Who is defrauding workers' comp?

Exaggerations by insurers and employers perpetuate the myth that workers are the only ones committing fraud.

The insurance industry and corporate America have waged a media campaign to convince the public that claimants--not insurers or employers--are responsible for most insurance fraud. Insurers and the corporate sector are especially targeting injured workers as guilty parties because annual benefits paid in this area amount to billions of dollars.(1)

Insurers and corporate leaders have also sought to persuade legislators that the government should join the effort to curb claimant insurance fraud. Many states have commissioned special insurance fraud task forces to help catch and prosecute these offenders.

In Pennsylvania, for example, the insurance industry grants money to state attorneys general and local prosecutors to fund their insurance fraud investigations and prosecutions. These funds, administered by the Pennsylvania Insurance Fraud Task Force, are also used to buy billboard space and radio and television airtime for commercials that lead viewers to believe all workers' compensation benefits recipients are somehow defrauding their employers.

However, what these task forces, insurers, and corporations have failed to publicize is that fraud committed by employers and insurers has cost the insurance industry more money than worker fraud.(2) For example, a U.S. attorney in Massachusetts has estimated that "premium revenues of $100 million per year are lost because employers cheat on their workers' compensation insurance."(3) In Missouri, a claims adjuster for a large insurance carrier was convicted of defrauding an injured worker and settling the claim for far less than full value by hiding the results of an independent medical examination.(4)

This article details some of the ways employers and insurers commit workers' compensation fraud.

Premium fraud

Workers' compensation premiums for a company are usually determined by three factors: accident records; numbers of employees; and job classifications, which rate the risk of a specific job.(5) Premium fraud occurs when an employer attempts to manipulate one or all of these factors to lower premium costs.

This type of fraud is big business. A report prepared by the Labor Research Association noted the work of Jerry Stewart, the bureau chief of workers' compensation/law enforcement operations at the Division of Insurance Fraud in Florida. Stewart said.

   Historically, there has been a common presumption that those committing the
   most costly type of workers' compensation fraud have been claimants whose
   actions, such as double-dipping or claims for false injuries, drove up the
   cost for workers' compensation. While claims fraud is a significant problem
   in Florida, ... it pales in comparison with the occult type of fraud known
   as "premium fraud," where loss estimates now range around $400 million.(6)

Stewart further stated that these "premium fraud scams are costly to companies in Florida, causing workers' compensation insurance rates to escalate and legitimate companies to lose business because they are less able to compete with companies shirking the system."(7)

The following case studies, which are based on composites of typical employer- or insurer-fraud scenarios, examine the practices of cost-shifting, which is one of the most common forms of premium fraud; misclassifying workers; and withholding medical records.

George's cost-shifting story. George was feeling good about life. In seven years, he and his wife would enjoy a long-awaited mortgage-burning party. It appeared they had also saved enough money to pay for their three children's college educations, and he felt confident he would soon be the foreman at the company where he had worked for 10 years. Unfortunately, George's life was about to be shattered.

While helping a coworker move a 55-gallon drum, George felt a pop in his lower back. As he straightened up, pain radiated into his legs, but he thought he could shake it off and he continued to work. Before going home at the end of the day, George told his supervisor that he thought he had sprained his back. The supervisor advised him not to say anything to anyone about the incidental because the company did not look kindly on work-related injuries.

George worked in pain for the rest of the week but finally decided to go to the company nurse. After he told the nurse how he injured his back, she advised him against reporting the incident as work-related, saying such information would hurt the company's workers' compensation premiums. She suggested that by leaving out the origin of his injury on his medical claim form, George's health insurer would pay his benefits more promptly. And she said his employer would appreciate his loyalty.

When George told his doctor he was not certain how he injured his back, the doctor began conservative treatments. The company nurse arranged for light-duty work so George could rest his back. He was satisfied, feeling that the company was looking out for him.

About a month later, George underwent an MRI, and his worst fears were realized. The test revealed a large herniated disk at the L4-L5 level. He was immediately sent to an orthopedic surgeon, who suggested surgery.

George relayed the information to his supervisor, who said the company could arrange for him to be laid off long enough that he could collect unemployment compensation benefits. George's supervisor also said that his job would always be open to him.

George began having misgivings about not reporting his injury as work-related and spoke to his foreman about his fears. He was advised that if he ever wanted to be a foreman with the company, he had better not make waves.

After undergoing back surgery and 13 weeks of aggressive physical therapy, George re-applied for his position. He was told his job had been filled. When George consulted a lawyer, he was told his workers' compensation claim could be barred because he failed to timely report his injury to his employer. In fact, his company successfully argued just that.

A short while later, George's former employer told him if he wanted health insurance he would have to get it under the federally mandated Consolidated Omnibus Budget Reconciliation Act (COBRA), which meant he would be responsible for paying the premiums. Because George had no job, he could not afford the premiums, and he and his family were left uninsured.

George now need back surgery again and is trying to get medical assistance to pay for it. The Department of Public Welfare placed a lien on his property, and he and his family have been forces to live on welfare benefits.

Unfortunately, there us no happy ending to George's story, he like tens of thousands of workers before him, fell victim to a scheme called cost-shifting. It occurs daily in workplaces across America. The burden of paying legitimate medical claims is shifted away from the employer to health insurance companies, unemployment insurance policies, extended disability plans, or state and federal assistance programs.

The sole purpose of cost-shifting is to save claims dollars for insurance companies and premiums for employers. Each of us pays for this fraud in the forms of higher health insurance premiums, unemployment taxes, and increased costs for extended disability insurance programs and government welfare benefits.

Bill's misclassification story. When Bill got his job at the XYZ Roofing & Siding Co., he had been out of work for three months. He was married with a small child and was thrilled to have steady employment, even though he would be responsible for his own health insurance costs. Unfortunately, bill never thought to ask what would happen to him if he were injured on the job.

On his first day, Bill fell from a residential customer's roof, fracturing his spine and rendering him a paraplegic. The XYZ Roofing & Siding Co. denied his legitimate claim for workers' compensation benefits on the ground that he was an independent contractor, not an XYZ employee.

It took Bill one and a half years and several meetings to convince a workers' compensation hearing officer that, in fact, he was an employee of the company and was entitled to the benefits he sought. During that time, the Department of Public Welfare supported Bill and his family. Bill is one of many victims of fraud perpetrated by an employer denying an employment relationship with the worker.

Several states have aggressively investigated employer fraud. In Massachusetts, one of the largest workers' compensation fraud cases in 1997 was resolved earlier this year. An employer reduced the insurance premiums for his rubbish collection workers, in part by classifying them as clerical workers.(8)

The employer, who was able to conceal nearly $1 million in payroll expenses from insurance auditors, pleaded guilty to fraud and conspiracy and was ordered to pay a $250,000 fine and nearly $480,000 in restitution to insurers. He was also sentenced to two years' probation.(9)

Antonio's misclassification story. Antonio's story differs somewhat from Bill's in that Bill's employer tried to dodge its workers' compensation responsibility altogether. Antonio's employer offered him insurance, but it failed to meet the coverage standards required in a true employer/ employee relationship such as theirs.

Antonio was thrilled when he was hired as a driver for a nationally recognized trucking company. He would earn far more than he was making as a factory worker, would wear a "Pleasant Package Express" uniform, and would drive his company-supplied truck along a regular route, delivering packages to customers each day.

His instructions were to load the truck under the direction of a company supervisor at the package delivery warehouse, make the deliveries, and then return the empty truck to the warehouse. After several weeks of work, Antonio was involved in a collision.

When he applied for workers' compensation benefits, he was advised that he was an independent contractor, not a company employee, and that his medical expenses were covered under the company's special benefits plan, called an independent contractor compensation program. He and his attorney discovered that this program offered far fewer benefits than he would have received under workers' compensation. Antonio filed for workers' compensation benefits and is still waiting to learn the outcome from a judge.

Misclassifying workers is an increasingly prevalent form of workers' compensation employers fraud. Some states, such as Florida, are aggressively dealing with the problem.

There, the state prosecutor impaneled a statewide grand jury to hear complex insurance fraud cases.(10) In late 1997, 11 employers were charged with racketeering and other fraudulent schemes involving $7.5 million in workers' compensation premium fraud looses.(11)

Getting at the truth

The Labor Research Association noted that a Texas workers' compensation study found that insurance carriers spend more money investigating injured worker benefit fraud than any other type of workers' compensation fraud.

   In 1996, Texas insurance carriers spent an average $1,257 per claimant
   fraud investigation, compared with $991 per employer premium fraud
   investigation and $823 per health care provider fraud investigation. In
   1996, the 19 insurers studied spent over $5.5 million investigating
   workers' compensation fraud in Texas, yet recovered a total of $1,520,179.
   Of the 4,077 cases of claimant fraud that the carriers investigated, only
   18 were referred for criminal prosecution.(12)

The researchers concluded that "more resources should spent fighting the most expensive and overlooked types of workers' compensation fraud: employer premium and health care provider fraud."(13)

Unfortunately, insurance industry propaganda and exaggerated reports by some news outlets would have the public believe that fraud in workers' compensation is committed exclusively by injured workers. For example, a Raleigh, North Carolina, television station, WRAL-TV, produced a special report on workers' compensation fraud, estimating that 25 percent of all claims are fraudulent.(14)

Bernadine Ballance of the North Carolina Industrial Commission disputed WRAL-TV's claims at ATLA's 1998 Annual Convention. Ballance said, "Assuming that 25 percent of all North Carolina's workers' compensation claims are fraudulent and that, in the 1996-97 fiscal year, 74,303 claims were filed, that would mean that 18,575.75 claims were fraudulent."(15)

She noted that in 1997, the Industrial Commission received 303 reports of suspected fraud. Therefore, "assuming that fraud is substantiated in each of these cases, that would only amount to 0.04 percent."(16) Ballance concluded "that there is no basis for estimating workers' compensation fraud at 25 percent in North Carolina. The more accurate estimate is probably less than 1 percent, and this is just an arbitrary guess, like most of the estimates that have been widely quoted nationally."(17)

Insurer fraud

In addition to employer fraud, fraud committed by insurers is also prevalent. Like employer fraud, insurer fraud is both underreported and underinvestigated. Insurance companies have the time and resources to investigate claimant fraud and, to a lesser extent, employer fraud. For insurers who do not have adequate staff resources, outside investigators are often hired to uncover fraud.

Conversely, few claimants have the knowledge or financial wherewithal to expose insurer fraud. They must rely on the federal and state government to investigate, expose, and punish fraud.

Alice's insurer fraud story. Alice, a seamstress for a dress manufacturing company, experienced excruciating back pain while she was lifting a large bundle of material. The pain quickly intensified and sent shock waves down her leg.

When she complained, her supervisor said her medical care would have to be managed by the Medical Work Center, a group of doctors selected by her employer. Having suffered a severe injury, Alice felt nervous about handing her treatment over to doctors she did not know or choose.

When she appeared at the physicians' office, the doctor spent a great deal of time asking her questions about her medical history and seemed more interested in determining whether she had had previous back injuries than he was in learning about the injury at hand.

After X-rays were taken, Alice was relieved when the doctor said the injury was not serious. As a precaution, the doctor sent her for an MRI and said he would call with the results. He also said she did not have to report to work until after the MRI was completed.

A week later, the company doctor referred her to a physical therapist in the Medical Work Center. The doctor assured Alice that moist heat and physical therapy would relieve her back symptoms.

Within a month, Alice was able to return to light-duty work with the dress manufacturing company. Although she still experienced symptoms, her physical therapy sessions were terminated, and the company doctor told her to see him on an as-needed basis. A short time later, Alice was laid off from her job due to an alleged downsizing by her employer.

She retained an attorney and learned that she could file a workers' compensation claim for her back problems. During the course of her case, the employer's doctor testified that Alice suffered a work-related back strain but that her injury had fully resolved at the time she was laid off from work. The doctor said that any symptoms she experienced afterward were due to a preexisting degenerative condition.

During discovery, Alice's lawyer noticed that the MRI report was not included in documents requested from the insurance company and the company doctor. The company doctor's chart did not contain the MRI report, nor did his chart notes discuss the results of the MRI.

Once it was obtained, the report showed a large herniated disk, which ultimately required surgical repair. An investigation revealed that the company doctor and insurance adjuster made a conscious effort to defraud Alice of her workers' compensation benefits.

Many lawyers handling workers' compensation claims across the country can share similar stories of claimants who have been denied their due benefits. In many states, the workers' compensation exclusive immunity provisions shield company doctors from a separate third-party lawsuit. Fortunately, in some jurisdictions, aggressive prosecutors have uncovered and prosecuted not only the doctors but the insurance adjusters who are responsible for this type of fraud.(18)

An Iowa jury awarded $2 million to an injured worker who sued his former employers for common law fraud when they attempted to undermine his workers' compensation claim. According to court papers, the employers falsely advised the worker's treating physician that surveillance tapes showed the claimant was a malingerer. The purpose of the phone call was to discourage the doctor from ordering an MRI, which, when it was performed, showed the claimant had suffered herniated disks that needed to be surgically repaired.(19)

Even defense counsel have been charged and convicted of fraud for withholding medical reports showing that an injured worker was totally disabled.(20) In California, two senior executives reportedly "covered up information that would have helped an injured worker but would have damaged her employer."(21)

These cases are just a few of the many examples of reported insurer fraud. There are probably many more cases that remain undetected.

Attorneys handling workers' compensation cases should become familiar with state officials who investigate and prosecute fraud and timely report known instances of fraud to these officials. Attorneys should also object strenuously when misleading reports of fraud appear in print or on television and radio.

When fraud task force investigators begin to aggressively target employers and insurers, true savings will be recognized by the premium payers. Until then, it is up to those of us who represent injured workers to carry the message forward that our clients are the true victims of workers' compensation fraud, not insurers and other corporations.

Notes

(1.) See Erik Schutz, Workers' Comp Fraud Has Many Sources, TOPEKA-CAP. J., Aug. 23, 1992, at D1 (estimating $60 billion in workers' compensation benefits was paid out nationwide in 1990. Kansas premiums paid in 1991 jumped 24 percent to $334.5 million a year, and rates jumped another 21.7 percent in 1992).

(2.) Mary Fricker, Employers, Insurers Commit Fraud by Lying, Denying Benefits, PRESS DEMOCRAT (Santa Rosa, Calif.), Dec. 7, 1997, at A5.

(3.) Haverhill City Councilor Sentenced to 18 Months in Prison for Insurance Fraud and Tax Scheme, Announces U.S. Attorney, PR NEWSWIRE, Dec. 7, 1995.

(4.) State v. Barnes, 942 S.W.2d 362 (Mo. 1997).

(5.) Stephen Blakely, Fighting Fraud in Workers' Comp, NATION'S BUS., Apr. 1998, at 14.

(6.) LABOR RESEARCH ASS'N, WORKERS' COMPENSATION FRAUD: THE REAL STORY 6-7 (1998) (citation omitted).

(7.) Id. at 7.

(8.) U.S. v. Vining, No. 97-CR-10323 (D. Mass. July 15, 1998).

(9.) U.S. Attorney, Boston, Mass., Andover Man Sentenced in Insurance Fraud Scheme, press release (July 15, 1998).

(10.) LABOR RESEARCH ASS'N, supra note 6, at 9.

(11). Id.

(12.) Id. at 8.

(13.) Id.

(14.) WRAL-TV News Special: Workers' Compensation Fraud (CBS television broadcast, Oct. 30, 1997).

(15.) Bernadine S. Ballance, Workers' Compensation Fraud: A North Carolina Perspective, in ATLA 1998 ANNUAL CONVENTION REFERENCE MATERIALS 989, 992.

(16.) Id.

(17.) Id.

(18.) See generally Barnes, 942 S.W.2d 362.

(19.) Wilson v. IBP, Inc., 558 N.W. 2d 132 (Iowa 1996).

(20.) Tim Bryant, Lawyer May Lose License for Ethics; First Charged Under Workers' Comp Law, ST. LOUIS POST-DISPATCH, Aug. 9, 1994, at 1B.

(21.) Fricker, supra note 2, at A5.

RELATED ARTICLE: ATLA section brings members together to fight workplace injustice

ATLA's Workers' Compensation and Workplace Injury Section strives to protect the rights of injured workers and make workplaces safer. To achieve this goal, the section sharpens attorneys' skills through presenting continuing legal education programs and sharing helpful information.

At the association's Annual Convention in Washington, D.C., last July, the section--over 600 members strong--sponsored an education program in conjunction with ATLA's National College of Advocacy. The program featured speakers on workers' compensation fraud, products liability in the workplace, and the Longshore and Harbor Workers' Compensation Act.

Section chair Steve Birnbaum of San Francisco said, "Attendance at the section's educational program at the Annual Convention was very good. We're expecting a similar turnout for the section program at the Annual Convention in San Francisco."

To promote the sharing of information, the section publishes two newsletters a year. It also serves as a clearing-house of information on new state legislation, insurance rate issues and data, and other research on trends and developments in the workers' compensation arena.

Section leaders encourage members to submit pleadings, briefs, depositions, and memoranda on workplace legal issues to ATLA's Exchange deposition and document banks so that other section members may benefit from those documents.

In addition to Birnbaum, officers for 1998-99 are Todd O'Malley of Scranton, Pennsylvania, vice-chair; Esther Weissman of Cleveland, vice-chair; Lewis Heller of New York City, vice-chair; and Kim Edward Presbrey of Aurora, Illinois, secretary.

To learn more about the section and its activities, call [phone], ext. 312. To join the section, call ATLA's membership department at [phone], ext. 611. Dues are $33 a year.

Todd J. O'Malley practices law in Scranton, Pennsylvania.