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There’s a huge aggregation of power coming from the insurance industry, insurance commissioners, the insurance trade press, and other government regulators organized to fight insurance fraud. But with all that power, the anti-fraud fighters miss half or more of the fraud problem – fraud committed by insurance companies in denying claims, underpaying claims, and stalling on claims. Of course, that’s only part of the picture of insurance company fraud. To get that full picture, you’d have to add in premium overcharges, confusing policies that mislead policyholders on coverage issues, fraudulent sales and other standard insurance company abuses.

The latest development on fraud comes from a leading insurance publication, Best’s Review (October 2005), with this cover story – “Fraud’s New Front Line.” For a second or two I thought at last someone was paying attention to insurance company fraud instead of policyholder fraud, but I was wrong. The new development was stated in the sub-headline: “Pharmaceutical scams are the latest battleground in health insurance fraud.”

Every time I see one of these articles in the insurance trade press or anywhere else I know how it will start -- with an estimate of how much of the premium dollar is eaten up by insurance fraud. In this case, one of the statistical pearls finds 3 to 10 percent of all health insurance premiums are lost to insurance fraud (meaning fraud committed by policyholders). There’s also an estimate of the dollar amount of insurance fraud at $85 billion a year.

Let me offer my own estimate of the amount of the health insurance premium dollar lost to insurance fraud committed by insurance companies. A conservative estimate would certainly be that 3 to 10 percent figure and it may well be much higher than that. And it would be reasonable to estimate that the premium lost to fraud by insurance companies is $85 billion or more a year.

Why isn’t anything done about insurance fraud by insurance companies? Because the regulatory apparatus, the so-called insurance commissioners, are conditioned to protect the insurance industry, not the insurance policyholders. The insurance companies regulate the insurance commissioners, not vice versa.

One manifestation of insurance company fraud victimizing policyholder is the failure of insurance commissioners or others to at least measure the extent of the problem. Every insurance commissioner should do a study of statewide claims payment and ascertain the percentage of claims involving fraud by the insurance companies and the cost in recoveries denied and other problems arising therefrom. A good place to start is a study of claims arising out of the two recent hurricanes and floods.

Studies of claims payments by every insurance commissioner would be one important step in ending insurance company fraud. Insurance commissioners should take other steps including more effective handling of complaints submitted by policyholders, perhaps giving the commissioner more authority from the legislature to adjudicate claims. A policyholder should only rarely have to litigate to collect claims so there should be both formal and informal mechanisms to quickly resolve policyholder complaints.

Another essential often proposed but never enacted reform for Pennsylvania is an insurance consumer advocate to serve as the lawyer and advocate for the consumer interest. The insurance consumer advocate could investigate insurance abuses, intervene in rate cases, litigate on behalf of consumers when appropriate, and carry out public education campaigns.

This is not to belittle fraud committed by policyholders. But fraud committed by insurance companies is probably of equal dimension and should get equal attention.

In the meantime, policyholder fraud gets almost all the attention. Right now that means pharmaceutical fraud by policyholders is being highlighted. It is the fastest growing segment of the fraud industry. It includes such things as diluting, misbranding, and tampering with drugs, but still charging the full price. It also includes charging brand name prices for generics, shorting consumers’ supplies, and even marketing counterfeit drugs.

Insurance companies are mobilizing new technology to screen claims for fraud, and they are continuing to get the full cooperation of government. But policyholders are left in the cold, and almost no one documents, investigates, takes action on, or even acknowledges this major branch of fraud, committed by insurance companies.

Herb Denenberg is a former Pennsylvania Insurance Commissioner, professor at the Wharton School, and Pennsylvania Public Utility Commissioner. He is a member of the Institute of Medicine of the National Academy of Sciences and is a board member of the Center for Safe Medication Use. He is an adjunct professor of insurance and information science and technology at Cabrini College. You can write Herb at POB 7301,St. Davids, PA e-mail him at hdenenberg@aol.com or reach him at his two Web sites: thedenrep_archive.org or denenbergsdump.org