[Congressional Record Volume 144, Number 143 (Sunday, October 11, 1998)]
[Extensions of Remarks]
[Pages E2057-E2059]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


          ON THE REAL STORY ABOUT WORKERS' COMPENSATION FRAUD

                                 ______
                                 

                        HON. DENNIS J. KUCINICH

                                of ohio

                    in the house of representatives

                        Friday, October 9, 1998

  Mr. KUCINICH. Mr. Speaker, I rise to present the findings of a 
significant, new report on workers' compensation fraud, prepared for 
the Injured Workers Bar Association. The report finds that allegations 
of fraud due to false worker's claims are far out of proportion to 
their occurrence. I ask that my colleagues consider these findings.

              Worker's Compensation Fraud: The Real Story

(Prepared by the Labor Research Association, Greg Tarpinian, executive 
                               director)

                           Executive Summary

       Escalating workers' compensation insurance premiums in the 
     late 1980s and early 1990s set off a series of 
     unsubstantiated charges about widespread claimant fraud as a 
     major cost driver in the workers' compensation system. A 
     number of states passed anti-fraud legislation and began to 
     pursue fraud cases and to collect information about fraud on 
     a serious basis. These efforts have uncovered no evidence to 
     support the charges of widespread claimant fraud and, in 
     fact, have revealed that employer fraud is a far larger drain 
     on the system. The misplaced focus on claimant fraud has 
     created an atmosphere of fear and intimidation for injured 
     workers with legitimate claims. It has also distracted 
     policymakers, law enforcement officials and the public from 
     the real fraud problem in workers' compensation: employer 
     fraud.
       Dramatic increases in workers' compensation premiums 
     throughout the late 1980's and early 1990's fueled 
     unsubstantiated charges that costs were high in part because 
     workers abused the system, fraudulently collecting benefits 
     for faked injuries or remaining on benefits far longer than 
     their recovery required. The American Insurance Association 
     estimated fraud losses at 10% of the cost of claims paid, or 
     about $3 billion. The National Insurance Crime Bureau doubled 
     the ALA's estimate to $6 billion, even though it was involved 
     in only 99 fraud prosecutions in 1994 and 134 in 1995 
     nationwide. The Coalition Against Insurance Fraud adopted the 
     AIA's estimate. One insurance company president put the cost 
     of workers' compensation fraud at $30 billion a year. These 
     huge numbers grabbed the attention of the public and 
     policyholders. The presumption in the press and in the state 
     houses was that fraud was rampant and that most workers' 
     compensation fraud was claimant fraud.
       Since that time, more than half of the states have passed 
     legislation on workers' compensation fraud, with most of the 
     laws directed primarily at claimants. Thirty-three states 
     currently have active workers' compensation insurance fraud 
     units, many of them geared to fighting claimant fraud. In 
     every state, some claimant fraud has been discovered; 
     publicity about these cases has created a deterrent for 
     workers who might contemplate fraudulent claims. But it has 
     also created an atmosphere that Frederick Hill, California 
     analyst for Firemark Research of New Jersey, describes as the 
     ``unwarranted and anecdotal vilification of the work force.''
       In its extensive investigation of workers' compensation 
     fraud, the Santa Rosa Press Democrat concluded that, ``The 
     perception that workers are cashing in by faking or 
     exaggerating injuries has created a climate of mistrust in 
     which every person who is injured and files a claim can 
     become the subject of suspicion by insurance adjusters, 
     doctors and industry lawyers.'' Perhaps most importantly, the 
     fixation on claimant fraud has distracted policymakers, 
     enforcement agencies, and the public from growing evidence of 
     the real problem: millions of dollars in employer and 
     provider fraud.

                       Fixation on Claimant Fraud

       Few experts believe that claimant fraud is a major cost 
     driver in workers' compensation. But some estimates, 
     including those adopted by California Governor Pete Wilson, 
     suggest that fraud accounted for 25% of all employers' 
     workers' compensation costs and 10% of the claims. In 
     California, a wave of legislation in the late 1980s and early 
     1990s was fueled by allegations from employers that workers' 
     compensation costs were too high and that fraud was rampant 
     in the system. But between 1979 and 1991, insurance carriers 
     in California reported only 532 cases of alleged fraud.
       According to the Santa Rosa Press Democrat, ``Some 
     insurance companies saw fraud as a way to explain why 
     premiums were soaring, and politicians and the media jumped 
     on the bandwagon.'' The Press Democrat found that, ``While 
     some insurance companies claim one out of three workers lie 
     about their injuries, or 33%, the actual number of fraud 
     cases sent to prosecutors is less than 1 out of 100, or less 
     than 1%.
       In its estimates of fraud within its own state, Kentucky 
     reversed California's estimate of fraud accounting for 10% of 
     claims and 25% of costs, saying that ``as much as 25% of all 
     workers' compensation claims involve some element of fraud, 
     accounting for 10% of paid premium.'' Kentucky then 
     calculated its own fraud losses as $60 million a year. It 
     noted, however, that ``while the extent of the fraud cannot 
     be quantified, there is no doubt that workers' compensation 
     fraud is in the public eye. Reports of fraud . . . are 
     proliferated by the media.''
       High workers' compensation costs led to more anti-fraud 
     efforts. The Arkansas legislature created the Workers' 
     Compensation Fraud Investigation Unit in 1993, in response to 
     then-escalating workers' compensation costs. In its first 
     year of operation, the new Fraud Unit opened 116 
     investigations, leading to 10 claimant fraud prosecutions and 
     five employer fraud prosecutions, and quickly discovered that 
     the employer cases accounted for a large portion of the 
     dollar value involved.
       New York's massive 1996 workers' compensation legislation, 
     including its fraud provisions, resulted a directly from 
     employer claims that workers' compensation costs were out of 
     control. New York State Controller H. Carl McCall announced 
     flatly in October of 1997, ``Fraud is a factor in New York's 
     compensation costs.'' A statement from his office made the 
     link between rising costs and the presumption of widespread 
     fraud, stating

[[Page E2058]]

     that, ``In response to the high cost of workers' 
     compensation, reforms aimed at fraud detection and 
     prosecution were enacted in 1996.'' But according to the New 
     York State Insurance Department's annual report on insurance 
     fraud, workers' compensation fraud represented only 3% of all 
     the fraud reports in the state in 1996, the year that the 
     legislation was passed.
       Of the more than $6 million in insurance fraud documented 
     in the New York report, workers' compensation claimant cases 
     accounted for less than 2%. The report cited cases of 
     pharmacists, physicians, and medical clinics making a total 
     of almost $3 million in fraudulent claims. Three cases of 
     premium embezzlement totaled over half a million dollars. The 
     report cited only five cases of claimant fraud totaling 
     $107,300. Like other states that are pursuing workers' 
     compensation fraud, New York is quickly discovering that the 
     real drain on the system stems from employer and provider 
     fraud.

                     Common Forms of Employer Fraud

       The best evidence from the states that have pursued fraud 
     and generated detailed records indicates that for every $1 
     lost in claimant fraud, at least $4 to $5 (and in some states 
     as much as $10) are lost through premium fraud. Premium fraud 
     includes a number of schemes used by employers to reduce the 
     workers' compensation insurance premiums by underreporting 
     payroll, misclassifying employees' occupations and 
     misrepresenting their claims experience. According to the 
     National Council on Compensation, the most common frauds 
     include:
       Underreporting payroll. Employers reduce their premiums by 
     not reporting parts of the work force, paying workers off the 
     books or creating a companion corporation to hide a portion 
     of the employees.
       Declaring independent contractors. Employers avoid premium 
     payments for employees by classifying them as independent 
     contractors even though they are legally employees.
       Misclassifying workers. Employers intentionally 
     misrepresent the work employees do to put them in less 
     hazardous occupational categories and reduce their premiums.
       Misrepresenting claims experience. Employers hide previous 
     claims by classifying employees as independent contractors or 
     leased employees or creating a new company on paper.
       Employers deliberately underestimate employment projections 
     at the beginning of the premium year and essentially receive 
     an interest-free loan from the insurance company for the 
     amount that would have been required to insure new employees.
       In addition to premium fraud, employers often fail to 
     purchase workers' compensation insurance, despite state laws 
     mandating that they do so. There are also reports of 
     employers instructing injured workers to seek treatment under 
     group health insurance than workers' compensation, employers 
     discouraging workers from filing workers' compensation claims 
     and firing workers who file claims.

                       Recognizing the Real Fraud

       While some states and the media continue to focus on 
     claimant fraud, states that have pursued workers' 
     compensation fraud in a serious way are now concluding that 
     the emphasis on claimant fraud is misplaced, and employer 
     fraud is by far the greater problem. According to Jerry D. 
     Stewart, the bureau chief of workers' compensation/law 
     enforcement operations at the Division of Insurance Fraud in 
     Florida. ``Historically, there has been a common presumption 
     that those committing the most costly type of workers' 
     compensation fraud have been claimants whose actions, such a 
     double-dipping or claims for false injuries, drove up the 
     cost of workers' compensation insurance. While claims fraud 
     is a significant problem in Florida it pales in comparison 
     with the occult type of fraud known as `premium fraud,' 
     where loss estimates range around $400 million. Stewart 
     notes that, ``Premium fraud scams are costly to companies 
     in Florida, causing workers compensation insurance rates 
     to escalate and legitimate companies to lose business 
     because they are less able to compete with companies 
     shirking the system.''
       In Florida, the construction industry, the state Workers' 
     Compensation Oversight Board, and the House of 
     Representatives Committee on Financial Services all lobbied 
     for increased enforcement of premium fraud and stiffer 
     penalties for employers. Since 1996, Florida has turned its 
     attention to premium fraud, with dramatic results. Florida 
     now has a special strike force mobilized solely to fight 
     premium fraud. The state prosecutor has also impaneled a 
     statewide grand jury to hear complex insurance fraud schemes 
     such as premium fraud. During the last months of 1997, 11 
     persons were charged with racketeering and schemes to 
     defraud, which involved $7.5 million in workers' compensation 
     premium fraud losses.
       In one case, a Palm Beach leasing firm misclassified 
     employees and underreported their payroll, thus avoiding 
     payment of more than $800,000 in workers' compensation 
     insurance premiums. Another case involved underreporting of 
     payroll at a large fruit harvesting company, with fraud 
     charges totaling $3.5 million. Yet another employer in 
     central Florida was charged with defrauding insurers of $2 
     million while operating one of the state's largest temporary 
     employment agencies. The employer disguised the high-risk 
     nature of the work done by many of the employees, concealed 
     its claims history, prevented insurance companies from 
     conducting audits and lied on applications for workers' 
     compensation insurance. In January of 1998, two Florida 
     insurance executives and their attorney were charged with 
     multiple criminal counts in connection with the $100 million 
     collapse of two insurance companies caused by kickbacks to 
     reduce workers' compensation premiums.
       Under a state law that took effect in 1994, Wisconsin's 
     Division of Workers' Compensation now collects information 
     and issues annual reports on fraud. In 1994, the division 
     referred to the district attorney five cases of claimant 
     fraud, involving $44,674, out of 73,678 work-related injuries 
     reported for the year. In its 1997 study, the division 
     concluded that, ``There is no evidence that criminally 
     prosecutable fraud is more than one percent of all reported 
     claims in Wisconsin--a far cry from the 20-30% estimates 
     thrown about elsewhere.'' In 1996, there were 152 allegations 
     of workers' compensation claimant fraud made to the division 
     in Wisconsin. Eleven of those were referred to the district 
     attorney, and seven were pursued, with fraud losses valued at 
     total of $175,389. The division found that fraud is involved 
     in six-tenths of one percent of all reportable claims in 
     Wisconsin.
       A Texas study of workers' compensation fraud conducted by 
     the state's Research and Oversight Council on Workers' 
     Compensation found that, ``In 1996, health care provider 
     fraud was the most expensive type of fraud detected in the 
     Texas workers' compensation system in terms of total dollars 
     lost ($1,200,952), accounting for over eight times the dollar 
     amount of injured worker benefit fraud ($134,351).'' In 1996, 
     only 18 injured worker benefit fraud cases were referred to 
     district attorneys, with an average fraud of $7,464 per case, 
     compared with 46 health care providers, with an average fraud 
     of $26,108 per case.
       The Texas report found, however, that insurance carriers 
     spent more money investigating injured worker benefit fraud 
     than any other type of workers' compensation fraud. In 1996, 
     Texas insurance carriers spent an average of $1,257 per 
     claimant fraud investigation, compared with $991 per employer 
     premium fraud investigation and $823 per health care provider 
     fraud investigation. In 1996, the nineteen insurers studied 
     spent over $5.5 million investigating workers' compensation 
     fraud in Texas, yet recovered a total of $1,520,179. Of the 
     4,077 cases of claimant fraud that the carriers investigated, 
     only 18 were referred for criminal prosecution. The report 
     concluded: ``It is clear that more resources should be spent 
     fighting the most expensive and overlooked types of workers 
     compensation fraud: employer premium and health care provider 
     fruad.''
       A 1995 law that requires the reporting and investigation of 
     premium fraud has helped to shift the focus in California. 
     ``In terms of dollar costs, there's no question that employer 
     fraud today costs more dollars to carriers and to the 
     industry than employee fraud,'' according to Richard Schultz, 
     a spokesman for the State Compensation Insurance Fund, 
     California's largest compensation insurer. A recent study by 
     the California Department of Industrial Relations and the 
     Employment Development Department (EDD) calculated that 19% 
     of employers--nearly one out of every five--either 
     underreport payroll to EDD or have no workers' compensation 
     insurance. The California Department of Insurance concludes 
     that, ``Losses on premium fraud can and usually do exceed the 
     amount of loss in claimant fraud, and, in some instances, 
     medical mill fraud. For example, in several cases where 
     criminal charges have already been filed, losses due to 
     premium fraud for each case are estimated to be in excess of 
     $5 million.
       New York's new anti-fraud efforts have dramatically 
     increased arrests for workers' compensation fraud. In 1997, 
     the New York Insurance Department investigated 408 cases of 
     alleged workers' compensation fraud and made 37 arrests, with 
     $900,000 saved by insurance companies and more than $1.2 
     million in court-ordered restitution. Although New York 
     continues to focus on claimant fraud, its investigations have 
     uncovered premium fraud cases of far greater significance 
     than any of the claimant cases. In one recent case, the 
     comptroller of a trucking company pleaded guilty to mail 
     fraud after he falsified the company's payroll records to 
     defraud the State Insurance Fund of more than $1.2 million in 
     workers' compensation insurance premiums.
       Massachusetts's largest workers' compensation fraud case 
     for 1997 involved an employer who fraudulently reduced the 
     premiums for his rubbish collection workers by classifying 
     them as clerical workers, hiding payroll and using shell 
     corporations to evade surcharges based on the business's 
     unfavorable prior accident history. The employer concealed 
     more than $1 million in payroll from insurance auditors.
       Employers also abuse the system when they fail to provide 
     workers' compensation insurance for their employees or take 
     out a policy but then fail to pay the premiums. California is 
     beginning to investigate employers who fail to provide 
     workers' compensation insurance. In March of 1998, 
     California launched a three-part pilot project to match 
     computer databases from various state agencies to identify 
     employers who are illegally uninsured for workers' 
     compensation. According to John C. Duncan, Director of the 
     California Department of Industrial Relations, the project 
     is designed to ``level the playing field for law-abiding 
     insured employers and reduce the taxpayer burden created 
     by those who are not.''

[[Page E2059]]

       California's Commission on Health and Safety and Workers' 
     Compensation 1997 report concludes that, ``Especially in 
     industries with high premium rates, the illegally uninsured 
     employer is able to underbid the insured employer. Insured 
     employers are again disadvantaged when taxes are raised to 
     cover costs shifted to government services to assist the 
     injured workers of employers who are illegally uninsured.''
       Several other states, including Wisconsin and Colorado, are 
     also using proactive programs to identify uninsured employers 
     using computerized lists of employers and workers' 
     compensation politics. In New York, a 1997 audit by the state 
     comptroller's office revealed that employers owe more than 
     $500 million in overdue unpaid workers' compensation 
     insurance premiums to the State Insurance Fund. Failure to 
     secure workers' compensation insurance is only a misdemeanor 
     offense in New York. In West Virginia, the state has been 
     forced to initiate a series of lawsuits to force payment of 
     more than $100 million in unpaid workers' compensation 
     premiums.

                         Medical Provider Fraud

       Workers' compensation fraud also occurs among medical 
     providers. These forms of fraud evolve as the nature of 
     medical care changes over time. Outright fraud occurs when 
     providers bill for treatments that never occurred or were 
     blatantly unnecessary. Some of the newer forms of medical 
     provider fraud include kickbacks from specialists and other 
     treatment providers to referring physicians, and provider 
     upcoding, where provider charges exceed the scheduled amount. 
     Providers also shift from the less expensive, all-inclusive 
     patient report to supplemental reports, which add evaluations 
     and incur separate charges.
       Medical provider schemes include: creative billing--billing 
     for services not performed; self-referrals--medical providers 
     who inappropriately refer a patient to a clinic or laboratory 
     in which the provider has an interest; upcoding--billing for 
     a more expensive treatment than the one performed; 
     unbundling--performing a single service but billing it as a 
     series of separate procedures; product switching--a pharmacy 
     or other provider bills for one type of product but dispenses 
     a cheaper version, such as a generic drug.
       Newer forms of fraud and abuse occurring under managed care 
     arrangements include: underutilization--doctors receiving a 
     fixed fee per patient may not provide a sufficient level of 
     treatment; overutilization--unnecessary treatments or tests 
     given to justify higher patient fees in a new contract year; 
     kickbacks--incentives for patient referrals; internal fraud--
     providers collude with the medical plan or insurance company 
     to defraud the employer through a number of schemes.
       According to the National Council on Compensation, ``The 
     increased use of managed care for workers' compensation, as 
     well as for other insurance lines, is bringing new twists to 
     old schemes,'' Managed care creates more opportunities for 
     fraud because of the financial relationships and incentives 
     between players.
       Although the campaign against California medical mills 
     wiped out a substantial part of medical provider abuse in 
     that state, new cases continue to emerge. In October of 1997, 
     for example, a pharmacist plead guilty to 21 counts of 
     fraudulent workers' compensation insurance billing. The 
     pharmacist increased his revenues by up to 500% per 
     prescription on more than $600,000 of drugs sold over a four 
     year period.

                         Insult Added to Injury

       Because of the assumption of widespread claimant fraud, 
     injured workers who file a workers' compensation claim may be 
     subjected to insulting questions and treated as malingerers 
     and cheats. Under the auspices of ``fraud prevention,'' they 
     may face endless questioning and unnecessary medical 
     examinations. They may be subjected to constant video 
     surveillance by private investors hired to follow their every 
     move. Their employer may refuse to provide light duty work, 
     or take retaliatory actions against them when they return to 
     work. If they look for another job, their application may be 
     screened for prior workers' compensation claims.
       Although some of these tactics are used in legitimate 
     attempts to investigate questionable claims, they have also 
     become part of a broad employer attempt to intimidate workers 
     from filing workers' compensation claims. Under the pretext 
     of controlling what has been falsely presented as rampant 
     claimant fraud, injured workers are discouraged form 
     exercising their legitimate rights to workers' compensation 
     benefits. As a recent Michigan study demonstrated, the real 
     problem in workers' compensation is not that too many workers 
     claim benefits, but that too few do so. The study, sponsored 
     by the National Institute for Safety and Health, found that 
     only one in four workers with occupational diseases file for 
     workers' compensation. Unsubstantiated charges of rampant 
     claimant fraud undermine public confidence in the system and 
     discourage legitimately injured workers from seeking the 
     benefits they need and deserve.
       In California, a detailed investigation by state auditors 
     found that ``workers' compensation insurers violated workers' 
     rights in about half the claims it audited.'' The violations 
     included ``unacceptably high amounts'' of unpaid benefits, 
     late payments, inaccurate benefit notices and failure to 
     notify injured workers of their rights. In describing the 
     experience of many workers' compensation claimants. The Santa 
     Rosa Press Democrat found that many injured workers slam into 
     a wall of suspicion and distrust that will paralyze them with 
     shame and frustration and delay their recovery. One of the 
     injured workers interviewed by the newspaper commented: ``You 
     get the feeling that even though you have a legitimate 
     complaint and a six-inch scar, you're somehow a malingerer.''
       The grossly overstated estimates of claimant fraud have not 
     only subjected injured workers with legitimate claims to fear 
     and intimidation, but have also obscured a more serious look 
     at the workers' compensation system and the benefits it 
     provides. The real question is not why there is so much 
     claimant fraud, but why there is so little. In most states, 
     workers' compensation benefits provide little more than 
     poverty-level existence. Workers often wait weeks and months 
     for payments.
       Many employers refuse to provide light duty or alternative 
     jobs for workers who might be able to go back to work in a 
     modified capacity while they continue to recover, so workers 
     are forced to continue on inadequate benefit payments even 
     though they may be able to work in some capacity. Some 
     injured workers lose their jobs or are only offered positions 
     at much lower pay. It is little wonder that so many claimant 
     fraud cases involve workers illegally continuing to accept 
     benefits when they are in fact working at another 
     establishment. Too many times, inadequate benefits put people 
     in desperate straits, and they take desperate measures as a 
     result. A system that leaves people in poverty invites abuse.
       The presumption of widespread malingering and dishonesty 
     undercuts any meaningful discussion of the adequacy of 
     benefits and provides a convenient response for those opposed 
     to the benefit increases that are so critically needed in 
     many states. Until the misplaced focus on claimant fraud is 
     overcome, district attorneys will continue to fry the small 
     fish while the big fish go free, and the voting public will 
     remain distracted by anecdotes.

     

                          ____________________