Workers' Compensation Fraud by Employers Drives Costs Up for All

One of my favorite politically far right employer-side employment law blawgs, George's Employment Blawg (If you don't already have this guy's blawg loaded on your daily reading list, you should.) has a story today that asks the question: "How common and costly is workers comp fraud?"George correctly points out that with regard to employee-side fraud, "[s]ome say it's a huge problem; others that it is being exaggerated to promote antiworker reforms. I'd submit that the truth is somewhere in between, but that anything that can be cost-effectively done to reduce fraud is certainly worth looking into."

I agree with his sentiment for the most part. However, I would recommend that states begin actively pursuing employer-side workers' comp fraud with at least a little of the relish that they appear to have for investigating everyday employees.

An article from the Labor Research Association points out that states reporting such data indicate that employer-side fraud costs states 4 to 5 times more each year than employee-side fraud. In his article "Waste, Fraud and Abuse in Workers' Compensation: The Recent California Experience," Maryland Law Review, Vol. 52 Gary Schwartz reported that few experts believe that claimant fraud is a major cost driver in workers' compensation. But some estimates, including those adopted by California Governor Pete Wilson, suggest that fraud accounted for 25% of all employers' workers' compensation costs and 10% of the claims. In California, a wave of legislation in the late 1980s and early 1990s was fueled by allegations from employers that workers' compensation costs were too high and that fraud was rampant in the system. But between 1979 and 1991, insurance carriers in California reported only 532 cases of alleged fraud. (See Damon Darlin, "The System Was Spinning Out of Control," Forbes, Vol. 155, No. 6, 3/13/95)According to the LRA: "the most common forms of workers' comp fraud include:(1) Underreporting payroll. Employers reduce their premiums by not reporting parts of the work force, paying workers off the books or creating a companion corporation to hide a portion of the employees.(2) Declaring independent contractors. Employers avoid premium payments for employees by classifying them as independent contractors even though they are legally employees.(3) Misclassifying workers. Employers intentionally misrepresent the work employees do to put them in less hazardous occupational categories and reduce their premiums.(4) Misrepresenting claims experience. Employers hide previous claims by classifying employees as independent contractors or leased employees or creating a new company on paper. In addition to premium fraud, employers often fail to purchase workers' compensation insurance, despite state laws mandating that they do so." Employers also sometimes instruct injured workers to seek treatment under group health insurance rather than workers' compensation, and discourage workers from filing workers' compensation claims or fire workers who file claims.

Despite the statistical evidence indicating that rogue employers are responsible for far more fraud losses than employee-related fraud, state governments and insurance carriers seem intent on harassing injured workers while turning a blind eye to corporate comp fraud. According to a report conducted by the Texas Oversight Council on Workers' Compensation, insurance carriers spent more money investigating injured worker benefit fraud than any other type of workers' compensation fraud. In 1996, Texas insurance carriers spent an average of $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 nineteen 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. The report concluded: "While injured worker benefit fraud is the most often investigated form of workers' compensation fraud, it is far from the most costly. ... It is clear that more resources should be spent fighting the most expensive and overlooked types of workers compensation fraud: employer premium and health care provider fraud." (See Research and Oversight Council on Workers' Compensation, "Fraud in the Texas Workers' Compensation System," Texas Monitor, Vol. 2, No. 4, Winter 1997)My suggestion: Let's start looking into where the real fraud dollars are being lost and work to bring down rates for those employers that play by the rules.