Dealing in fraud: professional criminals and petty thieves are draining cash from the insurance industry, and more companies are getting serious about plugging the hole.

It's infiltrated by gangs, marked by turf wars, spectacularly profitable and hard to fight because of ambivalent public attitudes and uneven enforcement. It isn't drugs or illegal gambling; it's insurance fraud--a criminal enterprise that's grown profitable enough to lure some drug traffickers away from their original trade.

A huge amount of insurance dollars is lost to fraud each year, and the fight against it is keeping insurers' hands full. It's a battle fought on at least two fronts--with policyholders who feel entitled to exaggerate legitimate losses and with organized fraud rings that hit insurers with hundreds of fraudulent claims.

Dennis Jay, executive director of the Coalition Against Insurance Fraud, said he saw the movement between the drug trade and insurance fraud in the late 1990s. "Now we see such firings as gangs having turf battles ... [over] areas to stage automobile accidents," he said.

The industry estimates that 10% of all claims are fraudulent, which costs about $80 billion a year. An array of perpetrators, from members of organized crime, lawyers, physicians and body shop owners to the average policyholder, commit the crime.

The dollars going to fraud are so plentiful that the United States could use the funds to pay for free prescription drugs for everyone over 65, said Barry Zalma, an attorney in California and the author of "Mold: A Comprehensive Claims Guide."

"You could buy a new aircraft carrier ... it's better than Enron," he said.

Auto insurance, workers' compensation and health insurance are considered the most vulnerable to fraud, according to the Insurance Information Institute. Property/casualty fraud, in particular, costs Americans $30 billion a year, according to the National Insurance Crime Bureau. The crime adds $200 to $300 to total insurance premiums for the average household, the bureau said.

Complicating the issue, many Americans don't seem to care. There's an attitude in the United States that some one who commits fraud "should be given at medal for stealing from an insurance company," Zalma said, adding that he saw a report it few years ago in which people admitted they planned to fund their retirement through insurance fraud.

There are two types of fraud: opportunistic, which includes exaggerating a legitimate claim, and organized fraud. The latter involves setting up large networks of "crash-test dummies," or people who go out and intentionally cause auto accidents; unscrupulous attorneys and medical providers; theft rings, and other accomplices.

Padding claims, such as reporting a more expensive stereo than actually was stolen, represents the vast majority of insurance fraud in the United States, according to Roy Miller, executive director of the Pennsylvania Insurance Fraud Prevention Authority.

But insurance fraud rings can be vast, high-tech and effective by hitting insurers with small claims to stay under their anti-fraud radar. In some cases, after insurers begin investigating such claims, they realize the rings are much bigger, with a wider reach, than they ever imagined.

Professional criminals treat fraud as a full-time job, getting up every morning to commit insurance fraud, said Tracy Pickard, division manager of the special investigations unit for Progressive Insurance. Some make $100,000 a year or more, he added.

Red-Flag Scenarios

A common scam is to load a car with people, go out on a highway, pull in front of another car and slam on the brakes. If the victim's vehicle hits the carload of "crash-test dummies." the innocent party is liable under almost all insurance circumstances. Although the criminals will target anyone, they look for females under age 30 and senior citizens, with the assumption that younger females give in to admitting fault more easily, and older seniors are more prone to getting flustered, Pickard said. Then the fraudsters target the innocent driver's insurance company--and their own benefits in no-fault states.

Another scheme is to load up two cars with people, crash the cars, call the police and say that everybody's hurt, he said. The insurance companies then are billed for unnecessary and expensive medical care for soft-tissue damage, including whiplash.

In one case Pickard worked on, a group of people out of Brighton Beach and Brooklyn, N.Y., went to North Carolina to take out auto insurance policies with false addresses. They drove the cars back to New York and staged accidents. Investigators started with three or four names but began uncovering more and more people involved, Pickard said. Then, when they put the information in link-analysis software, "what I thought I knew was wrong," he said. There were 600 participants in a ring that targeted several insurance companies, ripping off at least one company in the range of $2 million.

Progressive works with all branches of law enforcement to fight fraud. "We want to send a clear message that Progressive aggressively investigates and prosecutes people who engage in fraud and works to root out this kind of criminal behavior." Pickard said.

Most in the industry agree that the more they fight fraud, the better results they see. The key is to know what's making insurers vulnerable to the crime and how they can prevent and fight it.

Creating a Breeding Ground

Cheats have been committing insurance fraud for more than a century, dating back to the time of the horse and buggy, Jay said. Some of the earliest fraud claims started on the railroads in the late 1800s with "slip and fall artists," he said. And there's evidence that auto insurance fraud was happening in the early 1920s, when city police officers gave attorneys' business cards to auto-accident victims in exchange for cash.

It's difficult to tell whether or not fraud has exploded more recently or whether it's been happening at the same magnitude without being detected, Jay said. Many say people commit fraud today because it's easy to get away with it. States unwittingly encouraged fraud when they implemented auto no-fault systems and then increased benefits in such places as New York, Florida, Pennsylvania and New Jersey, he said.

Currently, 12 states have no-fault insurance laws, which means insurers are required to pay claims for auto accidents regardless of fault, according to the III. Several states include personal injury protection coverage, or PIP, which pays medical bills and other economic losses. Organized fraud takes advantage of the laws by staging auto accidents, setting up fake medical clinics and using corrupt medical doctors and lawyers to bill insurance companies for medical tests that aren't necessary or are never administered.

Also, insurers' own practices might have contributed to fraud. Companies have shifted from face-to-face contact with customers to communication through call centers and the Internet. Although there are good financial reasons for the shift, it makes it harder to detect and deter fraud, Jay said. "There's a slice of America that is ranch more likely to file a fraudulent claim if they don't have to see anybody in person," he said.

Clayton Dukes, a former workers' comp claims adjuster who now works on claims software at Fair Isaac Corp., said that in the past he met with claimants within 24 hours after they filed a claim. "You gain a lot of insight about people after a while when you see them live and in person," he said. He learned what people looked like when they were in pain and gained an intuition about when people had legitimate, unquestionable injuries and when they were committing fraud. For example, he once visited a claimant who said she was permanently and totally disabled but managed to pick up a 40-pound toddler during his interview.

"Today, we investigate claims by telephone and we 'see' people differently than we did in the past," Dukes said. "We see them as a data stream."

Also, when consumers bought insurance from a human being in their own town, they had a personal connection to the insurance industry. "Today, most people probably buy personal insurance over the phone and on the Internet," and the insurance industry has become a "big, faceless bureaucracy," Jay said. "We're living in an age today that unless you have a really small niche market, it's almost impossible to know your customers well"

Maybe that's why surveys show that the public's attitude toward insurance fraud is dismal. In July, the Insurance Services Office's Insurance Research Council found that one in three Americans surveyed thought it was acceptable to pad an insurance claim to make up for the deductible. An earlier survey by Accenture Insurance Solutions Group found that more than one in 10 Americans approved of submitting insurance claims for items that weren't lost or damaged or for treatments that weren't provided.

But Ann Kramer, a policyholder attorney with Anderson Kill & Olick, wondered whether some of what insurers call fraud is brought upon themselves. "I'm not saying that fraud is justified," she said. But "[insurance companies] have created a process where, if a policyholder files a claim for $100--and let's say it's totally correct, justified and documented--they'll respond by pushing you to settle for $70," she said. Kramer wondered whether policyholders who file for more than they're entitled to are anticipating that the insurer would try to lower the payment. "I'm not sure how much of it has to do with deductibles," she said.

Also, she said that insurance companies, as a matter of course, force policyholders to hire lawyers to get their claims paid. "The claims departments of most insurance companies are understaffed, they have too many claims filed, and the easiest thing to do is file a reservation letter and wait for people to hassle you," she said.

Another part of the problem is insurers' attitude toward fraud, and that might be because insurers historically didn't think it was their area of expertise, Jay said. "There was a focus that fighting crime is not what we do--we pay claims," he said. But a significant number haven't taken the issue seriously, either. According to a 2002 report by the Insurance Research Council, only half of all property/casualty insurers considered fraud a "serious problem."

Even when insurers acknowledge the problem, they often walk a thin line between being vigilant for fraud and getting bad public relations for being tough on claims. "Some insurance companies want to be known as high on customer service and easy to work with. and that might equate to not pressing the issues when they're questionable," said Michael A. Lucarini, a partner in Accenture's insurance practice. Other insurers might just pursue a couple of fraudulent cases to establish the reputation that they don't tolerate fraud.

Sharpening the Focus on Fraud

The political landscape has changed dramatically in the past 20 years, bringing more attention to the issue. In 1992, the National Association of Independent Insurers published a report that found only eight states had fraud bureaus, and that four were "dry boles" with no funding, said John G. Eager, senior director of claims for the NAII. The other four bureaus had little funding.

Now, 38 states have full fledged fraud bureaus, eight more have state fraud units or workers' comp fraud bureaus, and the remaining states are thought likely to take action soon. "I don't think any state wants to be the only one" without an organized fraud effort, Eager said. Almost every state has defined insurance fraud as a felony rather than a misdemeanor, according to the III. States also provide immunity for those who report fraud.

Although state budgets might determine how much funding goes to fighting fraud, that's not the case everywhere. In Maryland, where funding comes from the attorney general's office, funding is affected by the office's budget, Eager said. In other states, funding comes from an assessment that's based on premiums written or general revenue.

Also, insurers now are required by law in 20 or so states to report fraud in exchange for being immune from lawsuits in which claimants could charge insurers with defamation or bad faith. About a dozen states require insurers to have special investigation units, Jay said. The laws were passed in the 1990s when only a handful of companies saw fraud as an increasing problem for the industry and were devoting resources to fighting it. The biggest change for insurance companies was being required to draft plans to attack fraud and submit them to insurance departments for review, he said.

As a result, insurers have changed their tune. When the NAII did its study in 1992, it found that a relatively small number of insurers were spending money to fight fraud. But when the group did the study again in 2000. there was a dramatic increase in special investigation units at insurance companies, Eager said. He attributed the change of attitude to seeing the numbers on the cost of fraud. "It was sort of frightening," he said. When insurers saw time billions of dollars being lost to fraud, "any CFO would say, 'What are we doing about it?'" Eager said.

At the same time, technology to help insurers fight fraud got better. In the late 1990s, the industry began using an all-claims database, in which companies share claims information and detect patterns.

About two-thirds of insurers use software to help identify fraudulent claims. Fair Isaac offers products to detect fraud among providers and in workers' comp claims, Dukes said. It identifies patterns of known fraudulent activity at the data level and assigns each claim a score based on its probability of being fraudulent. It's a way to nip claims in the bud before the claimant collects a significant amount of money and the company needs to conduct a full-blown fraud investigation, he said.

For example, someone injured on the job is likely to see a doctor the same day, get physical therapy for two or three visits, and go back to work after a week, Dukes said. But another claimant might be injured and go straight to a physical therapist before seeing a doctor, he said. The pattern of the second claimant is more likely to be fraudulent, and so the software would give it a score.

When faced with a claim that scores high, the insurance company can do a number of things before sending it to the special investigation unit, Dukes said. The insurer might simply send the claimant a letter that says the company noticed "something unusual" about the claim. The company might also decide to approach the employer about the claimant's motivation or visit the claimant at home. Those actions might persuade the claimant to go back to work more quickly, he said.

"The software is designed for the modern environment where you get data in and interact with a screen to score it," he said. Claims adjusters might have lost that intuition they once had out in the field, and the software helps identify fraudulent claims before they're large enough to be sent to SIUs at companies. Fair Isaac plans to launch similar software in the auto market.

The Results

The increased focus and resources are paying off with the arrests of insurance fraud criminals. In New York, arrests for insurance fraud during 2002 rose 27% from the previous year, and more than 400% since 1996, the III said. The Coalition Against Insurance Fraud did a nationwide study in 2001 and found criminal convictions for insurance fraud more than doubled between 1995 and 2000, according to III.

And because the vast majority of fraud in the United States is opportunistic, in which claimants pad their claims, states are tackling it with public-awareness programs. The Pennsylvania Insurance Fraud Prevention Authority has been targeting opportunistic fraud with public-service announcements on television, radio and outdoor billboards and in newspapers for the past five years, Miller said.

In one spot, the group highlights the effect getting caught for insurance fraud could have on family relationships. In the commercial, a teenager gives her father the silent treatment because friends at school made fun of her after he was arrested for insurance fraud.

That particular spot was a "home run," Miller said. Showing that fraud can have a devastating effect on family relationships was key to reaching people, he said. Although the group has no way of determining whether or not the number of fraudulent claims has gone down as a result of the advertising campaign, recall studies have shown "outstanding" results, he said. "Before we started media awareness, [insurance fraud] wasn't as widely understood as it is now," Miller said. Today, the public understands more keenly that a portion of premiums pays for fraud, and insurers are winning more support for taking a tough stand on fraud.

The advertising campaign, which is funded by an insurance assessment, has been so successful that other states have used the same announcements or developed their own based on what Pennsylvania has done. New York, New Jersey and Michigan have followed the state's lead, and Miller has received inquiries from Alaska, Ohio, Illinois, California, Florida and even Germany.

Surveys also are showing that Americans' attitudes are changing. Although 33% thought it was OK to slightly pad claims in certain circumstances in 2002, according to the IRC survey, acceptance of insurance fraud has been declining since 1997, when it reached a peak. More than 90% of those surveyed agreed that fraud leads to higher premiums and that people who commit fraud should be "prosecuted to the fullest extent of the law," the study" found.

At the same time, states and insurance companies are finding success at uncovering insurance fraud rings. In August, the Suffolk County (New York) District Attorney's Office said it exposed what was among the largest insurance fraud rings ever uncovered there, with one company's exposure at $48 million. Prosecutors obtained 567 indictments against 86 individuals or entities allegedly involved in an auto-accident ring. Investigators were looking into possible exposure for nine companies, including State Farm, Allstate, Geico and Hartford.

[GRAPHICS OMITTED]

Fraud by the Numbers

10%                 $30 billion        17 cents to 20 cents

The amount of       Cost of property/  The amount of a
all insurance       casualty fraud     premium dollar
claims that are     annually to        paid for bodily
fraudulent.         consumers.         injury claims for
                                       auto policies
                                       involving fraud.

Source: Industry    Source: National   Source: Insurance
estimate            Insurance Crime    Research Council,
                    Bureau             Insurance Services
                                       Office

50%                 38                 $650 Million

The number of       Number of          Amount insurers
property/casualty   states with        spend each
insurers            insurance fraud    year trying to
who consider        bureaus.           detect and
fraud a serious                        deter insurance
problem.                               fraud.

Source: Insurance   Source: National   Source: Alliance
Research Council,   Association of     of American
Insurance Services  Independent        Insurers
Office              Insurers

Staggering Stats: Adding Up the Cost of Fraud

Some staggering fraud statistics are bandied about by the insurance industry, including estimates that 10% of all claims are fraudulent, or that fraud among all lines of insurance costs s80 billion a year.

Those estimates were determined in the late 1990s after a review of all the figures used in the industry at the time. said Dennis Jay, executive director of the Coalition Against Insurance Fraud. The coalition chose a number on the low end of the ranges that it reviewed.

Some say, however, the estimates might be overstated by as much as 20%. Claims adjusters tend to pay small claims of less than $5,000 without investigating them, and companies then guess how many of those small claims are fraudulent, said Michael Corwin, owner of Corwin Research & Investigation LLC and an investigator hired by lawyers to determine whether plaintiffs have legitimate or fraudulent claims. "That may be where they overestimate," he said. And insurers have an incentive to round up their estimates because they can achieve rate increases to make up for what they're losing, he said.

But Kirk Hansen, director of claims for the Alliance of American Insurers, said overstated estimates could actually make it harder for insurers to receive rate increases. When states implement an anti-fraud plan, they sometimes look for a trade-off. "If they figure that they're going to prevent X amount of dollars being spent on claims fraud, they should have a corresponding rate rollback," Hansen said.

Because the estimates are based on so many assumptions, a better number might be one that the insurance industry can document, such as the total amount it spends trying to detect and deter insurance fraud, which is $650 million annually, he said. "The very nature of fraud ... makes it impossible to accurately quantify," Hansen said.

The coalition agrees that there are no good fraud estimates. In the most legal sense, fraud can be measured by the number of convictions, Jay said, But that doesn't say anything about the criminals who get away with it, and the industry says there's plenty of fraud that's not prosecuted.

Complicating the issue, the definition of fraud varies among fraud bureaus, consumers and even from insurer to insurer. "We're trying to grapple with that and come up with uniform definitions that everyone can identify with," Jay said.

In addition to using the $80 billion figure, the coalition has been doing a statistical study every year using data from state insurance departments. "We feel the activities among these entities are probably some of the best indications on the extent of fraud out there," he said. To be fair, the coalition takes into account the agencies' budgets, their capabilities in fighting fraud and how many referrals come in to the agencies. It also looks at how many cases are accepted for investigation, how many are prosecuted and how many result in criminal convictions. "It's always a guessing game," he said. "We try to put as much analysis on it as possible."

But it's important to let the public know about the severity of fraud and its effects, because people will be more likely to have a personal stake in trying to solve it, Jay said. At the same time, the coalition is hoping the concern carries over to legislators, who could help advance initiatives to pass insurance-fraud laws, create more insurance-fraud bureaus and receive more funding for government agencies to fight fraud. The group also hopes that releasing the numbers will make insurance companies that haven't been active participants in fighting fraud stand up and take notice.

"Our position is that whether it's $60 billion or $80 billion or $120 billion, it's a staggering amount of money that consumers end up paying because a small minority of people are choosing to cheat," Jay said.

Asking the Right Questions

Fraud investigators conduct research and plan out their questions carefully before they sit down for what could be an hours-long interview with a claimant they suspect of fraud.

Claims are sent to the special investigations unit of CNA Insurance after claims representatives notice certain red flags, said Jim Bonk, director of the company's Special Investigation Unit. "It's a methodical process," he said.

When faced with possible fraud, Investigators in CNA's SIU begin by learning as much as they can about the person's claims history, said investigator Bo Barber. He works out of CNA's California office on workers' compensation, auto accident, slip and fall, theft and medical provider investigations.

The company then collects evidence, such as medical reports, police reports and statements from witnesses. Investigators also visit the scene of the incident, where they look for more witnesses. In one case, CNA found a witness who watched an automobile accident occur, and then saw a man get in the car after the collision, which Barber called "stuffing" the vehicle with more victims. "That was pivotal, and we wouldn't have found the witness without canvassing the scene," he said. Sometimes the investigators even find video cameras nearby that might have recorded the incident, such as store security cameras, automated teller machine cameras and cameras that record traffic patterns, he said.

Then investigators conduct the interview. In California, as in other states, insurers have to prove that the criminals had the intent to commit the crime. "We do that through very specific questions," Barber said. The company insists on interviewing the claimants at the same time, but separately, to keep any of them from coaching the others about what to say during the interview. "Several times we'll show up and only half are there, and we won't do the Interview," Barber said. "The chief reason is that when you're in a situation where you were stuffed in the vehicle, most will be told the script and have a story down."

An interview may include the following questions:

* What did you do before the accident?

* Where were you going?

* Why were you riding together?

* What happened after the accident?

* Where were you sitting in the car?

* Where were the others sitting?

* What type of interior did the car have?

* Did the car have air conditioning?

* What were the weather conditions?

* What were the traffic conditions?

When investigators pull the claimants away from their script, they're forced to say they don't know the answers to the questions, or give differing answers, Barber said. "The more details you get, the more difficult it is for some of these people to pull off scams," he said.

On the road with a fraud investigator

After 27 years as a Philadelphia homicide detective and another seven as a fraud investigator for Progressive Insurance, Manuel Santiago knows how to talk his way into a medical clinic.

On a rainy afternoon in August, he walks into a clinic in Northeast Philadelphia and recognizes the woman behind the counter. He greets her in a friendly, booming voice. even though, in the past, her son has billed his company for a couple of hundred dollars without being properly licensed. He learns that she's the doctor on staff and that the man sitting in the waiting room is a massage therapist.

The clinic has a sign on the front of the building advertising treatment for auto accidents, slips and falls and workers' compensation. The waiting room is small, with white walls, a gray rug and a half-dozen gray chairs.

Santiago asks for a copy of her license. "So we can expect to be hearing from you," he says, smiling. She tells him the clinic has already seen a Progressive customer, and Santiago makes a mental note to look up the claim when he gets back to the office.

He asks for a tour, and she appears happy to walk him down a hallway, which has four small rooms. In one, a man is receiving electrical muscle stimulation therapy, which helps keep muscles from experiencing atrophy after an injury. Santiago notes the equipment aloud: electrical muscle stimulation machines and ultraviolet lamps.

As he drives away from the clinic, he says, "I have to be up front. I'm there to observe and ask questions about the process." When he does a walk-through, he notes the equipment in the clinic and makes sure it's all in working order. If Progressive is being billed for X-rays being taken at a clinic, Santiago will make sure the clinic's X-ray machine actually works.

On the Lookout

In some ways, Santiago is like the cop on the beat. "One thing you can't measure is prevention, but I do believe it works," he says. "I'm old-school police and I believe that a presence makes a difference. By going around, we're letting people know that we're on the lookout."

He was led to this clinic by a tip from an investigator with the Philadelphia District Attorney's Office and an old friend from his days as a detective. Many of the police officers he worked with when he was a homicide detective now are working for fraud units of insurance companies or for the district attorney's office, and they keep in touch. They also help each other keep tabs on suspects.

To make the transition from the police force to a medical-provider fraud investigator for Progressive's special investigation unit, Santiago had to learn about medical treatments and how they're rendered. Now, he spends his days in the office reviewing medical files and on the road visiting clinics. Traveling Philadelphia and its suburbs in a Ford Taurus, he drives with maps stuffed in his car door and a cell phone to check in with other investigators.

The same day, Santiago visits another clinic that he has been investigating for about a year. A tan brick house with a clinic on the bottom floor has a "For Sale" sign and looks closed. The grass surrounding the clinic is overgrown.

This clinic has billed Progressive for electrical muscle stimulation, massage therapy, ultrasound and whirlpool treatment. Although the clinics tend to bill the company as much as $45 for each eight- to 10-minute treatment. Progressive usually pays much less, such as $15 or $18. During one visit, Santiago learned that what the clinic considered whirlpool treatment was really a 10-minute soak in a foot bath, which can be bought at drug stores for $20.

Santiago was thrown out of this clinic during his last visit. He was asking questions that made the staff nervous. He wanted a copy of the doctor's license and to sec him. Santiago suspected the treating doctor was seeing patients and prescribing physical therapy that was then rendered by people who were unlicensed to carry out the treatment. Pennsylvania taw requires anyone treating patients to be licensed by the state or to render the care under the supervision of a licensed provider, depending on the practice.

Although the doctor had told Santiago the state made a mistake with his license, he couldn't produce a certificate. And Progressive continued to receive bills from the doctor. In addition to physical therapy, the clinic bills Progressive for electrical muscle stimulation treatment, ultrasound, whirlpool treatment and infrared heat therapy, al for soft-tissue injuries. Patients go to the clinic three or four times a week for four to six months at a time, he says. Progressive is billed $300 to $500 for one day but usually pays one-half to one-third of the amount because the insurer pays according to guidelines for usual, customary and reasonable charges.

Some clinics bill as much ms $10,000 for several tests, such as magnetic resonance imaging, X-rays and nerve conduction studies, but Progressive's policies typically have a $5,000 limit. This clinic billed about half of the policy limits, and Santiago wondered whether it was to stay under Progressive's radar. It hasn't worked. The licensing issue gave them away, Santiago says. Law enforcement wants to take over the case and file criminal charges, since a company can only go after civil fraud. Santiago says.

He's not surprised to see the "For Sale" sign. "It's a tactic used by a lot of places," he says. They'll restructure the corporation so a judge may side with it for fixing its problems. "It doesn't matter if the clinic Changes hands, because we already have a case against it," he says.

Santiago's special investigation unit receives three to eight new investigations a day from the company's claims department. They include suspicious car fires in which gas, kerosene or flammable liquid is found, claims with inconsistent information and others. As many as three of them become full-blown investigations that can take a few months or longer to resolve.

Building a Case

It's usually a long string of cases that leads the company to uncover big fraud. Santiago explains.

In one example, the company received a claim in November 1999 from a 72-year-old man who said he was driving home at 2 a.m. from a fishing trip and was hit by another car, which sped off. His car had $10,000 to $11.000 worth of damage, and he received medical care that cost between $3,000 and $4.000. At the time, he had been insured with Progressive for only two weeks. The man had a tow truck pick the car up at the scene, and the local police took a statement from him.

But then Progressive received an anonymous phone call from a person who said that the accident really happened near Temple University and the man's uninsured daughter was driving the vehicle. Progressive called Temple's hospital and found it had a statement that showed the actual date of the accident was Oct. 31. The man was arrested but gave federal authorities information on the clinic where he received medical care as a plea bargain. Authorities went after the clinic and arrested one man on charges of healthcare fraud, which resulted in a five-year jail term.

The Moving Target

Criminals constantly change the scams and schemes they use to rip off insurance companies, which can make organized fraud difficult to uncover.

"Once we start to understand the way schemes work, they change the way they orchestrate it." said Vince Coyne, director of Nationwide Insurance's special investigation unit.

"New York, in particular, has been hit hard by fraud. The state has 13% of all no-fault automobile policies nationwide, but it has 25% of the losses, Coyne said. One reason fraud succeeds in New York is that there are more organized crime rings working there, which makes uncovering the schemes particularly important. Two ploys organized groups have used in the Northeast. according to Coyne, are these:

* Attorney/law-firm runner conspiracy: Runners are paid $500 to $700 to bribe hospital workers for information on emergency-room victims. They then refer the patients' information to unethical attorneys, who file false retainers about how the patients were referred to them. Those attorneys then funnel the patients to unlicensed medical providers who bill insurance companies for unnecessary and expensive diagnostic tests or for services never rendered. Medical providers use management companies as facades to administer the medical services. The checks paid to them from insurance companies are routed through "shell corporations" owned by nonmedical individuals. who by New York law are prohibited from owning medical providers.

* Vertically integrated billing management company:

Unlicensed providers use a complicated facade to provide medical service as a properly licensed medical facility. In one case, a chiropractor, who by law was prohibited from practicing medicine or owning a medical corporation, hired a licensed medical doctor to incorporate four new facilities so they would appear legitimate. In exchange for use of his name and license, the incorporating doctor was paid $7,000 to $10;000 cash for each facility he alleged was formed under his ownership and medical license. Runners were employed to solicit: patients for treatment. Doctors with disciplinary records or who wanted to make money were recruited to conduct unnecessary and expensive diagnostic tests on patients. Those patients were paid $300 to $500 to say they received medical treatment so their insurance carriers would be billed. Checks from insurance carriers would be handled by a billing company located at a post office location and paid to represent the billing provider. Ultimately, the payments from insurance carriers would be forwarded to the medical provider and then routed to the management company and the chiropractor, who were the real owners.

When it comes to other types of fraud, people have used several seams to try, to rip off insurers. Safeco. a Seattle-based multiline insurer, becomes suspicious of workers' compensation claims if more than one or two people from the same employer are going to the same kind of doctor and reporting the same kind of injury, said Caryn Siebert. vice president of claims. "It could be that they know this doctor is willing to go ahead and say they can't work," she said

Presentation also is important. Some people have tampered with their receipts to file higher claims, and one way Safeco uncovers the scams is to check the claimants' math.

In the case of business interruption, business owners have made up their own books and records to take advantage of situations such as a blackout. Safeco avoids paying for that type of fraud by looking at the company's tax records.

RELATED ARTICLE: unleashing technology as a fraud buster.

As cheats and criminals continue to target insurers with ever-growing fraud, technology is one defensive weapon many companies are putting to the test.

"Aside from investigators themselves, technology is the industry's single most important tool in rooting out swindlers who've grown far more sophisticated and hard to catch over the years," said James Quiggle, a spokesman for the Coalition Against Insurance Fraud, a national alliance of insurers, consumer leaders and state agencies combating fraud across all lines of insurance.

Use of computerized databases, predictive modeling, data-mining tools, analytical software and various other technologies has become a growing part of many insurers' operations to help trim the nearly $80-billion-a-year price tag for bogus claims.

"Ultimately, insurance fraud drives up premiums, erodes public trust in the insurance industry, lowers shareholder profits, causes large political headaches for insurers, costs jobs, causes businesses--including insurers--to close, kills people, endangers their health and subjects them to anxiety, humiliation and mined lives," said Quiggle.

The coalition said insurers, especially large carriers, increasingly are using three kinds of anti-fraud technology: predictive, which compares existing claims against historical fraudulent claim patterns and flags claims that have a high risk of fraud; similarity searches, which identify similarities among factors such as small differences in phone numbers, spellings of last names and addresses; and visual link, which sifts through vast pools of data to find significant relationships among seemingly unrelated data.

In midsummer, MetLife Auto & Home began using the @FIRST system to analyze claims with the help of several engines--a modeling engine that creates models to compare new claims against a template based on instances of previous fraudulent claims; an identity search engine that analyzes particular data in current claims that might match other data fields; and a business-rules engine that applies indicators of fraud--such as length of time in reporting a claim, or the time between inception of a policy and when a claim occurred--that might exist in the company's data. Time company enters data into the Web-based system each evening, and by the next morning, analysts or special investigation unit supervisors are alerted of claims scores that might signal potential fraud. They alert investigators to more closely examine those claims, said John Sargent, corporate special investigation unit manager.

Deciphering the Details

Crooks hope that insurers won't spot the small details of crimes, but analytical software does exactly that, said Quiggle. "It sifts through vast piles of small and easily overlooked details and helps assemble them into a pattern that can reveal the entire outlines of a complex swindle in action--often in real time, literally as claims come through the insurer's system."

Today, many insurers are relying on Jersey City, N.J.-based Insurance Services Office's ISO ClaimSearch to spot suspicious claims. The comprehensive database. which now contains slightly fewer than 350 million claims, uses hundreds of millions of lines of software code for tracking, filing and reporting on casualty, property and auto claims. The system provides essential data such as prior loss histories, claims patterns and detection of suspect claims by automatically entering claims into the database and searching for other claims filed by the same individuals or businesses, said Richard Boehning, senior vice president of ISO.

"You can't fight fraud without some kind of technology. Without it, we'd be back to the pencil-and-paper method that strictly goes off gut instinct," said Vincent Cialdella, vice president of ISO ClaimSearch.

The National Insurance Crime Bureau, a not-for-profit organization that partners with insurers and law-enforcement agencies to facilitate the identification, detection and prosecution of insurance criminals, has also turned to technology as a fraud-busting measure. The bureau is using the LexisNexis Insurance Solutions page, which employs LexisNexis SmartLinx, a comprehensive report that defines relationships and connections among people, places, assets and locations and provides access to news publications, criminal records, and the Occupational Safety and Health Administration's inspection reports.

U.K.-based Halifax General Insurance is taking a somewhat different approach. In October, the company began a three-month pilot program to test whether voice-stress analysis techniques can help combat fraud. "This technique has been used successfully in the motor insurance field in the U.K., and we will be assessing whether it can now be successful for household insurance claims," said spokesman Mark Hemingway. The lie-detecting system analyzes the voice stress of people making homeowners insurance claims over the telephone. People will be told they are being tested, Hemingway added. Fraudulent auto and homeowners claims in the United Kingdom cost insurers about 1 billion [pounds sterling] a year, according to the Association of British Insurers.

Advantages of Technology

Technology as a fraud-fighting tool offers many benefits, including cost savings. ISO estimates that insurers using ISO ClaimSearch receive a return of nearly $50 or more for every dollar spent, said Boehning.

Describing other benefits, Quiggle said, "Insurers can apply a consistent, highly analytical standard to all claims: special investigation units can devote time to truly suspicious claims; it quickens the analysis that allows insurers to intercept more claims before they're finalized and the money is paid out: and fewer investigators can do more investigative work more accurately and faster."

In addition, technology helps create the bigger picture for suspicious claims. "One element alone may not signify a case of fraud, but analyzing several suspicious elements or "red flags' together can help to paint a picture that indicates dubious behavior or a motive for fraud," said Seth Perlmutter, vice president of insurance services for LexisNexis Risk Management.

The ultimate benefit, however, is that advanced antifraud technology helps to improve loss ratios, said Perlmutter. "The primary question for companies becomes 'how do I ensure that I am processing legitimate claims?'" he said. The use of technology, including modeling and scoring, can help carriers stay ahead of fraudsters by identifying fraud indicators at "First Notice of Loss" or at time of application.

For Princeton Insurance, which uses Adam Safeguard's Forensic Abstract, anti-fraud technology is significantly lowering its claims payout. The company uses Forensic Abstract to screen every professional-liability claim it receives for facts that might suggest an exaggerated or fraudulent claim. Information about the claimant such as driving record, Social Security number, additional names and prior dealings with the court could help to formulate a position that the claimant, or the claim, isn't credible. While technology can scour a person's background for "red flags," any piece of data, by itself, is not a positive indicator of fraud, said Tom Connolly, director of the company's special investigations trait.

But is technology the only answer? "The role of technology in helping to identify potentially fraudulent claims is credible, but technology cannot replace file good judgment of claims professionals who must assess the relevance of the clues uncovered by the fraud-detection software," said Connolly.

Quiggle agreed, adding that technology doesn't replace the street smarts and sheer will of investigators. "Instead, it does much of the tedious sent work, thus freeing investigators to better focus and direct their probes strategically," he said.

Technology Helps Fraudsters, Too

But while technology is helping fight fraudulent activity, it's also contributing to it. The rapid growth of the Internet is unleashing the potential for more criminals to commit fraud, particularly in large dollar volume. According to a 2000 Conning & Co. study, 84% of respondents to a fraud survey agreed that use of the Internet would create new classes of insurance fraud. For instance, some scam artists are creating Web sites to market deceptive insurance and other coverages, while others are logging onto chatrooms to exchange fraud tips. This was the case recently of an individual who was marketing a how-to manual for scamming rental policies, said Quiggle. In addition, standard transaction technology is used by sophisticated crooks to move money around when they're laundering loot stolen from insurers they control, such as former bond trader Martin Frankel did in the 1990s when he stole more than $200 million from several insurance companies, Quiggle added.

Despite rapid advances in technology, insurance fraud will remain a large and damaging crime well into the future, said Quiggle. "Many criminals are growing more sophisticated and better organized and are using technology and organizing gangs into small corporations that can steal insurance money more efficiently than the mom-and-pop operators of the past," he said.--Lori Chordas