Jul 12 1983 Ferreting Cut Fraud

FERRZPING CUI FRAUD: E MANUFACIVRE AND XNITL CF FRAUDULE' INSURANCE CLAIMS by Nancy Jane Reichman B.A. New Collge, Sarasota, Florida (1975) M.P.A. New York University (1978) Submitted to the Department of Urban Studies and Planning in Partial Fulfillment of the Requirements of the Degree of DOCTOR CEF PHILOSOPHY at the MASSACHUSI'S INSTI'IUIE OF TECHNOLOGY June 1983 ©Nancy J. Reichnan 1983 The author hereby grants to M.I.T. permission to reproduce and to distribute copies of this thesis document in whole or in part. Signature of Author. Department of Urban Studies and Planning April 11, 1983 Certified by___ /T r Gary T. Marx, Thesis Supervisor Accepted B yk%, Ro ; ?rl Fogelson, Chair, PhD Committee Archives MASN STfUTE JUL 12 1983 FERRETING CUT FRAUD: THE MANUFAI'URE AND CDNTROL OF FRAUDULENT INSURANCE CLAIMS BY NANCY JANE REICHMAN Submitted to the Department of Urban Studies and Planning on April 11, 1983 in partial fulfillment of the requirements for the degree of Doctor of Philsophy in Urban and Regional Studies ABSTRACT: This exploratory inquiry into fraud and its control examines insurance fraud as one type of business-related crime. Insurance fraud is defined as the manipulation of loss circumstances and reports (including to whom, what, where, when and how losses occur) in order to claim insurance benefits that otherwise would not be forthcoming. Since false claiming can be usefully conceptualized as rule breaking committed through or mediated by conventional insurance transactions, the study of such behavior is appropriately focused on the interaction between insurance activities, fraudulent behavior and fraud control. Transactions, rather than individuals or organizations, provide the empirical context for this inquiry. Data were obtained from a number of sources. In-depth interviews were conducted with insurance claim personnel, claimants, and public and private fraud investigators. Cases were reviewed as part of field site visits with a private investigative agency and a state-run fraud bureau. Secondary sources--e.g. trade journals, claim association proceedings, criminal indictments, newspaper articles and insurance texts-were used as well. Two questions informed the analysis. First, since insurance fraud offenders use the insurance process to obtain benefits unlawfully, to what extent do insurance organizations and activities influence the construction of false claims. Second, to what extent do processes of image manipulation and the relationship between deceiver and insurance organization influence abilities and incentives to detect and control fraudulent behavior. The nodel of fraud and fraud control developed in this study argues that fraudulent activity persists because of features of insurance process and deceptive behavior which permit offenders to manipulate loss images and reports and discourage potential 2 social control agents from exerting control. Incentives and opportunities for fraud and its control are analyzed as a consequence of the contradictory character of insurance activities and relationships providing opportunities to deceive, opportunities to conceal the offences, and limits on fraud recognition and control. The uncertainties associated with insurable risk permit fraud offenders to construct deceptive images of loss. Legitimate transactions and organizations cover-up fraudulent intent and shield fraud offenders from their targets. Control, like fraudulent behavior, is mediated through the insurance organization. Other insurance goals and activities often supercede fraud enforcement efforts. Finally, fraud effects are diffused limiting further the incentive to control deception. This research highlights an important perspective for analyzing programs and policies. In addition to evaluating whether programs meet their stated objectives, analysts should examine a program's influence on the generation of unintended or deviant outcomes. In this dissertation concepts useful for analyzing the insurance role in the production and control of fraudulent claims are developed. Thesis Supervisor: Dr. Gary T. Marx Professor of Sociology 3 LB NoC OU FRMARO SHOM"W lollAOR WHY AIRBNt211OSU In ~~VIV. O. MPNAFLAM9 (sl9V 'WRwAL Lw 'S bK/ This research would not have been possible without the support, friendship, good-will and patience of many, many people only same of wham I am able to mention here. Gary Marx provided the inspiration to do good work, intellectual encouragement for my own work, insightful criticism, solid advice and support, not only during the course of this research, but throughout my entire graduate program. Deborah Stone and Steven Spitzer continually provided me with thoughtful comnents, suggestions and encouragement and I thank them for their time and interest. Susan Bartlett and Cindy Horan, my closest school chums, were constant sources of support, emotionally and intellectually, and helped keep me going when the going seemed to get rough. My fellow "fellows" at the Joint Center for Urban Studies deserve mention for having sat through same crazy lunches and for being around and listening to me trying to make sense out of all of this. I owe a substantial debt to all those out there fighting fraud, willing to let me came talk, listen and observe, but who, for reasons of confidentiality, I cannot mention here. I would like to express my thanks to the entire staff of the Florida Division of Insurance Fraud for their assistance. Jean Lucey and her staff at the Insurance Library Association of Boston provided invaluable help in my research efforts as well. Many thanks go to David Griffel and Stuar t McIntosh of Admins, Inc. for providing me with "state-of-the-art" technology and to the rest of the Admins staff for teaching me how to use it to process my thesis. My closest friend and strongest supporter, my husband Charlie Gwirtsman, deserves at least half of my PhD degree. He got me through it. Charlie, I have just one question-"Do I have a dissertation?" 4t1l1I1l1F 1t1I +1 1 11 1l1I1Fl-till 11 1l1i--l- I 1 Fl-U1t]1I1 This research was partially funded by the National Institute of Justice, Grant No. 81-IJ-CX-0044 and the MIT-Harvard Joint Center for Urban Studies. 5 TABLE OF CXNIENTS IN190DUCTION 8 1. FABRICATED CRIMES, CON'RIVED LOSSES AND OTHER DECEPTIVE ACTS 1-20 1.1 Insurance Fraud Defined 1-25 1.2 Fraud Incidence 1-28 1.3 Other Concepts/Models of Fraud 1-30 1.4 Types of Deceptive Claims Activity 1-34 1.5 Factors Influencing the Incidence of Fraudulent Activity 1-51 1.6 Additional Questions 1-59 2. TRADING THE INSURANCE COhlODITY 2-63 2.1 The Marketplace 2-64 2.2 Selling the Insurance Product 2-82 2.3 Assuming Risk 2-91 2.4 Spreading Risk 2-97 2.5 Investing The Insurance Premium 2-107 2.6. The "Business of Risk" and False Claiming 2-109 3. CLAIMS MAKING 3-111 3.1 The Structure of Claims Processing 3-114 3.2 Subverting Claims Processing Authority 3-130 3.3 The Road to Fraud 3-131 3.4 Criminogenesis in Claim Process 3-147 4. SPINNING WEBS OF DECEIT 4-150 4.1 Methods Used in Deceptive Claims 4-151 4.2 Creating Uncertainty 4-163 4.3 The Organization of Deceptive Claims Activity 4-165 6 -------- ---- - page 4.4 Organizing To Conceal Fraud 4-181 5. DISCDVERING DECEIT 5-184 5.1. Location of Discovery Agents 5-188 5.2 The Effect of Location On Discovery 5-204 5.3 Techniques of Fraud Discovery 5-206 5.4 The Effect of Technique on Detection Opportunities 5-233 6. UNRAVELLING DECEPTION 6-236 6.1 Questions Raised By False Claims 6-237 6.2 Strategies 6-240 6.3 Choosing An Investigatory Strategy 6-261 7. DEALING WITH DECEIVERS 7-266 7.1 Ignoring Frauds 7-274 7.2 Recognizing Fraud But Adjusting The Claim Nonetheless 7-277 7.3 Denying Claims 7-284 7.4 Criminal Processing 7-287 7.5 Factors Influencing Enforcement 7-294 8. CONCLUSIONS 8-297 8.1 Opportunities to Deceive 8-299 8.2 Opportunities to Conceal Fraud 8-305 8.3 Limits on Enforcement 8-309 8.4 Further Questions and Future Research 8-314 APPENDIX- FRAUD ENFORCEMENI' ORGANIZATIONS 320 BILBIOGRAPHY 385 7 INrCTacric Over the past decade insurance scams have becane nationally recognized phenomena. Arsons-for-profit, medicaid fraud, welfare fraud-terms once familiar only to program adminstrators-are ccmmonly known today. Arson-for-profit is perhaps the most visible of all types of insurance fraud. The burning of America's cities has been well addressed in national and local media. The United States Senate as well as other state and local legislative tndies have established special cnmissions to study the problem. Comrunity groups have organized around the arson issue. Enforcement task forces have been established in several jur isdictions. Ronald Reagan's 1980 presidential campaign rallied around the issue of "fraud, waste and abuse" in government services. Campaign rhetoric identified categories of welfare, medicaid and food stamp "cheats." In arguing for separating the "truly needy"-those deserving benefits- fram those receiving them, 8 Reagan suggested implicitly, if not explicitly, that United States citizens were stealing fro their social insurance system. Doctorr, lawyers and auto body shop owners who set up phoney autcxobile accidents and then submit phoney claims to insurance cmpanies have been exposed by national and local media. In 1980 reporters from the Chicag Sun Times and V station WLS went "undercover" to expose an organized insurance fraud ring involved in setting up fake autarobile accidents and submitting phoney insurance clairs to several insurers. Reporters uncovered instances of unnecessary treatments, even surgery, simply for the insurance payoff. Also in 1980 Massachusetts' Governor Edward King created a task force to examine auto theft and auto theft fraud. The task force reported that an estimated twenty-five percent of all reported auto thefts were actually fraudulent. In addition to the highly publicized arsons-for-profit, medicaid mills and fraudulent auto thefts, insurance schemes include: persons who murder their spouses for life insurance benefits; men who deliberately shoot off their arms and legs for disability benefits; and families who act out burglaries in their own hoes.

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