Workers' Compensation Fraud

Faced with a possible workers' compensation fraud case? You and your casualty insurer might want to investigate the accused employee's medical provider, which could be complicit. You could have a much better chance of recovering losses, and you might even uncover additional crimes.

Reprinted with permission from an article in the Aug. 13, 2010, issue of The Legal Intelligencer © 2010 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Jake worked in the distribution center of a small paper distributor.  One day, when he was unloading supplies, he heard a small pop in his lower back. He continued working, but by quitting time he was hobbling. He gingerly eased into his car seat and drove home. Jake stopped by his mailbox and found three past past-due bill notices. He added them to four more he had received the week before.

Jake had overextended his credit and needed some money. He remembered some employees quietly talking about a doctor on their insurance plan who was "friendly" to those wanting to claim workers' compensation, especially for an extended period. The next day, Jake visited Dr. James who examined Jake and decided that he was not fit for work and signed a form that gave him full benefits for at least two weeks. Every other week, Dr. James extended Jake's lucrative benefits. By the time he went back to work four months later, he was able to pay off his bills. And Dr. James was able to milk the insurer for thousands.

Meanwhile, Sam, a CFE for the paper distributor, smelled a rat. He had had his eye on Dr. James for some time. He suspected that the physician and Jake had a little cozy deal. However, Sam knew that if he went after Jake he probably would not be able to collect much. So Sam, working with the legal department, the company's special investigation unit and the insurer, decided to investigate the employee's medical provider. Sam ultimately discovered that Dr. James had been complicit not only in Jake's case but in scores of other workers' compensation frauds.

This case is fictitious, but most employers and their insurers, at one time or another, have been victims of false or fraudulent claims. Only on rare occasions is the perpetrator caught and prosecuted. Even when the prosecution is successful, often the perpetrator does not have the financial means to pay restitution to the employer and/or its insurer. In some cases, the employee's medical provider is not only the impetus to commit fraud but is complicit in fraudulent conduct.

MEDICAL PROVIDER FRAUD

Traditionally, workers' compensation insurance carriers have underutilized tools to investigate fraud, waste and abuse. Perceived expense or risk in fraud detection methods might have deterred carriers. However, in reality, the resources available and potential benefits of mitigating fraud risk are extraordinary.

Larger insurance carriers can service a huge number of claims. Rudimentary statistical analyses can identify physicians who tend to have a greater number of claims for a geographic area or higher costs for certain classes of injuries. Of course, no two claims are identical, but you should be concerned if there are high volumes of claims from a practitioner/practice in a given geographical area when compared to claim volumes from other practitioners/practice groups in that same area. Alternatively, you might see a disproportionate amount of alleged patient complications and an alleged need for more complex and frequent treatment than would be anticipated statistically. You can flag outlier physicians for more comprehensive review and increased scrutiny.

There are multiple types of medical provider fraud. A non-exhaustive list of schemes includes: (1) the unwitting claimant, (2) the claimant as a willing participant in the fraud and (3) the provider who persuades the claimant to participate in the fraud.

The first type, the unwitting claimant, occurs when the claimant is treated by the provider and then willingly goes back to work. However, the provider bills the workers' compensation carrier for work that he or she did not perform or "upcodes" the treatment performed, which exaggerates the type of work done. The physician also might bill for multiple visits or treatments when only one patient visit occurred.

The second type, the claimant as a willing participant, involves a physician/claimant partnership in defrauding the carrier. A claimant might hear, via word of mouth, that a certain provider "goes easy" on workers' compensation claimants. The physician understands that the patient desires the benefit of a diagnosis that will keep him or her out of work for an extended period of time, while simultaneously receiving benefits. Likewise, the patient understands that the doctor desires the benefit of a patient willing to undergo treatment for an extended period (albeit excessive and unwarranted) to allow the billing to continue. Whether the two openly discuss their mutual interests or not, they clearly understand the nature of their deceptive relationship.

The third type, the persuaded participant, might be the most nefarious from the perspective of the medical community. A physician receives a patient in his office and persuades the patient that it is in the patient's best interest to submit a fraudulent claim to the workers' compensation carrier. The patient's advantage is that he or she receives benefits and a financial source for treatment that might be required. Also, the physician gains a financial source for his services that otherwise would not be available to him. The workers' compensation carrier unwittingly pays for the services.

THEORY INTO ACTION

Identifying and pursuing medical provider fraud schemes can be an expensive and daunting task. However, there are tools available publicly, and especially online, to assist carriers in reducing fraud, waste and abuse. Insurance carriers, small and large, should have the capacity to view claims data on a macro level: the number of claims, for what services and to which providers. Outliers should be readily apparent. If they are not, however, comparing macro data to national averages and/or regional averages is helpful.

The National Health Care Anti-Fraud Association provides useful resources for investigations in this sector. A helpful government publication is MLN Matters, which is produced by the Centers for Medicare and Medicaid Services (CMS). The newsletter includes coding updates and guidance — similar to local coverage determinations — that will assist carriers in assessing whether providers are coding properly for rendered services. A simple online search reveals software packages that conduct statistical analysis and identify outliers. Contractors are available to help if a carrier does not have the desire or capacity to engage in the analysis.

Once you have identified outliers, the investigative work begins. If the scheme includes unwitting patients, insurance companies can develop their cases easily by interviewing the patients to verify the services they did or did not receive. One big red flag for this strategy is communicating with a represented party. Workers' compensation claimants are usually represented by counsel, and insurance carriers and their attorneys should be sensitive to this issue.

If the potential scheme includes patients as willing participants, interviews will surely prove futile. A well-planned undercover investigation might be the next step; an employee or contractor of the carrier can play the role of a worker injured on the job. Be sure to consult with counsel knowledgeable in your jurisdiction before recording any interactions with providers.

UNDERUTILIZED LITIGATION TOOLS

Insurance carriers have many tools in their litigation toolboxes to pursue medical provider fraud. Filing a garden variety common law fraud action in state court is an effective weapon against fraud, but state legislatures across the U.S. have codified private causes of action tailored to this industry. The payoff can be exponentially higher — monetarily and systemically — than pursuing claimants.

For instance, one does not have to travel out of the Commonwealth of Pennsylvania to find such a remedy. A civil cause of action lies buried within the statute criminalizing insurance fraud:

An insurer damaged as a result of a violation of this section may sue there for in any court of competent jurisdiction to recover compensatory damages, which may include reasonable investigation expenses, costs of suit and attorney fees. An insurer may recover treble damages if the court determines that the defendant has engaged in a pattern of violating this section. [18 Pa.C.S.A. § 4117(g)]  

New Jersey has a similar provision in N.J.S.A. 17:33A-7, which states:(a) Any insurance company damaged as a result of a violation of any provision of this act may sue there for in any court of competent jurisdiction to recover compensatory damages, which shall include reasonable investigation expenses, costs of suit and attorneys fees.(b) A successful claimant under subsection (a) shall recover treble damages if the court determines that the defendant has engaged in a pattern of violating this act. 

Fear not if you find yourself in a jurisdiction without such a statute. Most states that do not have such laws, such as New York, have insurance fraud bureaus or insurance fraud task forces designed to supplement law enforcement resources to target provider fraud. New York's Insurance Fraud Bureau was established in 1981 with the mission "to effectively detect, investigate and prevent insurance fraud and to refer for prosecution persons who commit acts of insurance fraud." New York accomplishes this by working in eight specialized units, one being devoted solely to investigating policyholders, doctors and other health-care professionals who submit inflated bills or bills for services that were not rendered. Not only does the bureau have the capacity to refer offenders for criminal prosecution, but it has the ability to levy civil penalties of up to $5,000, plus the value of the claim, against any person who submits a fraudulent insurance claim.

THE FUTURE

By using data mining and other investigative methods and investing in a proactive litigation strategy, carriers can develop a well-oiled machine to identify outlier physicians who defraud the system through one of the three schemes outlined in this article. Shutting down one fraudulent medical provider can eliminate the same amount of fraud perpetrated by dozens of fraudulent workers' compensation claimants. Furthermore, a carrier might have the statutory ability to recoup its investigative and litigation fees under these statutes, along with the potential for treble damages.

In an era of increased scrutiny on health care providers and insurance, these preventive strategies and tools will prove useful in the detection and deterrence of medical provider fraud.

Mark Gordon, Esq., a founding partner of Pietragallo Gordon Alfano Bosick & Raspanti LLP, is based in the firm's Pittsburgh, Pa., office. He heads the Risk Management Group of the firm and was past chair of the Workers' Compensation Group.

Douglas K. Rosenblum, Esq., CFE, is an associate in the Philadelphia, Pa., office of Pietragallo Gordon Alfano Bosick & Raspanti LLP. Rosenblum previously served as both a state and federal prosecutor. He is a member of the White Collar Criminal Defense, Federal and State Qui Tam and Commercial Litigation practice groups.

SIDE BAR 

Workers' Comp Fraudsters Use Four Classic Schemes 

Schemes are generally divided into: premium fraud, agent fraud, claimant fraud and organized fraud schemes.

1. PREMIUM FRAUD

This crime involves misrepresenting information to the insurer by employers to lower the cost of workers' compensation premiums.

Employee Classification

Workers' compensation rates vary depending on the job classification of an employee. Employees who have higher risks for injuries on their jobs will have higher premium rates. Clerical employees have lower probabilities for injuries than, for example, truck drivers or construction workers, and, accordingly, their premiums should be lower. Therefore, to lower their premium rates, employers might intentionally misclassify employees.

Understatement of Payroll

The premium for a specific job classification is based on the total payroll for that classification. Employers might understate the amount of the payroll for higher risk classifications.

Geographic Location of the Insured's Operation

Premium rates differ significantly based on geographic location from state to state. An employer might have a storefront location or a P.O. box in a state that has lower rates. A multistate employer might list all of its employees as operating in the state that has the lowest rates.

History of Past Losses

The modification or "mod" factor is a multiplier that is used to determine premium rates. The multiplier is derived by comparing the employer's claims history with other employers' claims histories in the same industry. The higher the claims loss, the higher the mod and thus the higher the premium. A new business will start with a neutral mod for that type of business. Employers that have a high mod factor might become "new" businesses that do not have mods established and thus have lower premiums than they should.

Corporate Gerrymandering

The risk pool assigned to an employer will accept any business no matter what the claim experience is. However, it does not have to accept any employer that owes premiums. Some employers will create new corporate entities to obtain coverage or to avoid higher premiums due to past heavy losses.

Forged Documents

Some employers will forge or alter prior certificates showing coverage to collect payment for work done or as proof of coverage to authorities.

2. AGENT FRAUD

Pocketing Premiums

Agents issue certificates of coverage indicating customers are insured but never forward the premiums to the insurance companies.

Conspiring to Reduce Premiums

Agents might alter applications for coverage completed by employers to be able to offer a lower premium to their clients.

Agents might also improperly advise employers on how to complete applications, or they might advise employers to transfer groups of employees into lower risk classifications to avoid expensive modifiers.

Employers might not be aware that the schemes are violations of law but could be charged regardless.

3. CLAIMANT FRAUD

Employees might fabricate injuries or misrepresent circumstances of actual injuries.

Injury Fraud

False information about the injured worker is submitted to the workers' compensation carrier. The report describes the injury and states the employee is either totally or partially disabled and either unable to work or only able to work part-time. In many of these schemes, the fraud is helped along by a doctor who, for a fee, will provide a false diagnosis and false medical records for phony treatments.

The employee might stage an accident and fabricate an injury or actually have an accident and then exaggerate the injury.

Secondary Employment

Employees who are collecting workers' compensation benefits might also secure a job with another employer — either part time or full time. Employees might fake identities or assume other identities to receive compensation.

4. ORGANIZED FRAUD

Organized fraud schemes are composed of the united efforts of lawyers, "cappers," doctors and claimants. (These individuals might use this scheme in other medical frauds, such as automobile injuries.)

Lawyers

Lawyers, who are usually the schemes' organizers, will profit the most. Most lawyers in workers' compensation cases agree to be paid only if settlements are awarded. This is a high-volume business, and the lawyers do not want the cases to be litigated. They are relying on the insurance companies' desire to settle as quickly as possible.

Lawyers might entice claimants into securing their services by promising large settlements from insurance companies. The claimants might or might not have to undergo medical tests because the only requirement is that they are insured. Lawyers will then refer injured parties to doctors for "treatment."

Cappers

Cappers, also known as runners, are used to recruit patients for schemes. They might be employed by either attorneys or doctors and are paid — either on a percentage of the total take or per person — for bringing in patients. Cappers might make as little as $150 per patient or as much as $1,500 per patient, depending on the area of the country. Cappers might approach patients at unemployment compensation lines, work sites, scenes of accidents or at any other types of organized gatherings.

Doctors

Doctors must be players in the schemes to assure they will work. They will bill for services they might or might not render and for unnecessary services. Also, if patients have regular health insurance, doctors might double-bill for the services. If an injury is the result of an automobile accident that occurred while the patient was on the job, the doctor might bill all three insurance companies: the workers' compensation carrier, the employee's health insurance company and the automobile carrier.

Excerpted and adapted from the ACFE's "Fraud Examiners Manual" ©2011

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