Funding of insurance fraud bureaus
BackgroundDuring research on model fraud bureau legislation, the Coalition Against Insurance Fraud identified six potential funding mechanisms for the operation of an insurance fraud bureau.
It is the Coalition's view that government has an important role to play in the ongoing fight against insurance fraud. The effort must be a joint partnership of consumers, the insurance industry and government in order to have a real impact on reducing the cost of fraud on premiums consumers and businesses pay, and on the claims costs borne by insurers.
Insurance fraud bureaus are a means to facilitate the detection of insurance fraud and the prosecution of those persons committing insurance fraud. There are currently 33 states that in recent years created insurance fraud bureaus with the sole purpose to investigate suspected fraudulent activity and to bring to justice those individuals who violate existing insurance fraud laws. In some cases, these bureaus have jurisdiction over all areas of insurance, in other cases, the bureaus have jurisdiction over only specific lines, such as health insurance or workers compensation fraud.
States vary in degree in the size of the bureau and how the bureau is funded. Some states use general revenues as a means to finance the bureau; others assess insurers in the state. This White paper discusses various options the Coalition has identified to fund fraud bureaus.
Funding Options1) General Revenues — Several states including New York, Iowa, Alaska, and Texas utilize general revenues for the funding of the fraud bureau.
The advantage of this funding mechanism is that the resources comes out of the state budget. The funding is part of the annual state budget process and becomes part of the debate on how best to allocate state resources. One argument for including bureau funding in the general state budget is that fraud fighting benefits the general public, and thus, should be paid for by all taxpayers.
The disadvantage of general revenue funding is that the fraud bureau budget becomes part of annual budget battles. State constitutions generally mandate the state budget be balanced, so programs may be reduced to meet that requirement. With increased pressure to lower state revenues, state budgets will be reduced in order to keep them balanced. A program such as a fraud bureau, may be viewed as an item that could be funded through other resources, such as the insurance industry, and thus would be a logical place to cut spending — possibly by eliminating the program entirely.
2) Industry Assessments -Arizona, California, Delaware, Massachusetts, New Jersey and Maryland fund fraud bureaus through special assessment on the insurance companies licensed in the state.
The advantage is that the fraud bureau's operation isn't held hostage to the vagaries of the state budget process. One proposal has uniform annual annual assessments; thus, the industry knows exactly how much each individual company pays. In several states, the assessment each company pays is less than $500 per year, an amount that is usually deemed to be a good investment in fighting fraud. New Jersey is among several states that assesses each insurance company based on a formula on the level of business written in the state — the larger companies in this system pay a higher proportion for the operation of the fraud unit. Some states also allow insurers to pass the assessment back to the policyholder, but given the relatively inexpensive charge, most policyholders don't see an increase in their premiums. The fraud bureau also knows exactly how large a budget it will have
• The industry already is assessed to help pay for the cost of the
regulatory activities of the state insurance department. An additional
assessment is one more "user fee" the industry must pay in order to do
business in the state.
• Some fraud bureaus have authority to investigate both claims fraud and insurer fraud, but spend most of their time investigating insurer fraud. Thus, industry is paying the bureau to investigate itself and doesn't see action reducing the effect of claims fraud on the consumer or the industry.
• Some fraud bureaus are small and conduct relatively few investigations each year. In this instance, it is questionable whether the industry assessment supports an agency that's working in the best interest of the industry and the consumer.
3) Per Policy Assessments -There is currently no bureau that
receives its total funding through an assessment on policies. However,
California collects $1 per policy to fund automobile theft and fraud
A major advantage to this funding scheme is that it brings the consumer directly into the effort to fight insurance fraud. Each policyholder sees an additional line on the premium payment notice for the amount that will go directly to pay for the operation of the fraud bureau. Each insurance company would collect the assessment and pass to the bureau its share based on its policyholders in the state. Consumers will see clearly there is an effort to fight insurance fraud in their state. The cost would probably be from 25 cents to $1 per year per policy. Most states would receive more than adequate funding through this source and may even receive more than necessary.
One potential disadvantage is that skeptical consumers may see this payment as just more money going to their insurance company without receiving any immediate tangible benefit in the way of reduced premiums from fighting fraud.
Insurer would bear additional costs as well. They would have to collect the funds, segregate it from other sources of income derived from the premium and then send the funds to the state, whether in a single payment or by installments. Either way, it would increase administrative costs.
4) Administrative or Civil Fines — South Carolina instituted its fraud bureau in 1994 planning to fund it partially by administrative fines.
In the perfect world, this funding mechanism may be the fairest of them all. It sets up a system where people committing fraud end up paying for the operation of the bureau. With administrative remedies, there is no limit to the amount of fines the bureau can levy and how much the bureau may collect. New York collected in excess of $2 million in the first six months it levied administrative fines.
The disadvantages, however, may outweigh the advantages. The question begs to be asked-if the bureau goes after everyone the bureau deems has committed insurance fraud, do they all have the means to pay the fines? If not, what happens then to those who commit fraud? Levying a fine and collecting it are two distinct steps; the levying of a fine does not guarantee collection. The bureau would be operating on the faith that at some point, the fines that are levied will be collected.
Other states have different budgetary restrictions. Some states have a prohibition against dedicated funds, so collected fines may have to be sent to the general fund of the state. It may not be possible for the fraud bureau to receive all funds collected from the state.
5) Recovery of Legal and Investigative Expenses — No jurisdiction uses this funding mechanism.
The advantage is similar to administrative fines: funding for the bureau's operation comes from those it has investigated and found in violation of law. Investigative costs and legal expenses could be substantial, so recovery of those expenses could potentially fund the bureau for the year. It frees the bureau from the vagaries of the state budget process since funding would be direct. Also, the bureau would not be seeking funding from consumers or the industry to help finance the bureau, easing any financial burden on either of them.
The disadvantages are several. In most cases, the fraud bureau asks state prosecutors (whether district attorneys, states attorneys or the attorney general) to prosecute individuals for insurance fraud. There will be legal expenses, but by and large they will not be the bureau's expenses. Also, as with administrative fines, it is possible the individual may not have adequate resources to pay restitution, a civil fine or legal/investigative expenses.
In some instances, the fraud bureau will investigate reports of insurance fraud and decide not to recommend prosecution, and thus would not receive revenue from such cases. Similar to civil fines, there may be a time lag in collection of investigative expenses that forces the bureau to seek bridge funding until fees can be collected. If that's the case, bridge funding would be needed, and if recovery of investigative expenses is considered part of a funding mechanism, the amount recovered would be unknown and unpredictable.
6) Percent of Criminal Fines — There are currently no states using criminal penalties to fund the fraud bureau.
Similar to funding mechanism that avoid the state budget process, this option keeps the bureau free from the vagaries of the special interest involvement in developing state budgets. Also, if persons convicted of fraud pay for the operation of the bureau, it avoids involvement of the victims of insurance fraud-the consumer and insurance industry. The fines would be collected as part of the criminal process through a court adjudication. Fines would be collected as all criminal fines are collected, and a portion sent to the fraud bureau for its funding.
The disadvantages also are similar to those raised with civil fines or recovery of investigative expenses. Levying a fine doesn't guarantee it will be paid, or paid in a timely manner. In most cases, people fined either may not have the funds to pay or they are able to delay payment for some time after adjudication. The fraud bureau basically has to operate on the belief that at some time, it will receive funding. At no time would the bureau be able to estimate how much money it would receive. Also, state laws may mandate all criminal fines to go to general revenues. Finally, fraud bureaus do not recommend criminal prosecution in all cases, and the prosecutor may not seek a criminal action in cases referred. Thus, the universe of possible receipts for the bureau decreases greatly.
The six funding options are divided evenly between victims of the fraud-the consumer and insurance industry-paying directly or indirectly for the operation of the fraud bureau, and collecting from people who commit the fraud.
The first three funding options clearly fall on the shoulders of taxpayer, policyholders and insurance industry. Whether through general revenues or through assessments, consumers and the industry end up funding the bureau. The second three options force the person who has committed the fraud to pay for the operation of the bureau.
The problem with the latter group of options is that level of funding is unpredictable. At no time during the budget process could the fraud bureau assume exactly what monies would be received, whether through administrative fines, criminal fines or for the payment of investigative expenses. The bureau would expend funds without the knowledge of how much would be returned by the end of the fiscal year.
The state would have to determine how bureau funding could be dedicated and assured of continuation without the source(s) disappearing or being transferred to other programs.
In any case, there are several options for states to consider as funding mechanisms. The Coalition believes each state should look at its own resources and structure to best determine the funding for its own fraud bureau. Further, states need to work with the insurance industry and consumers to ensure full support for an effective and successful fraud bureau.