Workers Compensation and Insurance Fraud

Anthony Agnese RMI400 Professor Macdonald 11/30/2013

In todays society, many people buy insurance weather it is life insurance, health insurance, vehicle insurance, homeowners insurance, or other various types of insurance. These various insurances can help the insured by compensating for there lose. Compensation can come in different ways mainly by a cash reimbursement to the insured. This helps the insured pay for damages, bills, to replace damage/stolen goods, and etc. One big type of insurance that covers many people in todays society is workers compensation. The big problem with workers compensation even though it benefits many injured employees, many insurance companies come across fraudulent cases, which definitely has an impact on the insurance company, the business, and society. When there is fraud the insurance companies and the government try to fix the problems from reoccurring.

Worker Compensation varies by state but the basis of all workers compensation is the same. State WC programs are the oldest and one of the largest forms of social insurance in the United States. WC laws require that firms obtain insurance or self-insure to provide to workers who become injured or ill on the job a state-mandated amount of cash benefits, medical care, and rehabilitation services when necessary (Bronchetti & McInerney, 2012). All companies in society have some type of workers compensation program. State laws require employers to purchase insurance from private underwriters, or from a state-operated insurance fund. Twelve states currently have such funds. Some states also permit employers to be self-insured by posting a performance bond (Elsberry, 2008). Workers Compensation is mandated by states, this is to protect employees if they get hurt and also could help if an employee tries to sue the company. This can be seen

based on the article, which states, Coverage extends to almost 94% of the American wage and salaried workforce, and a worker becomes eligible to receive WC as soon as he or she enters covered employment (Bronchetti & McInerney, 2012). Since workers compensation covers a large percentage of their employees, they pay a high insurance premium. These premiums are paid so that the insurance company can have money to pay incase of a workers compensation claim. Nationally, the average cost to business for workers compensation insurance is $2,800 per employee a year (Elsberry, 2001). This cost over the years has most likely increase due to several factors in society and insurance but regardless depending on the number of employees businesses have this makes the workers compensation insurance a billion dollar industry. According the article How to Cut High Cost of Workers' Compensation, The cost of workers compensation coverage has been rising dramatically since the mid1980s, frequently posting double-digit annual increases. For many employers, the annual premium now represents the single largest insurance outlay (Leinheiser, 1992). Even though the premiums keep increasing companies need to keep paying because if something to its employees and they dont have workers compensation there could be even more money taken from a lawsuit. Premiums for workers compensation are figured out just like other premiums. Three factors go into setting workers compensation premiums: size of payroll, employee job classifications and the company's claims experience (Leinheiser, 1992). With these three factors possibly always increasing for a company it is easily seen how premiums can continual increase in cost. The cost of the premiums always increase has to do with the modifier. Experience modification is the insurance industry term for the rate adjustment

conditioned by a company's past-claims-payment experience (Leinheiser, 1992). Basically, the more claims a business has the modifier is increased and so is the premium. Since the modifier and premiums are increasing, this means the number of claims and payout are also increasing. The number of fatal and nonfatal injuries in 2007 was estimated to be more than 5,600 and almost 8,559,000, respectively, at a cost of $6 billion and $186 billion. The number of fatal and nonfatal illnesses was estimated at more than 53,000 and nearly 427,000, respectively, with cost estimates of $46 billion and $12 billion. For injuries and diseases combined, medical cost estimates were $67 billion (27% of the total), and indirect costs were almost $183 billion (73%). Injuries comprised 77 percent of the total, and diseases accounted for 23 percent (Leigh, 2011). As seen from this article workers compensation pays out a very significant amount of money to employees who file for workers compensation. With companies filing for workers compensation and with all this money in payouts, it is possible for fraudulent case to occur.

Insurance fraud is a major problem that effect many things and it continues to grow in todays society. Insurance fraud not only impacts upon the insurance industry but also affects all policyholders through increased premiums and, in some cases, increased exclusions and difficulties in obtaining insurance cover. Insurance fraud is also a complex and multi-faceted problem. It varies in scale from inated claims for genuine incidents through to systematic multi-person scams that involve staged accidents, thefts and so on (Ormerod, 2012). When frauds accords it can impact the policyholders, in the case of workers compensation the policyholder would be the employer of the worker

could have other repercussions as well. This could also possibly hurt the workers compensation for other employees at the business. Since fraud has to do with scams there are ways workers can make fraudulent workers compensation claims. It is said that workers compensation fraud falls into two categories: benefits fraud and premium avoidance fraud. The first type of WC insurance fraud is the claim for benefits based upon intentional misrepresentation of material facts of the injury or treatment (Derrig, 1994). Benefits fraud basically is where someone lies about their injury or illness and collects the damages from the workers compensation fund when they do not actually need it. The other major categorization of WC fraud involves premium avoidance. According to the 1991 Internal Security Association study of premium fraud, material (criminal misrepresentation can arise from any or all of four premium determinants), Total Premium = Total Covered Payroll (#1,2) x Class Rates (#3) x Experience Modification (#4) (Derrig, 1994). Premium avoidance fraud is basically someone intentionally changes or giving false numbers so when the premium is calculated that the company would end up paying a lower cost. Employees usually do benefits fraud and there is three ways that they usually collect. Employee fraud generally is one of three types: (1) collecting benefits for exaggerated or non-existent injuries, (2) double dipping, which means the employee is working on a second job while receiving workers comp payments, and (3) collecting for nonwork-related injuries. Another widespread problem is malingering stretching out recovery time to extend weekly disability payments (Elsberry, 2008). These different types of fraudulent acts are what employees try to do to get out of work and still make money, which in the end could hurt them and their business. The employer commits premium avoidance fraud and this is done by them

not complying with the law. Some employers who do buy insurance try to cut costs by under-reporting their payroll. Insurance premiums normally average 2% to more than 4% per $100 of wages, but in construction trades they can be ten times higher. Other ploys are misclassifying workers jobs, or representing employees as independent contractors (Elsberry, 2008). Premium avoidance is done by basically employers paying employees off-the-books, claiming different job titles, and claiming that they work for another company. Employers that do that try to cut the cost of their premiums but in the end it could cost them more. Although the insurance industry says fraudulent claims cost it about $5 billion annually, false claims by employees represent only 1 % to 2% of all claims, according to a recent study (Elsberry, 2008). Even though workers compensation fraud is only one to two percent of all insurance fraud, it still adds up to being close to a hundred million dollars in false claims every year. Industry estimates put the cost of fraudulent claims in the United States at about $120 billion a year (Anthony 1998). As the rate of fraudulent insurance claims increase as well as the cost of these claims, so does how the insurance companies and the employer try to stop claims from occurring.

Employers have to make an effort to step up and try to deter workers compensation claims whether they are real or fraudulent claims. One of the keys to reducing direct and indirect costs for workers compensation is effectively managing processes, such those for injury prevention and claims management (Dintenfass, 2005). Overall to prevent workers compensation claims, companies should use risk management. Companies that implement risk management will be able to work on their

loss prevention and loss control. With these two risk management tools companies will be able to see what is causing the problem and fix it or change it before it cause a problem, which later can lead to a potential workers compensation claim. This can help cut the amount of fraudulent cases because if there is a proven safe work environment and someone get hurt it could be their own fault or they are making a false claim. Employers must instill in employees a strong sense of what workers compensations is about, and stress that it works for everyone(Kuhar, 1994). This is important the companies due this because if there is a guideline implanted employees might try and take advantage of the workers compensation insurance. In the article, Workers' compensation: Is fraud flying high? by Mark Kuhar, it talks about what employers should do to cut down on workers compensation. 1.Check out the background of prospective employees. 2. Create a workplace safety committee. 3.Work for legislative reform. and 4.Be prepared to identify the red flags (1994). For the first one it is important to make sure that the employees are on the payroll and that they have done what have stated. This will help a company not have to worry about premium avoidance fraud. Next, in creating a safety committee it helps improve the risk management aspect of the business as stated earlier. Legislative reforms it helps prevent fraud by implanting them directly in the companies policy. Finally being able to identify red flags allows companies to identify employees that are likely to commit fraud in workers compensation. Despite the fact that workers compensation rates are set by the state, there are ways that employers can reduce their premium. Guidelines include: 1. loss control, 2. classification codes, 3. using the correct payroll, 4. proactive claims handling, 5. checking your experience modifier, and 6. getting a competitive quote (McNelly,

2000). If companies follow these guidelines and reduce their premiums, it would save them money in the long run and probably help cut the risk of a workers compensation claim occurring. Insurance companies play the biggest part in detecting and solving fraudulent claims in workers compensation. Many of the cases are solve by the insurance companies working directly with the company. But two things insurers and employers agree upon is that fraud raises businesses insurance premiums, and that no fraud prosecution is likely to be successful without video surveillance or eye witnesses (Elsberry, 2008). The insurance premium is raised to cover the cost of the money paid out, and to prevent it from happening in the future. Also implementing fraud prosecution will help both parties detect and prove fraudulent cases. One tool that many insurance companies implement one major tool and that is video surveillance. To help reduce the cost of workers compensation fraud, videotaped surveillance is increasingly being used to supplement traditional fact-gathering investigative techniques. By helping employers uncover exaggerated or fraudulent claims, surveillance can serve as an effective cost-containment measure (Maldonado, 1995). Using these surveillance fact-gathering investigative techniques, it allows the insurance companies to watch over people who make claims and potentially gather evidence against the person to claim fraud. An example of this would be a person filing a workers compensation claim against his employer for hurting his back on the job. The insurance company could do research on this and they get video evidence of this person outside their house cleaning out the gutters. This would obviously prove fraud since the employee should be hurt and should be doing anything strenuous on his back. Thus causing the insurance company to bring up fraud charges. Typical fraud

indicators might include tips from employees; medical reports with information that appears to be in conflict with the claim; or an inability to contact a supposedly disabled employee during business hours. Claims personnel and service providers must all be alert to the possibility of workers compensation fraud and must work together in a coordinated effort to prevent it (Maldonado, 1995). These are other ways that insurance companies can go about solving workers compensation fraud and setting up an internal office to help prevent fraud would also significantly help insurance companies look for fraud cases.

Workers Compensation is a very important type of insurance that is mandated by states to help protect both the employee and employer. Workers compensation protects the employee incase of injury or illness on the job while it protects the employer from being sued. Employers pay high premiums to insurance companies to pay incase of workers compensation claim. How the premiums are determined make it a constant increase in amount for money in workers compensation funds. With so much money coming in it also helps pay out all the compensation claims to the employees. Along with all the claims, there are also fraudulent claims. These fraudulent claims make up for a large number of the money being paid. All the claims that are made the employer have to evaluate their risk management plan and control their workers compensation claims. Now the employer and insurance companies work together to try and reduce the number of fraudulent claims. They are able to do this by creating internal office and surveillance workers compensation cases try and decrease the number of cases. If employers and insurance companies can lower the amount of workers compensation fraud cases it

would most likely cut the cost of premiums and the total money lost by the insurance companies from fraud cases.

Work Cited Anthony, A. (1998). Workers' compensation fraud. Risk Management, 45(10), 33-36. Retrieved from http://ezproxy.oswego.edu:2048/login?url=http://search.proquest.com/docview/22 7013263?accountid=13025 BRONCHETTI, E., & MCINERNEY, M. (2012). REVISITING INCENTIVE EFFECTS IN WORKERS' COMPENSATION: DO HIGHER BENEFITS REALLY INDUCE MORE CLAIMS?. Industrial & Labor Relations Review, 65(2), 286315. Derrig, R. A., & Krauss, L. K. (1994). First steps to fight workers' compensation fraud. Journalof Insurance Regulation, 12(3), 390. Retrieved from http://ezproxy.oswego.edu:2048/login?url=http://search.proquest.com/docview/20 4940004?accountid=13025 Dintenfass, N. (2005). BUSINESS PROCESS MANAGEMENT: The next evolution in managing workers compensation. Risk Management, 52(10), 38-41. Retrieved from http://ezproxy.oswego.edu:2048/login?url=http://search.proquest.com/docview/22 7018165?accountid=13025 Elsberry, R. B. (2001). Don't get tripped up by workers compensation fraud. Electrical Apparatus, 54(5), 40-41. Retrieved from http://ezproxy.oswego.edu:2048/login?url=http://search.proquest.com/docview/20 0458282?accountid=13025 Elsberry, R. B. (2008). Workers' compensation claims decline, but fraud persists. Electrical Apparatus, 61(6), 48. Retrieved from http://ezproxy.oswego.edu:2048/login?url=http://search.proquest.com/docview/20 0418336?accountid=13025 Kuhar, M. S. (1994). Workers' compensation: Is fraud flying high? Occupational Hazards, 56(8), 38. Retrieved from http://ezproxy.oswego.edu:2048/login?url=http://search.proquest.com/docview/21 3688712?accountid=13025 LEIGH, J. (2011). Economic Burden of Occupational Injury and Illness in the United States. Milbank Quarterly, 89(4), 728-772. doi:10.1111/j.14680009.2011.00648.x Leinheiser, W. (1992). How to cut high cost of workers' compensation. Journal of Accountancy, 173(3), 57. Retrieved from http://ezproxy.oswego.edu:2048/login?url=http://search.proquest.com/docview/20 6758899?accountid=13025

Maldonado, J. (1995). Managing surveillance activities to contain workers' compensation costs. Risk Management, 42(11), 49. Retrieved from http://ezproxy.oswego.edu:2048/login?url=http://search.proquest.com/docview/2270 06369?accountid=13025

McNelly, T. J. (2000). Workers' compensation--six ways to reduce your premium. Franchising World, 32(5), 49-50. Retrieved from http://ezproxy.oswego.edu:2048/login?url=http://search.proquest.com/docview/20 8944864?accountid=13025 Ormerod, T. C., Ball, L. J., & Morley, N. J. (2012). Informing the development of a fraud prevention toolset through a situated analysis of fraud investigation expertise. Behaviour & Information Technology, 31(4), 371-381. doi:10.1080/01449291003752906