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Health InsuranceMisuse and

Misappropriation

Group -5
C026 Omkar Joshi

C038 Jahnavi Modi

C027 Akriti Kalra

Saxena

C048 Shikhar

C036 Neerav Mahajan

Essam Rashid

C059 Syed

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Contents
INTRODUCTION

INDIAN HEALTH INSURANCE SCENARIO

DEFINING HEALTH INSURANCE FRAUD

ESSENTIAL COMPONENTS OF HEALTH INSURANCE FRAUD

MISUSE OF HEALTH INSURANCE

ETHICAL PRINCIPLES VIOLATED

EXISTING INSTRUMENTS TO PREVENT HEALTH INSURANCE FRAUD7

PROPOSED SOLUTIONS

CASE STUDY: ICICI LOMBARD

REFERENCES

10

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INTRODUCTION
Health insurance has historically played a pivotal role in
The Health Insurance has historically played a pivotal role in improving access to
healthcare around the world. Health insurance is a contract between the insurance company
and the insured person to cover the medical costs that will arise from illnesses, accidental
injuries, surgeries and other medical complications. Over the last 50 years, India has achieved
a lot in terms of health improvement. In case of the government funded health care system,
the quality and access of these services has always remained a major concern for everyone.
An extremely fast growing private health market has developed in India. This private
sector market bridges most of the gaps between what government offers and what people
need. However, in the emerging Insurance scenario in India, pricing as well as claims
servicing decide where the Insurance Company would stand. Moreover, with proliferation of
various health care technologies / innovations and general price rise, the costs of care have
also become very expensive and unaffordable to the large segment of the population. In fact,
in the future, claim costs will have a direct bearing on the pricing of the claims. Leakages and
frauds on account of claim / underwriting will adversely affect the claims experience, which
in turn will affect the pricing. Because of the misdeeds of a few people in the society and
because of the lack of effective controls and regulations by the Insurance Companies, the
genuine customers, who constitute the majority, will have to pay higher prices for the
Insurance Products. In an open market with a lot many options available, the consequences
are quite so obvious. Not only because of higher prices it will hamper new customers to come
even existing clients base will start dwindling.
Thus, Marketing of Health care insurance policies is of paramount importance to help the
people to meet out to the untoward expenses arising out of unexpected situations. It is,
therefore, essential for their own survival that Insurance Companies should formulate a claim
management philosophy where concerns on the account of leakages and frauds are taken care
of properly. A transparent claims management policy in fact can be a very good market
strategy.
We all accept that as long as there has been Insurances, there have been Insurance
frauds. So lets accept the fact that the leakages and frauds cannot be eliminated altogether.
But lets also accept the fact that they can be managed, regulated and kept within a limit.

INDIAN HEALTH INSURANCE SCENARIO

India is a country where less than 15% of the population has some or the other forms
of health insurance coverage, thus the potential for the health insurance segment remains
high. It seems that there is a need to revamp the health insurance coverage in the country as
out-of-pocket payments are still among the highest in the world.

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Moreover, according to the statistics of the World Health Organization (WHO), in 2011, India
has spent only 3.9 per cent of gross domestic product (GDP) on the healthcare sector which is
the lowest amongst all of the BRICS (Brazil, Russia, India, China, South Africa) member
countries.
Moreover, amongst the BRICS nations, in 2011, Russias out-of-pocket expenses stood
highest at 87.9 per cent closely followed by India (86 per cent), China (78.8 per cent), Brazil
(57.8 per cent), and South Africa (13.8 per cent). However, these expenses in developed
economies of US and UK were comfortably poised at 20.9 per cent and 53.1 per cent
respectively. (Refer: Exhibit-2)
Although the Indian health insurance market has been trailing behind other countries in terms
of penetration but the health insurance segment has been rising from quite some time. It
continues to be one of the most rapidly growing sectors in the Indian insurance industry with
gross premiums for health insurance segment increased by 16% from Rs 13,212 crore in
2011-12 to Rs 15,341 crore in 2012-13. The health insurance premiums have registered a
compounded annual growth rate (CAGR) of 32 per cent for the past eight financial years.
(Refer: Exhibit-1)
The health insurance industry is presently dominated by the following players:
1.

4 public sector entities (National, New India, Oriental, and United India) that together
have 60 per cent market share

2. 17 private sector players with 40 per cent market share of which:

a. 4 Standalone Health Insurance Companies (Star Health, Apollo Munich, Max
Bupa, and Religare Health).
b. Health Insurance from life insurance companies

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DEFINING HEALTH INSURANCE FRAUD

There is a tremendously growing concern among the insurance industry about the increasing
incidences and cases of the abuses and frauds in the health insurance industry. It is a matter of
grave concern that the 'Insurance Fraud' is not defined under the Indian Insurance Act.
However, IRDA has recently quoted the definition which is provided by the International
Association of Insurance Supervisors (IAIS) which defines fraud as:
An act or omission intended to gain dishonest or unlawful advantage for a party
committing the fraud or for other related parties."
In common mens language Insurance Fraud can be defined as:
Non-disclosure of material fact with the intention of:
- Getting reduced Insurance Premium rate
- Getting claim settled, which otherwise could not have been possible.
Another definition of Insurance Fraud is:
In simple parlance, insurance fraud can be defined as: The act of making a statement
known to be false and used to induce another party to issue a contract or pay a claim.
This act must be wilful and deliberate, involve financial gain, done under false pretences
and is illegal.

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Although there are various definitions of Insurance Fraud but all these are not penalised
under the court of law.
Other instruments of the Indian legal system, such as the Indian Penal Code (IPC) or
Indian Contract Act, also do not offer specific laws so as to define Fraud or Insurance
Fraud. Certain sections of the IPC that are dealing with the issues of fraudulent acts,
forgeries, cheating cases, etc. are sometimes applied to it but none of them are not that
specifically targeted at the insurance fraud and they are also inadequate for the purpose of
acting as applicable to punishment.
In absence of specific laws and harsh punishments, prosecution will rarely be successful and
if successful, the penalty inadequate to deter others. As social health insurance grows the
central and state governments will become one of the largest victims of health insurance
fraud and that may be the catalyst that leads to the development of a comprehensive legal
framework to tackle health insurance fraud.

ESSENTIAL COMPONENTS OF HEALTH INSURANCE FRAUD

The essential components of a health insurance fraud include the intention to deceive,
to derive the benefits from Insurance Industry, the preparation of exaggerated or inflated
claims or medical bills and malign intention to induce the firm to pay more than it otherwise
would have.
Moreover, devising innovative methods and tactics including the pressure tactics,
favouritism, etc. also form a part of the insurance fraud, which is a hazard growing by leaps
and bounds since the last decade.

MISUSE OF HEALTH INSURANCE

Misuse by Agents
Agents who provide health insurance sometimes resort to unethical means to get financial
gains. They sometimes provide fake policies to customers and siphon off the funds. In other
cases they may manipulate the pre policy health records of the customer, in order to extract
more money from them. Frauds committed by health insurance agents also include
channelizing customers to fake doctors, fudging data in group health covers etc.

Misuse by Companies
Health insurance companies cheat customers not giving them their rightful claim or deducting
a heavy amount of money from their deposit. Due to the absence of standard medical
protocols, no oversight of a regulator, the provider induced fraud and abuse forms quite a
large portion of fraudulent claims. It would be quite difficult for a customer to file a
fraudulent claim or fake medical documents without connivance of treating doctor or
hospital. Frauds of such companies also include overcharging the customers, while the
services may be available at a lower cost. They may also deny coverage claims citing
company policies introduced after the health insurance had been taken by the customer.

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Misuse by Customers
Customers sometimes exploit their health insurance policies or the health insurance policies
of their family members for financial gains. Customer frauds may include concealing preexisting disease or chronic ailment, manipulating pre-policy health check-up findings, submit
fake documents to meet policy terms conditions, fake disability claims etc. For example in
Delhi man faked his fathers death in order to claim Rs. 50 lakhs.

Statistics

Insurance companies in USA incur losses over 30 billion USD annually to healthcare
insurance frauds.
In 2007, insurance firms in India lost as much as Rs.15,288 crore, of which life
insurance accounted for `13,148 crore while the general insurance segment lost
Rs.2,140 crore
According to the Federal Bureau of Investigation, healthcare fraud, both private and
public, is estimated to account for between 3 and 10 percent of total healthcare
expenditures, or between $81 billion and $270 billion in 2011.
The Institute of Medicine said in a 2012 report that the U.S. healthcare system wastes
$75 billion a year on fraud.

ETHICAL PRINCIPLES VIOLATED

Utilitarianism Theory
When health insurance companies or agents or even customers resort to fraud, according
to the utilitarianism theory, this is unethical since the perpetrators know that they would
gain financially using such means. It puts them in a dilemma since on one hand it is a
breach of trust and on the other hand there is a financial gain at stake. An agent resorting
to fraud not only betrays his customer but also his company. Similarly a company doing
fraud betrays the trust of its customer.

Deontological Theory
An agent of a company may commit fraud unknowingly if the rules of the company are
flawed. In such a case it becomes the responsibility of the agent to give the customer the
complete details of the health policy which the company offers. If an agent knows that the
policies of the company are not in the best interest of the customer, then he faces an
ethical dilemma. On one hand he misguides a customer by giving him wrong or
incomplete information. On the other hand, he loses a potential customer which can
reduce the revenue of the company.

Moral Relativism
In some case a customer may commit a fraud not for the purpose of financial gains but
because of some crisis he/she is in. In the middle of a crisis it, a person is torn apart
between two decisions. If the victim is forced to commit fraud to take him out of the crisis
it affects his reputation and may further lead him into other crisis. While he may not

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resort to fraud but at the same time may be forced to bear the brunt of the crisis he is
already in. Hence it becomes a case of moral relativism where a right thing is right from
one perspective and wrong from some other perspective and vice versa.

Moral Hazard
Moral hazard occurs in cases where the health insurance agents are subjected to take more
risks on behalf of their firms. In these cases, the moral duty lies with the agents since they
take the unnecessary amount of risks due to the fact that the onus finally lies on the
company to which they belong to and not on them.

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EXISTING
INSTRUMENTS
INSURANCE FRAUD

TO

PREVENT

Insurance
Regulatory
Development
Regulations on Fraud:

Authority

HEALTH

(IRDA)

The Authority has taken a number of measures to address the various risks faced by the
insurance companies. The Corporate Governance guidelines mandate insurance companies to
set up a Risk Management Committee to lay down Risk Management Strategy.
The Guidelines mandate insurance companies to put in place, as part of their corporate
governance structure, fraud detection and mitigation measures and submit periodic reports to
IRDA.
The Anti-Fraud Policy dictated by IRDA requires all insurance companies to set up fraud
monitoring departments, assess high risk areas of fraud, establish procedures to co-ordinate
with law enforcement agencies, formulate frameworks for transparency, procedures to carry
out due diligence on personnel appointments along with a strong whistle blower policy.
IRDA has launched a user friendly and menu driven portal www.policyholder.gov.in which
helps policy holders in redressing grievances, making complaints and buying insurance
policies.
IRDA has initiated the development of a platform called Electronic Transaction
Administration and Settlement system (ETASS) to administer settlement of insurance, coinsurance and re-insurance effectively.

Indian Penal Code:

Section 23, 24 and 25 of the IPC deal with wrongful gain and define fraud. Section 25 asserts
that a person involved in fraud can be convicted only if he has fraudulent intent. However
most of the times it is difficult to prove fraudulent intent in the court of law and defendant
can easily get away maintaining that the act was an oversight.
Section 463 defines forgery and section 477A deals with falsification of accounts. These may
be applicable in certain cases of health insurance fraud wherein claims were misappropriated
or false bills were submitted to insurance companies in support of the claim. Such fraudulent
claims may involve claimants colluding with insurance agents or insurance company
employees. Any person found guilty can be punished with imprisonment for a term which
may extend to seven years, or with fine, or with both.

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PROPOSED SOLUTIONS
A particular law addressing health insurance fraud is conspicuous by its absence in Indian
Legislation. We are of the view that government of India should pass a specific legislation
addressing the intricacies and loopholes that are observed in Indian Health Insurance Sector.
General sections in IPC as mentioned above benchmark frauds committed in health insurance
sector vis--vis frauds committed in other sectors.
Any health insurance deal consists of 3 stakeholders: the insurance company, the agent and
the insurant. If the fraud has been committed by the insurance company or agent it could have
a huge impact on the life of the policy holder and hence the punitive penalties should be
higher in case of fraud.
Legislation should include clear policies about risk identification, risk abatement and
settlement guidelines.
In accordance with the legislations effective in Western countries, India should also include
provisions for Claw-back procedures which ensure that the enable an insurer to recover
payments, if fraud is proven.
Insurance companies can deploy robust technology and data analytics processes for detecting
outlier behaviour or for predictive modelling. These function as a kind of early warning
system for detecting fraud. The solutions offered can work in conjunction with existing
practices to create a robust framework for early detection / prevention of fraud.
Whistleblower policy at company level can help motivate individuals to alert an insurer about
individual cases of fraud or systematic fraud. This can be a very attractive mechanism
through which the general population can be engaged in the fight against fraud. In addition
this is a mechanism for disgruntled co-conspirators to exit a risky situation whilst claiming
credit for stopping it.
A structured training program along with mandatory examination, as well as continuing
education requirements should be developed for fraud investigators. All fraud investigators
must meet a minimum skill set requirement. In addition, there should be a mechanism
whereby a fraud investigator can be assessed and certified for higher skill levels. This would
create a cadre of professional and highly skilled fraud investigators. It may be desirable to
ensure that these investigators are licensed by the IRDA.

CASE STUDY: ICICI Lombard

One of the most recent frauds committed by a health insurance company to have come up in
the Health Insurance sector is that by ICICI Lombard GIC Ltd, Indias largest privatelyowned general insurance company. The fraud comes in the wake of the direct cash transfer
scheme initiated by the Government of India. The company has been alleged to have
swindled the central government of crores by forging beneficiaries and enrolling thousands of
ineligible people under the Rajiv Gandhi Shilpi Swasthya Bima Yojana (RGSSBY), a health
insurance scheme for artisans.

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In the year 2009- 2010, the government signed a Memorandum of Understanding with ICICI
Lombard. The company was to enrol 8 lakh artisans across the country in the fourth year of
RGSSBY. ICICI Lombard denied genuine beneficiaries of their insurance claims and made
fake accounts of policy holders and charged the government several crores as premium
against fake enrolments. Of the 8 lakh, almost 30,000 were from Rajasthan. Evidence shows
fake enrolments were used to meet the target and at least 20 per cent of the total enrolments
are dubious. Besides this, the company also destroyed cards issued under the scheme. The
fraud was revealed by a whistleblower which was followed by an investigation.

Chart representing stock price of ICICI Bank

The report was made public by DNA newspaper on July 2, 2014. The stock price of ICICI
Bank, part owners of ICICI Lombard reached a 52 week low the same day.

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%20in%20Health%20Insurance.pdf
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