The Workers Compensation Fraud (The Latent Crisis)

By Donald T. DeCarlo, Esq., AMCOMP Chairman/President, and Roger T. Thompson, AMCOMP Consultant

Introduction

Cumulative trauma, asbestos, medical and drug costs, and terrorism are prior workers compensation crises. Now, with an economy in crisis, we have the makings of the next crisis in the workers compensation system — fraud.

When discussing the subject of insurance fraud, or more specifically for our purposes here, workers compensation fraud, it is important to place the term in its proper context. Fraud is generally defined in the law as an intentional misrepresentation of material existing fact made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other person relies with resulting injury or damage. Fraud may also by made by an omission or purposeful failure to state material facts, which nondisclosure makes other statements misleading.

In the case of workers compensation, a fraudulent act would result in the payment of benefits or the payment or reimbursement of expenses when the same are not warranted, or the affording of insurance coverage or protection in exchange for the payment of inadequate premium.

This general description of fraud is intended to distinguish the completely fraudulent situations from those scenarios where the system is being abused. While there is the potential for overlap between the instances of fraud and those of abuse, it is important to attempt to distinguish between the two.

Fraud versus Abuse
What distinguishes fraud from abuse? In the simplest terms, fraud occurs when someone knowingly and with intent to defraud, presents or causes to be presented, any written statement that is materially false and misleading to obtain some benefit or advantage, or to cause some benefit that is due to be denied. If there is no material written or verbal lie, there may be abuse, but is not fraud.

In contrast, workers compensation abuse is any practice that uses the compensation system in a way that is contrary to either the intended purpose of the system or the law. This may include some behavior that is not criminal and some that is — most significantly, fraud. Typical abuses of the system also include magnification of complaints or disability that fall short of an outright lie, or an overutilization of benefits. For example, soft-tissue injuries give rise to subjective complaints that they cannot either prove or disprove.

The presence or absence of a specific, provable false statement is the deciding factor. To separate fraud from abuse, it is necessary to look for the material written or verbal lie that was presented or caused to be presented. For example, engaging in some form of employment while receiving temporary disability payments might be abuse, or it might be fraud, depending upon the circumstances. If temporary disability benefits continue when the claimant has returned to work, and no one ever asks the claimant if he or she is working, there is an abuse of temporary disability benefits, but there is no written or verbal lie and, therefore, no action that attains the level of employee fraud.

Using the same example, however, if someone, such as the adjuster or the doctor, specifically asks the claimant if he or she is currently working and the claimant replies “no” and thus lies, and that lie is transcribed in a written instrument (e.g., doctor’s report or employer’s claim form), there is fraud if the false statement is relied upon to determine the amount and payment of temporary disability. Again, it is the written or verbal act that moves it into the realm of fraud.

In separating criminal workers compensation fraud from abuse, the New York Workers Compensation Fraud Inspector General has identified the following key elements:

There is always a false representation — the lie.
The lie must be intentional or knowingly made.
The lie must be made for the purpose of obtaining a benefit the claimant is not due, denying a benefit that is due, or obtaining insurance at less than the proper rate.
The lie must be material, that is, it must make a difference: "If the truth had been told, would you have done anything differently?"

Types of Workers Compensation Fraud

What are the different types of workers compensation fraud? The following details the major types of fraud along with several examples to illustrate what is involved:

workers who receive improper benefits through intentional deception
employers who avoid payment of proper insurance premiums, often to gain a competitive advantage in the marketplace
healthcare providers, attorneys, and others who bill for services not rendered, misrepresent their services, receive kickbacks for referrals, and/or contribute to a worker receiving improper benefits
employers, carriers, and medical agents/experts who knowingly act to deny or dispute legitimate claims by workers
organized workers compensation fraud rings have made a practice of recruiting people to file phony work injury claims. The workers are sent to medical clinics or legal referral centers (commonly known as "claim mills"), which in turn refer them to doctors or lawyers who are in on the scheme.

Employee Fraud
When it comes to fraud in workers comp, we usually look to employers, doctors, and lawyers. They go after the big bucks. While there are opportunities for ordinary workers to exploit the system, employee fraud occurs when an employee knowingly, either verbally or in writing, lies about, or causes another to lie about a material fact in order to obtain workers compensation benefits to which she/he is not entitled.

Self-Inflicted or Intentional Injury

Most state workers compensation laws preclude the payments of benefits where the injury is a result of an intentional act. To illustrate this type of fraud, let me describe two cases — ironically one from the East Coast and the other the West Coast.

Example - In October of 2006, the manager of a Gardner, Massachusetts, Shell station reported to Gardner police that he had been assaulted and robbed while taking cash receipts to the bank. To authenticate the assault, the manager sported a bruised face and a seriously injured eye.

Pieces of his story did not hold up under police questioning, and the manager eventually confessed to stealing the $7,000 deposit. In February 2007, he was charged with larceny and making a false report of a crime. In April, he pled guilty to both charges and was sentenced to one year of probation. He also must pay the insurance company $7,900 (to repay the “stolen” payroll).

But what about the supposed work-related injury to his eye? The manager confessed that he had a friend give him a hard punch to the face to make his story more credible. This hard punch had permanently damaged his vision. Because, initially, the injury appeared to arise out of and in the course of employment, workers compensation benefits were paid. The insurer (AIG) paid $16,000 in medical expenses and $3,000 for indemnity. Following the filing of charges for larceny, the insurer sought reimbursement and referred the matter to the Massachusetts Fraud Bureau. This action led to an indictment handed down by a Worcester County grand jury.

So along with committing workers compensation fraud, the service station manager earned himself a place in the Hall of Fame for Incompetent Criminals. He not only botched the fake robbery and had to repay the medical expenses and ill-gotten indemnity, but due to his friends competence in mashing him in the face, he also has permanent impaired vision.

Example - A young man worked at a ski resort in California bordering near Lake Tahoe. When the 2004 skiing season was ending, the young man was advised that he would not be rehired the following season. One night, after a few beers with his buddies, he decided to get even by getting himself injured on the job.

One night in April of 2004, the young man jumped up and down on a snow bridge that covered the top of a percolation test hole. After three or four jumps, he broke through and fell into the five-foot-deep hole, injuring his knee. The injured knee required surgery and again appeared to be work-related, and workers comp benefits were paid. The young man felt that the benefits available through workers comp were not sufficient, and he decided to sue the resort. He wanted to pierce comp's “exclusive remedy” shield due to the resort’s “extreme negligence” in allowing an “unprotected” hole to exist on their grounds. The resort spent $40,000 defending itself and more than $42,000 in medical bills on Nick’s injured knee. They offered Nick $110,000 to make the case go away.

Nick refused to accept what he now considered “chump change.” He told his buddies that he wanted really big bucks. At that point, one of the friends (perhaps a more apt description would be “disgusted friends”) who witnessed the incident decided enough was enough and decided to tell all. While technically the friends were co-conspirators, they were granted immunity from prosecution inasmuch as they had not benefited financially from the fraud. Nick was convicted of stealing more than $65,000 and now faces up to four years in prison.

Claiming a Job-Related Injury That Never Occurred

For example, the employee while skiing over the weekend or after work sustains a strain or sprain of the knee. The employee waits until the following work shift and reports a work-related injury to the employer shortly after reporting for work.

Malingering or Working While Allegedly Disabled

In addition to the forms of fraud noted above, there is also the potential for fraud following the occurrence of a legitimate work-related injury where the purpose of the fraud is to retain or continue the payment of compensation benefits when they should terminate. This sometimes occurs in relatively minor injury claims where there is an extended period of recovery or inability to return to work. In some instances, the treating physician who is furnishing medical care to the injured worker may abet this type of fraud.

Example - Garrett Dalton, 41, a Connecticut correction officer, injured his back in June 2007, while lifting a box of toilet paper and soap at the New Haven Correctional Center. While collecting workers compensation benefits, it seems that Mr. Dalton decided that he wanted tickets to see a Hannah Montana concert (probably for one of his children). In an attempt to win tickets, he entered a contest that required him to dress as a woman, wear high heels, and run a 40-yard dash, carrying an egg in a spoon. News crews and photographers filmed him running the dash, and thousands of people — including his boss — saw Dalton on TV.

Dalton was subsequently charged with one count of workers compensation fraud and faces up to 20 years in prison if convicted. And by the way, Mr. Dalton didn't win the race for those Hannah Montana tickets.

What do employers/insurers need to be looking at to prevent the various forms of employee fraud? The list could be long, but here is just a partial list of some of the more common items to focus on:

Employee did not report the injury with timeliness.
No witnesses to the injury occurrence or resulting symptoms.
Employee’s account of cause of injury is vague or contradictory.
Subjective complaints of injury are not medically diagnosed.
Employee “shops” for caregivers and/or is noncompliant.
Employee has a history of multiple workers compensation claims.
Employee’s employment status was in jeopardy prior to injury.
Employee has a history of multiple workers compensation claims.

Practices Designed to Deter Employee Fraud

Explain the rules up-front. Make workers compensation a part of any orientation program just as you would any other benefit. First, explain your safety policies and your expectation that these will be followed diligently. Then explain what will happen should an injury occur. Explain their responsibility to report promptly all work-related injuries, how the benefit program works, and discuss any return-to-work program. At the same time, note that fraud is a felony and will be aggressively prosecuted.

Stay connected. If an employee is out for more than a few days for an injury or illness, make personal contact and stay in good communication. Be supportive and let the employee know you value them and want them back on the team. Establish goals for return to work.

Investigate every work-related injury. It is important to know what happened so that any future similar accident can be prevented. Emphasize that the investigation is being conducted, not to establish blame, but rather to establish the facts surrounding the event and learn how to keep other workers safe.

But the single best advice for preventing fraud — Be an employer who earns and maintains the respect of his/her employees.

Employer Fraud
Employer fraud occurs when the employer knowingly misrepresents the truth in order to avoid, deny, or obtain compensation on behalf of employees, or knowingly lies about entitlement to benefits to discourage an injured employee from pursuing a legitimate claim, or falsifies policy-related information. Another form of employer fraud involves the employer who alleges to have purchased insurance coverage but in fact has taken no such action. This may entail the employer falsifying the Proof of Insurance and posting notice to employees indicating that insurance coverage is in force.

But failure to obtain insurance is not the only way for employers to cheat the system. One of the growing areas of concern is the effort by employers to designate certain employees as independent contractors so as to remove those workers from the employer’s responsibility to provide workers compensation coverage.

(1) Underreporting of Payroll
The most obvious form is that of concealing payroll from consideration in the determination of insurance premium. For purposes of determining an employers’ workers compensation premium, the system relies upon the employer reporting fully the amount of wages paid. This reporting of payroll is not done on an individual employee basis but rather the cumulative wages of all employees by classification of employment.

The employer may submit financial statements that reflect only a portion of the actual payroll or may provide an estimate of payroll that is knowingly understated. While this form of fraud is often detected at the time of payroll audit, it is not unusual for the delay factor to result in inadequate premiums paid by the employer for a couple of years.

(2) Misclassification of Payroll
An associated form of employer fraud involves the misclassification of payroll. Where the employer has workers engaged in more hazardous occupations — and those occupations carry a higher rate per hundred dollars of payroll — there is the potential to manipulate the system in this fashion.

Example – To insure a roofer, the employer may have to pay $90 in workers compensation premium for every $100 in payroll. But to obtain coverage for a clerical person working for that same employer, the rate is only a few cents per $100 of payroll.

For the dishonest employer, the solution is obvious — classify the roofer as a clerical person. That person’s cost, instead of adding substantially to the employer’s workers compensation premium, would increase it only slightly. But, if the “fake” clerk falls off the roof, the insurer is still responsible for all of the bills associated with the medical care and income replacement benefits.

The above action delays proper payment of premium until audit, which can be considered an interest-free loan to the fraudulent employer. The employer doesn’t pay the right premium, and many months or years later the fraudulent premium reports are uncovered on audit.

Medical fraud, attorney fraud, and so-called “fraudulent mills” are topics for another article, but it’s clear the costs are in the hundreds of millions.

Ways to Prevent Workers Compensation Fraud Checklist

Have in place a clear and concise written policy statement about the importance of promptly reporting all accidents.
Require prompt reporting of claims and convey that report immediately.
Reenact accidents to determine what happened and how the hazard can be avoided in the future.
Have a supervisor accompany the injured worker to the medical provider, with the employee’s permission.
As an employer, remain in contact with the medical provider and injured worker to discuss return-to-work options.

Determine whether any workers are deemed to be independent contractors.
Review all renewal applications to determine if current payroll reported is consistent with business.
Review all renewal applications to identify any substantial changes in employee classifications.
Scrutinize all medical and vendor billing to ensure that the services rendered are required.
Be alert for multiple claims of the same or similar nature coming through a particular medical facility and/or firm of attorneys.

Concluding Observations

Workers compensation fraud is a serious offense and is not a victimless crime. All consumers ultimately pay the price of fraud in the workers compensation system.
In these difficult economic times, be diligent in efforts to identify and prosecute cases of fraud.

This article is reprinted from AMCOMP Views, 1st Quarter 2009, with permission from the American Society of Workers Comp Professionals.