Cheap tricks.

In May of 1992, Christi Norton was 17 years old and excited to be working at her first job ever. Although it was hot, dirty, and sometimes dangerous work on the dairy farm she was employed at in rural Modesto, Calif., she cheerfully helped out the rest of the farm hands with anything that needed to be done. It was in May of 1992 that the accident happened. It was a freak accident that didn't seem too serious at first. Norton was knocked in the chest by a steer which bruised her lungs and was airlifted to the local hospital. But two weeks later, one of her bruised lungs collapsed, cutting off oxygen to her brain. Those precious few minutes in which her brain was starved of oxygen left her in a vegetative state ma state she will remain in for the rest of her life. "The medical term is anoxic. Severe anoxic and encepholopathy with spasdic quadriplegia and severe cognitive deficit," says her mother, Sherri Atkins. "In real life, it means that ... she has no awareness, no movement on her own. She's totally incapacitated."

After the accident, Sherri Atkins and her husband, Allen, were consumed with taking care of their daughter, which quickly became a 24-hour job. But in addition to taking a crash course in health care, they also got a harsh lesson in workers compensation insurance. Because although Christi's employer, contractor Michael Bennett, was required by state law to carry workers comp insurance policies for his employees, he had neglected to purchase any insurance policies.

Officially, what Bennett did is called premium fraud. It can involve employers who buy no workers comp insurance policies and, therefore, pay no workers comp insurance premiums at all, or it can involve employers who buy policies but lower the cost of their premiums in fraudulent ways. Prosecutors and insurance fraud specialists say that this is the next big thing in workers comp fraud.

When you think of workers comp scams, you probably think of what we've all seen thanks to the hidden cameras of insurance company investigators and newsmagazines--malingering employees who continue to collect checks for sprained backs that healed months or even years ago. We've all seen the footage of men and women, supposedly out on medical leave, as they play golf or work at another job, usually one that requires heavy lifting. This is called claimant fraud. Or you may think of the doctors who, for a cut of the workers comp claim settlement, will conduct only cursory medical exams of the malingering employees. These doctors will then say that the employees need to receive medical care (and benefit checks) for far longer than is necessary. This is called provider fraud. Both claimant fraud and provider fraud helped inflate the cost of workers comp insurance premiums in the late 1980s and early 1990s, says insurance fraud expert Dennis Jay.

These expanded costs helped trigger the new wave of premium fraud. "The damage one employer can do is much bigger than what one claimant can do," says Don Elisburg of the National Council on Compensation Insurance. "The stuff that has sex appeal, the visuals, is the fraud done by claimants. But the big dollars come from the fraud done on the employer's end"

Few states have quantified how much they lose every year to premium fraud, but the Los Angeles County district attorney's office, which has recently made prosecuting these kinds of fraud cases a priority, estimates that California residents lose about $240 million every year to premium fraud. Los Angeles Deputy District Attorney Barry Gale, now assigned to prosecute premium fraud cases full-time, says he had one overriding thought when he took the assignment and saw his cases pile up: "My God, look at all this money!" And California isn't the only state paying a high price for premium fraud. "There's no state that's immune to it," says Dennis Jay of the Coalition Against Insurance Fraud. "And there's at least half a dozen states with problems as bad as California's"

Sherri and Allen Atkins found out just how bad California's problems are. After Christi's accident, expenses were running $10,000 a day, says Allen, and his own insurance policy capped the amount of money available for Christi's care. Christi soon exceeded that cap and the family spent everything else they had on her mounting medical bills while wondering how they were going to continue to care for Christi at home. They envisioned having to put Christi into a state facility, which, they feared, would just monitor her body functions until she died.

Before Christi's accident, the Atkins had no idea their daughter was not covered by a workers comp insurance policy. But even if families don't know that employers can neglect to take out workers comp policies for their employees, states--which often sell workers comp insurance themselves--know and prepare for it. California, for example, has set up a special fund for people in the Atkins' situation. This $23 million taxpayer-financed reserve fund, called appropriately enough the Uninsured Employers Fund and administered by the state's Department of Industrial Relations, pays the medical bills of employees whose employers did not take out workers comp policies on their behalf. That's the theory. In reality, once Sherri and Allen Atkins found out that the fund even existed, they then had to go to court to prove that Michael Bennett was Christi's so-called employer of record and that it had been his responsibility to provide Christi with workers comp insurance. Their litigation would have been unnecessary if Christi had been covered in the first place because workers comp is a "no-fault" system, meaning that employees do not have to sue their employers in order to get their medical and disability benefits.

The courts eventually found that Bennett was indeed Christi's employer of record, that he should have purchased a workers comp policy for her, and that because he neglected to do so he was therefore liable for her medical expenses. But Bennett then turned around and declared bankruptcy, once again putting the financial burden of Christi's care on the taxpayers of California. The irony should be apparent: Because employers like Christi's refuse to spend just hundreds of dollars a year on a workers comp insurance policy, taxpayers end up spending millions of dollars a year on their employees' medical bills.

Risky Businesses

The Atkins are saddened that taxpayers have had to pay Christi's medical bills. "We find out that [Bennett] didn't have workman's comp and then what do you do? I mean we're not talking about a few hundred dollars a month. We're talking about thousands of dollars a month," says Sherri Atkins. "No family that I know of could assume that responsibility. We wish it wasn't like that but when they don't have workman's comp, what other ways do you have?" It's a raw deal for everyone. It's a raw deal for employees, who often have to litigate for benefits that should have come to them automatically. They are then faced with delaying treatment or skipping it altogether if they can't come up with the money needed to pay their medical bills while their case winds its way through the courts. It's also a raw deal for taxpayers, who may be forced to pay the medical bills that should have been covered by a workers comp insurance pool if an employer can't pay up even after the courts say he must. And it's a raw deal for honest businesses that are forced to pay more for their own workers comp insurance policies because dishonest businesses pay less. But there are many more consequences to this kind of fraud, many more ways for employers to cheat the system, and many things that could be done to crack down on these crooked companies--but aren't.

Employers commit premium fraud in a variety of ways. They may refuse to buy workers comp insurance at all or they may try to lower their premiums in fraudulent ways. Workers comp insurance premium rates are based on an employer's total payroll amount, the classification of his employees (which is based on how risky their jobs are), and the employer's accident record (much as your car insurance premiums are based partly on your driving record). As you might expect, companies with high-risk jobs and frequent accidents, like construction companies, pay the highest premiums and, subsequently, have the highest incidences of premium fraud. To lower their premiums, companies will underreport the number of employees they have on the payroll or they will underreport the wages they pay their employees. Some employers will pay employees in cash to get them off the books or they create affiliated companies on paper and use these fictitious companies to "hide" their employees. Or, at the start of a fiscal year, employers may purposefully underestimate the number of employees they plan to hire and what they will pay them in the upcoming year. If they are audited at the end of the year by their insurance carrier, the employer will often then pay the proper premiums. But in the meantime, the employer has received a low-interest loan for the year thanks to their reduced premium costs. If an insurance carrier drops an employer for scamming them this way--no problem. The employer can just get coverage through another carrier. Since insurance carriers don't usually share information about current or prior policy holders with other carriers, a shady employer can switch carriers many times, perpetrating this same scam over and over again.

Crooked employers will also misclassify workers in order to reduce premium costs. Because premiums are based in part on the danger level of a job, telling the state that a construction worker is a clerical worker can save an employer a lot of money. When Florida state prosecutors convened a grand jury in order to investigate premium fraud, they heard stories about roofers who had been classified by their employer as secretaries. This meant that the employer--who should have been paying $80 per $100 of payroll for his workers comp insurance premiums--was paying 89 cents per $100. Other crooked employers will classify their employees as independent contractors because states do not require employers to buy workers comp insurance for these kinds of employees. Finally, employers will also lie about their past workers comp claims. They may do this by lying outright on their insurance policy application or, once again, they may create a fictitious company on paper in order to hide past claims.

There isn't a person left untouched by this kind of insurance fraud. First of all, if employers even bothered to buy insurance at all, they have ripped-off their insurance carrier. Employers can usually buy workers comp insurance policies from two different sources--from a private insurance company or directly from the state they do business in. In order to compensate for crooked employers who pay too little into this insurance pool, insurance carriers will charge their customers a little extra to ensure that there will be adequate reserves for the inevitable worksite accidents. Honest employers pick up those additional costs in the form of higher premiums. But they then turn around and pass those additional costs on to you, charging more for whatever goods and services they provide to consumers. "It's like a hidden tax on everything you buy," says Los Angeles Deputy District Attorney Barry Gale.

But even if honest employers are able to pass along the costs of their higher premiums, that doesn't mean they aren't adversely affected by premium fraud. For example, honest construction companies lose out on projects to premium fraud-committing companies because they are underbid by these crooked companies, which have lower overhead costs thanks to their lower premium costs. If they get underbid enough, honest businesses will either go out of business or leave the state. "If you're an honest business in any state, you're getting screwed," says Dennis Jay. The Los Angeles district attorney's office estimates that California loses 20,000 jobs a year due to business that pack up and leave after losing one project too many. And employers that cheat on their insurance premiums also tend to cheat on other aspects of the job--the wages they pay employees, the taxes they pay the state, the unemployment insurance fund they're supposed to pay into, even the raw materials they use for their construction work. "They're shoddy companies," says Barry Gale. "They cut corners everywhere"

Of course, all this is in addition to the hit that taxpayers take by picking up the costs of the medical bills that would have been covered by the insurance pool had an employer obeyed state law and bought workers comp insurance in the first place. Even an aggressive state like California, which, through the Uninsured Employers Fund, sues negligent employers in order to get them to pay these medical bills, has a hard time making employers pay up. In fact, the administrators of the Uninsured Employers Fund admit they only get about 15 percent of the crooked employers they sue to reimburse state taxpayers. Of course, they have their work cut out for them given that one-third of all businesses in California don't have workers comp insurance, according to estimates from the Los Angeles district attorney's office. Other states don't even bother to sue and instead levy a tax on the insurance policies they sell to businesses in order to have a reserve fund. (Private insurance carriers do much the same thing for the same reason.) This reserve fund serves the same purpose as California's Uninsured Employers Fund: It covers the medical bills of employees working for uninsured employers or employers who have skimped on their insurance coverage. But, once again, the tax levied on businesses to fill up this reserve fund is passed along as far as it can go--which means on to you. Of course, the biggest victims are the employees who don't know that they aren't covered by a workers comp insurance policy until they need the benefits.

So if the problem is so big and the dollar amount lost so huge, why isn't more being done about it? Barry Gale would love to prosecute more cases, but he is only allowed to prosecute the cases in which an employer fraudulently lowered his insurance premiums, not the cases in which an employer neglected to buy insurance at all. Why? Because he is only allowed to prosecute workers comp felonies--and not buying workers comp insurance at all is only considered a misdemeanor in California. A grand jury convened in Florida last year to investigate premium fraud found much the same thing. "[E]mployers who buy no insurance at all are rarely, if ever, referred for prosecution, and generally face minimal civil penalties," the report noted. "The irony is that as things stand now, employers who buy no insurance face significantly less punishment than employers who buy some insurance" The grand jury also said that this inequity could make a bad system worse: 'As more and more businesses stop paying insurance, the rates will be driven up even further for those remaining legitimate businesses, thereby increasing the pressure on them to also stop buying insurance so that they may survive"

But no matter what state you live in, it's the complicated nature of premium fraud that stymies investigations and prosecutions. In order to find premium fraud, you need investigators who can decipher articles of incorporation, government employment statistics, and complex classification codes. "You need forensic accountants to go in and figure out what happened," says Dennis Jay. Or a bookkeeper who blows the whistle, which is how many investigations begin. Jay also notes that many state workers comp agencies often aren't set up to root out fraud because the workers comp judicial structure is focused on administering benefits, not doling out criminal justice.

States of Confusion

To make matter worse, states often have multiple agencies and departments that oversee different parts of the workers comp system. This split or overlapping authority can ensure that no one agency sees the big picture or notices when an employer has started to scam the system. Insurance companies, on the other hand, often have special investigation units specifically detailed to look for fraud, which, in theory, could help states track down premium fraud cases. But insurance companies don't have access to the very state records that would help them make their cases, namely state payroll records. Employers that commit premium fraud have lied on their workers comp insurance applications, which are usually submitted to private insurance companies. On the other hand, these employers often don't lie on their actual payroll records, which are submitted to the state. They don't lie on these records for two reasons. One--lying on state payroll records carries a much higher penalty then lying on insurance applications. (In fact, there are no penalties levied by insurance companies, says Jay. If caught, an employer only has to pay back what he should have paid during the year in premium costs, which turns the money saved during the year into a low-interest loan.) Two--they don't lie because they don't have to; their insurance carrier will never be allowed to see those records.

But it's not just the complicated nature of premium fraud that stops states from rooting out this kind of fraud. States are often their own worst enemy. In its report, the Florida grand jury found that lax enforcement and miniscule fines by the agencies in charge of the workers comp system was partly to blame. The message sent by Florida is that fraud will be tolerated if you stay and do business in this state. "We have found that when a penalty is issued, it is invariably $1,000 for first time offenders, no matter how large the payroll, how egregious the violation, or the amount of premium dollars stolen," the report said. In fact, of the 2,862 penalties given out by the state between 1996 and 1997, only 12 were for more than $1,000. Another irony emerges here. In an attempt to keep businesses in the state, premium fraud is tolerated, which, in turn, raises the premium rates of honest businesses, which, in turn, drives them out of the state.

In the meantime, protect yourself. Ask your employer if he has taken out a workers comp insurance policy in your name. If you have a contractor or subcontractor working on a project for you, make sure their workers comp insurance is paid up. Because if a worker gets hurt, you might be liable for their medical expenses. Of course, as a taxpayer and a consumer, you'll be paying for premium fraud until the states get serious about stopping it.

Rebekah Young is associate producer of ABC's "World News Tonight."