10th Global Conference of Actuaries
Lemons Problem and Health Insurance Fraud
Role of information asymmetry in inducing health insurance fraud. By T S Rama Krishna Rao
Samuel B Sekar
In insurance contracts inaccurate or false information results in distortion of truth. Imperfect information on the other hand results in adverse selection (lemons) and moral hazard. Imperfect information when performed intentionally, with unwarranted profit in mind, where one of the parties will be a victim to the cheating of the other, is a fraud. Insurance business is not immune to frauds though the “Principle of Utmost Good Faith” is one of the pillars, which assures the success of insurance operations. When this principle is breached, it disturbs an insurer’s capability in meeting its social and business obligations. This is what happens, when either the person buying an insurance plan or the one who provides insurance commits fraud, by giving or withholding information which misleads the decision making process. The information imbalance is called lemons problem, a form of “Asymmetry of information”. This paper focuses on health insurance frauds resulting from asymmetry of information – the lemons problem. Important terms
Health Insurance Fraud, Asymmetric Information, Principle of Utmost Good Faith, Representations, Warranties, Concealments, Mistakes, Non-disclosure, Demand Side Frauds, Existing Information, Non-Existing Information, Adverse Selection, Moral Hazard, Lemons Problem, Principal-Agent Problem.
A person asked God, “What surprises you most about mankind?” God answered, “They lose their health to make money and then money to restore their health.” Although life is less fleeting today than what it was a few decades ago and with life spans and life expectancies across the globe increasing, the future of the triumvirate of health, health care and health care costs continues to be an area of concern for Governments all over the world. The role of health insurance is paramount in achieving “Health for all”. Indian health and wellness market is said to be worth Rs.3500 crore, and is growing at a CAGR of 40%. 1 The growth is attributed to the change in the mindset that has come in our attitude towards health. The old adage, Health is wealth, was earlier thought to be for the elderly and well-settled sections of society but today it seems to influence the remaining sections of population. For instance, Jagdeep Kapoor, CMD of Samsika, says, “People in developed markets realise they can enjoy material goods only if they live long and well. In the case of our country, the lack of sensitivity to health was not because we were distracted by luxuries, but because we were distracted by necessities. But both markets are now aware of the need.” The increasing awareness among citizens about the importance of keeping good health as also the Government’s stand in raising the health standards of its citizens in general has transformed the health care market into a lucrative one in India. According to Article 47 of the Directive Principles of Indian Constitution, “the 1
Technopak Report, The Healing Touch, Brand Equity, The economic times, 10th October 2007.
10th Global Conference of Actuaries
duty of the state is to raise the level of nutrition, the standard of living and to improve public health,” of its citizens.
Despite the limited spread of health insurance in the country, the claims ratio of Mediclaim policies rose from 94 per cent in the year 2002 to a whopping 140 per cent in 2004. This sharp increase in claims within a short span of two years was a shock to the overseers of health insurance system – the Insurance Regulatory and Development Authority of India (IRDA). This phenomenon provoked the IRDA to review the existing healthcare policies which were not only matching the present needs of the people, but also gave room for unwarranted gain to a few groups of notorious clients who were adept...
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