Blockchain as a Tool for Health Insurance Fraud Detection: Strategic Shift for Actuaries

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The Persistent Problem of Health Insurance Fraud

Health insurance fraud accounts for 3% to 10% of global healthcare spending[1] and can be higher for developing countries. These losses are non-abstract as they materialize as inflated premiums, reduced profitability, and even the financial destabilization of insurers. The problem is financial as well as actuarial. Fraud distorts claim patterns, skews risk assumptions, and undermines pricing models, making sound actuarial judgment difficult.

Traditional systems of claim verification rely heavily on manual audits, intermediaries, and scattered data silos, which create opportunities for errors, delays, and exploitation. From an actuarial perspective, the lack of standardized, verifiable, and real-time data introduces unnecessary volatility into reserving, pricing, and capital adequacy planning. In response, insurance companies are beginning to explore blockchain, a technology capable of transforming fraud detection from a retrospective chore into a proactive, real-time safeguard. While blockchain won’t eliminate fraud outright, it radically changes the data environment in which fraud is fought.

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Why Blockchain Matters for Fraud Prevention

Blockchain is essentially a distributed ledger that records transactions securely and immutably. When integrated into a health insurance ecosystem, it enables real-time visibility, digital authentication, and process automation via smart contracts. More importantly for actuaries, it produces auditable, consistent, and tamper-proof data that can underpin models with far greater confidence.

Smart contracts, predefined rules that self-execute when conditions are met, can automate everything from policy issuance to claim adjudication. In a blockchain-integrated claims process, each party (policyholder, provider, pharmacy, insurer) signs data at every stage. Any tampering, even a single altered character, breaks the cryptographic validation. This level of integrity turns blockchain into a fraud deterrence tool as much as a detection mechanism.

At the center of the system is a private blockchain with a hybrid consensus algorithm called Proof of Authorized Work (PoAW), which combines the scalability and speed of Proof of Authority (PoA) with the security benefits of Proof of Work (PoW). This setup ensures that only verified nodes[2], controlled by the insurance company, can contribute blocks to the ledger. As a result, every transaction, be it a policy issuance, a diagnosis, or a prescription, carries a digital fingerprint and is traceable across the ecosystem.

The inclusion of smart contracts further automates claim processing. These contracts are programmed to recognize and enforce insurance policy terms. For instance, if a policyholder fails to pay premiums or submits inconsistent information, the contract can automatically reject the claim. Conversely, if the data aligns with policy conditions, the contract may initiate reimbursement either in fiat currency or digital tokens.

Fraudulent claims are caught at the point of entry, not weeks later. And the data trail is immutable, allowing actuaries to trust the claim histories they rely on to set reserves or determine IBNR. As actuaries, we always emphasize that Garbage In, Garbage Out. So, no amount of modeling can compensate for garbage level of distorted datasets.

A particularly valuable innovation for actuaries in the blockchain-health insurance nexus lies in the handling of personal data. One of the main frictions in current insurance processes is the repeated need for customers to submit the same personal or medical information across different interactions. This leads not only to inefficiency but also to inconsistencies in underwriting and claims analytics.

A blockchain framework where identity verification or health data is user-controlled but cryptographically verified offers a solution. In such a setup, personal medical data remains on the individual’s device, while only the verification of events (like a diagnosis date) is immutably recorded on the blockchain. This structure allows verified data to be reused securely across the insurance network. For actuaries, the impact is twofold: better data quality and fewer unknowns in modeling inputs. More standardized inputs directly translate to reduced volatility in pricing models and greater confidence in assumptions used for reserving and experience analysis.

From a fraud detection standpoint, one of the main barriers to progress is the heterogeneity and fragmentation of health insurance claims. Services provided at a single appointment can be billed through multiple separate claims, often by different providers, and not necessarily at the same time. This makes it hard to detect patterns or define benchmarks against which outliers can be flagged. Blockchain provides structure and sequence. By recording every stage of a patient interaction, from consultation to prescription and reimbursement, onto a shared ledger, actuaries can now observe the complete claim lifecycle in a unified, time-stamped chain. Even partial automation of this process using smart contracts allows for higher integrity of the data, making fraud modeling and claims forecasting more precise.

Smart Contracts in Action: How the System Detects Fraud

The proposed web-based application functions as the interface for all stakeholders; patients, doctors, pharmacists, and insurers; allowing each to interact with the blockchain through asymmetric keys and digital signatures. Every participant is required to sign the data they contribute, creating a chain of verifiable inputs that cannot be manipulated without detection.

For example, a digital insurance claim begins with a patient inputting symptoms and receiving a diagnosis from a health professional. The doctor then adds treatment recommendations and signs the data. If a pharmacy is involved, it too enters the dispensed medication details and signs them. The final claim contains all inputs and three digital signatures. Upon submission, the smart contract verifies the authenticity of each signature using cryptographic functions like Elliptical Curve Recover and cross-references public keys registered to each entity.

If even a single character in the data is altered; for instance, to inflate drug prices or falsify a diagnosis, the hash of the data changes, invalidating the corresponding signature. The system flags the claim for review and prevents automatic reimbursement. Notably, even sophisticated attempts to impersonate another party by forging a signature will fail, as the system checks the public key against known entities. This structure makes it very difficult (if not virtually impossible) to submit fraudulent claims without detection.

The model goes further by integrating rule-based anomaly detection. For example, in one test scenario, a pharmacy and patient colluded to inflate drug prices. Although the claim passed signature validation, backend logic identified the pricing as irregular, triggering an alert. These predefined rules can evolve to include drug price databases, historical patient behavior, and integration with external APIs to compare claimed reimbursements with actual payments.

Practical Implementation and Policy Implications

While the benefits of this model are clear; faster claim processing, real-time fraud detection, data integrity, and improved stakeholder trust; the barriers to implementation are significant. Building and maintaining a private blockchain requires substantial upfront investment in hardware, software, and skilled personnel. For this reason, it is recommended that the solution is primarily implemented by large insurance companies with substantial resources and branch networks. Smaller firms may face challenges scaling or justifying the costs.

The potential savings from fraud reduction and administrative efficiency could offset initial expenses over time. In addition, as blockchain technology matures, the costs of implementation are expected to decrease. Insurance companies may also leverage consortium models, in which multiple insurers share a blockchain infrastructure while retaining individual data control. For actuaries, this opens up new roles, not just in modeling, but in architecture design, simulation testing, and evaluating the return on technology investments from a risk-adjusted perspective.

From a regulatory perspective, embracing blockchain could align with emerging data governance and privacy laws. Patient data is stored off-chain and only referenced through verified transactions, reducing exposure to breaches. The system can also enforce compliance with KYC and Health regulations through smart contracts.

How Actuaries Fit into the Blockchain Ecosystem

The scalability and throughput of blockchain systems are often seen as technical bottlenecks, but they carry real implications for actuarial work. In healthcare, transactions can involve heavy data, such as imaging results or lab reports. Single-ledger architectures may struggle with throughput if every transaction is replicated across all nodes. To address this, newer designs, such as lightweight architectures with clustered replication, have emerged. These architectures allow for only key transaction data (such as hashes or metadata) to be stored on the ledger, while full medical records remain off-chain. For actuaries designing models that rely on timely data access without bloating the system, this is an important balance. Moreover, private or hybrid blockchain networks reduce the overhead associated with public key encryption while maintaining data privacy and access control; key concerns in health insurance applications.

Choice of blockchain platform is also a strategic decision with actuarial implications. Not all blockchains are built alike. According to comparative studies, platforms like Hyperledger Fabric are especially suited for health insurance environments due to their permissioned nature, scalability, and support for complex smart contracts. These platforms support private channels and multi-party computation, allowing insurers and healthcare providers to share sensitive data without exposing it to the broader network. For actuaries, this means the ability to model multi-stakeholder contracts, such as bundled payments or capitation arrangements, on a shared but secure platform, improving coordination while reducing frictional loss.

As blockchain pilots move beyond proof-of-concept into operational systems, actuaries should position themselves as data stewards and model interpreters. The profession’s strength has always been in understanding the long-term financial implications of uncertainty. Blockchain doesn’t remove uncertainty, but it changes its nature. Bottom of Form Actuaries are uniquely qualified to assess that shift. Whether it's modeling smart contract behavior, stress-testing pool dynamics, or designing fraud thresholds, the skills are relevant; it’s the context that’s changed.

Conclusion

The intersection of blockchain and health insurance fraud detection marks a transformative opportunity. By combining the transparency of distributed ledgers with the precision of smart contracts and the robustness of cryptographic verification, insurers can build systems that are not only secure and efficient but also trustworthy by design. As fraudulent schemes grow in sophistication, so too must our defences; and that is why blockchain might just be the leap forward that the sector has long needed.

We must also acknowledge institutional inertia. Blockchain is not a silver bullet. Initial deployment costs are high. Integration with legacy systems is difficult. Regulatory ambiguity is real. But ignoring the shift is no longer viable. The cost of doing nothing may now outweigh the risk of experimentation. The proposal model from our side talks not just about blockchain, but using a suite of tools like webpage (APIs, front-interface, back-interface) to follow an integrated systems approach.

To remain relevant, actuaries must adapt. Engage with tech teams. Understand the architecture. Contribute to design choices. And most importantly, champion the value of models built on reliable, secure, and auditable data; the kind blockchain promises to deliver.

About the Guest Authors

Syed Danish Ali is an actuarial consultant with 15 years’ experience across multiple global markets; certified in predictive analytics (iCAS) and graduate of University of London.

Abbas Raad is an Actuary with more than 20 years of broad experience. He is CEO of Sina Insurance Company, Founder and Director of Blockchain and Data Mining Laboratory at SBU University and sits on Board of Directors for multiple insurance companies. He is also a Visiting Fellow In Cranfield University UK on Sustainable Development. He has a PhD in Blockchain and Health Insurance, as well as a PhD in Artificial Intelligence & Industrial Engineering.

[1] Sparrow, Malcolm K, Health care fraud control: understanding the challenge, JOURNAL OF INSURANCE MEDICINE-NEW YORK- 28 (1996): 86-96.

[2] Abbas Raad1, Reza Ofoghi2, Ghadir Mahdavi3, Fraud detection in supplementary health insurance based on smart contract in blockchain network, Journal of Mathematics and Modeling in Finance (JMMF), Vol. 4, No. 2, Pages:33–56, (2024).