vigorously blew their whistles to alert others to the commission of a crime) reports wrongdoing within an organization. This can involve a violation of law or regulation, or a more direct assault on the public interest in the form of fraud, violations of health or safety rules, or corrupt behavior. Whistleblowers may report illegal or unethical practices to a colleague or supervisor within their organization, or to an entity or person outside the organization, an attorney, law-enforcement agencies, the media or issue-specific watchdog groups, or the government entity injured by the wrongdoing.

They may encounter persecution and reprisals at the workplace, with inconsistent legal protection that varies by state and by subject area.

Whistleblowers may be motivated by a pure desire for justice and accountability, especially in the operation of public programs, but long-standing federal law also augments public interest with a private incentive.

Whistleblowers rewarded for successThe Federal False Claims Act,1 passed by

Congress in 1863 to encourage the prosecution of unscrupulous and fraudulent suppliers of military materiel (especially broken-down, sick Army mules), remains the federal government’s most consistent weapon for fighting fraud and theft in programs funded by taxpayers.

It established the legal principle of qui tam, enabling the courts to assign a portion of the government’s damages to the private citizen — the “relator” — who brings the original action against those who improperly receive payment from, or

avoid payment to, an agency of the federal government. The joining of this private, inside information to the investigative and prosecutorial resources of the government greatly expands the opportunity to expose and redress what have become increasingly complicated and complex fraud schemes.

$25 billion returned to the treasuryWhat began as a Civil War-era response to fraud

by military contractors continues today, uncovering misappropriations of government funds during the Iraq and Afghan wars, the response to natural catastrophes like Hurricane Katrina, and systematic schemes to divert many millions of dollars from the Medicare and Medicaid programs. More than $25 billion in taxpayer dollars have been returned to the U.S. Treasury as a result of joint efforts of the government and whistleblowers during the last 20 years.

The key to enhanced detection and effective prosecution and deterrence of fraud is to pass laws with strong whistleblower provisions like qui tam. These provisions reinforce the public interest with enough private benefit that those with inside information and deep understanding of the agency or business — and the scheme to defraud it — will come forward and assist the government.

More than half of states have False Claims Acts that include whistleblower protections, and permit whistleblowers to share in the damages recovered once cases of fraud have been identified, tried and adjudicated by a court of law. These states have prosecuted and punished fraud that would have

Summer 2010 29

never been uncovered without laws to protect and encourage the whistleblowers who brought these cases forward.

More than 80 percent of all false claims cases on the federal and state levels are now initiated by whistleblowers. Since the federal False Claims Act was strengthened under President Reagan in 1986, an average of more than $1 billion stolen dollars has been recovered every year.

Contrary to the testimony often presented to state legislatures considering the passage of false claims acts, routine mistakes and errors are not the target of prosecutions instigated by whistleblowers.

Errors not included in False Claims ActsThe Maryland False Health Claims Act of 2010,2

enacted during the recently concluded legislative session, specifically states that mistakes made in filing claims are not the subject of the statute. Maryland’s state health department, whose Office of the Inspector General includes a fraud-control unit dedicated to the State’s Medicaid program, processes mistaken claims as just that — mistakes and recovered amounts paid to providers that resulted from these errors.

Whistleblowers focus on active, intentional schemes to pilfer funds through fraudulent billing, or on those who purposefully and knowingly ignore such schemes.

During the recent legislative hearings on Maryland’s new law, testimony from various states indicated that no health-care entities had left any state because they had enacted laws that protected and rewarded whistleblowers under a false claims act. In addition, no states that have enacted these laws have to date repealed them. Opponents of the legislation could provide no examples of adverse effects on the state or local business climate as a result of false claims laws. On the contrary, the consensus of the testimony demonstrated that these laws level the playing field for businesses, health-care providers, insurance companies and others who play by the rules.

Another frequent objection to the passage of a false health claims act was that it would encourage frivolous or malicious lawsuits against providers. However, two significant deterrents prevent this: one

is that considerable penalties apply to frivolous lawsuits in federal and state courts.

A complainant may be required to pay the defendants’ legal fees if the court determines that a claim was frivolous or made for harassment.3 Data analysis of cases at the federal level and in states with whistleblower provisions in their false claims statutes indicates that, over the last 20 years, courts have deemed frivolous in only 18 cases out of more than 4,000 filed actions.4

Cheaters cover whistleblower awardsThe other, structural, deterrent to the frivolous

lawsuit is the fact that most of the cases brought by whistleblowers employ private attorneys who work on a contingency arrangement, in which they are only paid if the fraud is successfully prosecuted. The time, money and other resources that must be invested in a false-claims case effectively preclude the pursuit of a case that the attorneys or the government believes will not be successful.

A significant benefit both of federal and state false claims laws is that the cost of whistleblower rewards is borne by the entities that steal and cheat, not by taxpayers. Because these laws usually award triple damages in a successful case, the cost of the whistleblower award is covered, as well as the cost of investigations and prosecutions.

The larger false-claims cases often take years to investigate and litigate. But the involvement of knowledgeable and upright private citizens, encouraged by these laws, helps supplement the limited investigative resources of government and private industry.

. . . the challenge for the private sector will be to redouble its anti-fraud efforts and reassert its role as an effective partner . . . in the overall fight against health-care fraud.


In several recent cases, whistleblowers were central to recouping damages of $2.3 billion from Pfizer, Inc. ($1.3 billion as a criminal fine for kickbacks, and $1 billion in false claims) and $840 million in criminal fines, civil penalties and damages for unlawful billing practices from The Health Care Company (a 2000 case in which the whistleblower invested 13 years, and his law firm more than 85,000 hours, with more than $1.5 billion returned to the taxpayers).

Some $310.5 million was recovered from Gambro HealthCare in 2004 for a litany of offenses including physician kickbacks, false statements related to payment for unnecessary tests and services, payments made to a sham durable medical equipment company (in admitting to its scheme, the company incurred a $25-million fine and was permanently excluded from the Medicare program).5

Firms less likely to threaten employeesDamages in these types of cases must, and do,

exceed “the cost of doing business,” in order to truly and permanently change behavior.

Accordingly, a structural benefit of whistleblower protections and rewards is that firms are demonstrating more active responsibility for internal operations, in an effort to combat fraud. There is evidence that firms in states with statutory protections are less likely to threaten and intimidate

employees who detect apparent fraudulent practices, realizing that these employees could become whistleblowers and be protected from employer retaliation.

One indication that this protection has had a deterrent effect is the retooling of some consulting companies. They have shifted from providing advice on how to “beat the system” to advising on best practices for compliance, through software systems, internal auditing, and educating employees to report problems. Even one large settlement in a false-claims case can have a ripple effect throughout that industry, and change behavior.

This is one of the most important goals of whistleblower statutes: deterring fraudulent behavior before it occurs.

About the author: Thomas V. Russell is inspector general, Department of Health and Mental Hygiene, State of Maryland.

endNOTES

1 31 U.S.C. § 3729–3733

2 Chapter 4, Laws of Maryland, 2010

3 SB 279 (Enrolled Copy) page 19 lines 7-14.

4 Jeb White, Executive Director, Taxpayers Against Fraud, written testimony submitted in support of SB 279 in Maryland for the 2010 legislative session. February 23 before the Senate, and March 10 before the House.

5 http://www.justice.gov/opa/pr/2004/December/04_civ_774.htm

http://www.justice.gov/opa/pr/2004/December/04_civ_774.htm




Summer 2010 31

False Claims Acts: CON

Citing the need to combat Medicaid fraud and abuse, Congress in early 2006 enacted provisions of the Deficit

Reduction Act (DRA)1 that purport to provide incentives to states for enacting laws modeled on the federal False Claims Act (FCA). Spurred by this false promise of increased funding for Medicaid, several state legislatures have proposed measures that would add qui tam provisions2 — and the percentage-based rewards they offer whistleblowers — to the existing arsenals available to law-enforcement officials working to combat Medicaid fraud.3

While perhaps well-intended, neither Congress nor many states now contemplating qui tam legislation have considered its practical consequences. If enacted, proposed laws would entitle whistleblowers to increased shares of state and federal recoveries for doing little more than they do now under the federal statute.

Yet the concomitant rise of multi-jurisdictional litigation — under state and federal law, in state and federal courts — delays health care fraud investigations, denies respondents the ability to mount a meaningful defense, complicates the resolution of those FCA lawsuits prosecutors actually pursue, and inflates the number of cases litigated by whistleblowers alone after federal and/or state governments have declined to adopt their allegations.

Qui tam provisions consume recoveriesDrafted as an amendment to the Medicaid

statute, the DRA’s qui tam provisions divert funds from federal Medicaid fraud recoveries, ostensibly to reward states that enact statutes modeled on the federal FCA and its qui tam provisions. As amended, the Medicaid statute provides that “the Federal medical assistance percentage” (“FMAP”) of any amounts recovered in an action brought under a qualifying state FCA will be “decreased by 10 percentage points.”

Thus, in a state where the federal government reimburses 60 percent of state Medicaid expenses, instead of receiving a 40-percent share of a Medicaid fraud settlement, the state will receive a 50-percent

share. Coincidentally (or perhaps not) a state that enacts a qui tam statute must incur a new cost — joining the federal government in paying a substantial reward to whistleblowers — that in most cases consumes the entire amount of that “additional” recovery. In other words, the federal subsidy does not really increase Medicaid funding; it underwrites the costs of doubling the reward paid to those who blow the whistle on Medicaid fraud.

The requirements imposed on states to qualify for this reward subsidy have proven controversial. The subsidy is contingent on 1) state enactment of a qui tam statute and 2) a determination by the HHS Inspector General, in “consultation with the Attorney General...that the State has in effect a law that meets [certain] requirements.” Those requirements are that the law:

1) Establishes liability to the State for false or fraudulent claims to Medicaid consistent with the liability provisions of the federal FCA;

2) Is at least as effective as the federal FCA at rewarding and facilitating qui tam actions;

3) Provides for filing an action under seal for 60 days with review by the state attorney general; and

4) Contains a civil penalty that is not less than what is authorized by the federal FCA.

The controversy is that of the 14 states to have amended or enacted qui tam statutes in anticipation of receiving the reward subsidy, only six have been deemed to qualify. And the DRA’s primary sponsor recently has questioned the Inspector General for, in his view, lowering the standard. Thus, eight states and possibly several others are rewarding


whistleblowers while not receiving the subsidy to which they thought they were entitled.

The requirements clearly reflect the desire that greater incentives will induce whistleblowers to alert law enforcement officials to alleged schemes, while deterring potential fraudfeasors from hatching those schemes in the first place.

Their sponsor, Sen. Charles E. Grassley (R-Iowa), proclaimed that the provisions underscored “an effort to contain the escalation of fraud and waste and abuse in the Medicaid program.”

He emphasized the requirement that qualifying states reward and facilitate whistleblower actions: “The importance of meeting each element of the qui tam requirement cannot be understated; the FCA works to detect and prevent fraud and abuse because of the qui tam provisions.” But in practice, state qui tam laws stand to obfuscate, not serve those goals, by undermining the uniformity of existing federal incentives and promoting multi-jurisdictional bounty hunting above true fraud exposure.4

Statutes incentivize more litigationThe text of the DRA suggests that its authors

expected states to recover Medicaid damages consisting of a state and a federal share in one state action brought under one state FCA.

But practice under existing state qui tam statutes demonstrates that relators do not see filing a state qui tam action as an alternative to filing under the federal FCA. Instead, relators seek to maximize their own recovery under qui tam statutes by invoking the federal FCA, to obtain a share of the federal Medicaid recovery, and all available state FCAs, to

obtain a share of each state’s Medicaid recoveries.5Nothing in the federal statute, or any state

statute, precludes the same relator from bringing claims under state and federal statutes. Nor do the DRA incentives address the procedural and practical complexity of investigating, defending, or litigating Medicaid fraud allegations under multiple state and federal qui tam provisions.

Most relators filing Medicaid cases under state qui tam statutes have done so in federal courts, which exercise jurisdiction over cases brought under state law for “the recovery of funds paid by a state or local government if the action arises from the same transaction or occurrence as an action brought under” the federal qui tam provision. Yet relators seeking a more active role in prosecuting state claims also have filed separate state claims in state court.

The realities of multiple actions filed in multiple courts pose obvious heightened risks and costs for the defendants. They also threaten the rights of individual defendants who may be subject to parallel criminal investigation. Furthermore, filings under multiple state statutes often impede the progress and coordination of investigations of alleged multi-state schemes. Thus, while state qui tam laws promise large rewards, they do so at the peril of government, judicial and defense interests alike. The examples below illustrate the complications such laws beget.

1) Seal Issues. State qui tam statutes, like the federal FCA, require whistleblower complaints be filed under seal, served on relevant law enforcement official(s), and maintained under seal for a set period of time unless an extension is granted (which happens fairly regularly).6 Yet state statutes impose divergent rules on which officials may be served,7 and how long extensions endure.8

In multi-jurisdictional cases, this raises the possibility that the same sealed complaint could be served on hundreds of people as representatives of various political subdivisions. Where individual states impose their own limits on seal extensions, it also creates a risk that a complaint could be unsealed for litigation of state civil claims while the federal government and other states continue a criminal investigation of that very same complaint.

While Congress established the federal seal and investigative period for the benefit of the

The realities of

multiple actions filed in

multiple courts pose obvious

heightened risks and costs

for the defendants.

Summer 2010 33

government, in practice the seal period also benefits defendants. It affords them an opportunity to investigate and respond to allegations, to avoid needless litigation when prosecutors (and occasionally relator’s counsel) are convinced that a whistleblower’s claim lacks merit, and to avoid or minimize the stigma of defending against unfounded fraud allegations. Wide circulation, and inconsistent unsealing, of complaints under state statutes deny defendants the benefit of that seal, and expose them to conflicting procedures.

2) Fairness and Due Process Issues. A proliferation of whistleblower suits based on identical allegations, under state and federal statutes, likewise raises fairness and due process concerns. For one, the federal FCA and each state qui tam statute permit the government to seek a stay of relator discovery pending completion of the government’s investigation or prosecution of a civil or criminal matter arising out of the same facts as those alleged in a qui tam complaint.

Yet no state statute authorizes a court to stay discovery in deference to the investigation by another state. And where a statute limits the granting of stay to certain circumstances, invoking the court’s general supervisory powers to issue a stay outside those circumstances likely will prove difficult. Thus, the normal remedy available to avoid one of the primary perils of parallel proceedings is simply unavailable in the context of multi-state qui tam litigation where some states investigate diligently and others have no reason, or resources, to do so.9

3) Gamesmanship Issues. Too often, multi-jurisdictional complaints breed gamesmanship, as whistleblowers seek multiple state recoveries for identical claims. In one classic example, the United States brokered a settlement for $124 million, $50.6 million of which was to be paid to 22 states — only to watch a relator launch a post-settlement campaign for more money.10

The relator’s thrice-amended complaint invoked the federal FCA and several state qui tam provisions. Before announcement of the settlement, the relator did not serve any state with his complaint or disclosure of material evidence. Once the settlement went public, however, he served the qui

tam states, asserted a right to share in the proceeds, and took discovery to challenge the fairness and adequacy of the settlement and obtain a share of the estimated value of the Corporate Integrity Agreement the defendant had signed with the OIG.

The District Court dismissed all of the relator’s claims to share in the state recoveries. Yet notwithstanding the relator’s sweeping loss, at least four months passed between the execution of the settlement and actual resolution of the matter. All of this was because the various state qui tam statutes provided the relator with opportunities to delay resolution and demand a greater reward than he expected when he first filed his qui tam action.11

Despite admirable intent, the DRA incentives, and the state qui tam statutes they inspire, pose latent risks to the government and defendants alike. The challenge is to recognize those risks while supporting the pursuit of true fraud, not bounties.

About the author: Jonathan L. Diesenhaus is a partner with Hogan Lovells US LLP law firm in Washington, D.C. Before joining the firm in September 2005, Diesenhaus served as Senior Trial Counsel in the Fraud

Section of the Civil Division at the United States Department of Justice. There, he handled numerous health care False Claims Act and qui tam matters from 1998 to 2005.

A proliferation of

whistleblower suits based on identical

allegations, under state and federal

statutes, likewise raises fairness and

due process concerns.


endNOTES

1 Deficit Reduction Act of 2005, Pub. L. No. 109-171, § 6031, 120 Stat. 4, 72-73 (2006).

2 Qui tam provisions: a) authorize a whistleblower (or “relator”) to commence an FCA action on behalf of the state and the whistleblower by filing, under seal, a civil complaint alleging that a person or entity has submitted or caused the submission of false claims to a state; b) provide that the whistleblower may proceed in the name of the state in the event that the state’s attorney general elects not to take over the suit; and c) provide that the whistleblower (most often represented by contingent fee attorneys) receives a bounty or “share” of the government’s recoveries. Under the federal statute, the government may recover up to treble damages plus a civil penalty of $5,500 to $11,000 per false claim submitted. The federal statute caps the relator’s share at 30 percent of the funds recovered by settlement or judgment. See 31 U.S.C. §§ 3730(d)(1)-(2) (2000).

3 As of this writing, 25 states and the District of Columbia now have qui tam statutes. In 2009, 24 sought to enact an FCA or amend an existing FCA. Only two of those states appear to have excluded qui tam provisions altogether.

4 To further complicate matters, in May 2009, and again on March 2010, Congress amended several key provisions of the federal FCA, effectively moving the target states are required to hit to recover the DRA incentive.

5 See, e.g., United States ex rel. Bogart v. King Pharms., 414 F. Supp. 2d 540, 541 (E.D. Pa. 2006) (dismissing relator’s claims against several qui tam and non-qui tam states for a share of the state portion of a Medicaid false claims settlement).

6 See, e.g., 31 U.S.C. § 3710(b)(2); N.H. REV. STAT. ANN. § 167:61-c(II)(b) (Westlaw through end of 2009 Reg. Sess.).

7 Some of those states, California in particular, set out an intricate legislative scheme enabling a relator to sue in the name of the state and any political subdivision of the state alleged to have suffered damage by from the same scheme. CAL. GOV’T CODE §§ 12652(a)–(c)(1) (Westlaw through 2009 Reg. Sess.); see also DEL. CODE ANN. tit. 6, § 1203(b) (Westlaw through 77 Del. Laws, Ch. 214); MASS. GEN. LAWS ANN. ch. 12, § 5C (Westlaw through Ch. 114, of the 2009 1st Annual Sess.).

8 Under the Louisiana FCA, for example, the State “may request one extension of the ninety-day period for the complaint and information to remain under seal.” LA. REV. STAT. ANN. § 46:439.2(A)(4)(b) (Westlaw through all 2008 Regular Session Acts). Although ambiguous, the statute suggests that the seal must be lifted after 180 days, irrespective of any compelling reason why the federal government may need such a seal in place.

9 For instance, where one state declines to intervene and take over a relator’s civil action, while other states and the federal government continue to conduct a criminal investigation in connection with the same alleged underlying conduct, the first state’s declination could entitle, or obligate, the relator to commence civil discovery against that defendant in the midst of the parallel criminal investigation.

10 See Bogart, 414 F. Supp. 2d at 544-45 (disposing of whistleblower’s demands for share of proceeds recovered by various states despite a) his failure to serve those states before the announcement of a settlement and b) the absence of qui tam provisions authorizing the payment of awards to whistleblowers in most states).

11 Among the more extreme of the relator’s allegations was the charge that the proposed transfer of the state settlement amount into an escrow account maintained by the New York Attorney General was an attempt to undermine the jurisdiction of the Court and deprive the relator of his rightful share of the settlement funds. See Relator’s Response in Opposition to the United States’ Motion to Dismiss with Prejudice Count I of the Third Amended Complaint at 3, Bogart, 414 F. Supp. 2d 540 (E.D. Pa. 2006) (No. Civ. A. 03-1538).

By Howard Goldblatt

A young couple sues to compel their health insurer to cover expensive treatment of their seriously ill newborn.

The insurer has denied coverage, arguing to the judge that the procedure is experimental and not covered by the couple’s insurance.

The policy also should be rescinded because the husband lied on his policy application, the insurer contends. The evidence: a photo on a social network website showing the husband holding a cigarette, even though he said on the policy application that he does not smoke. The judge allows the insurer to rescind.

This isn’t a real case. It was part a plot line from the television series The Good Wife, and was broadcast during the key end-debates before passage of health-care reform in March.

But stories like this — real and fictional — have been drivers of highly publicized and emotion-tinged efforts to forbid health-policy rescissions.

Health insurers defend rescissions as necessary to

end coverage that was taken out based on fraud, misrepresentation or material factual error by the insured in the application process. Critics say rescissions too often are merely an insurer’s excuse to save money by using post-claims underwriting to avoid covering legitimate claims. So the definition depends upon which side of the street one stands on.

Soon after passage of health-care reform in March, a large health insurer was accused of selectively rescinding policies of women with breast cancer. Secretary of Health & Human Services (HHS) Secretary Kathleen Sebelius wrote the insurer, seeking an immediate end to the practice.1

The insurer said the news reports were taken out of context. Only four of 200,000 breast- cancer cases involved rescissions, and “they were not singled out because of their breast cancer,” the insurer said.2 It did not matter if the insurer was correct or if there was a pattern of illicit rescinding of policies of breast-cancer patients.

The general perception was that the insurer was simply trying to avoid paying for the women’s cancer treatments.

Summer 2010 35

Health-Policy Rescissions Defused, but Questions Remain

Abstract: Health insurers say they rescind polices for fraud and misrepresentation on the application. But consumer groups have argued that insurers have used rescissions to avoid paying legitimate claims. In essence, they argue, insurers find a reason to rescind a policy instead of paying the claim. This debate over the legitimacy of policy rescissions led to language in the Patient Protection and Affordable Care Act that bans rescissions unless there is fraud or intentional misrepresentation of a material fact on the policy application. Health reform thus provides greater clarity by narrowing the rescission debates to the proper meaning of fraud and willful misrepresentation. This allows greater focus on identifying and solving fraud, and defuses some of the most traditionally divisive debates over rescissions. There may be a clearer view of when rescissions can be used, but some debate still may linger over the meaning of “fraud” and “willful misrepresentation.”

Health insurers need rescission rightsIf you ask most consumers about rescissions,

their response probably will be the same: Health insurers have used rescissions as an excuse to avoid paying for legitimately covered medical needs.

But during the debate over health-care reform, the Regulatory Framework Task Force of the National Association of Insurance Commissioners (NAIC) issued a data call to 52 insurance companies that write individual major medical policies.3

“Because the majority of individual major medical policies are medically underwritten, it is important for companies to have the right to rescind a policy if information provided by an applicant is both fraudulently misrepresented, and material to the condition for which coverage is being sought.”4

The data call covered a five-year period (2004-2008), and discovered approximately 27,000 rescissions of about 6.7 million policies — or 3.7 rescissions per 1,000 policies. 5 The rescissions peaked in 2005 and were lowest in 2008.

The surveyed insurers maintained detailed underwriting to help their decision-making when reviewing policies for rescission. The insurers also installed detailed appeals processes that included multiple tiers of appeal.6 The extensive process is intended to protect companies and give consumers adequate ability to override the rescission, the insurers contend.

Regardless of the evidence in the NAIC’s data call, there remains a division among health policy experts and many consumer advocates. Insurers and other experts argue that the rescission issue is overblown, and that the evidence proves that insurers rescind policies primarily for proper reasons such as fraud and misrepresentation.7

Rescission an excuse to deny expensive claims?But health-insurance consumers and liberal

health-reform activists see rescissions as evidence that insurers are looking for excuses to deny legitimate coverage for insureds. Consumer activists have seen rescission as unethical post-claims underwriting. “They’re supposed to look at your medical records ahead of time — but once they offer the coverage, you should be able to rely on it,” Jerry Flanagan of the

California-based Consumer Watchdog says in a blog posting.8

“Representatives of the insurance industry have testified that rescission is rare and occurs in less than one percent of the policies. Even if this estimate is accurate, it is not comforting. One percent of the population accounts for one-quarter of all medical bills. The sickest individuals may be small in number, but they are the most vulnerable and most in need of coverage,” says an alliance of consumer groups.9

Families USA, a leading liberal health reform organization, recently created a guide to the new health-reform law. “Insurers will be prohibited from revoking [insert specific state] coverage once they (consumers) get sick. They will be able to rescind policies only in clear instances of fraud where individuals truly intended to mislead the insurer. Moreover, insurers will not be able to deny coverage based on health status, making it much harder for them to unfairly revoke coverage when people get sick,” Families USA says in the analysis.10

Rescission was controversial enough that health reform took the issue head-on, largely banning the practice and defusing much of the controversy.


Insurers cannot rescind a policy unless “a covered individual who has performed an act or practice that constitutes fraud or makes an intentional misrepresentation of material fact as prohibited by the terms of the plan or coverage,” says Section 2712 of the Patient Protection and Affordable Care Act and the Budget Reconciliation Act (PPACA) (Public Law 111-148 and Public Law 111-152).

State laws clear about insurance fraudThe health-reform law is both clear and

ambiguous. It clearly states that only fraud and intentional misrepresentation can trigger rescissions. But nowhere does the new law clearly define these terms.

Fraud may be easier to define than misrepresentation. State laws are relatively clear about defining insurance fraud. The 47 states and District of Columbia with laws making insurance fraud a specific crime all say fraud involves an intentional act and, in some states, “knowing” or “willful” actions. Even with that seeming clarity, there still can be considerable debate over whether a given act is intentional, willful or knowing. So going forward, the courts still will be called upon to decide in individual cases.

“Intentional misrepresentation of material fact” may be dicier. Take The Good Wife scenario: Does simply having a photograph of a person holding a cigarette when the applicant states he does not smoke make the act an “intentional misrepresentation of material fact” that would properly allow rescission?

Is it an intentional and material misrepresentation for an adult to not tell the insurer that he or she had acne as a teenager? Clearly, insurers and consumer advocates might view “intentional misrepresentation” differently. This can lead to considerable debate and possible lawsuits over what constitutes a basis for rescission.

Insurers would argue that simply not mentioning a fact such as acne treatment as a teenager would not necessarily lead to rescission. Nor would simply having a photograph of an insured holding a cigarette.

Regardless, the rescission ban of the PPACA takes effect in September 2010. But most health insurers already have announced they will abandon rescissions

except for fraud and intentional misrepresentation. “While many health plans already abide by the

standards outlined in the new law, our community is committed to implementing the new standards in May 2010 to ensure that individuals and families will have greater peace of mind when purchasing coverage on their own,” Karen Ignani, CEO of America’s Health Insurance Plans (AHIP), wrote in a letter to congressional leaders.11

“Health reform made rescissions illegal because all Americans should be able to rely on quality care when they need it most,” responded Nancy-Ann DeParle, head of the White House health-reform effort.12

States likely to set own rescission guidelinesBoth AHIP and the White House statements

crystallize the issue: Rescissions would end before the effective date, and the only rescissions allowed to continue are fraud and material misstatements as specifically mentioned in Section 2712 of health reform.

As of early June, the health-insurance community was expecting a new regulation or guideline from HHS, and departments of Justice and Treasury Department. But it was uncertain whether the document would discuss rescission or provide guidance in defining “intentional misrepresentation.”

Historically, however, the federal government has shown little willingness to give guidance to state regulators on interpreting new federal laws. When

Summer 2010 37

The health-reform law is both clear and ambiguous. It clearly states that only fraud and intentional misrepresentation can trigger rescissions. But nowhere does the new law clearly define these terms?

the sweeping federal crime-control law was enacted 1994, for instance, it included two insurance fraud-related provisions commonly known as sections 1033 and 1034. The provisions forbid anyone convicted of a crime of dishonesty or breach of trust from working in the insurance business unless they receive a waiver from a state insurance commissioner.13

The National Association of Insurance Commissioners (NAIC) sought an advisory opinion as it worked on guidelines to help state insurance departments decide how to create a waiver program. The Department of Justice said it does not give out advisory opinions. So the NAIC wrote the guideline on its own, and state insurance departments have used it for 15 years without federal reaction one way or another.

So state regulators either can hope the federal government issues clear guidance on “intentional misrepresentation,” or the states can set standards for meeting the rescission provisions on their own.

How then should the states and insurers meet the rescission requirements of Section 2712?

Given health reform’s intent to have a national framework that is implemented by state insurance regulators, the NAIC as the voice of state insurance departments needs to develop rescission guidelines.

Some 21 consumer advocates who are writing recommendations for implementing health reform suggest four tests before insurers can rescind a policy:

There must be clear and convincing evidence of intentional and material fraud, plus a causal relationship between the condition allegedly misrepresented and the condition resulting in the claim.

! Less than 12 months must have elapsed from the application date.

! The insurer must complete all required underwriting procedures and exercise due diligence in underwriting the policy.

! An independent organization must review the rescission order.14

! Insurers may see less of a need for individual states or the NAIC to create regulations or guidelines. They believe rescissions are not a significant problem, and already have largely abandoned the practice before health reform’s

September effective date.

States likely to issue own rescission guidelinesInsurers also take issue with the criticism that

they have engaged in illicit post-claim underwriting. The cost of full-blown investigations of every application to identify potential “fraud” or “intentional misrepresentation” would be prohibitive, they argue. Such reviews would raise insurer costs, and thus could end up passed onto consumers via higher premiums over the longrun.

Regulators and the NAIC also have been more focused on other health-reform issues than on defining “intentional misrepresentation.” Health reform gave the NAIC authority to complete key tasks (most are not fraud-related) by specific dates, and those issues have been the focus for now.

There appears to be a collective belief among consumer advocates and insurers that what constitutes fraud and intentional misrepresentation has been well-settled in practice, and that a new regulation or guideline may not be necessary.

Insurers say they already allow consumers ample appeal before a final rescission is ordered. Thus, according to insurers, simply showing a photograph of a person holding a cigarette does not by itself allow a rescission. Nor would a relatively inconsequential misrepresentation necessarily trigger a rescission.

The insurer abandonment of most rescissions before the September effective date shows that health reform, from their perspective, has not shifted the paradigm on dealing with rescission. To most insurers, nothing really changed when health reform passed. Insurers believe their standards for rescinding were valid before passage and will remain valid after the September implementation.

But consumer advocates clearly see a victory in health reform: Legitimate claims would not lead to post-claims underwriting and invalid rescissions. Some states have taken up the mantle even before the federal provisions become operative in September. California’s legislature, for instance, is debating banning most rescissions on its own; the bill also would create a mechanism for independent review of any proposed rescissions. The measure has passed the Assembly and is being reviewed by the Senate.

Regardless of their longstanding differences over


rescission, insurers and consumers agree that “fraud” and “intentional misrepresentation” still are valid reasons for health insurers to yank policies. They still, however, differ over the precise meaning of fraud and material misstatements.

So where does this leave us?Health reform makes rescissions far more

difficult by greatly limiting the criteria to fraud or intentional misrepresentation. In the process, reform also will help clarify the terms “fraud” and “intentional misrepresentation.” The new rescission limits thus could benefit insurers, regulators, consumers and fraud fighters. The term “fraud” finally may be used more accurately, and more consistently so. This allows the debates to focus on the real issues of thwarting fraud and misrepresentation instead of getting sidetracked by divisive and unproductive debates over non-fraud issues.

Too many news stories, for example, have inaccurately used the term “fraud” to cover anything and everything under the sun. Fraud has specific legal meaning. Using it to describe actions that are not legally fraud needlessly confuses the issues, helps incite public overreactions, and complicates the job of investigating real fraud.

But even with greater clarity about — and narrowing of — rescissions, lively debates and lawsuits still are likely. Claimants and insures will continue taking to the courts to define the meaning of the remaining rescission-worthy actions of fraud and willful misrepresentation. So the debates aren’t over, but just narrower in scope, and possibly less incendiary and divisive in the brave new world of health reform.

About the author: Howard Goldblatt is director of government affairs for the Coalition Against Insurance Fraud.

Summer 2010 39

endNOTES1 News release, U.S. Dept. of Health & Human

Services, April 23, 2010. http://tiny.cc/j16sw2 “Health plan responds angrily to Obama mention of

rescission,” by AmedNews.com, May 17, 2009. http://tiny.cc/t8iv8

3 NAIC Rescission Data Call of the NAIC Regulatory Framework Task Force, December 17, 2009.

4 NAIC Data Call, pg. 1.5 ibid.6 ibid.7 See Wall Street Journal editorial by Scott

Harrington, September 14, 2009: “Fact-Checking the President on Health Insurance. His tales of abuse don’t stand scrutiny” and “Rescissions: Much Ado About Nothing” by John Goodman, http://tiny.cc/mwd84

8 “Think you’ve got health insurance?” by Melba

Newsome, blog posting, September 2, 2009.9 “PPACA Implementation: Consumer

Recommendations for Regulators and Lawmakers,” pg. 35, http://tiny.cc/g98uv

10 “Health Coverage in the States: Will Health Reform Help?” by Families USA, March 2010, http://tiny.cc/cspk9

11 “Insurance industry will end rescission in May,” by Chris Frates & Jennifer Haberkorn, online news article, April 28, 2010, http://tiny.cc/odeop

12 ibid.13 18 US Code 1033, 103414 “PPACA Implementation: Consumer

Recommendations for Regulators and Lawmakers,” by United Policyholders, pg. 36, http://tiny.cc/u5xeh

15 California Assembly Bill 2470 http://tiny.cc/oa3k4

Much Ado About Less: Economy Drains Resources

aintaining forceful crime-busting efforts has grown harder in some fraud fighting quarters with the wobbly economy

siphoning budget funds over the last two-plus years.State and local fraud fighters have absorbed some

financial hits, dodged near-misses, or are working to avoid threatened losses.

More than 60 percent of state fraud bureaus experienced budget cuts last year, according to a Coalition survey of 37 of these agencies. More than a third of fraud bureaus also have left positions unfilled, and nearly a quarter had positions eliminated.

“This is somewhat surprising given that a majority of the fraud bureaus were created with dedicated funding, specifically assessments on insurers, which was done to shield these agencies from the whims of state budget cutters,” the survey says.

Consider some of the economy’s impacts on fraud fighters:

Most of the Arizona fraud bureau’s staff was axed last year in state budget-cutting moves that have left the unit with a fraction of its former fraud-fighting capacity.

California Gov. Schwarzenegger proposed reducing insurance fraud to a misdemeanor. This would’ve reduced prosecutions and jail terms, thus saving the state money. But an outrcy by fraud fighters around the U.S., including the Coalition, persuaded Schwarzenegger wisely to back off.

A bill increasing the assessment insurers pay to fund Utah’s fraud bureau was quashed last year, even though the measure would not have soaked up a

dime of state budget money. Increasing the agency’s budget didn’t look good during a time of austerity, legislative leaders decided.The Virginia

legislature has authorized sweeping more than $3 million from the insurance fraud trust fund into the general account. In Louisiana, a bill would allow the state to sweep more than $101,400 in fraud-bureau money back into the general fund.

Lawmakers in Pennsylvania are eying that state’s anti-fraud funds to help balance its budget, according to sources in Harrisburg. Prosecutors in California are having a hard time getting their anti-fraud funds released, even though by law the funds can be used only for prosecuting insurance fraud.

The Tulsa, Okla. police have stopped sending officers to respond to certain calls such as fraud unless the crime is in progress, and to certain non-injury car crashes even if the crash is suspicious. The city recently laid off 124 officers due to a budget crisis.

Furloughs have forced cutbacks in work hours of some fraud bureaus such as Maryland and Arizona. Furloughs in large Los Angeles County court system could slow fraud cases.

But some bright spots have emerged as well. Florida this year increased the number of prosecutors dedicated mostly for auto-fraud cases. A Colorado bill would allow a small increase in the annual insurer assessment earmarked for the fraud bureau.


TrendWatch: The economy, rate evasion, drugs

and ‘ObamaCare’

Summer 2010 41

And the Michigan Insurance Fraud Awareness Coalition has raised money from insurers to fund an assistant prosecutor to handle arson-for-hire cases in the Detroit area.

Invasion of Rate Evaders: Fighting Back With Scarlet “A”

The city of Haverhill, Mass. is knuckling down on drivers who illegally register their vehicles in neighboring New Hampshire, where premiums can be much lower.

Auto rate evasion has dogged insurers in several states with high premiums for years. Such cons are in full view in Haverhill, with local drivers brazenly displaying New Hampshire plates in their neighborhoods.

Haverhill police are amping up, issuing full citations instead of mere warnings. Police received 330 reports of out-of-state plates since 2006 but issued only seven citations. Haverhill also is setting up a fraud hotline and a section on the city’s website so irritated citizens who pay full auto premiums can report rate evaders.

The Massachusetts city of Lawrence also has hardened its stance. An insurance-fraud task force follows up on every lead, and has issued more than 500 citations over the last six or seven years. Violators pay $400 per cite. Officers record the times when they see a vehicle with out-of-state plates parked at a home. After 30 entries, officers plaster an orange violation sticker onto the windshield. The stickers are large, hard to remove, and an obvious public rebuke — much like the scarlet “A” fastened to Hester Prynne’s dress.

Rate evasion robs auto insurers of the premiums the drivers would’ve paid by registering legally. Honest drivers in the targeted states also subsidize evaders’ accidents and moving violations with higher premiums. The evaders’ home state loses auto registration fees. And people who play by the rules are upset that their dishonest neighbors get a cheaper and illegal ride at their expense.

Rate evasion also has hit high-premium states New York and New Jersey with some force over the years. Drivers register in other states such as North Carolina. Rings orchestrate high-volume evasions. Legislation being debated in New Jersey would

impose harsh penalties on evaders. A bill in New York would give the insurance department authority to investigate suspected evaders.

States are cooperating with each other. Some 24 suspected New York and New Jersey rate evaders were busted for registering their vehicles in Pennsylvania late last year. The drivers illegally shaved $1,000 to $4,000 a year off their premiums, according to state AG Tom Corbett. Rate evaders sock Quaker State policyholders with up to $15 million in added claims a year.

Insurers: Hijacking for Drug High Stays HighAmerica’s deadly dance with OxyContin and

other addictive prescription drugs refuses to downshift despite increasingly vigorous crackdowns around the nation. In fact, drug diversion may be speeding up.

Suspicious claims involving the hijacked meds rose during the last year, fully half of insurers say in a recent survey of 51 insurers by the Coalition. No insurers report a drop in suspect claims. Diversion also is moderate or very high, half of insurers also say.

Insurance fraud bankrolls much of America’s epidemic drug diversion spree. Shady doctors, pharmacists and drug rings obtain much of the stuff with bogus claims, often using forged prescriptions. Insurers lose billions of dollars a year, and some addicts lose their lives.

In Salt Lake City, pain doctor Dr. Warren Stack received eight years for dolling out painkillers that, prosecutors say, led to the deaths of five addicted patients. Now Stack’s liability insurer doesn’t even want to defend him against a lawsuit by the family of one dead patient because he was convicted of a crime. In Houston, word spread quickly in the local drug culture that docs Arun and Kiran Sharm were

easy scores. So many addicts flocked to the Sharms’ clinics that the pair had to hire foreign medical students to help handle the trafficking.


One addict received as many as seven times the needed dosage. The Sharms also threatened to withhold drugs when some patients balked at receiving large regimens of drug shots the couple required.

In Rochester, the medical director of an arena football team headed up a prescription drug ring that stole around $500,000, prosecutors say. Dr. Charles Livingston allegedly sold blank prescription pads to cronies for $800 each. The cronies then resold the pads, or forged doctor signatures for drugs such as oxycodone and Percocet.

Many insurers were not especially well-prepared to compete against the fierce pull of addiction and trafficking profits just a few years ago. But more insurers have stepped up their anti-fraud efforts lately. Half of the insurers in the Coalition’s survey say they have adopted new anti-diversion strategies over the last two years. This includes using more data analytics, and more training of claims staff and SIUs.

Obamacare Scare: Fake Plans Prey on ReformBarely days after President Obama inked health

reform into law, crooks began harssing consumers with barely disguised deals for ersatz coverage.

Most people barely knew what the 2,000-page tract contained or fully meant to the 30 million Americans who eventually will be covered. The staggered timetable for many of the major changes only compounded people’s confusion. Perfect camouflage for criminals.

In Illinois, a telemarketer sold an elderly woman coverage for “death panels.”

Peddlers also have gone door to door, saying they were from the federal government and selling required “Obamacare” policies. But the feds aren’t sending out agents to sell coverage under health reform, no one is authorized to sell health-reform coverage by knocking on doors, coverage isn’t currently “required,” and there is no such thing as “Obamacare.”

Crude blast faxes also offered fake coverage for suspiciously low monthly premiums such as $29.95, or “limited-enrollment” deals (which aren’t now part of health reform).

Cheaters demanded people’s sensitive financial

information such as credit-card numbers. That suggests many of the frauds were attempted identity thefts.

Another round of cons surfaced when the feds began mailing rebate checks in June to seniors who reached the so-called Medicare “donut hole” prescription coverage gap. Con artists, for instance, were promising to facilitate sending of the checks, even though Medicare sent the checks automatically. Crooks were asking seniors to fill out forms, including their Social Security and Medicare ID info, in a likely bid for medical identity theft.

Whether “Obamacare” swindles are a serious public threat or relatively small-time cottage industry remains a question. There have been no publicly revealed arrests. Nor have reports surfaced about victims losing much money. The often-crude flyers also suggest many “Obamacare” cheaters are fly-by-nighters with questionable skills and possibly limited overall numbers.

Compare these cons with possibly hundreds of savvy fake health plans that started preying on consumers at least two years before health reform passed.

Many of these cons have mounted sophisticated — and effective — national sales campaigns that exploited worried consumers with hyped-up promises of guaranteed, affordable, full-benefit health insurance. They’re effectively taking advantage of cash-strapped people’s anxiety in an unstable economy.

Some fraud operations have erected complex

networks of affiliates, all working to separate consumers from their money. Many states have issued emergency cease-and-desist orders as the victim count quickly grew.

And those victims can be heartbreaking.A Colorado man was gravely hurt in a hit-and-

run. He piled up $43,000 in medical bills before dying, but the National Trade & Business Alliance paid just $250, regulators say. Another plan stuck Minnesota resident Mary Lloyd with more than $50,000 in bills for her husband’s blocked artery.

American Trade Association (ATA) has fleeced at least 12,000 people out of $14 million nationally, regulators say.

Shady outfits such as ATA have spent quality time refining their shady business model. They’re a proven threat. But most “Obamacare” newcomers still appear to be learning their thiefcraft. Fortunately for consumers, they haven’t yet shown they can exploit health reform as effectively as the older brands are exploiting the downturned economy.

Summer 2010 43

www.InsuranceFraud.org

The Coalition Against Insurance Fraud is a national alliance of insurers, government agencies and consumer groups dedicated to combatting all forms of insurance fraud through legislative advocacy and public education.

1012 14th St., N.W., Suite 200Washington, D.C. 20005

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