New state anti-fraud law may be reducing workers' comp claims.

Early reports that statewide workers' compensation claims may have decreased in 1992, after increasing for several successive years, are offering some hope that California's fledgling anti-fraud efforts are working, said local insurance industry sources.

A sweeping anti-fraud law that went into effect in January 1992 provided new funds earmarked for investigating and prosecuting workers' comp fraud. The new law also designated a number of workers' comp crimes as felonies and required insurance companies to report suspected cases of workers' comp fraud.

Although the California Department of Industrial Relations has not yet finished tabulating statewide workers' comp claim statistics for 1992, the Los Angeles Times recently reported that figures released by three of the state's five major workers' comp insurers suggest that workers' comp claims fell as much as 30 percent in the fourth quarter of 1992 and by about 18 percent for the year.

The expected drop was partially attributed to improved safety conditions on the job, illegal under-reporting of injury claims by employers looking to save money and to injured workers not filing claims because they fear reprisal from their bosses. But the expected decline in workers' comp claims was primarily attributed to the state's new anti-fraud efforts.

"Until January 1992, there was really no incentive for insurance companies to tackle workers' comp fraud," said Elena Stern, a spokeswoman for Insurance Commissioner John Garamendi.

Insurance companies always had the "padding" to cover fraud because 32.8 percent of premium dollars were going toward expenditures, such as overhead, and there was always money left over, Stern said.

Fraud accounts for at least $1 billion in annual costs to the workers' comp system, with most of that fraud concentrated in L.A. County, said Stern.

By most industry observers' accounts, fraud has been a largely ignored problem even though it's crippling the workers' compensation system, causing premiums to skyrocket and businesses to flee the state.

The biggest examples of workers' comp fraud can be found in the "medical mills," according to local law enforcement officials. These "mills" involve highly organized efforts to convince workers to file dubious claims. These workers are often personally recruited directly from unemployment lines, or through the use of late-night advertisements urging them to call a toll-free 800 number.

Recruits are then taken to clinics for expensive evaluations and treatments, which are then billed to the employers and paid through the employers' workers' comp insurance.

To date, the state's stepped-up efforts have failed to yield a single conviction of a major medical mill ring. But a number of arrests have been made, and insurance companies are becoming more aggressive about challenging bogus claims, said industry observers.

Jerry Treadway, regional supervisor for the California Department of Insurance's Fraud Division, which oversees 10 counties in Southern California, said his unit is going after nine major fraud rings in Southern California. Most of those rings are either based in L.A. or have their origins in L.A., he said.

If the state succeeds in convicting ring participants of engaging in criminal kickbacks, illegal rebates, insurance fraud and grand theft, it will be seek "major prison sentences," Treadway said.

Statewide, the fraud division has made 26 arrests involving workers comp fraud, according to Treadway. Only one arrest was of a medical doctor, he said. The rest were mostly people who were unemployed or had "miscellaneous occupations."

Treadway said his department has suffered a spate of criticism for not making more headway in solving the problem.

But as of January 1992, he pointed out, the department only had eight investigators to "go after a problem festering for years."

The Los Angeles District Attorney's Office, which has also come under fire for its lack of progress in fighting workers' comp fraud, has succeeded in getting eight to 10 workers' comp fraud convictions, said Allen Field, head deputy district attorney for the D.A.'s Major Fraud Division.

Although initial funding for the anti-fraud measure known as SB 1218 was just $3 million, an additional $7 million will be pumped into the efforts in 1993.

With the new state funds, Treadway said his office will be able to add 34 investigators to combat workers' comp fraud, up from the 28 in place today. "By the time we get new people on board, we will have one of the best units to go after workers' comp fraud in the nation," he said.

The state money, which is equally divided between the Department of Insurance and the L.A. County District Attorney's Office, will also enable the local D.A.'s fraud unit to add six more prosecutors and eight investigators to its current staff of nine prosecutors and five investigators, said Field.

He quickly added, however, that those new positions might be in jeopardy if the Los Angeles County Board of Supervisors decides to cut back the number of prosecutors to help solve the county's budget crisis.

The stepped-up local and state efforts to crack down on workers' comp fraud also appears to be emboldening the private sector.

The state's fraud unit has been receiving 800 to 900 suspected workers' comp fraud per month, since January 1992, said Treadway. Most of the calls, he said, were from insurance companies.

By comparison, the state's fraud unit received only 527 such reports in the previous 13 years combined, he said.

The surge in cases now being investigated is largely due to the rigorous involvement of insurance companies, said industry observers.

Glendale-based Fremont Compensation Insurance Co., one of the largest private workers' comp insurance companies in the state, with $400 million in annual premiums, is running a 600-billboard anti-fraud advertising campaign. The billboards, posted throughout the state, feature three tattoo-covered thugs in a jail cell with the slogan: "Workers' comp fraud stops here."

Hank Krizl, senior vice president for Fremont's claim department, said Fremont set up a fraud unit in December 1991, headed by a former member of the Glendale Sheriff's Department and staffed with four retired Los Angeles Police Department investigators.

Fremont's efforts so far, he said, have resulted in 18 arrests and five convictions.

He said Fremont has reported 980 suspected fraud cases to the California Department of Insurance, 80 of which are completely investigated and ready for arrests.

Laura Henson, who heads up the special Southern California investigative unit for Argonaut Insurance Co., a Menlo Park-based workers comp insurance company with $300 million in premiums, said her unit saved the company $147,000 last year by challenging bogus billings.

She said a couple hundred more billings are waiting to be challenged before the Workers' Compensation Appeals Board -- the state panel that hears disputes on workers' comp claims -- and 70 cases have been submitted to the L.A. County District Attorney's Office for prosecution.

With state and local law enforcement agencies increasingly overwhelmed by the vast number of workers' comp fraud cases, insurance companies must take it upon themselves to make a dent in fraud, Henson asserted.

Although Argonaut has had some success in challenging bogus bills, she said fraud will continue until some major convictions are handed down.