Workers Aren’t the Only Comp Cheats

Detection by front-line insurance company personnel … is often the first line of defense against workers’ comp fraud.

Within the insurance industry—and even outside it—workers’ compensation fraud is typically associated with malingering employees who fake an injury in order to collect compensation and some paid “vacation” time. While it’s true that employee claim abuse is the most common type of workers’ comp fraud, insurers are concerned that the continued weak economy is encouraging the steady growth of other types of scams: namely, premium fraud and medical provider fraud.

According to the National Insurance Crime Bureau (NICB), workers’ compensation fraud costs the insurance industry roughly $5 billion each year. Fraud has been estimated to account for as much as 10 percent of the cost of claims in this line. By one estimate, comp fraud in the 1990s accounted for 10 percent of claim costs and 25 percent of all employers’ workers’ comp costs in California.

Workers’ compensation premium fraud is perpetrated by employers who intentionally and inaccurately falsify insurance forms so they can save money on premiums. Favored methods include misrepresenting the types of work being done at the company, listing too few employees that need coverage, falsifying claims experience and minimizing the skill levels of their employees, all in an attempt to lower the business’s assessed risks, premium rates and overall operating costs.

Although employer-perpetrated premium fraud is only one aspect of workers’ compensation fraud, experts from insurers’ special investigation units agree that it is a growing problem. Weak economic conditions and growing pressure on businesses’ bottom lines are thought to be the primary drivers for this increase in fraud. One source contends that the evidence from states that have pursued workers’ compensation fraud indicates that for every $1 in claimant fraud, $4 to $5—even as much as $10—are lost to premium fraud.

Ironically, premium fraud typically increases both when the economy is rapidly expanding and when it’s contracting. During expansion periods, employers may underreport their booming payroll; during contraction periods, struggling businesses might misclassify workers to underestimate their skill levels. Both methods are an attempt to lower premiums that do not accurately reflect the risk—and the projected claims cost—of covered employees. For example, a common ploy used by construction companies is to classify most of its employees as manual laborers, omitting the fact that they also employ skilled laborers such as carpenters and electricians. Employers pay less for low-rate categories like manual laborers, making this an attractive alternative for cash-strapped companies.

Medical provider fraud can take several forms, including billings for services not performed, providers inappropriately referring patients to clinics or labs in which the provider has an interest, “upcoding”—or billing for a more expensive treatment than the one performed, “unbundling”—or performing a single service but billing it as a series of separate procedures, and product switching, which is billing for one type of product but dispensing a cheaper version.

The advent of managed care has yielded new forms of fraud and abuse, including not providing a sufficient level of treatment, giving unnecessary treatments or tests to justify higher patient fees in a new contract year, kickbacks, or incentives for patient referrals, and internal fraud, such as providers colluding with the medical plan to defraud the employer through various schemes.

Comp fraud needs tough medicine
Since the 1980s, more than half the states have passed legislation dealing with workers’ comp fraud, with most laws directed primarily at claimants. Currently, more than 30 states have active workers’ comp fraud units, and insurers are dedicating more internal resources to fight workers’ comp fraud and abuse.

Unfortunately, in many cases it is difficult to prosecute workers’ comp claimants for fraud, and much of the time the most that can be done is to terminate benefits. This is true in part because workers’ compensation boards and commissions are often reluctant to find against the claimant, and in part because local prosecutors feel that workers’ comp fraud is a lower priority than other crimes. Because of this, detection by front-line insurance company personnel like underwriters and claims adjusters is often the first line of defense against workers’ comp fraud. And diligent agents can help identify these schemes because they have direct contact with employers.

In addition, technology can play an important role in preventing fraud by facilitating communication between insurers, employers and providers and by allowing insurers to recognize indicators such as patterns of excessive treatment. With the assistance of trained and motivated insurer employees, we can detect and eliminate workers’ compensation fraud—a costly drain on insurer operations and a comp system that was designed to protect, not victimize, injured workers.

Jim Whitaker is executive of claims central support at Westfield Insurance, an Ohio-based insurer operating in 26 states. Whitaker is also a member of the PCI Fraud Sub Committee.