Prosecutors target 'mills' in workers' comp crackdown.

After launching a crackdown last year on employers who skirt paying workers' compensation premiums, local prosecutors are going after networks of doctors and lawyers widely believed to generate a major portion of fraudulent workers' comp claims.

But limited resources on the part of both the L.A. County District Attorney's office and insurance companies' anti-fraud units could hamper progress in the overall battle.

"We realize (prosecutors) are doing everything they can with the resources they have available. But you could double the resources and still have a lot of fraud out there," said Laura Clifford, executive director of the Southern California Employers Fraud Task Force, a coalition of employers, insurers, law enforcement officials, doctors and lawyers.

Late last week, county prosecutors were preparing to file their first case against one of the alleged "medical-legal mills" suspected of generating fraudulent or inflated claims.

"We want to break the vicious cycle of employees being recruited to file claims by these mills, running up all sorts of unnecessary charges on those claims and then using those employees to rope in even more people," said John Portillo, deputy district attorney for the workers' compensation fraud division.

Portillo took over the workers' comp unit in April after Tom Higgins, who headed the operation for the past two years, was transferred to the Central Complaints division.

Higgins unsuccessfully challenged District Attorney Steve Cooley in the March primary and claims that the move was politically motivated. Cooley denied that political retaliation played any role. "It was a routine transfer, one of more than 1,200 I have made since I took office," he said.

Portillo, who headed the District Attorney's Antelope Valley office for the past three years, has not previously handled workers' compensation fraud. Even so, perhaps a bigger factor in the unit's results could be belt-tightening, and resulting staffing levels.

The workers' comp unit is funded primarily through a surcharge levied on employers' insurance premiums, so it has escaped the county budget ax so far. For the current fiscal year, the Los Angeles District Attorney's share of that surcharge is $4.5 million, enough to fund 10 investigators, 10 prosecutors and seven support staff workers.

Cooley said he intends to put in for an identical $4.5 million for the 2004-05 fiscal year to keep staffing at the same levels.

But, there's a catch. Because of a District Attorney's Office hiring freeze that's been in effect since 2002, any vacancies due to attrition can only be filled through internal transfers. What's more, County Administrative Officer David Janssen's proposed 2004-05 budget calls for the elimination of 23 deputy district attorney positions.

"We are rapidly reaching the point where we are going to have to choose between pulling more deputies from the violent crime side to fulfill our grant obligations or turn away grant dollars for these specialized efforts," said Deputy District Attorney Richard Doyle, director of the fraud and integrity units.

Staff erosion

The workers' comp fraud unit has seen staffing levels erode over the past decade. In the mid-1990s, the unit was more than double its current size.

Cooley stressed that the unit was part of his office's "core mission" and he had no plans to turn away grant dollars or reduce staff- at least for next year.

But, he said, "if the budget cuts go deeper than we expect, there could be some impact. Also, with the budget situation so fluid from year to year, there's no guarantee we won't turn away some more grant monies next year."

Any staff cuts are likely to hamper the unit's ability to file and pursue cases, and could reverse the recent upward trend in case filings, Portillo said.

In 2001, prosecutors filed charges in 23 cases of workers' compensation fraud. That increased to 36 in 2002 and 48 in 2003. On average, more than 90 percent of these cases result in convictions or plea deals, Doyle said.

Tip of iceberg

Clifford said only l0 percent of the fraud cases fit the common perception of workers faking or exaggerating injuries. The rest comes either from employers trying to evade premium payments or from the medical-legal mills.

Going after these mills poses a challenge. They recruit plaintiffs to file claims, then refer the patients to affiliated doctors who rack up tens of thousands of dollars in medical tests. The lawyers, meanwhile, try to get settlements out of insurance companies for the claims.

In the mid-1990s, there was a statewide crackdown on workers' comp mills, and many fled the state or become more sophisticated in their tactics. Also, they branched into other lines of insurance, such as auto or Medi-Cal claims. "Some of these mills changed their names, but they never went away," Clifford said.

Prosecutors rely on the use of Internal Revenue Service files, although Doyle refused to elaborate on the unit's level of collaboration with the IRS. "Often, tax evasion is easier to prove than constructing this complicated paper trail," Doyle said. "Then we can go after them on the workers' comp."

While the efforts are expected to make a significant dent in the fraud problem, some in the industry believe that far more could be done if insurers would fight fraud more aggressively.

In the early 1990s, insurance companies were required to set up their own investigation units and forward fraud cases to district attorneys for prosecutions. But in the price-cutting wars unleashed by deregulation later in the decade, insurers generally cut their fraud units. There was little pressure from employers to beef them back up because premiums were falling.

By the time premiums headed back up, many insurance companies were in severe financial trouble, so anti-fraud units continued to languish.

"Insurance companies are charging all-time record premiums and they are not going after fraudulent claims," said Nick Roxborough, an attorney who represents employers. "So even if the DA's are adequately funded, there aren't enough cases coming through the pipeline."

Roxborough said after an insurance carrier refused to investigate a recent case, one of his clients took photos to prove that an employee was lying about an injury.

"Even then, the employer had to go way up the chain of command in the insurance company before they would agree to cover the cost of the surveillance," Roxborough said.

Forcing insurers to pursue fraud cases more aggressively is the responsibility of state Insurance Commissioner John Garamendi. But he's not doing enough, said Stanley Zax, chairman and chief executive of Woodland Hills-based Zenith Insurance Co.

"The business community is being assessed for the fraud fight, but I'm not aware of any crackdown on workers' compensation fraud from the state," Zax said.

Garamendi did not return calls.