Fraud Finding

Knowledge Is power. In an effective underwriting process, the more information about an applicant's historical health status the better. Particularly for individual policies, fully identifying costly conditions up front helps organizations better assign risk and avoid potentially damaging rescission situations when costly claims arise.

Mertz says each year applicant fraud takes a bite out of company profits, and health insurers could cover their risks with greater precision by using fraud detection tools at initial underwriting.

Accurate numbers for new health policies issued across the industry are difficult to get agreement on, but according to Reden and Anders Consulting, there's more than 15 million individual health insurance policies issued annually in the United States. The potential for applicant fraud with a large dollar amount is significant. In studies we've done, we believe that on an industrywide basis, applicant fraud amounts to probably between $500 million and $1 billion. That's significant when you consider the margins health insurers' operate under.

Q How often does applicant fraud occur and what are the immediate costs?

A After searching our database for impairments associated with nonrated policies, we discovered that 12 out of every 1,000 health insurance policies issued would have been declined if the information that is in the MIB database would have been available at underwriting. This data was based on the sample companies' actual underwriting guidelines. Another 29 of the 1,000 had undisclosed conditions serious enough that an underwriter would have requested further information had they been aware of it at the time, which could have resulted in ratings, exclusions or declinations. Based on today's margins, that could turn a profitable book unprofitable in a hurry.

Some of the conditions identified in this study were chronic obstructive pulmonary disease, diabetes, hepatitis C and coronary artery disease. For example, undisclosed coronary artery disease has first-year excess claim costs between $33,000 and $41,000 [according to Milliman USA]. If you go back to the example of 12 out of every 1,000, then a company that issues 5,000 policies could be expected to have 60 cases approved with declinable conditions. Conservatively speaking, if you assume five of those 60 had coronary artery disease, you're talking upwards of $200,000 in excess first-year plan costs right on the bottom line just from five of those 60 members.