Reprinted with permission from, Volume 21, Number 8; May 2011. Copyright 2011, Standard Publishing Corp., Boston, MA. All rights reserved. www.spcpub.com Workers Compensation Outlook VOL. 21 NO. 8 May 2011 Fighting Workers Compensation Fraud This issue of examines dishonest activity by employees, health-care providers, and employers; explains how to identify red flags; discusses how states have cracked down on fraud; and suggests steps that employers can take to fight workers compensation fraud. Size and scope Workers compensation fraud undermines a 100-year old social system originally designed to assist injured workers and their families with medical bills and partial wage replacement for on-the-job accidents. The added strain associated with workers compensation fraud places substantial pressure on the system s infrastructure. When fraudsters cheat the system, the results are greater losses for employers and insurers, higher insurance premiums, lower revenues for insurers, depressed wages, and possibly fewer jobs for honest workers. The size and scope of workers compensation fraud is difficult to determine. The Insurance Information Institute estimates that property/casualty insurance fraud costs insurers $30 billion annually. The National Insurance Crime Bureau estimates that workers compensation fraud makes up approximately 25 percent of that amount, or $7.2 billion per year. The National Coalition Against Insurance Fraud reports a lesser estimate at $6 billion a year. Even the lowest of these estimates indicates that fraud is a serious problem and indicative of considerable strain on the workers compensation system. Types of fraud The most common way of classifying workers compensation fraud is by type. Generally, this includes employee fraud, provider fraud, and employer fraud. A better understanding of the types of fraud and what to look for will shed light on how best to combat this criminal behavior. Employee fraud Employee fraud tends to be the most highly publicized type of workers compensation fraud. Businesses that employ a high number of contract, temporary, or seasonal workers are particularly susceptible to this type of fraud. WORKERS COMPENSATION OUTLOOK: Editorial Director: Robert Montgomery, CPCU, AU; Editor: Katherine Allnutt Panikian, Esq.; Copy Editor: Lindsey Croteau; Production Coordinator: Nakeesha Warner; Marketing Manager: Susanne Edes Dillman; Circulation Manager: Kelly Cotter; Publisher: John C. Cross, Esq. WORKERS COMPENSATION OUTLOOK (ISSN # 1052-6358) is published monthly by the John Liner Organization, a division of Standard Publishing Corporation, 155 Federal Street, Boston, MA 02110. Subscription price: $259 per year U.S. and U.S. possessions; $336.70 in Canada and elsewhere. Periodicals postage paid at Boston, MA, and additional mailing offices. POSTMASTER: Send address changes to WORKERS COMPENSATION OUTLOOK, 155 Federal Street, Boston, MA 02110.
Employee fraud takes many forms. One of the more common occurs when malingering employees pretend their injuries or conditions are worse than they really are to receive more money or time off work. Sometimes, employees work a second job while they fraudulently collect disability for an injury on another job. In other instances, employees report an injury that never occurred. Additionally, employees fleece the system when they report nonwork-related injuries as having occurred on the job. These activities translate into greater financial losses, higher insurance premiums, and reduced revenues. Remaining workers are often forced to shoulder increased workloads. Supervisors spend time completing paperwork related to claims and training replacement workers. Consumers feel the impact at the cash register in terms of higher priced goods or services. While all claims should be treated as legitimate, managers should be trained to look carefully for suspicious signs of possible fraud. Managers should be alert for common characteristics that may suggest a claim is not legitimate. While these red flags do not confirm fraudulent activity, they can identify claims that warrant a closer look. Common red flags associated with fraudulent employee claims include the following: Injury is reported on Monday morning or after a vacation or holiday. Injury is reported about the same time every year. Injury is reported late. Claimant is a new, seasonal, or contract employee, or claimant has a history of short-term employment. Claimant has an attorney when injury is reported. Claimant demands quick settlement. Claimant is facing possible layoff or termination. Claimant s description of the accident and resulting injury are not consistent. Claimant goes to the emergency room for treatment for a nonemergency condition. Claimant refuses diagnostic procedures to confirm treatment. Claimant s address is a post office box or hotel address. Claimant is disgruntled. There are no witnesses to the accident. Provider fraud It is particularly disappointing when trusted health-care professionals commit workers compensation fraud. While these providers seek to pocket money they have not earned, they can also jeopardize the health of injured workers who have come to them for treatment and care. 2
Health-care provider fraud takes many forms. One of the more prevalent provider fraud schemes involves upcoding or inflating medical bills. In these instances, providers exaggerate injuries and then bill for unnecessary or unrelated treatments. Another way health-care providers defraud the system is by billing for treatments that never took place, including instances where doctors have billed for services provided to deceased patients. Some fraudulent health-care providers view workers compensation and group health insurance as an opportunity for double dipping. They bill the workers compensation insurer and the injured employee s group health insurer for the same procedure in hopes of being paid twice. Sometimes health-care providers team up with attorneys to take advantage of the system. For example, health-care providers will refer patients to attorneys in return for kickbacks. Another scam involves health-care providers and attorneys recruiting runners to bring injured workers in for treatment and consultation. They gamble that insurers would rather settle than fight a time-consuming and potentially expensive lawsuit. The more extreme cases of fraud involve organized crime rings and the establishment of medical mills. These groups may go so far as to set up bogus health-care clinics. These clinics rarely employ licensed medical physicians, contain little if any medical equipment, and provide virtually no medical treatment. Their sole purpose is to serve as a staging area for fraudulent claims, fabricating everything from fake credentials to medical bills. In some instances, these clinics will pay outsiders to participate in staged accidents. Fraudulent provider claims also have red flags. While they do not confirm fraud, one or several red flags may indicate the need for a more in-depth investigation. These red flags include the following: Provider bills for treatment the injured employee does not remember receiving. Provider does not change treatment regimen. Provider bills for dates of service on weekends or holidays for nonemergency procedures. Provider bills for evaluation and management procedure codes only. Provider bills multiple claims for injured worker. Provider bills for many drug-related and prescription charges. Provider continues to bill for services after injured worker has selected another physician for treatment. Provider bills for services that are not likely performed. Provider s medical reports read almost identical even though patients and conditions being treated are different. 3
The level and duration of treatment is inconsistent with the type and severity of injury reported. Injured worker shows no measurable improvement after extended period of time. The same doctors and attorneys are associated with the same types of questionable claims. There is a sudden and unexplained increase in provider billing. There are delays in receiving requested records. The doctor s office is far away from injured worker s home address. Employer fraud A third type of fraud, employer fraud, also has a significant negative impact on the workers compensation system and on the general economy. Those who cheat in paying workers compensation premiums can then undercut the prices of competitors. The result is an uneven playing field. Employers can defraud the workers compensation system in many ways. One of the more common is by underreporting payroll and number of employees. A variation of this tactic involves misclassifying payroll and job classifications. For example, a roofing contractor might underreport the number of workers it employs or indicate the type of work they perform is simply general carpentry. Both payroll and job classification determine the amount of workers compensation premium that an employer pays. Sometimes, employers attempt to cheat the system by keeping payroll off the books. They pay workers in cash, allowing them to keep payments off the books and deflate the payroll amount reported. Employee leasing arrangements should also be carefully monitored. Some employers have attempted to set up dummy companies with fake accounting and tax records. These companies become the source of their employees. Such an arrangement is also used to avoid the impact of a high experience modification factor that can increase standard premiums significantly. Some employers attempt to lower their overall costs by simply not purchasing workers compensation insurance. Underhanded employers may also attempt to deceive their employees by deducting premium dollars from workers pay or telling the workers that they are not eligible for workers compensation coverage until they have worked for the company for a minimum of six months. Many contract jobs require a certificate of insurance in order for the contractor to submit a bid. As a result, a black market offering fake insurance certificates for sale has emerged. In some cases, original certificates have been altered and photocopied so many times they appear grainy. 4
Like many other types of fraud, employer fraud carries its own set of red flags. Among the signs to look for are the following: The employer has multiple businesses operating from the same address. The employer refuses or delays access to records for audit. The employer s name is not consistent with the work performed. The employer has selected the lowest rated classification for its exposure. The employer has a high experience modification factor paired with a low premium exposure. The employer shows excessive use of independent contractor classifications. The employer s equipment and vehicles are not consistent with job classifications. The employer discourages employees from filing workers compensation claims. The employer displays a certificate of insurance with inaccurate data or the employer s certificate of coverage exceeds anticipated exposure. The employer makes a significant deposit premium in order to avoid audits. The employer requires new employees to complete a 1099 form declaring themselves as independent contractors. The employer reports significant payroll decreases even though revenues stay the same or increase. The employer s principal address is a post office box. The employer is unable to identify tax or unemployment reports. Strength in numbers The good news is that a number of businesses, insurance service providers, and governmental agencies have banded together to fight workers compensation fraud. Their efforts have been largely successful and hold considerable promise for the future. Governmental agencies The Washington State Department of Labor and Industries reported many successes and key developments in its 2010 Annual Fraud Report to the legislature. Among its achievements, the state accomplished the following: Completed a record 5,789 claimant investigations. This represented a 12 percent increase over the prior year. Completed a record 5,846 employer audits. This resulted in $26.4 million in assessments. 5
Collected $137.4 million in delinquent employer premiums, audit assessments, overpayments to workers and health-care and vocational providers, and fraud recovery orders. Referred 17 cases for criminal prosecution and maintained a 100 percent conviction rate. Created a blog called NAILED that features fraud fighting efforts around the country. The blog also shows surveillance videos from recently completed investigations and provides updates on the prosecution of major fraud cases. Similar fraud fighting efforts are taking place around the country. Almost every state has passed laws raising the level of insurance fraud from a misdemeanor to a felony. Some states provide immunity from civil liability to those who report suspected activity. Most states work hard to educate the public about the detriments of fraud through various outreach programs. Additionally, many states have created telephone hotlines for reporting fraud, and these have produced promising results. Insurance service providers Insurers, third party administrators, and other insurance service providers are also committed to fighting workers compensation fraud. Many have combined traditional fraud fighting techniques with today s technological advancements. One of these advanced approaches involves the use of predictive analytics. The insurance industry has learned to apply the same predictive modeling techniques used by retailers and credit card companies to detect patterns of behavior indicative of workers compensation fraud. Traditionally, claims examiners looked for red flags one claim at a time. Now they can use predictive modeling to analyze thousands of data elements simultaneously to detect subtle and complex patterns. By identifying high-risk claims early on, cases can be referred to highly trained examiners or special investigation units for proper follow-up. Moreover, predictive models give examiners an objective assessment of data patterns. The data are analyzed for outliers and aberrant activity with no predispositions. These models can be used to examine patterns related to employee behavior, healthcare provider billing, or employer payroll classifications. Traditional claims investigation has also been impacted by technology and patterns of social behavior. Social networking sites like Facebook, Twitter, LinkedIn, YouTube, and MySpace have proven to be tremendous assets in putting the brakes on fraud. What used to take investigators days to uncover is now readily posted by the claimants themselves for the world to see. Businesses Businesses are very capable of fighting fraud. Whether developing a new anti-fraud program or enhancing an existing one, the following steps are effective ways to prevent and contain costs associated with workers compensation fraud: 6
Establish a zero tolerance culture. Employers should not tolerate workers compensation fraud. To achieve a truly successful culture, accountability must rest at the top with senior management. Enforce a strong hiring program. An employer truly committed to zero tolerance will enforce strong hiring practices. Quality employees are both productive and less likely to engage in fraudulent activities. Promote the company s anti-fraud philosophy. Communication is important. An employer should convey that it will not tolerate workers compensation fraud and perpetrators will be prosecuted to the fullest extent of the law. Create a safe and positive workplace. Creating a safe and positive work environment is an excellent way to avoid fraudulent activity. Disgruntlement is a leading indicator of workers compensation fraud. Equip managers and supervisors. Teach managers and supervisors that every accident should be treated as legitimate and every employee should be treated with respect. However, they should also be able to recognize red flags commonly associated with fraudulent claims. Managers and supervisors should have clear procedures for reporting red flags. Enforce a return-to-work program. An effective return-towork program can be used to deter fraud. If employees know a modified duty position will be made available following an injury, they may be less inclined to stage an accident to obtain time off. Maintain current files. If fraud is suspected, an employee s file can aid the investigation process. Having the employee s current address, phone number, badge photo, and performance reviews available can be valuable. Establish strong relationships with claims adjusters. The claims adjuster is one of an employer s most valuable team members when it comes to fighting fraud. Establishing a strong partnership and ensuring the adjuster knows the company is very important. Investigate accidents immediately. Details begin to fade as time passes. Ensure managers and supervisors investigate accidents as quickly as circumstances allow. This includes inspecting the accident scene, taking employee statements, and interviewing witnesses. Know how to take and document statements. Train managers and supervisors how to record and document statements from injured employees and witnesses. Invite law enforcement or members of special investigations units to explain how to ask better questions and take more definitive statements. Use surveillance when appropriate. Surveillance involves monitoring a claimant s activities to determine if they contradict earlier statements or representations. While expen- 7
sive, it can be a valuable investigation tool. Prosecute fraud. Everyone pays a price for fraud. Once an employer s zero tolerance policy is communicated, businesses must take every action to expose and prosecute fraud. This can be a great deterrent to others in the workplace. Provide fraud hotline. Install a dedicated phone line that employees can use to report fraud. Employees should know how to report such activity and have assurance that their identity will be protected. Utilize outside resources. Keep track of new services available in the industry to fight fraud. Many insurers, third party administrators, and other service providers devote substantial resources to this campaign against fraud. Review and refine program continuously. Like any business initiative, a company s anti-fraud program should be periodically reviewed and refined. Make adjustments as needed. A final note Workers compensation fraud is a problem that plagues the entire system. This includes dishonest activity by employees, health-care providers, and employers. While not conclusive, red flags are valuable in knowing what to look for when fraud is suspected. The good news is governmental agencies, insurance services providers, and businesses have banded together to fight this threatening problem. Playing off their own strength in numbers, these entities are taking advantage of technology and other industry advancements to better identify and prosecute these criminals. Their recent successes hold much promise for the future. About the author Catherine D. Bennett, CPCU, ARM, is communications manager for Sedgwick Claims Management Services Inc., a leading North American provider of claims and productivity management solutions. Throughout her 25-year career in the risk management and insurance industry, Bennett has held various brokerage, consulting, and marketing positions. She is a frequent speaker at conferences and seminars, author of numerous articles within the industry, and the co-author of the book The Art of Self-Insurance. Bennett is a graduate of Vanderbilt University and the Owen Graduate School of Management. Copyright 2011 Standard Publishing Corporation. All rights reserved. workers compensation outlook is published monthly by the John Liner Organization, a division of Standard Publishing Corporation, 155 Federal Street, Boston, MA 02110. Quotation or reproduction of material, in whole or in part, only with permission of the publisher. Subscription price: $259 per year plus shipping and handling, United States and U.S. possessions; $336.70 plus shipping and handling in Canada and elsewhere. To order your subscription, call (617) 457-0600, toll-free (800) 682-5759, or e-mail order@spcpub. com. is now available online through Vertafore ReferenceConnect. For customer service, e-mail k.cotter@spcpub.com; for editorial inquiries, k.allnutt@spcpub.com. Please visit our Web site, www.spcpub.com. This publication is designed to provide authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other expert advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought. 8