California Commission on
Health and Safety and Workers’ Compensation

 

 

REPORT ON THE

WORKERS’ COMPENSATION ANTI-FRAUD PROGRAM

 

Prepared by

Thomas J. McBirnie

 

August 2001

 

 


On November 28, 2000, the Commission on Health and Safety and Workers’ Compensation (Commission) issued a "call for information" regarding the state’s ongoing program against workers’ compensation fraud. The call asked that the workers’ compensation community and interested members of the public respond concerning the six issues discussed below. Subsequently, written responses were received from several sources, ranging across a wide spectrum of opinion. In addition, Commission staff was able to speak informally with many of the principal participants in the anti-fraud program and also attended meetings of the Fraud Assessment Commission. At one of those meetings, district attorneys from around the state discussed many of the issues surrounding the program including priorities, funding, resource needs, problems and proposed solutions.

Following receipt of this input, roundtable discussions were held in San Francisco on April 10, 2001, and June 26, 2001. Public interest in the topic exceeded expectations, as 38 people attended the first roundtable and 40 attended the second. Despite the large number of people participating in these roundtables, the discussions were thoughtful, detailed and informative. Many recommendations in this report are an outgrowth of those discussions. While there were opposing opinions and continuing disagreements on some of the core issues, there was general support for many of the ideas expressed.

The following is a discussion of some of the information and comments received on the six issues raised.

 

Is workers’ compensation fraud a major problem?

There is no generally accepted method or standard for measuring the extent of workers’ compensation fraud in California. As a consequence, there are widely divergent opinions about the size of the problem and the relative importance of the issue. In part, the problem is one of how broadly or narrowly "fraud" is defined. For example, should employers who are illegally uninsured for workers’ compensation be considered part of the fraud problem? Should physicians who show a pattern of excessive treatment of work injuries be considered part of the fraud problem? Should insurers and self-insured employers who are repeatedly found to have failed to pay the full amount of benefits owed be considered fraudulent? Most importantly, should the estimated amount of "undiscovered" fraud be included in the calculation? It is difficult to find agreed answers to these questions.

Those who describe fraud broadly and believe that a sizable amount of fraud goes unreported claim that workers’ compensation fraud is a major problem. For example, the Los Angeles District Attorney (LA DA) cites a 1993 "Little Hoover Commission" report that reportedly concluded that (1) 30% of system costs, or $3 billion a year, are wasted in fraud, (2) 20% to 30% of employee claims are fraudulent, and (3) businesses are twice as likely to commit fraud than are injured workers. On the other hand, those who doubt that fraud is that prevalent or substantial point to the relatively small number of cases in which it is prosecuted. In that regard, California Applicants’ Attorneys Association (CAAA) refers to statistics indicating that in 1998, there were 358 fraud arrests, three-quarters of which were injured workers, and that amounted to "less than one-tenth of 1% of claims."

In addition, CAAA has submitted a 1998 article prepared by the Labor Reasearch Association that refers to a 1997 study by the Wisconsin Division of Workers’ Compensation which concluded that, "There is no evidence that criminally prosecutable fraud is more than one percent of all reported claims in Wisconsin, a far cry from the 20-30% estimates thrown about elsewhere." The Labor Research Association article concluded by stating:

"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 over-come, district attorneys will continue to fry the small fish while the big fish go free, and the voting public will remain distracted by anecdotes."

Some assistance in assessing the extent of the identified fraud problem can be found in statistics compiled by the Department of Insurance Fraud Division (Fraud Division) summarizing for FY 1999-2000, by county, the number or amount of arrests, prosecutions, convictions, penalties and court-ordered restitution. The summary is enclosed as "Attachment A." (It should be noted that not all counties participate in the anti-fraud grant program.) Those statistics indicate that from July 1999 through June 2000, 478 people were arrested for various types of workers’ compensation fraud, and that 390 people were convicted. These numbers are similar to those reported for prior years. The courts ordered payments of $8,821,239 in restitution and $190,743 in penalties. The total amount of fraud charged was $141,055,765.

Another approach is to look at the issue on a relative basis, how bad is workers’ compensation fraud today compared with the early 1990s, when the anti-fraud program was enacted? Although there is strong disagreement, there appears to be a general belief that there is not as much fraud in evidence now as there was then. In the words of the then Acting President of the California Workers’ Compensation Institute (CWCI):

"Recent CWCI surveys on statewide fraud prosecution activity reflect a significant diminishment of fraud referrals since 1992 although late 1999 and early 2000 may reflect the start of an upward trend. The peaks in the number of fraud arrests and convictions naturally lag behind higher levels of referrals due to the time to develop a case for prosecution. However, CWCI and other payor data suggests these rates may be tailing off as well. Whether this is due to the ‘sentinel’ effect, lower claim frequency, more difficulty in successfully pursuing fraud, or a lessened commitment is arguable and not worth pursuing as a means to enhance the fraud effort."

 

What should be the scope of the anti-fraud campaign?

When the workers’ compensation anti-fraud program began in 1992, the primary targets appeared to be medical treatment fraud, medical reporting fraud, claimant fraud, "capping" by attorneys and others, and, ostensibly, employer and insurer fraud that discouraged or prevented injured workers from obtaining benefits. The program was subsequently broadened to include employer premium fraud.

The question of whether the scope of the anti-fraud program should be broadened to include illegally uninsured employers remains unsettled. Some district attorneys assert that it make no sense to prosecute insured employers for felony premium fraud under the anti-fraud program while leaving illegally uninsured employers subject to a simple misdemeanor and their prosecution beyond the support of program funding. However, there is a legal opinion by the Department of Insurance that the current anti-fraud statutes do not encompass the act of being an illegally uninsured employer. In addition, there are others who argue that the problem of illegally uninsured employers should be dealt with by the Divisions of Labor Standards Enforcement (DLSE) and Workers’ Compensation (DWC) and should not be a part of the anti-fraud program. What is undisputed is that illegally uninsured employers are a major problem for their injured employees, for similar businesses with whom they unfairly compete, for the workers’ compensation adjudication process, and for many other private and public programs (including the Uninsured Employers Fund) that have to shoulder the medical treatment and benefit burdens that illegally uninsured employers have improperly avoided. In light of this problem, it appears that the Legislature should consider raising the criminal penalty for knowing failure to secure the payment of compensation, and also consider statutory changes to increase the identification and pursuit of illegally uninsured employers, including possible amendment of existing anti-fraud laws.

As noted, current anti-fraud provisions make it unlawful to fraudulently discourage injured workers from claiming workers’ compensation benefits or pursuing a claim. These same laws also make it unlawful to make or present a fraudulent statement in opposition to a claim for compensation or for the purpose of denying compensation. However, despite reports that employers are directing or encouraging industrially injured workers to use other benefit programs, rather than file workers’ compensation claims, and despite charges that employers and insurance carriers are fraudulently denying compensation and opposing claims, there is little indication they are being prosecuted for such offenses. Attorneys for injured workers claim that they have frequently reported these offenses, but that prosecutors fail to bring charges. District attorneys assert that they are quite willing to pursue such matters, but workers and their attorneys have failed to complete reports of the alleged offenses. In this regard, it was notable that the East San Jose Community Law Center reported that it has made referrals to the Santa Clara County District Attorney and that those referrals are being pursued. However, to encourage reporting, investigation and prosecution of suspected employer and insurer fraud, steps should be taken by the Fraud Division and district attorneys to publicize the means for filing such complaints and to publicly document the number and outcome of those complaints.

A separate, but related issue, is so-called "insider fraud," where claims managers, claims administrators, outside investigators and agents engage in fraudulent schemes involving the handling of policies and claims for personal gain. The LA DA indicates that a wide variety of criminal cases have been successfully prosecuted throughout the state, but that many cases are handled administratively by insurers without official reports to authorities. Although insider fraud is seldom mentioned in connection with the anti-fraud program, it appears to be a recurring problem that should be included as a specifically identified subject of anti-fraud enforcement, as it is in some other states. To this end, the Fraud Division should work with the special investigation units (SIU) of each insurance company, as well as self-insured employers and third party administrators, to insure that all cases involving suspected insider fraud are referred to law enforcement authorities for investigation.

The East San Jose Community Law Center has also proposed that an employer’s "knowing and material omission" that delays, discourages, or deprives an injured worker from receiving benefits should constitute fraud to the same extent as an affirmative representation. They note that Insurance Code section 1871.4 makes it unlawful to knowingly make, or cause to be made, a material mistatement in order to deny or discourage a claim. There is, however, no explicit statutory safeguard to protect an injured worker who is deprived of benefits because of an employer’s knowing material omission. The Law Center states:

"Labor Code Section 5401(a) imposes the legal duty upon employers to provide employees within one day of a reported injury, a claim form and notice of potential eligibility for benefits. The Law Center regularly counsels clients who are denied benefits because their employers violate this duty; we commonly see cases where employers have failed to inform the employee of the right to file a claim or of potential eligibility. These victimized employees suffer the same direct and proxi-mate damages as those in the fraud and uninsured employer situation. We therefore suggest that measures be taken to make it explicitly unlawful to prevent, delay, deny, or discourage a claim through material omission. This should at least be done when the material omission is a violation of a statutory duty."

 

What should be the focus and priority of anti-fraud efforts?

In response to the Commission’s call for information, the LA DA reported that "[e]ven though more claimant fraud is reported, it is the providers, by far, who generate most of the fraud within the workers’ compensation system." In its response, the Fraud Division added:

"While many of the most flagrant [medical] mills operating in Los Angeles County have been investigated and prosecuted, with several being tried in fiscal year 1998-99, some medical-legal mills are still operating in Southern California. Due to the complex nature of the workers’ compensation system and minimal accountability demanded of its service providers, documenting medical-legal fraud and determining criminal responsibility are exceptionally difficult."

Similarly, CWCI responded that:

"… Provider fraud is the most difficult for payors to uncover. Finding aberrant and fraudulent provider treatment and billing patterns is difficult because few insurers or self-insured employers have enough ‘signal’ from a given provider group to reliably identify any pattern of care, let alone a fraudulent one. We think a lot of fraud may be slipping through the cracks because there is currently no centralized resource that can look across all of the payors for these patterns."

Based upon these responses, it appears that medical provider fraud, both in medical treatment and medical-legal reporting, continues to have a significant impact on the economic cost of the workers’ compensation system to employers and insurers. The fact that these schemes are often difficult to identify, investigate and prosecute should not keep them from being one of the primary focuses of the anti-fraud program.

In its response to the Commission’s call for information, CAAA claimed that "from an economic standpoint, employer premium fraud and medical provider fraud is 3-4 times more costly than claimant fraud." Some examples of the economic costs of these types of fraud are found in the "Cases Examples" provided to the Commision by the Fraud Division and enclosed as "Attachment B." It is noteworthy that all but two of the examples involved either medical provider fraud or employer premium fraud. In this connection, the head of the Fraud Division (recently renamed as the "Criminal Investigations Branch") stated:

"Employment misrepresentation does have a direct impact on the business climate of the state. Unfairly assessed premiums each year cost employers millions of dollars. Employers, who misrepresent the facts about their business or their employees in order to reduce their workers’ compensation cost, tarnish the business climate, especially for small employers. Employment misrepresentation hits certain sectors hard, such as construction, and the garment industry, where the margin of profit is already small. …"

The LA DA added that "prosecutors and investigators agree that prosecution of ‘high impact’ cases, i.e., cases against providers, employers, or large premium fraud cases, gives the public and those working within the system a greater sense of justice and satisfaction." Because of their economic and community impact, it appears that cases of employer premium fraud should continue to be one of the primary focuses of the anti-fraud program.

Claimant fraud is another important issue. Approximately three out of four of the people convicted of workers’ compensation fraud are claimants. To some degree, this is due to the fact that claimant fraud is easier to detect, investigate and prosecute. However, the fraud committed is, nonetheless, an unfortunate reality. It occurs even in cases of legitimate injuries, where injured workers lie in order to obtain additional benefits. Employers and insurers correctly believe that one of the proper purposes of the anti-fraud program is to deter such conduct in the first place, and to punish it when it occurs. Many injured workers and their attorneys are understandably sensitive to the energetic prosecution of claimant fraud, arguing that it is not that common, that what there is has less economic impact than other types of fraud, that the approach of the anti-fraud program is not evenhanded, and that the program tends to create a public image that all injured workers are cheats. Despite some rhetoric to the contrary, it appears obvious that the great majority of injured workers are not cheating the system, they are unintentional participants in the workers’ compensation process, seeking only the medical treatment and other benefits to which they are statutorily entitled. However, there is enough claimant fraud occurring to continue to make it an important part of the anti-fraud program. If it goes unchecked, more workers will be tempted to file false claims or exaggerate disabilities, leading to improper awards and increased premium payments for California employers.

In a letter dated May 15, 2001, the president of CAAA stated that his group questioned "the failure to more clearly condemn the focus on claimant fraud as well as the failure to recommend actions that would enhance the prosecution of employers and insurers who illegally discourage workers from filing claims, lie to workers about coverage, and outright deny benefits to which a worker is legally entitled." He added that "[s]uch timidity surely is a disservice to fairminded parties."

As stated in the preceding paragraphs of this section, it appears that, due to their economic impact, the foremost targets of the anti-fraud program should be medical provider fraud and employer premium fraud. We also have suggested that steps should be taken by the Fraud Division and district attorneys to publicize the means for filing complaints of suspected employer and insurer fraud and publicly document the number and outcome of those complaints. One significant step in improving the reporting of suspected employer and insurer fraud would be to change the form generally used for reporting fraud. The title and basic focus of the form (FD-1) is on claimants, not on employers or insurers who may be violating the fraud provisions. The title of the form is "Suspected Fraudulent Claim (SFC) Referral Form." Section I of the form asks for the "reporting party code." None of the codes specifically refers to claimants, providers or attorneys. Five of the ten codes are for employers and insurers, two are for law enforcement and the other three are generic (e.g., "CDI Information Source"). Section II of the form asks for "loss/injury information," including claim and policy numbers, the premium and potential loss, etc. Section VI asks for the name of the insured or employer involved. Section VII asks for the names of other parties to the loss/injury. None of this is oriented toward or "user friendly" to an injured worker who is attempting to report fraudulently denied benefits.

Fraud by employers and insurers in connection with injury claims also needs to be a visible focus of the anti-fraud program. It is important to the program’s success that it be seen as evenhanded and that it be so in reality, particularly in light of the fact that it is employer funded. However, for this to happen, injured workers, their attorneys, and even employer and insurer personnel have to be willing to report suspected fraud in sufficient detail for it to be investigated. Further, the Fraud Division and district attorneys must not only document such referrals, they must understand why the reported conduct or statement is suspected to be fraudulent and have the determination to investigate the case. To some extent, it may be necessary to reach out to more groups and educate them about what "fraud" is, and is not.

All of the above are appropriate targets of the anti-fraud program. However, due to their economic impact, it appears that the foremost targets of program budgets and resources should be medical provider fraud and employer premium fraud. In addition, the program should remain vigilent in investigating claimant fraud and be much more responsive to allegations of employer and insurer fraud in connection with injury claims.

 

What should be the source and the level of funding for anti-fraud efforts?

In a letter dated April 26, 2001, Commissioner Steinberg raised as an issue the "need to specially fund the investigative activity of the Department of Insurance and the prosecutorial activity of the local District Attorneys at their current very substantial financial levels or the policy implications of privately funding these activities at all."

Since its inception, the anti-fraud program has been funded entirely by assessments on employers. The amount of the annual employer assessment is determined by the Fraud Assessment Commission, with the approval of the Insurance Commissioner and Governor. The Fraud Assessment Commission is made up of only employer and insurer representatives. It reviews funding requests from the various district attorneys whose counties are interested in participating in the program. The overall funding is divided almost equally between the district attorneys and the Fraud Division. On August 6, 2000, the Los Angeles Times ran a feature article entitled "Public Fraud Favors Those Who Privately Fund It." That article suggested, among other things, that the Fraud Division and district attorneys would not prosecute employers and insurers for claims fraud because they did not want to "bite the hand that feeds it." Both the Fraud Division and local district attorneys have denied that charge.

However, in response to the Commission’s call for information, the LA DA did report, in part:

"… The [Fraud Assessment] Commission’s authority to review and comment on the district attorney’s funding has led to criminal defense attorney accusations and lengthy legal motions alleging bias. In order to successfully prove a conflict of interest allegation, the defense must show, in part, that the ‘district attorney’s discretionary decision making has been placed within the influence and control of a private party with a particular interest in the prosecution of the defendant.’ … To date, these conflict of interest allegations have been deemed by reviewing courts to be unfounded and without merit. However, defending the funding scheme is needless waste of prosecution resources."

The response goes on to suggest that the funding assessment should continue to be levied on all employers. However, "the funding should be applied toward criminal investigations and prosecutions on a per county basis based on a formula which analyzes the number of employees in each county." Such an approach "would still require a review of data by the Insurance Commissioner and Fraud Division, but would eliminate the need for the FAC." The response further suggests that the "Fraud Division should be reviewed and funded on a regional and not statewide basis."

According to the August 6, 2000, Los Angeles Times story, there were two reasons behind employer funding of the anti-fraud program:

"[Senator Robert] Presley’s legislation, which passed in 1991, was unusual in that it required employers, rather than taxpayers in general, to pay for investigations and prosecutions through a surcharge collection on their insurance premiums.

"There were two reasons Presley took the private money approach. The state was in the red and Presley said any general fund appropriation would not pass. County prosecutors were unwilling to use tax money already assigned to them. They had higher priorities: violent crimes.

"[James] Morris, the Presley aide, recalled speaking to several county prosecutors including representatives of the Los Angeles County district attorney’s office who told him: ‘Unless we see any money, we’re not going to prosecute this type of case.’"

In subsequent years, the needed money came. What began in 1992 as a $3 million a year program has rapidly expanded to more than $30 million a year in funding. Many district attorneys have grown attuned to the program and its anti-fraud targets. Over the past nine years, there have been several high profile fraud prosecutions, some successful, some not. According to district attorneys, the scope of the program has grown and the perpetrators of fraud have become more sophisticated. Investigating and prosecuting these sophisticated operators, they say, requires substantial and continued funding.

CWCI’s response discusses the overall amounts spent on the program, rather than the funding source:

"Each year the Fraud Assessment Commission generates through assessments $30,000,000 to be distributed to the Fraud Division … and local district attorneys. Each insurer licensed to do business in the State must maintain a Special Investiga-tions Unit. Annual costs range between $50,000 and $200,000 or more depending on the size of the insurer, the amount of workers’ compensation insurance written, and whether the SIU is out-sourced or not.

"To our knowledge, no one has been able to put a price tag on the total system cost of the anti-fraud effort nor for that matter have we been able to get a good handle on the cost-benefit of pursuing fraud in workers’ compensation."

In a letter dated May 15, 2001, the president of CAAA attempted such a cost-benefit analysis. Referring to the amounts of court-ordered restitution and penalties, he stated:

"Compare these figures with the costs of investigation and prosecution. This figure can be approximated by adding the cost of the fraud assessment ($30 million) with the cost of the Special Investigation Units (estimated by CWCI at $50,000 to $200,000 per licensed insurer). Then ask the question: Is it appropriate to spend $30 million annually plus the cost of the SIU’s to successfully prosecute 390 cases to obtain $9,012,132 in penalties and restitution? And of that, to obtain only $3,660,856 in collections? Only when these figures are appropriately analyzed can this issue be intelligently discussed. We urge the Commission to examine this data."

In another letter dated July 6, 2001, the head of the Fraud Division responded, in part, as follows:

"… Back in the early 90’s, doctors and attorneys sent their cappers out to the Employment Development Department (EDD) offices to recruit clients. These potential clients were employees applying for unemployment benefits. There was no enforcement and cappers had no real fear of reprisal. But soon, with funding from California employers and a recommendation by the Fraud Assessment Commission, resources were in place providing an aggressive anti-fraud effort. These efforts resulted in the prosecution of many attorneys and medical clinic doctors. Today some doctors and lawyers have developed different or more sophisticated fraudulent schemes to avoid detection and prey upon the system. Others have gone to other states and some are just continuing their illegal activities with other forms of insurance fraud.

*****

"An effective anti-fraud campaign in California has played and will continue to play a substantial role protecting workers, reducing costs of the WC system and (sic) to honest employers statewide. … Fraud Division is eager to investigate those cases that make the greatest economic impact in order to protect businesses and the public. Measurements of results by numbers alone overlooks the societal value of a program. … However, on the numbers side of the ledger, in fiscal year 1999-2000, the district attorneys reported $141,055,765 was charged in workers’ compensation insurance fraud in cases that went to trial. The joint anti-fraud efforts are achieving a valid economic impact as well as a deterrent effect."

Others view the current source and level of funding to be appropriate, but believe that the total monies could be used more effectively. They point to the claimed duplication of investigative efforts by the Fraud Division and district attorneys. And like CAAA, some argue that the anti-fraud program is not getting enough "bang for the buck" when evaluated by the number of convictions obtained and amounts collected in restitution.

Prosecutors respond that investigation and prosecution of high impact cases involving medical provider fraud or employer premium fraud require substantial resources and are very difficult and time consuming. Too much program emphasis on increasing the number of convictions will cause more effort to be spent harvesting only the "low hanging fruit" of claimant fraud. There also appears to be a widespread view among the Fraud Division and district attorneys that more specialized resources are needed, particularly forensic auditors and experts in computer science. In some cases, these experts need to be available on very short notice or for lengthy periods of time. Acquiring this important expertise would require increased program funding.

 

Should there be greater interagency coordination of anti-fraud efforts?

It is undeniable that the more information is shared among those who collect it, the more likely it is that major fraudulent schemes will be detected, adequately investigated and successfully prosecuted. In this regard, CWCI states:

"A collaborative, multi-payer transactional data warehouse increases the potential of detecting true fraud and abuse ‘signals’ while discounting singular or aberrant anecdotes that distract special investigations. A centralized specialized investigation unit removes duplicative expenses associated with each payer trying to identify fraudulent activity. It can also serve to coordinate the efforts of payers, the Department of Insurance, and local district attorneys. Depending on the data content of the warehouse, it can be used to address employer and claimant fraud as well as provider fraud."

In this connection, the LA DA adds:

"The Workers’ Compensation Insurance Rating Bureau (WCIRB) is the depository for workers’ compensation insurance policy information. WCIRB computers are able to communicate with the Employment Development Department computers, as demonstrated by the [Commission’s] Illegally Uninsured Employer Pilot program. Additionally, software is available to identify employers that are reporting payroll figures inconsistent with those reported to insurance carriers for premium purposes. These anomalies could point to premium fraud cases. … [P]rosecutors should establish a memorandum of understanding with the [Department of Insurance] to create a system of direct access between the WCIRB database and the various District Attorney offices throughout the state."

On the same topic, but from a somewhat different perspective, CAAA has recommended that the Commission "actively support the DWC Workers’ Compensation Information System efforts, which will provide an independent public database for tracking the timeliness of benefit payments to workers and medical providers, thus eliminating policymakers’ reliance on the insurance industry for information." However, CAAA also expresses significant reservations about the sharing of information between public and private agencies, to the extent allowed by law and regulation. They contend that approving of this practice "without a discussion of the possible privacy concerns is irresponsible." Further, they state that a "collaborative, multi-payer transactional data warehouse," as proposed by CWCI, "is an invitation to abuse privacy rights under the guise of investigating fraud."

In addition to sharing of information, some have suggested that there should be greater interaction between public agency employees (primarily in DWC) and those investigating and prosecuting workers’ compensation fraud. For example, DWC Information & Assistance Officers, members of the Audit Unit and the staff of the Uninsured Employers Fund all may have contact with information suggesting suspected fraud. In some cases, the information may be considered privileged by law or regulation. In other instances, however, the information may not be privileged or may even be unshared public record. One prime example is the annual report of DWC’s Audit Unit. The most recent Audit Unit report, for calendar year 2000, is at http://www.dir.ca.gov/dwc/audrpt00.pdf and contains important information about current claims handling practices. This information may be of use to those investigating alleged fraudulent claims practices. However, to do this there needs to be greater cooperation and coordination between agencies and law enforcement in sharing of collected information and reporting suspected fraud.

In some instances, public employees who are not in law enforcement may question whether it is their proper "role" to be reporting suspected fraud. Generally, it is. However, a rather more debatable case involves the workers’ compensation judges who must impartially decide disputed cases. They often are in an advantageous position to recognize suspected fraud and to gather the information needed to pursue an investigation. However, some WCJs believe that if they report the suspected fraud themselves, instead of letting attorneys handle the problem, they are creating an appearance of bias or prejudgment in future cases involving the same medical provider, employer, insurer, attorney, etc. To avoid that appearance, they may need to "recuse" themselves from hearing those cases.

At the first roundtable, it was reported that some WCJs have referred cases of suspected fraud to investigative authorities. In addition, as part of DWC’s training program, the Fraud Division has been making presentations to all WCJs about the anti-fraud laws and how to report suspected fraud. Some of the roundtable participants thought that WCJs should be required to report all cases of suspected fraud. Others who were present (in addition to WCJs who were not present) indicated misgivings about such a requirement.

Based upon the information and comments received, it appears that, to the extent allowed by law and regulation, private and public agencies should share information that may assist in the detection and investigation of suspected fraud. Further, private and public employees should be encouraged to report suspected fraudulent activities and to cooperate in the investigation of those activities.

 

Are there new ideas or innovative approaches that might improve the anti-fraud program?

The East San Jose Community Law Center proposes that the Fraud Assessment Commission should have employee representation. They state:

"… Because the [Fraud Assessment Commission] funds prosecution efforts, the absence of employee representation creates an inherent imbalance. Prosecution efforts against employers have, thus far, focused almost exclusively on premium fraud violations; there has been a virtual absence of employer fraud prosecution. Because premium fraud prosecution directly protects the interests of the insurance industry, while employer fraud prosecution more directly benefits victimized employees, this imbalance must be remedied.

"We believe that a balance of interests should be represented on the Commission. Employees, who are presently silenced through exclusion, should be provided an ‘official’ voice on the Commission. …"

At the initial roundtable, there was general support for this idea, including agreement by the members of the Fraud Assessment Commission who were present. Accordingly, it is recommended that Insurance Code section 1872.83(b)(1) be amended to include employee representation on the Fraud Assessment Commission. (CAAA raises the question of whether one appointment is "enough to create a true balance.") In addition, the LA DA has suggested that the Fraud Division’s Fraud Advisory Committee "should be more representative of the workers’ compensation system."

Another suggestion concerned the civil immunity afforded to insurers, and their authorized agents, who provide information in reporting fraud, so long as they are acting "in good faith, without malice, and reasonably believe that the action taken was warranted by the then known facts." The LA DA stated that "[t]his immunity should be available to anyone who reports fraud in the system – employee, co-employee, attorney, medical provider, workers’ compensation judge or WCAB employee." On the other hand, CAAA argued that the Commission ought to "consider legislative changes to eliminate the insurer’s immunity from civil liability." Further, in its letter of May 15, 2001, CAAA stated: "We support broadening immunity only if it is limited to injured workers. We believe that the recommendation to broaden civil immunity to everyone would be paramount to encouraging reckless misconduct." (Italics in the original letter.)

At the first roundtable discussion, it was suggested that other civil immunity provisions are adequate to protect both insurers and others who report suspected fraud. That appears to be the case. In a 1996 opinion, the Court of Appeal observed that "another statute, section 47 of the Civil Code, already gives everybody – including insurers – the right to report crimes to the police, the local prosecutor or the appropriate regulatory agency, even if the report is made in bad faith." (Italics in the court’s opinion.) The broad immunity from civil tort liability that flows from the section 47 privilege is nearly absolute. The exception under state law is that the person reporting a suspected crime may be subject to later suit for malicious prosecution.

Based on existing law, it appears that no "broadening" of the statutory civil immunity provisions is necessary. (There is some additional protection for those who report suspected fraud in Insurance Code section 1879.5. That section applies to "any person" who notifies the Department of Insurance of suspected fraud. However, that section is more narrowly applied than Civil Code section 47.)

It also is unlikely that the current civil immunities afforded to insurers will be abolished. In addition to their immunities under Civil Code section 47 and Insurance Code section 1879.5, insurers, their employees, and agents are also protected by specific provisions of Insurance Code sections 1872.5, 1873.2, 1874.4, 1875.4 and 1877.5. And even if all of those Insurance Code sections were repealed, it appears highly unlikely that the long established immunity under Civil Code section 47 would be restricted. (However, it should be noted that Mr. Indravadan Jayaswal, who appeared at the second roundtable, was able to successfully sue the insurance carrier that furnished false information concerning his alleged fraud. The details of his case are in the August 6, 2000, Los Angeles Times article that was included in materials provided by CAAA. Mr. Jayaswal’s suit against the workers’ compensation carrier was for malicious prosecution.)

Another injured worker who appeared at the second roundtable was Gary Vincelet. The issue in his case was reimbursement of approximately $100,000 in expenses incurred in successfully defending against criminal charges of workers’ compensation fraud. According to the case summary, after the jury in the criminal trial deadlocked, the judge declared a mistrial. Subsequently, the charges against Mr. Vincelet were dismissed at the request of the district attorney. Following that, Mr. Vincelet filed a petition with the WCAB seeking reimbursement of his court expenses from his employer, who had reported the alleged fraud. In ruling against Mr. Vincelet, the WCAB stated (1) that the issue of whether to allow costs in a proceeding in the Superior Court lies within the Superior Court’s jurisdiction, (2) that the WCAB was unaware of authority that would allow costs to be imposed against a non-party in a [criminal] action, and (3) that the criminal defense costs incurred were not subject to reimbursement under the provisions of Labor Code sections 4607, 5410.1 or 5811. Both the Court of Appeal and Supreme Court denied Mr. Vincelet’s petitions for review of the WCAB’s decision.

On November 15, 1999, former Commissioner O’Hara wrote a letter to the Commission stating that he planned to review this issue with CAAA and California Labor Federation and to develop legislation for introduction in the Legislature. He stated it would be helpful to have the Commission’s "thinking and possible resolve on this matter" and that it also "is incumbent upon the workers’ compensation community to remedy this bar to workers approaching their benefits."

The potential legal difficulties in attempting to address this type of situation include (1) determining the proper forum, (2) circumventing the immunity from civil liability in Civil Code section 47, (3) bringing the costs of a criminal defense within the statutory ambit of workers’ compensation benefits, (4) determining whether employer liability should be contingent on having made an improper fraud referral, and (5) deciding whether the benefit should limited to only those acquitted of all criminal charges. However, in view of the Legislature’s broad powers to amend the workers’ compensation laws, perhaps legislation addressing this situation could be introduced.

In his letter dated July 12, 2001, the president of CAAA has urged the Commission to "recommend elimination of the fraud program in its current form." He states that the issue at stake is one of equity. Medical providers who overbill are not being prosecuted and issues relating to nonpayment or denial of benefits to workers are considered a "regulatory problem" and not acted upon by district attorneys. This leaves workers to bear the brunt of criminal prosecutions and penalties. In order to remedy this, he states:

"Our Association has not deterred from our concern that fraud, to the extent that it exists, must be prevented but our Associ-ation believes that the correct means in dealing with this issue is through the civil system. The civil system can more fairly deal with the problem rather than the current harsh treatment of innocent injured workers in the criminal system. We therefore urge the Commission to take this opportunity to recommend that criminal penalties be eliminated in favor of civil penalties. The unfair prosecutions against defenseless workers must cease."

At present, Labor Code section 3820 provides for civil penalties for various types of workers’ compensation fraud. However, that provision is in addition to the criminal penalties specified in the Insurance Code and Penal Code. While the Insurance Code sections could be amended to reduce the group of persons subject to criminal penalties for specified acts of workers’ compensation fraud, it is unlikely that the common perjury, theft and fraud provisions of the Penal Code would ever be amended to exclude workers’ compensation claimants from potential prosecution.

Another issue raised in Commissioner Steinberg’s letter of April 26, 2001, concerned the "pursuit of criminal prosecutions of applicant fraud for essentially exaggerated claims of disability prior to … the workers’ compen-sation proceedings in which the alleged fraud was committed being allowed to reach resolution." Among the complaints mentioned by the commissioner were (1) arrests of workers at the WCAB in the midst of scheduled hearings, (2) district attorneys usurping the function of WCJs to determine the facts in accordance with workers’ compensation laws, and (3) the res judicata effect that a criminal conviction can have on a valid workers’ compensation claim.

Basically, the issue is whether a criminal prosecution should be held in abeyance pending completion of a worker’s workers’ compensation case. The difficulty is that criminal prosecutions generally must proceed according to established statutory timelines. In light of the length of time it reportedly takes to investigate most fraud referrals, district attorneys might not have the latitude to delay arrests and prosecutions, even in the unlikely event that they wanted to. Also, there are statutes, such as Insurance Code section 1871.7, which provide that certain civil proceedings involving substantially the same conduct shall be stayed until the criminal action has been concluded at the trial court level. Although there have been cases where the appellate courts have allowed workers’ compensation proceedings to continue in the face of pending criminal prosecutions, at least where reopening is possible, it would be anomalous to see a criminal prosecution stayed pending the outcome of a workers’ compensation case.

Another suggestion, from the LA DA, was that the Information for Injured Workers pamphlet should provide information to workers regarding fraud:

"… It must be clearly emphasized to injured workers that if they are [temporarily totally disabled] and they work, they could be committing a crime. Workers’ compensation fraud should be clearly defined, as well as the ways to avoid involvement in fraudulent practices. Employer fraud should be clearly described and claimants should be advised to report it and told how to report it. Employees should be informed that employers are required to have workers’ compensation coverage, instructed to report violations, and told the way in which to do so. These pamphlets should detail the consequences of fraud and how fraud affects the employer, employee, consumer, taxpayers, and the state."

In the initial roundtable discussion, there was general support for providing early and complete information to injured workers about all types of workers’ compensation fraud, how to avoid it, how to recognize it, and how to report it. The group felt that DWC should include this information in the information pamphlet that is provided for injured workers.

A number of other significant matters were raised in response to the Commission’s call for information which may require additional information and discussion. One of the most pressing issues concerns what to do about insurer Special Investigations Units (SIUs). In the view of several district attorneys, only a half dozen SIUs are providing consistent support for the anti-fraud program. Most of the SIUs refer almost no suspected fraudulent claims to the Fraud Division or to district attorneys. This also is borne out in the quarterly fraud statistics published by CWCI. In the view of some, the remedy is for the Insurance Commissioner to take more aggressive action against insurers who are not complying with statutory requirements. Some also contend that SIU requirements should be expanded to include self-insured employers. On the other hand, some appear to believe that SIUs are costly and ineffective in detecting or preventing fraud and should be replaced by either a voluntary reporting structure or an entirely different mechanism for collecting and reporting information about suspected fraudulent activities. At the present time, virtually no one is satisfied.

Another sore subject is restitution. At present, even when fraud claims are successfully prosecuted, very little comes back to the victim in restitution. Even when the criminal court orders restitution, the recovery is often limited. In many counties, restitution is handled by the probation department, not the district attorney’s office. Probation officers often have very large case loads and other pressing responsibilities to attend to. Further, Penal Code section 1203.2(a) provides that probation shall not be revoked for failure of a person to make restitution unless the court determines that the defendant has willfully failed to pay and has the ability to pay. In an effort to obtain some amount of restitution for the victim, prosecutors will discount the term of incarceration. In effect, a defendant can buy his or her way out of jail by repaying a portion of the ordered restitution. This concept is frustrating not only to prosecutors, but also to the victims and the community. Another complaint is that even when restitution is obtained, it sometimes flows only to the insurer, not to the employer. Still another form of frustration involves seeking restitution before the WCAB. When restitution has been ordered by a criminal court judge, the WCJ may not feel that he or she has jurisdiction or authority to order either additional restitution or measures to enforce the criminal court’s order. A final point is that in cases where injured workers are the victims of fraud, they also should be entitled to restitution, either through the criminal courts or the WCAB.

Recommendations

Based on the information and comments received, the Commission makes the following recommendations:

1. The Legislature should consider raising the criminal penalty for knowing failure to secure the payment of compensation.

2. The Legislature should consider making statutory changes to increase the identification and pursuit of illegally uninsured employers, including possible changes to the existing anti-fraud laws.

3. The Fraud Division and district attorneys should take steps to publicize the methods for filing reports of suspected employer and insurer fraud and should publicly document the number and outcome of the reports.

4. The Fraud Division should work with insurance company SIUs, as well as self-insured employers and third party administrators, to insure that all cases involving suspected "insider fraud" are referred to law enforcement authorities for investigation.

5. Due to their economic impact, the foremost targets of fraud program budgets and resources should be medical provider fraud and employer premium fraud.

6. The Fraud Division and district attorneys should also remain vigilant in investigating claimant fraud and be more responsive to allegations of employer and insurer fraud in connection with the reporting and handling of injury claims.

7. To the extent permitted by law and regulation, private and public agencies should share information that may assist in the detection and investigation of suspected fraud.

8. Private and public employees should be encouraged to report suspected fraudulent activities and to cooperate in the investigation of those activities.

9. The Legislature should consider amending Insurance Code section 1872.83 to include employee representation on the Fraud Assessment Commission.

10. The Division of Workers’ Compensation should provide an information pamphlet for injured workers that has, among other things, complete information about the general types of workers’ compensation fraud, including how to avoid it, how to recognize it, and how to report it.

Additional recommendations voted at August 24, 2001, meeting:

11. The Department of Insurance should change the form generally used for reporting suspected fraud to make it more "user friendly" to injured employees.

12. Further review should be conducted of the role of insurer special investigation units in reporting suspected workers’ compensation fraud.

13. Full restitution to the victims of workers’ compensation fraud should be made a more important aspect of the anti-fraud program.