What does workers’ compensation fraud actually look like? It looks like big insurance skimming billions of dollars and wealthy businesses living lavishly on workcover (workers compensation) funding. Fraud costs everyone involved in the workcover system. Unfortunately the insurance and business interests continually claim employee fraud is a major problem. In reality worker fraud is a very small problem, accounting for less than 5% of fraud costs, some figures claim less than 1%.
Workcover fraud looks like this
A recent PBS segment summarised the workcover fraud facts very well
In recent years, the insurance industry’s focus on cheaters and malingerers helped push through national workers’ compensation reform, a profitable cost-cutting campaign supported by outrage over alleged abuse of the system.
The problem, however, is that the fraud image is false for the vast majority of workcover cases. Studies show that only 1 to 2 percent of workcover claims are fraudulent. Certainly, the tens of thousands of workers killed every year were hardly aiming for a free ride on their employer’s tab, duh.
A national prime time television show aired a show on workers’ compensation fraud, opening dramatically with footage of an old man working on a farm and a lawyer interviewing that same old man.
Announcer: This is DATELINE Monday, May 29th, 2000. Tonight. It’s a crime that takes money out of your pocket, it starts with a lie.
Unidentified Lawyer: Are you able to lift anything?
Mr. Emil Mentel: A cup.
Lawyer: A cup?
Mr. Mentel: This is how I am.
Announcer: Think he’s a broken old man? Here’s what hidden cameras showed he was really doing while collecting money from you.
Mr. Manny Pageler: The man can grip. I see the legs working, I see the arms working.
John Larson reporting: When you first saw that videotape of him throwing that bale of hay, what was your reaction?
Mr. Pageler: I was mad.
Announcer: John Larson, with lies, ripoffs and videotape.
One of the many incendiary messages in this show is in the announcer’s very first line when the viewer is informed that “money is taken right out of their pocket.” Seconds later, the announcer again informs viewers that the supposedly injured man was throwing hay bales “while collecting money from you.”
Money does not mysteriously float out of viewer’s pockets as portrayed by the sensationalized lead into this segment.
First, money paid to workers’ compensation claims, including fraudulent ones, comes directly from insurance industry profits. Only after dipping into insurer profits does the cost get passed onto employers purchasing workers’ compensation insurance. Then, the costs are spread over the entire group of policyholders; costs are not charged back to each employer dollar for dollar with their injuries. If employer rates do increase, the employer pays for it by one or more of the following ways: taking it out of the company profits; reducing wages; and passing it on to consumers. For the smaller number of companies that choose to self-insure, they pay the claims directly rather than pay premiums for workers’ compensation insurance. Then, and only then, does it come out of the general public’s pocket IF the public chooses to purchase the specific products made by companies with high workers’ compensation rates. In neither case does money flow out of unsuspecting people’s pockets as portrayed by the insurance industry. … OK!?
The show neglected to mention that in 1998, workers’ compensation costs were only 1.35% of payroll down from a peak of 2.17% in 1993. It also failed to explain that between 1992 and 1998, workers’ compensation costs to employers decreased 38% as a percentage of payroll while benefits to workers declined 35% (in the USA)
Instead, in the middle of the segment, reporter John Larson asserts, “After all, workers’ compensation fraud is quite common. The industry estimates it adds up to $5 billion a year.”The American Federation of Labor and Congress of Industrial Organizations(AFL-CIO) has heard this $5 billion claim before. The union’s workers’ compensation newsletter explained, “These allegations have absolutely no relationship to fact but are based on ‘attitudes’ about fraud (when respondents say they ‘know’ of someone supposedly on workers’ comp even though he or she might be capable of working). A similar claim put workers’ compensation fraud at 20 percent of the total of all claims in California in 1996; the truth was that suspected fraud that year, according to the state’s Department of Insurance, was three-tenths of one percent!
In the summer of 2000, an independent team of experts — J. Paul Leigh, Ph.D., Steven Markowitz, M.D., Marianne Fahs, Ph.D., M.P.H., and Philip Landrigan, M.D. — published a book titled, “Costs of Occupational Injuries and Illnesses.” In it, they estimated the national price tag for fraudulent claims to be 1.2 billion dollars, roughly one-fourth of the insurance industry estimate. Conceding that $1.2 billion is still a lot of money, the Leigh team put it into perspective by explaining that it was only about two-percent of all workers’ compensation dollars spent in their sample year of 1992. Whether the true fraud rate is less than one-percent or as high as two-percent, it is hardly “quite common.”
The Dateline show provoked a response from the AFL-CIO Department of Occupational Health and Safety, which wrote:
On May 29th NBC Nightly News and its program Dateline chose again to focus on an instance of worker fraud in workers’ compensation. Despite the fact that studies show that claimant fraud in this system is minimal — in California, worker fraud is less than 3 tenths of 1 percent of all claims; and in Wisconsin, it is less than 1 tenth of 1 percent of all claims, these exposés, encouraged by irresponsible allegations from the insurance industry, feed the myth that workers injured on the job are frauds, cheats, and malingerers.
From the opposite side of the country, Robert Stern of the Washington State Labor Council, AFL-CIO also sent a letter to Dateline reporter Tom Brokaw. He received no response.
Dear Mr. Brokaw:
Approximately a week and a half ago, you broadcast a report on fraud by an injured worker in California. I frankly do not know whether or not this worker in fact committed fraud. I have no sympathy for workers who defraud the Industrial Insurance system. What is astonishing to me is that your report focused on what is acknowledged by the vast majority of academic experts to be, by far, the source of the lowest amount of fraud in the Industrial Insurance system. In every study that has been done on fraud in Workers’ Compensation, employer, insurer, and provider fraud are found to be a dramatically greater problem than claimant fraud. At a time when injured workers throughout this nation are suffering enormously from “deform” of the system driven primarily by insurance providers, your report gave a seriously skewed presentation on the problems with the system.
I do not believe you have a serious interest in what is happening to injured workers, but if by chance you do, I urge you to take a look at the recommendations that were made by the National Commission on Workers’ Compensation during the Nixon administration (an administration not particularly sympathetic to workers), then have your staff compare those recommendations to today’s reality for injured workers. We should be ashamed of what we are doing to injured workers throughout this nation.
I wish I did not feel cynical about sending you this e-mail. I am sorry that you have bitten the insurance industry bait, hook, line and sinker.
– Robert Stern, Special Assistant to the President,
Washington State Labor Council, AFL-CIO
In the 1970s, benefits to injured workers sunk so low that President Nixon appointed the National Commission on State Workmen’s Compensation Laws to study the issue. It recommended that all states pay totally disabled workers at least two-thirds of their salary up to a maximum of the state’s average weekly wage. Still, 17 states have not complied with the Commission’s recommended standard wage.
Studies support Stern’s assertion that employer fraud is much greater than claimant fraud. In Florida, a 1995-1996 compliance audit found that of 22,758 employers contacted, 13.1% were operating without legally required workers’ compensation insurance. In just the next year, the auditors found the rate grew another half percent.Stating that 13.6% is probably an underestimate, the audit report explained that in addition to the large number of employers making no attempt to buy the insurance, still others cheat the system by intentionally under-reporting or misclassifying its payroll and by falsely representing employees as independent contractors.
In a 1997 press release, the Wisconsin Department of Workforce Development stated that workers’ compensation fraud in the state was less than six-tenths of one percent. As recently as November 1, 2000, the same department reported on fraud from 1994 to 1999 concluding, “The public perception of workers’ compensation fraud is exaggerated,” and “The documented level of workers’ compensation fraud in Wisconsin is minimal.”
A few months after the Dateline show aired, the LA Times printed, “Anti-Fraud Drive Proves Costly for Employees,” and found, “Over the last decade, employers and insurance carriers have saved billions of dollars as legislatures in many states rolled back benefits, more narrowly defined workplace injuries and introduced impediments to collecting for them.”
And the J. Paul Leigh team concluded, “The dollar amount of fraudulent workers’ compensation claims submitted by workers pales in comparison to the amount for claims never filed and, more importantly, the overall small amount of total costs paid by workers’ compensation systems. Moreover, fraud committed by insurance companies at workers’ expense is likely to be significant.”
The Leigh team further estimated that workers’ compensation covers only 27 percent of all occupational illness and injury costs and that taxpayers bear a financial burden of 28.5 billion dollars — close to six times the estimate of workers’ compensation fraud — through Medicare, Medicaid, and Social Security. Further, they discovered that costs were borne by injured workers and their families, by all workers through lower wages, by employers with lower profits and by consumers with higher prices. Specifically, they estimated that injured and ill workers and their families absorbed about 44% of the costs. Now that is an injustice worthy of outrage. …
Workers’ compensation is hardly the gold mine insurers portray it as. Fat lawsuits and big settlements are usually completely out of the question.
“When I tell distraught families who just lost someone in a workplace fatality that they cannot sue the employer, they are shocked. Sometimes it takes attorneys to tell them the same thing until they believe it,” says Ron Hayes, founder of Families in Grief Hold Together (The FIGHT Project). “I’ve had families go to three or four attorneys until they would accept it. It depends on how angry they are.”
The National Academy of Social Insurance, a private non-profit, non-partisan resource center explains the workers’ compensation arrangement this way:
Under the exclusive remedy concept, the worker accepts workers’ compensation as payment in full, without recourse to an additional tort suit. Employers are responsible for benefit payments as prescribed by workers’ compensation laws, thereby ending their liability.
In other words, exclusive remedy safeguards employers from large punitive awards but impedes justice in the many cases that might be better served in court. The bottom line is that in all but the most willfully negligent circumstances, injured and ill workers cannot sue their employer for making them injured or ill.
Discussing exclusive remedy in an online article, the law firm of Boxer & Gerson explained a California case this way:
The survivors of three workers killed by the Tosco refinery explosion were awarded a total of $21 million in damages. The workers were not employees of Tosco but of a subcontractor at the site; thus they had the right to sue Tosco for negligence. In contrast, Steve Duncan was a Tosco employee. He survived by jumping off the tower while ablaze from the blast. His sole remedy is workers’ compensation. As a result of falling some 60 feet, Duncan broke almost every bone in his body. He has had 24 surgeries to date, numerous skin grafts, and amputation of his fingers and a thumb on one hand. He is confined to a wheelchair; and has numerous metal pins sticking out from his knee and thigh.
He was earning more than $1,000 per week. Now, he gets $490 a week in temporary disability benefits. Even if he is totally, permanently disabled, this is the most he will ever get — no cost of living raise and no lump sum payment. If he is found to be less than 100% permanently disabled — even if marginally less, such as 99.75% disabled — he will receive just $230 per week in permanent disability benefits — and not for life, but for a finite period of time.
Hayes explains, “In a handful of states, there are certain exceptions that let people sue, such as when a person behaves criminally. But usually, they cannot sue their direct employer. Instead, they have to sue other employers that were involved (like on a multi-employer construction site) or they can sue under product liability, like when someone killed by a drill rig sues the manufacturer of the equipment rather than the employer who did not maintain it or train workers on it.”
“But,” cautions Ron, “what people don’t realize is that if they win these lawsuits, they then have to return all money received under workers’ compensation because winning the suit will actually prove someone else was at fault. So here are these families that fight to win in court and then they discover that of any award they received, they have to pay the lawyers 30-40% off the top, return any workers’ compensation they have received back to the insurance company (sometimes a lump sum of $20,000 or more) and they won’t receive any more payments under workers’ compensation. The employer’s insurance company actually ends up getting their money back.” Ron describes the whole mess, saying “It’s like the lawyers need to hire economists to figure out if the families will end up with anything.” …
The flip side of the exclusive remedy coin is that workers are paid even if an injury was partially their fault. If a person missteps and falls off a ladder, for instance, he or she is still compensated. The exclusive remedy trade-off works for many short duration injuries and illnesses where the system achieves the goal of prompt compensation without lawsuits. For most seriously injured and ill workers, however, the system does not work fairly.
After lengthy investigation, Executive Director Greg Tarpinian from Labor Research Associates concludes, “The presumption of widespread malingering and dishonesty undercuts any meaningful discussion of the adequacy of benefits and provides a convenient response for those opposed to the benefit increases that are so critically needed in many states. Until the misplaced focus on claimant fraud is overcome, district attorneys will continue to fry the small fish while the big fish go free, and the voting public will remain distracted by anecdotes. The emphasis on fraud and costs also distracts the public and lawmakers from the workplace hazards and flagrant safety violations that are the real cause of the problem of worker injuries and workers’ compensation costs.”
Here is another must-read article:
$ Billions In Employer Fraud: Top 10 Cases of 2011
When we hear about workplace fraud, most of us think of a worker faking an injury to receive benefits that he or she does not deserve. While that kind of fraud does exist, it is minor compared to the big money lost to fraud from companies.
The big money lost to fraud comes from companies, not workers.
Companies are cheating the government out of billions of dollars a year. It baffles me why we never hear about this, especially when, just by prosecuting these bad actors for defrauding the system, states could close large portions of their budget deficits without raising taxes or cutting spending, the overall cost of the workers’ compensation system would be lower, and costs to law abiding employers would be less.
Companies are stealing, and we are stuck paying the bills.
When companies commit workers’ compensation fraud and other kinds of payroll fraud — under-reporting or misreporting the number of employees on their payroll — they do major damage to working people’s lives in 2 major ways:
- State workers’ compensation insurance funds are left under-funded, and taxpayers may be called upon to replenish them. It’s a dollar out of your pocket and tacked onto the profits of the company.
- Workers are left without insurance if they are hurt on the job. Uninsured injured workers often receive poor medical care, or none at all. When these workers do receive medical care, often tax-supported hospitals or Medicaid (taxpayers again) are left to foot the bill while their employers pocket the profits from not having paid for insurance that they are required by law to have. Middle class workers who have prudently saved all of their lives can end up on the edge of bankruptcy. It’s why companies are required by law to provide workers’ compensation insurance.
This is not a new problem.
I have been tracking this issue for over 20 years, as an adjunct professor of workers’ compensation law at NC Central University School of Law and somebody who has been practicing in this field for 30 years, as well as in my capacity as chair of the Workers’ Injury Law and Advocacy Group’s (WILG) national Fraud Task Force. In that time, I have consistently seen companies break the law. Even worse, for the small number of companies that do get caught, the cases are often settled for less than the amount the company saved by acting illegally. You and I wouldn’t expect to keep the stolen cash if we robbed a bank, so why do these employers keep some of their ill-gotten gains when robbing the government? When the victim is the taxpayer, it apparently pays to break the law.
We all need to come together to hold companies accountable for their legal obligations. If we did that, we wouldn’t be forced to make the choice between paying more in taxes and firing teachers and police. This enforcement issue is not about higher taxes; it’s about catching thieves who hide in offices and behind spreadsheets.
TOP 10 EMPLOYER FRAUD CASES OF 2011
This top 10 list represents just a small portion of the company fraud cases in the news this year. More importantly, the total amounts stolen are just a fraction of the amounts companies have managed to steal. For every company that has been caught, we can only assume many more are getting away with the same crime.
Of the $2 billion worth of fraud in just 2 of the following cases, only $498 million has been recovered. That’s over $1.5 BILLION that these employers got away with stealing. Once again, big business wins, while workers and taxpayers lose, big time.
- Insurance giant AIG commits $1 billion in workers’ compensation fraud. AIG settled the $1 billion suit for $450 million. A federal judge approved a settlement by American International Group, Inc. to pay $450 million for shortchanging state insurance pools by nearly $1 billion. This is the same AIG that taxpayers bailed out during the 2007 economic crisis, and just last year they paid $146.5 million in fines, taxes and assessments in a settlement with all 50 states over workers’ compensation reporting errors. A good recovery, but the settlement leaves a potential $550 million in unrecovered funds.
- Compensation Risk Managers commits $1 billion in fraud, forcing many small businesses to close.Compensation Risk Managers (CRM), a company that acted as trust administrator for small business in New York State who self-insured for workers’ compensation, was sued in 2009 for $400 million in a lawsuit for fraud. CRM was deliberately underestimating the liabilities of many businesses, making its service seem to save companies money when it was really leaving them with inadequate reserves when workers got hurt. When CRM filed for bankruptcy, New York State was left with no other option than to go after the 900 small businesses that were CRM’s clients, who have collectively under-paid over $600 million. Many businesses were forced to close, and only $48 million has been recovered so far.
- California couple underreports payroll by $30 million, buys Ferraris and Rolexes instead. Kile and Petronella funded a lavish lifestyle with the money they stole.Devon Lynn Kile and her husband Michael Petronella committed a total of $30 million in insurance fraud, while buying $500,000 in jewels, Rolex watches, and a car collection including two Ferraris, a Bentley and a Range Rover. Kile has been sentenced to 10 years probation and a possible 10 years in prison, and has been ordered to pay $2.8 million in restitution. Investigators also found an application by Ms. Kile to appear on Bravo’s “The Real Housewives of Orange County.” The couple are walking off with a profit of more than $27 million for their scheme.
- Janitorial company owner underreports $10 million in payroll and saves $2 million. In April, Teresa Reif, owner of Genesis Janitorial in San Mateo, CA, was arrested for under-reporting the number of employees and her payroll to her insurance carriers. Reif allegedly employed more than 140 people but reported fewer than 70 and used fraudulent paperwork to support her lies. Inconsistencies in her numbers alerted her insurance carriers to the fraud and her fraudulent books were found during a search of her business. If convicted, she faces up to five years in prison and a $50,000 fine. That leaves nearly $2 million in unrecovered funds and 70 employees without insurance.
- North Carolina man pleads guilty to $2.7 million in fraud$2.7 million of NES’s work’ comp’ insurance payments were stolen by Carl Dale FullerCarl Dale Fuller, a North Carolina business man, defrauded his employer and the company’s employees when he pocketed the $2,716,537 of the company’s workers’ compensation insurance premium payments. He issued fake insurance certificates and even paid a few claims, but was finally caught by the FBI and brought to justice. The fraudster faces up to 20 years in prison, a $250,000 fine and must pay back all of the money he took in premiums.
- Maki-Maki restaurant owners are convicted of tax evasion and insurance fraud totaling $2.1 million.In February, the former owners of two high end Japanese restaurants pled guilty to 14 felony counts including $2.1 million worth of tax evasion and insurance fraud. Since 2001 the couple had pocketed the money they were supposed to be paying in workers’ compensation premiums and unemployment insurance. The husband will also serve 2 years in jail, but the $2.1 million remains unrecovered, including an estimated $1.1 million sales tax loss to the state of California.
- Bay Area shuttle service owner convicted on 10 counts of workers’ compensation fraud, totaling $1.3 million In February, the former owner of a Bay Area shuttle service was sentenced to 10 years in prison and ordered to pay $2.7 million in fines after being convicted of more than 19 counts of workers’ compensation fraud. The company under-reported payroll by more then $5 million, resulting in more than a $925,000 underpayment of payroll taxes. The company also failed to report $11 million in income, costing the state and federal governments more than $500,000 in tax revenue.
- California general contractor convicted of multiple counts of fraud and ordered to pay $1.2 million. Monica Mui Ung, owner of NBC General Contractor Corporation, was convicted of numerous counts of workers compensation and wage fraud, including underpaying wages due her employees, and failing to pay for overtime, sick leave, pension, health care, training, vacation, and other benefits as required by labor laws. She has been sentenced to 4 years in prison and ordered to pay $350,000 in restitution to her employees, as well as $850,000 to the State Compensation Insurance Fund. Because Ung was a recipient of public contracts, her actions “created an unfair bidding environment for all other legitimate bidders for public works contracts.”
- Gray Container owner ordered to pay $600,000 owed to the Ohio Bureau of Workers’ Compensation. Anthony Gray was recently sentenced for letting his company’s workers’ compensation insurance lapse, unbeknownst to his employees, who were filing valid claims. Gray Container, a 55-gallon drum manufacturer, has been ordered to discontinue operations until he becomes compliant with workers’ compensation law and takes action to repay more than $600,000 owed to the Ohio Bureau of Workers’ Compensation. The CEO of the Ohio Bureau of Workers’ Compensation has remarked that “[t]his is one of the most egregious cases of an employer simply ignoring laws meant to protect workers.”
- Ohio business owner fails to pay $73,000 worth of workers compensation coverage for her employees. In February, Linda Bommer, owner of R&W Swimming Pools in Harrison, Ohio, was convicted of failing to maintain workers’ compensation insurance coverage for her employees. Eight claims were filed against her company while she was operating a business under a lapsed policy. She currently owes approximately $73,000 in past due premiums, in addition to non-compliance claims costs.
Now, lets review items 2 and 3 from that top 10 list below to see the old adage “if you are going to steal, steal a lot” at work in the workers’ compensation system:
- Compensation Risk Managers commits $1 billion in fraud, forcing many small businesses to close. Compensation Risk Managers (CRM), a company that acted as trust administrator for small business in New York State who self-insured for workers’ compensation, was sued in 2009 for $400 million in a lawsuit for fraud. CRM was deliberately underestimating the liabilities of many businesses, making its service seem to save companies money when it was really leaving them with inadequate reserves when workers got hurt. When CRM filed for bankruptcy, New York State was left with no other option than to go after the 900 small businesses that were CRM’s clients, who have collectively under-paid over $600 million. Many businesses were forced to close, and only $48 million has been recovered so far.
- California couple underreports payroll by $30 million, buys Ferraris and Rolexes instead. Devon Lynn Kile and her husband Michael Petronella committed a total of $30 million in insurance fraud, while buying $500,000 in jewels, Rolex watches, and a car collection including two Ferraris, a Bentley and a Range Rover. Kile has been sentenced to 10 years probation and a possible 10 years in prison, and has been ordered to pay $2.8 million in restitution. Investigators also found an application by Ms. Kile to appear on Bravo’s “The Real Housewives of Orange County.” The couple are walking off with a profit of more than $27 million for their scheme.
The next time some one argues that worker fraud makes the system too expensive and benefits need to be cut back, please show them the facts.
[Sourced by our most loyal contributor "None", with mega-thanks again -- Adapted from http://workerscompensationwatch.com]
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