Health Care Fraud by Patients and Insurers

Overview
When most people think of health care fraud, they picture a dishonest physician billing for services never rendered. But the ACFE Fraud Examiners Manual makes clear that fraud flows from every participant in the health care system. This guide covers the two parties that are frequently overlooked: the patient (beneficiary) who receives care and the insurer (payer), including managed care organizations, that is supposed to pay for it. Understanding both ends of the payment chain is essential for the Financial Transactions and Fraud Schemes section of the CFE Exam.

Why This Topic Is Important
1. Scale of loss. Health care is one of the largest sectors of the economy, and fraud losses are estimated at tens of billions of dollars annually in the United States alone. Patient and insurer schemes add a layer of loss on top of provider fraud.
2. Everyone pays. Fraud inflates premiums, raises taxes that fund public programs such as Medicare and Medicaid, and diverts resources from legitimate care.
3. Patient safety. Patient fraud such as doctor shopping fuels prescription drug abuse, and insurer fraud such as improper claim denials or sham plans can leave sick people without care.
4. Exam relevance. The CFE Exam expects you to identify who commits a scheme, how it works, and what red flags reveal it. Questions often present a scenario and ask you to classify the fraud correctly.

Part One: Health Care Fraud by Patients
Patients, beneficiaries, and plan members commit fraud when they deceive an insurer or government program to obtain benefits, drugs, or money they are not entitled to receive. The main schemes are:

1. Eligibility and Application Fraud
- Misrepresenting facts on an insurance application to obtain coverage or lower premiums (e.g., concealing a pre-existing condition, smoking status, or employment status).
- Adding ineligible dependents to a policy, such as a former spouse, an adult child who no longer qualifies, or a friend posing as a family member.
- Continuing to use employer-sponsored coverage after leaving the job.
- Falsifying income or residency to qualify for Medicaid or subsidized coverage.

2. Medical Identity Theft and Card Sharing
- Using another person's insurance card or identification number to receive treatment.
- Lending one's own card to an uninsured friend or relative.
- Selling insurance information to dishonest providers, who then bill for phantom services (the rent-a-patient arrangement). Red flag: a patient's medical record contains treatments or diagnoses inconsistent with the patient's actual history.

3. Prescription Drug Fraud
- Doctor shopping: visiting multiple physicians to obtain duplicate prescriptions for controlled substances (opioids, benzodiazepines, stimulants), often for personal abuse or resale.
- Forging or altering prescriptions (changing quantities, refill numbers, or drug names).
- Stealing prescription pads.
- Feigning symptoms to obtain narcotics.
- Reselling drugs obtained through insurance at a fraction of their cost (diversion). Red flags: early refill requests, cash payments for some prescriptions and insurance for others, multiple prescribers and pharmacies.

4. False or Inflated Claims by Patients
- Submitting claims for services never received when the plan reimburses the member directly.
- Altering receipts or bills to increase the reimbursement amount.
- Double-dipping: submitting the same bill to two insurers or to an insurer and a flexible spending account, while failing to disclose other coverage required for coordination of benefits.
- Seeking reimbursement for non-covered or cosmetic items disguised as medical necessities.

5. Malingering and Benefit Fraud
- Faking or exaggerating injuries or illness to collect disability, workers' compensation, or long-term care benefits.
- Staging accidents and then seeking treatment to build an insurance claim, frequently in collusion with providers or attorneys.

6. Collusion with Providers
- Accepting kickbacks or waived copayments in exchange for allowing the provider to bill for unnecessary or fictitious services.
- Participating in clinic or testing mills where recruiters (cappers or runners) pay patients to show up.

Part Two: Health Care Fraud by Insurers and Managed Care Organizations
Insurers hold premium dollars in trust and are responsible for paying legitimate claims. Fraud occurs when insurers, their employees, agents, or affiliated managed care entities abuse that position. Key schemes include:

1. Fictitious or Sham Insurance Companies and Plans
- Unlicensed entities collect premiums for coverage that does not exist or that will never pay claims. Victims often discover the fraud only when a large medical bill is denied.
- Bogus discount medical plans marketed as if they were insurance.
- Fraudulent multiple employer welfare arrangements (MEWAs) or association health plans that collect contributions from small employers and then collapse or vanish.
- Red flags: premiums far below market, pressure to sign quickly, no state licensing, vague plan documents, slow or nonexistent claims payment.

2. Bad Faith Claims Handling
- Systematically denying, delaying, or underpaying legitimate claims to boost profits.
- Misrepresenting policy terms to deny coverage.
- Unjustified rescission of policies after a member becomes sick (post-claim underwriting).
- Misclassifying services as experimental or not medically necessary without proper review.

3. Premium Diversion and Agent Fraud
- Agents or brokers collect premiums but fail to remit them to the carrier, leaving the insured without coverage.
- Selling unnecessary or duplicate policies, especially to elderly consumers (churning or twisting).
- Forging applications or falsifying health information to earn commissions.

4. Fraud by Insurer Employees
- Claims processors creating fictitious providers or fictitious policyholders and paying claims to themselves or accomplices.
- Adjusters approving inflated or bogus claims in return for kickbacks.
- Manipulating claims systems, reserve figures, or financial statements.
- Red flags: claims paid to post office box addresses, providers added without credentialing, claims consistently approved by the same employee just under review thresholds.

5. Managed Care and Capitation Fraud
Under capitation, a managed care organization (MCO) or health maintenance organization (HMO) receives a fixed amount per enrollee per month regardless of services used. This creates incentives opposite to fee-for-service fraud: instead of overbilling, the incentive is to underserve and to inflate enrollment. Schemes include:
- Underutilization: denying or withholding necessary care, limiting referrals, or using excessive gatekeeping to reduce costs.
- Cherry-picking (skimming): marketing selectively to healthy enrollees who cost little.
- Dumping: improperly disenrolling or discouraging sick, high-cost members.
- Ghost or phantom enrollees: reporting fictitious, deceased, or departed members to collect capitation payments.
- Risk adjustment fraud: in Medicare Advantage and similar programs, inflating diagnosis codes so enrollees appear sicker than they are, which raises the government's capitation payment.
- Falsifying encounter data, quality metrics, or network adequacy reports.
- Marketing misrepresentations, such as misstating benefits or provider networks to win enrollments, and paying illegal inducements to enroll.
- Diverting plan funds to related parties through inflated management fees or sham subcontracts.

6. Third-Party Administrator (TPA) and Pharmacy Benefit Manager Issues
- TPAs may pay fictitious claims, misappropriate plan assets, or fail to pass through negotiated discounts.
- Pharmacy benefit managers may engage in spread pricing abuses or hidden rebate retention that violate contract terms.

How Investigators Detect These Schemes
- Data analytics: identify patients with multiple prescribers for controlled substances, duplicate claims across payers, dependents whose ages exceed eligibility limits, enrollees with no claims activity (possible ghosts), and MCOs with abnormally low utilization rates.
- Eligibility audits: require birth certificates, marriage certificates, or tax records to verify dependents.
- Explanation of Benefits (EOB) review: send EOBs directly to members so they can report services they never received.
- Prescription drug monitoring programs (PDMPs): state databases that flag doctor shopping.
- Licensing checks: verify an insurer, agent, or plan is licensed with the state insurance department.
- Complaint analysis: patterns of denied claims, delayed payments, or disenrollment complaints point to bad faith or managed care fraud.
- Interviews and surveillance: used in malingering and staged accident cases.

Key Terms to Memorize
Doctor shopping - visiting multiple providers to obtain duplicate controlled-substance prescriptions.
Medical identity theft - using another person's identity or insurance information to obtain care or bill for care.
Coordination of benefits - rules determining which insurer pays first when a person has multiple policies; concealment enables double-dipping.
Capitation - fixed per-member payment to a managed care plan.
Underutilization - withholding needed care to retain capitation dollars.
Cherry-picking / skimming - enrolling only healthy members.
Dumping - pushing out costly members.
Ghost enrollees - fictitious members used to inflate capitation revenue.
Bad faith - an insurer's unreasonable denial or delay of valid claims.
Premium diversion - agent keeps premiums instead of remitting them.
MEWA - multiple employer welfare arrangement; often exploited by sham plan operators.

Exam Tips: Answering Questions on Health Care Fraud by Patients and Insurers

Tip 1: Identify the perpetrator first. Many CFE questions describe a scheme and ask who is committing it or which category it belongs to. Ask yourself: Is the person receiving care (patient), providing care (provider), or paying for care (insurer or MCO)? Doctor shopping, card lending, and ineligible dependents are patient schemes. Underutilization, ghost enrollees, and bad faith denials are insurer or managed care schemes. Upcoding and unbundling are provider schemes and are common distractors.

Tip 2: Remember that managed care fraud runs in the opposite direction. In fee-for-service, the fraud incentive is to bill more. Under capitation, the incentive is to deliver less care and to enroll more (or healthier) people. If a question describes a plan being paid a fixed monthly amount and then withholding referrals, the answer is underutilization, not overbilling.

Tip 3: Distinguish cherry-picking from dumping. Cherry-picking (skimming) happens at enrollment and targets healthy people. Dumping happens after enrollment and pushes out sick people. Both exploit capitation.

Tip 4: Know the sham insurer red flags. Expect a question listing characteristics such as unusually low premiums, lack of state licensing, high-pressure sales, and delayed claim payments. The correct answer will identify these as indicators of a fictitious or unlicensed insurance plan.

Tip 5: Doctor shopping is about prescriptions, not second opinions. A patient legitimately seeking a second opinion is not committing fraud. Doctor shopping specifically involves obtaining multiple prescriptions, usually for controlled substances, by concealing other prescribers.

Tip 6: Watch for true/false wording. The CFE Exam uses true/false items. Statements like 'Only providers commit health care fraud' or 'Under capitation, plans have an incentive to overbill for each service' are false. Statements like 'Patients may commit fraud by submitting the same claim to more than one insurer' are true.

Tip 7: Link detection methods to the right scheme. PDMP databases detect doctor shopping. Dependent eligibility audits detect ineligible dependents. EOB mailings to members detect phantom billing and card misuse. Utilization analysis detects managed care underservice. Licensing verification detects sham plans.

Tip 8: Collusion questions often have a 'best' answer. If a scenario involves a patient paid to visit a clinic that bills for unnecessary tests, the patient is participating in a kickback or rent-a-patient scheme, and the provider is committing billing fraud. Read the question stem carefully to see whether it asks about the patient's role or the provider's role.

Tip 9: Do not confuse premium diversion with premium fraud. Premium diversion is an agent or insurer keeping premiums that should fund coverage. Premium fraud (common in workers' compensation) is an employer understating payroll or misclassifying workers to pay lower premiums. Both involve premiums, but the perpetrator and direction differ.

Tip 10: Use elimination. When unsure, eliminate answers that describe provider-side coding schemes (upcoding, unbundling, phantom billing) if the question clearly centers on a patient or payer. The remaining choice is usually correct.

Quick Self-Check Questions
1. A health plan receives a fixed monthly fee per member and systematically denies specialist referrals. What is the scheme? Answer: Underutilization under capitation.
2. A woman keeps her ex-husband on her employer health plan after the divorce. What is the scheme? Answer: Ineligible dependent / eligibility fraud by a patient.
3. An entity sells low-cost health coverage to small businesses, is not licensed in any state, and stops paying claims after one year. What is this? Answer: Fictitious or sham insurance plan (often a fraudulent MEWA).
4. A patient visits four physicians in one month and receives an opioid prescription from each without disclosing the others. What is this? Answer: Doctor shopping.
5. An HMO reports members who have moved out of state in order to keep receiving monthly payments for them. What is this? Answer: Ghost or phantom enrollees (capitation fraud).

Summary
Health care fraud is not limited to providers. Patients defraud insurers through eligibility misrepresentation, identity misuse, prescription schemes, false claims, malingering, and collusion. Insurers and managed care organizations defraud members and government programs through sham plans, bad faith claims handling, premium diversion, employee embezzlement, and capitation abuses such as underutilization, cherry-picking, dumping, and ghost enrollees. For the CFE Exam, focus on identifying the perpetrator, understanding the direction of the financial incentive, memorizing key terms, and matching each scheme with its red flags and detection method.