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Insurers facing challenge to halt hospital cash plan fraud

If the abuse of hospital cash plans continues to escalate, life insurers may have to take tough measures to ensure the financial viability of these products. Association for Savings and Investment SA CEO Peter Dempsey said that the measures could include raising premiums, introducing standard cancellation clauses and even stopping hospital cash plans completely. The association's statistics show hospital cash plan fraud is a growing problem in SA. In 2011, association members detected 549 cases worth R4m. In 2010, 649 cases were detected worth R12.6m.

Long-term Insurance Ombudsman Judge Brian Galgut said in his recently released annual report that many of the excessive hospital cash plan claims appeared to be part of an organised scam. The annual report makes reference to a specific case where a policyholder had claimed for 10 hospital stays totalling 71 days over a period of two years. The reasons included flu and other medical conditions that do not usually need a patient to be admitted to hospital. According to a review of the South African hospital cash plan market commissioned last year by the FinMark Trust, there are between 1-million and 1.5-million hospital cash plans in effect, providing cover to 2.4-million people. The review found the hospital cash plan market was growing rapidly with about 50 000 policies sold monthly. A hospital cash plan is a policy that starts paying the patient a daily cash amount for every day spent in hospital. The benefit usually becomes payable after day two or three in hospital, depending on the contract.

Dempsey said that unfortunately there had been a consistent increase in fraudulent claims where doctor and hospital administrator collusion was helping dishonest policyholders to make claims they were not entitled to. Insurers have encountered cases where patients being treated for minor conditions were kept in hospital for much longer than needed, enabling them to claim from several hospital cash plans, with several insurers. With a hospital cash plan, the policyholder is admitted to hospital first and then makes the claim once released. Dempsey said if a doctor admitted the policyholder to hospital for flu, the insurer could not decline the claim because the patient had been in hospital, whether this was necessary or not. He said hospital cash plans were easy to understand products designed to help consumers cope with unexpected expenses as a result of being admitted to hospital. He said that unfortunately the simplicity of these products left them wide open to abuse.

Dempsey said as a first step toward protecting honest policyholders who could be negatively affected by the abuse, insurers had started including cancellation clauses in their hospital cash plan contracts. He said if fraudulent hospital cash plan claims were being submitted or if a policyholder was claiming excessively, cancelling the policy of that policyholder was a fair and effective way of protecting honest policyholders from premium increases, provided the contract had a cancellation clause in at inception. Dempsey said it was imperative, however, that such a cancellation clause be contained in the contract at inception and that the decision to cancel a policy was exercised in a reasonable manner. He said that a decision to cancel the policy could be challenged and that the long-term ombudsman had the power to overrule the decision of an insurer. Dempsey encouraged the public to tip off life insurers on collusion attempts by doctors, hospital staff, and policyholders that might be making fraudulent claims from hospital cash plans.

Business Day, 5 June 2013