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Fraud: The Ones That Got Away
By Robert Warne - July 6, 2001

We’ve all heard the one about the guy who is supposedly permanently disabled and collecting workers’ compensation benefits. Then on "20/20," footage is played showing him framing track homes and powering lumber around a construction site.

When the California Department of Insurance Fraud Division casts its net, this imposter is the usual suspect hauled in. This is the department’s prize catch, its trophy.

Have you heard the one about the crooked employees at an insurance company or employer getting cuffed and hauled in for committing insurance fraud? If you have, this is a rare tale, because in California this is a fish story. It’s a story about the one that got away.

Sure, employers and insurance companies have had their wrists slapped with fines and civil judgments, but not by a local DA. This can be attributed to an opinion shared by prosecutors who think civil judgments are usually punishment enough.

If, in effect, individual claimants make up the majority of the group of people getting nailed, then who’s keeping track of employers and insurance companies?

Are the insurance commissioner, the Fraud Division or local DA’s keeping an eye on insurance companies and employers? On paper, the insurance commissioner, Fraud Division and local DA’s have a duty to fight insurance fraud against whoever is committing it. The laws and necessary funding are available for the insurance commissioner, Fraud Division and local DA’s to keep a lid on fraud committed by insurance companies and employers.

Any form of insurance fraud is damaging. It’s estimated by the DOI that $1 billion to $3 billion is attributable to WC fraud annually in California.

It is apparent that the Fraud Division is adequately functioning in breaking up illegal insurance rings. A person can’t log onto the DOI website these days without noticing that some character or group of characters in Antioch or Palmdale have been rung up on WC fraud charges.

Sasquach of Fraud

The big fish, insurance companies and employers, are the real culprits, however, when it comes to fraud. There is evidence of fraud committed by insurance companies and employers, but its tough to build a case in court. Articles such as an Aug. 6, 2000 piece in the Los Angeles Times titled, "Public Fraud Unit Favors Those Who Privately Fund It," illustrate the point. There are bits of material on the DOI website that point to a hole in the net when it comes to hauling in insurance companies and employers on the same charges that claimants face.

This reverse look at fraud makes one wonder how much fraud are claimants exposed to when dealing with insurance companies by being denied benefits or delayed benefits. How many employers underreport payroll or not report payroll at all to get lower premiums, or even avoid WC insurance all together? How often are employers exposed to fraud when an insurance company misquotes premiums after manipulating statistical data to benefit the insurer?

The DOI readily admits statistics on these types of fraud is not available. What is available, though, is that these types of fraud are more costly than fraud committed by workers. In a February 2000 Consumer Reports article titled, "Workers’ comp: Falling down on the job," Eric Oxfeld president of UWC-Strategic Services on Unemployment and Workers’ Compensation, conceded that claimant fraud was never a major problem.

Laziness, Naivety or Indifference

The California Department of Insurance Fraud Division was established in 1979 to investigate and arrest those who commit insurance fraud and protect the public from economic loss and distress. For the first 12 years of its existence, the Fraud Division didn’t have much to show for what it had done to curtail insurance fraud. According to the Commission on Health and Safety and Workers’ Compensation, a report by the California Little Hoover Commission in 1988 found that only one case of fraud had been prosecuted since ’79.

Local DA’s focused on violent crimes and didn’t bother to challenge or investigate reports of insurance fraud. Employers faced intolerably high premiums by absorbing the cost of fraud insurance companies were passing on to them. Getting tax money and resources already allocated to county prosecutors was like trying to pry a juicy steak from the chops of a hungry lion.

During the ’80s, crooked doctors were running medical fraud mills and lawyers were taking advantage of California’s WC laws. Some were charging five to six times more than any other state because of unique California laws. The law provided doctors special incentives to inflate bills and required insurers and employers to pay for initial evaluations whether workers turned out to be injured or not.

Recruiters paid by doctors and lawyers would troll unemployment insurance lines, telling laid-off workers that they would be better off if they claimed that they had been injured on the job.

Employers weren’t going to tolerate absorbing the cost of fraud. They successfully organized and got the attention of state legislators by threatening to leave California if something wasn't done about the high premiums.

The first step to fighting fraud was to adequately fund the Fraud Division and also provide funding to local DA’s to crack down on organized WC fraud.

Legislative Lube Job

SB 1218 (Presley), enacted in 1991, created a means to publicly fund the Fraud Division without using tax money and was worded to close loopholes and patch weaker areas of earlier legislation.

Local DA’s statewide since 1991 have received private funding as a result of SB 1218 to fight WC insurance fraud. Since ’91 they’ve received half of a special assessment collected from insurance companies to prosecute insurance fraud cases—since ’97 they’ve received more than half. The annual assessment is approximately $30 million for 2000-2001.

The Workers’ Compensation Fraud Assessment Commission (WCFAC) is charged with the task of deciding what portion of the assessment each DA receives. The WCFAC is made up of five members consisting of two representatives of self-insured employers, one representative of insured employers, one representative of WC insurers, and the president of the State Compensation Insurance Fund.

Funding for the Fraud Division has been a controversial topic. Many cite a conflict of interest regarding who is investigated and prosecuted, and who is not.

The financial backing is derived from a $1,000 annual assessment of each licensed insurance company plus an additional special assessment for the enhanced investigation and prosecution of automobile and WC fraud. The total fraud surcharge for 2000-01 previously cited is on the brink of $30 million—part of which goes to the Fraud Division. Since 1997, local district attorneys have received more than half of the assessment.

Employers are the source of these funds that get funneled through insurance companies and collected by the DOI. This arrangement to some appears to be like a state-run security guard fraud service to protect employers and insurance companies.

Some feel insurance companies don’t want to accuse employers of fraud because they’re customers. Some also think the DA doesn’t want to prosecute insurance companies because it could influence the level of funding the DA’s office receives. It is much easier to prosecute a single claimant than to build a case against an employer or insurance company.

One awkward challenge that has been avoided has been for a DA to charge SCIF with fraud. There has been more than one instance when evidence was uncovered pointing to fraud, and the DA wouldn’t bite the hook. This would mean biting the hand that feeds the DA’s office, since the president of the SCIF is a permanent member of the Fraud Assessment Commission. He helps decide how big a slice of the anti-fraud funds pie each DA’s office gets annually. Plus SCIF, according to prosecutors, is the most cooperative insurance company in providing information that leads to cases that might be prosecuted.

Defense lawyers have challenged the method of using private money to fund the fight against fraud. Prosecutors have assured that their judgments are independent. Even appellate courts have upheld that there is no actual conflict of interest.

Leaving the Trout Farm in Search of Big Game

According to the DOI, "it has increased enforcement and prosecution of both claimant and medical providers who file false workers’ compensation claims or inflated bills." It is unclear how much effort is devoted to investigating employers and insurers who (1) make or cause to be made knowingly false material statements for the purpose of denying compensation, (2) present or cause to be presented knowingly false material statements in opposition to any claim for compensation, or (3) make or cause to be made knowingly false statements with regard to entitlement to benefits with the intent to discourage an injured worker from claiming benefits or pursuing a claim.

Insurance Code section 1871.4, the same statute under which many workers and medical providers are prosecuted, proscribes all these actions.

The DOI offers a couple of reasons for the lack of awareness of how employers and insurers are prosecutable under the same fraud laws as an individual claimant. One reason is that on every WC check for temporary disability benefits and every advertisement is a statutory warning and notice. Although criminal penalties are the same for employers and insurers, there are no required statutory warnings or notices. The second reason pertains to the procedures in place for reporting fraud.

All licensed California insurance companies by law are required to report suspected fraudulent claims to the Fraud Division for review and possible investigation. Other sources of investigations originate from citizen complaints and division-initiated cases. There is no publicized or established procedure or program for reporting suspected employer or insurer fraud.

On the Horizon

Legislation is currently being recommended requiring warnings and notices targeting employers and insurers in order to provide a more evenhanded approach to dousing all aspects of fraud.

A series of pilot programs was started in 1997 by the Commission on Health and Safety and Workers’ Compensation to bring uninsured employers into compliance. In a report about the program, it is stated that the Division of Workers’ Compensation Claims Unit pays out on average $22.6 million per year from the Uninsured Employers Fund and only recovers an average of $2.3 million including penalties.

Along with the State’s General Fund being pillaged and plundered, uninsured employers have a competitive advantage over complying employers. An uninsured employer can unfairly underbid and provide services at a lower cost and is not affected by rising premiums.

The pilot programs were able to improve overall compliance of uninsured employers through notification and on-sight inspections.

DWC audits have been mandated by Legislature since 1989. The Audit and Enforcement Unit audits insurance companies, self-insured employers and third-party administrators to ensure that they have met obligations under the Labor Code and the Administrative Director's regulations. By assessing penalties and ordering that unpaid compensation be paid, this unit ensures that proper benefits are delivered accurately and in a timely manner.

The results of the audits are available online, and include the amount of fines levied against non-complying insurance companies, self-insured companies and third-party administrators.

The pilot program to bring uninsured or underinsured employers into compliance through notification and on-sight inspections, new legislation mandating warning notices containing penalties for employers, or insurance companies committing fraud and insurance company audits are all appropriate measures to cleaning fraud out of the system. Through these proactive steps it does appear that the commissioner is concerned about this imbalance in prosecution. When it was made clear that the medical fraud mills wouldn’t be tolerated and that doctors and lawyers would be charged and prosecuted, the operations mysteriously disappeared. If the sentinel effect worked to thwart these fraudulent activities, it can also work to thwart the fraud within insurance companies and employers.

The Fraud Division and the local DA’s need to turn the heat up a few notches on these organizations to let them know that committing fraud is a serious offense.


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