New Tactics to Watch in Workers’ Comp Fraud Investigations
Workers’ compensation fraud takes three main forms — claim fraud, premium fraud and provider fraud — and the effects on honest employers and employees can be devastating.
New analysis from the Coalition Against Insurance Fraud found the combined fraud burden for the workers’ comp line weighs in at $32 billion per year.
Luckily, new investigation efforts based on the growth of our online lives can help mitigate the damage.
Comp Fraud by the Numbers
Between the three types of workers’ comp fraud, employer fraud far exceeds employee fraud, despite the focus on false claims in an often adversarial system, while Medicare fraud far exceeds both.
The Coalition Against Insurance Fraud numbers out employer premium fraud at $23 billion of the total.
Typically, employers game the system by misclassifying employees or methods of underreporting payroll through “under the table” pay arrangements.
For executives in the business, the lopsided understanding of how fraud occurs in the comp system comes down to public imagination.
“Depending on how these are defined, the cost of provider fraud may well exceed the cost of premium fraud. For the public, perhaps claim fraud is the easiest to understand; it’s easy to picture someone pretending to be more disabled by an injury than they truly are. Perhaps they might even know of someone who has engaged in that behavior,” said Reagan Pufall, president and CEO of Omaha National.
“By contrast, it might be harder for them to envision how premium or provider fraud occurs. It’s also important to note that sometimes misclassifying employees can occur with the fraudulent intent to improperly reduce premiums, but sometimes it is an innocent mistake.”
Indeed, while difficult to parse, the National Health Care Anti-Fraud Association (NHCAA) underscores Pufall’s point.
The organization published a conservative estimate of 3% of total health care expenditures as fraudulent, while noting that other sources indicate a fraud burden of nearly 10% across lines of insurance and Medicare, equal to some $300 billion.
Meanwhile, most studies find that only 1% or 2% of employee claims are fraudulent.
“When we talk about claimant fraud, we’re talking about a one-off, individual claim, a single act. These acts are often seen to be more profound because the alleged injured worker is seen doing an egregious act in the public eye, like climbing a ladder while alleging they are bed-ridden,” said David Stacey, director of the special investigations unit at Sentry Insurance.
“When we talk about misclassification, it’s not as suggestive, and often not viewed or even heard of by the public. However, misclassifications are more lopsided because it can impact several employees from a handful, to hundreds, to entire companies — so the numbers are much larger.”
Worse than the dollars and cents effect of fraud on every employer, misclassification and illegal payment jeopardize the health and wellbeing of employees on the job, especially undocumented or otherwise marginalized workers.
A study from the University of Massachusetts focusing on construction employers in that state found that the construction industry “almost completely jettisoned regularized employees in residential construction,” thereby decreasing the cost of employees by 15 to 30%.
The researchers also warned that their state was no exception, and that regulatory resources dedicated to this type of employer fraud were woefully inadequate, a sentiment borne out by the low numbers of regulators dedicated to investigating large scale fraudulent operations in high-risk industries.
Tech-based (and Some Old-school) Investigative Techniques Can Help
For individual insurance organizations, investment in systems within the underwriting and claims intake processes can ease the burden and reassure customers and claimants.
“We are fortunate that we design and develop our own software in house,” said Pufall. “So we can build fraud-spotting functionality right into our claims management application or our underwriting application.
“The best strategy employs a variety of methods such as exception reports, AI pattern recognition, and automated internet information gathering. Social media can be a rich source of information. However, tech can only supplement the work of talented human beings, not replace it.
“Many special investigations units now make the mistake of thinking investigations are done entirely or primarily online, but in reality, real world investigative techniques are still often the most effective approach.”
For his part, Stacey agreed that the solution can start with tech, but that experienced professionals must back it up at every step.
“Tools like artificial intelligence, machine learning, and predictive model audits can identify suspect indicators and ensure the loss matches the classification,” he said. “For example, it would be questionable if a window washer in a large city reported that they don’t work above three stories. Or that a landscaper fell from a bridge.”
Looking to a Fraud-free Future
As with top-of-class accident prevention and loss control programs, fraud investigation programs have a noble and lofty goal — working towards zero. However, lack of investment in fraud investigations in workers’ comp, perhaps because of the misperception that employees are the primary cause, means that goal post seems ever farther away.
“Over the years, there has been a compliance focus on many other areas of insurance, while the workers’ compensation side of the industry has been lacking,” Stacey said.
“Better regulatory controls can hold carriers and their insureds more accountable. The industry could use more regulatory controls in this space because when regulators step up their oversight, insurers also step up theirs. By aiming to do it right, we help protect the insurer, the insured, and the consumer.”
For Pufall, the issue is tied to complacency as much as lack of investment.
“Within the industry, there are some companies that view fraud investigations as a burdensome obligation that they are legally required to perform,” said Pufall.
“We do not view it as a burden but as an opportunity. We protect our clients from improperly inflated claim costs. We protect our injured workers from inappropriate and risky medical procedures. We protect the financial success of our own company. In addition, we protect society as a whole from the costs of insurance fraud.” &