Preface
The idea of shared risk is the foundation of all types of insurance. In one of the earliest examples of shared risk, ancient Chinese traders would distribute their cargo throughout many different oceangoing vessels to limit the incurred losses if any single one of them capsized. Later, the Babylonians enacted the first known written laws in the Code of Hammurabi (circa 1750 B.C.), which, among its many provisions, allowed lenders to charge additional costs to cancel loans for which the collateral was lost or stolen.
Early insurance was principally limited to the extreme risks associated with ships and the goods they transported on the high seas. But even in ancient Rome, records exist to show that there were burial societies that paid for funeral costs of their members out of the dues they were assessed. The Achaemenid Empire in ancient Persia (circa 550–330 B.C.) was the first to offer individuals insurance for their general interests. Each year citizens presented the ruler with a gift. If it was worth more than 10,000 gold coins, the gift and the giver were recorded in a ledger. If the gift giver later needed money for an investment, for a child's wedding or another personal venture, the government would give him or her twice the amount of the recorded gift.
By the mid-1400s, marine insurance was highly developed but other forms of insurance were not. Sharing losses, rather than making a profit, was the main goal at the time. However, after the Renaissance in Europe, the insurance industry experienced significant growth and became much more sophisticated.
Other disasters began to be covered by insurance after the Great Fire of London of 1666, which destroyed 13,200 buildings. In 1680, Englishman Nicholas Barbon established the first fire insurance company, known as The Fire Office. Around the same time, Mr. Edward Lloyd of London opened a coffee shop that became a popular hangout for ship owners and merchants. Risk takers also congregated at Lloyd's to provide insurance (for a profit) for shipping concerns. Documents would be prepared, and those providing the insurance would each sign at the bottom, a process that added the term underwriter to our lexicon. Lloyds's of London would go on to become one of the largest insurance entities in the world.
More insurance companies sprang up in England and continental Europe after 1711, during the so-called bubble era. Many were downright fraudulent get-rich-quick schemes that sold worthless securities to the public. Others were woefully undercapitalized and could not cover their losses from claims. And no systems had yet been developed to weed out fraudulent claims by the insureds. The resulting chaos of the burgeoning industry took more than a century to right itself.
What we now call health insurance probably began in Germany, building on the tradition of welfare programs in Prussia and Saxony that began in the 1840s. By 1880, German Chancellor Otto von Bismarck introduced old-age pensions, accident insurance, medical care and unemployment insurance. The British followed with a system of social insurance in the early 1900s, which was greatly expanded after World War II.
In America, the insurance industry developed slowly, helped along by Benjamin Franklin. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, which made significant contributions to the prevention field by warning against certain fire hazards and refusing to insure high-risk dwellings. Around the same time, the sale of life insurance commenced in the United States, mostly tied to religious institutions. The Presbyterian Synods in New York and Philadelphia started the Corporation for Relief of Poor and Distressed Widows of Presbyterian Ministers. And within 50 years, nearly two dozen life insurance companies went into business, but most failed.
By the mid-1850s, life insurance companies had started taking hold in the United States. New York Life was formed during this period and is now one of the most prominent. Early life insurance companies had to contend with crooked agents in their employ, a problem that still exists in measure today. It was common then for agents to sign up people they knew to be in bad health for the sole purpose of collecting a commission on the sale; no physical exams were required at the time. But by the late 1800s, employing doctors to use standard criteria for evaluating risks reduced (but did not eliminate) the problem. The other half of the fraud equation was the insurance companies themselves. Many that sprang up were nothing more than Ponzi schemes, which were mathematically predestined to fail.
In the early 20th century, the insurance industry blossomed with profits, and companies sought to expand by offering additional coverage for a variety of risks. One of the first forms of insurance for health was established by Britain in 1911 with the passage of the National Insurance Act. In the United States, a group of Dallas-based teachers formed a partnership with an area hospital in 1929 to provide a set amount of health and sickness coverage in exchange for a set, prepaid fee. This partnership eventually became known as Blue Cross. Meanwhile, physicians developed Blue Shield as an alternative. The two groups eventually merged.
During World War II, wage freezes were instituted throughout companies in America. Group life and health insurance offerings sprang up (at mostly the companies' expense) as corporations, desperate for workers, saw a legal way to attract and keep employees. Such large group policies went to large carriers, which led to a consolidation of the industry, squeezing out smaller entities.
As the healthcare market grew, the U.S. government began encouraging participation, which led to tax-exempt status for employer/employee contributions in 1954. Although some continued to strongly oppose a nationalized healthcare system, Congress enacted Medicare and Medicaid in 1965. Medicare called for compulsory hospital insurance for those over 65; Medicaid provided care for low-income people through a program that combined federal and state resources, the benefits of which vary from state to state depending on per-capita income.
While many counties have nationalized healthcare, the United States remains a patchwork of governmental and private plans. This has resulted in some of the world's most expensive and ineffective health insurance coverage. In 2010, the U.S. Congress passed the Patient Protection and Affordable Care Act (ACA), seeking to extend mandated coverage for nearly 50 million uninsured Americans. The ACA also wants to slow down the growth in the cost of healthcare and improve the patient delivery system. But it has been used as a political football, as a large minority of Americans oppose mandated, universal healthcare. Only time will tell whether it is better or worse than the system (or lack thereof) it replaces.
Fraud in the insurance and healthcare industry has always been a problem. Although there have been many attempts to determine the actual costs, the figures are estimates at best and unsupported guesses at worst. Suffice it to say that fraudulent transactions regarding insurance claims probably exceed those in any other area for a number of reasons.
First is the concept of diffusion of harm. This means that fictitious claims are spread across a large number of people. While a person might never steal from a neighbor, committing fraud against a faceless corporation, governmental agency or insurance company is easier to justify. Second, most people just don't like insurance companies. Many argue that they are bloated, rich bureaucracies interested only in their own welfare and not the people they insure. They claim that the insurance companies are there when collecting premiums but absent when it comes to paying claims. This attitude makes insurers an easy target for fraud.
The third reason for large volumes of insurance fraud might relate to the technological processing of claims. Those charged with developing systems to prevent insurance fraud are certainly no smarter than some of those committing it, and internal control systems are designed only to be reasonable, not foolproof. In short, where there is a will, there is usually a way. A fourth reason for insurance fraud, particularly as it relates to health insurance, stems from a patient's instinctual trust of his or her medical provider. Many of us think of our doctors and nurses as benevolent caretakers who have our best interest at heart, but we fail to realize that these providers commit the overwhelming majority of healthcare fraud. Whatever the causes, most experts believe insurance and healthcare fraud is getting worse, not better.
This collection of case studies comes to you directly from members of the ACFE; each case has been investigated and written by anti-fraud experts working directly to combat insurance schemes. The case studies cover a wide array of insurance fraud — from healthcare fraud, to arson, to murder and everything in between — because we want to provide a panoramic view of the problem rather than limit the cases to a narrow sector of the industry. We changed the names of the people and places to protect the anonymity of those involved, but the cases themselves are real. All profits from this publication will be donated to the ACFE Scholarship Foundation to train the next generation of anti-fraud experts.
As legislation develops and the insurance industry evolves, staying abreast of the trends will be essential for the fraud fighters investigating the crimes and the consumers trying to avoid becoming victims. We hope this collection offers you an informative but also entertaining reference, whether you are reading it as an expert or an interested novice.
Laura Hymes, CFE
Dr. Joseph T. Wells, CFE, CPA
Austin, Texas
March 2013