1. Commission on Health & Safety & Workers' Comp

Report on the Campaign Against the Workers' Compensation Fraud

During the past decade, there has been an energetic and rapidly growing campaign in the state against workers’ compensation fraud. This report on the nature and results of that campaign is based primarily on information obtained from the California Department of Insurance Fraud Division (Fraud Division), as well as applicable Insurance Code and Labor Code sections and data published in periodic Bulletin[s] of the California Workers’ Compensation Institute (CWCI).

Although workers’ compensation fraud was a prosecutable offence under previous laws, a 1988 report of California’s Little Hoover Commission observed that insurers had referred 160 claims to the Department of Insurance since 1979, and that the Fraud Bureau (now Fraud Division) had investigated only 17 of those cases. Only one case had been prosecuted.

In 1991, a new anti-fraud law, SB 1218 (Presley), was enacted. This legislation attacked some of the causes of past failure by guaranteeing insurers immunity from civil liability for reporting suspected fraud to appropriate government agencies. In addition, the new law established stiffer penalties of up to five years imprisonment for persons filing false or fraudulent claims, and subjected physicians and attorneys who engaged in specified fraudulent activity to professional discipline including loss of state licenses. Most importantly, the legislation also established a specially funded program to combat workers’ compensation fraud

The funding level for this program is set annually by the Workers’ Compensation Fraud Assessment Commission (WCFAC). WCFAC is composed of five members consisting of two representatives of self-insured employers, one representative of insured employers, one representative of workers’ compensation insurers, and the President of State Compensation Insurance Fund, or his or her designee. The members are appointed by the Governor for four-year terms.

Funding for the program is derived from an annual assessment on employers. The assessment applied to insured employers is based on the dollar amount of their worker’s compensation insurance. The assessment on self-insured employers is based on payroll. The initial assessment for the program was set at $3 million. However, by 1994, the annual assessment had increased to $25 million. In 1997, the annual assessment was further increased to $28.5 million. Following an additional increase, the current annual assessment is $30 million.

Originally, half of the funding went to the Fraud Division and half to local district attorneys. However, in 1997, Insurance Commissioner Quackenbush agreed to let local district attorneys receive a greater proportion of the annual assessment. In March 1999, WCFAC allocated $13.16 million in funds to the Fraud Division and $16.84 million for local district attorneys.

Each county in the state is eligible for funds to prosecute workers’ compensation fraud cases. By statute, each district attorney seeking a portion of the funds must submit an application to the Insurance Commissioner setting forth in detail the proposed use of any funds provided. Any district attorney receiving such funds must agree that the funds will be used solely for investigating and prosecuting cases of workers’ compensation fraud and must submit an annual report to the Insurance Commissioner with respect to the success of the district attorney’s efforts. The distribution of funds among the district attorneys who apply is made by the Insurance Commissioner with the advice and consent of the Fraud Division and WCFAC. In August 1999, the Insurance Commissioner awarded $15.9 million to district attorneys in 35 counties to fund workers’ compensation fraud investigations and prosecutions. Apparently, some moneys originally allocated by WCFAC are retained in order to pay for investigations and prosecutions in those counties that have not received annual funding.

According to the Fraud Division, the types of complaints or cases investigated include (1) "phony workers’ compensation claims," including claims made by workers, medical providers, pharmacies, attorneys and others, (2) "fraudulent denial of workers’ compensation benefits," and (3) "workers’ compensation premium fraud by employers." There are criminal prohibitions against each of these activities, primarily under Insurance Code sections 1871.4, 11760 and 11880. The sources of Fraud Division investigations include referrals by insurance companies and self-insured employers, citizen complaints and Division-initiated cases.

Insurance Code sections 1877-1877.5 are the "Workers’ Compensation Insurance Fraud Reporting Act." Pursuant to these and other provisions, all licensed insurers doing business in the state and all self-insured employers that suspect fraudulent claim activity must report it to the Fraud Division and the local district attorney. A report must be made within 30 days of knowing or reasonably believing a claim to be fraudulent. The report must be submitted on a form prescribed by the Department of Insurance.

In this connection, every licensed insurer doing business in the state is required to maintain a "Special Investigation Unit" (SIU). The intent of these requirements is to establish a systematic method for detecting and reporting suspected fraudulent claims. SIU Annual Compliance Reports are required to be sent to the Fraud Division detailing how insurers are complying with Department of Insurance regulations. This report must describe the insurer’s anti-fraud plan as well as current calendar year activities and future planned activities. This includes reporting the number of claims processed during the calendar year, the number of claims referred to the SIU, and the number of suspected fraudulent claims reported to the Fraud Division and local district attorneys. The reports are initially reviewed for completeness and compliance with regulations. Subsequently, insurers are chosen for audit based upon a review of the history of suspected fraudulent claims received by the Fraud Division and by other criteria. The audits include paper audits and on-site inspections at the insurers’ offices to determine whether the compliance reports filed by the insurers are accurate. Failure to comply with these regulations can result in penalties. In 1998, the Department of Insurance issued "orders to show cause" to two insurance carriers to explain why their "certificate of authority" should not be suspended for failing to maintain anti-fraud units. Both carriers subsequently stipulated to the Department’s order to maintain sufficient anti-fraud units, paid fines totaling $80,000, and are currently being monitored and re-inspected to ensure their compliance.

Insurance Code section 1877.3 provides, in part, that when an insurer knows of a person or entity whom it believes has committed a fraudulent act relating to a workers’ compensation claim or policy, the insurer must notify the local district attorney’s office and the Department of Insurance Fraud Division. In practice, it appears that most, but not all, suspected cases are referred to the Fraud Division, and that a slightly smaller number are referred to local district attorneys. In addition, the Fraud Division and local district attorneys may receive referrals from outside persons that are not tracked by both entities. As a consequence of these differences, the number of referrals and arrests reported by the Fraud Division is usually somewhat lower than figures reported by CWCI in its periodic surveys of insurers and large self-insured employers.

Based on information from the Fraud Division and CWCI Bulletin[s], the number of cases of suspected workers’ compensation fraud reported annually is as follows:

Following referrals, time is required for investigation before any arrests are made. The average time from referral to arrest is usually around nine months. For this reason, the number of arrests does not necessarily correspond with the number of referrals in a particular year.

Based on information from the Fraud Division and CWCI Bulletin[s], the number of workers’ compensation fraud suspects arrested annually is as follows:

Further information was obtained on the number of workers’ compensation fraud convictions and the classifications of the persons convicted. Based on information from the Fraud Division and CWCI Bulletin[s], the number of workers’ compensation fraud suspects convicted annually is as follows:

Some issues of the CWCI Bulletin included a breakdown of the classifications of people convicted of workers’ compensation fraud. Of the 387 convictions in which the classification of the person was indicated, 292 (75.4%) were claimants, 51 (13.2%) were employers, 22 (5.7%) were providers, 3 (0.8%) were attorneys, and 19 (4.9%) were others or of unknown classification. Out of the 45 cases in which the nature of the employer’s conviction was indicated, 44 convictions were for premium fraud and one conviction was for collusion with an agent. The types of offenses for which the other classifications were convicted were not specified.

Based on limited information, the rate of conviction appears to vary greatly from year to year. Fraud Division statistics indicate local district attorneys prosecuted 363 defendants in Fiscal Year 1993-1994, generating 181 convictions (49.9%). In Fiscal Year 1994-1995, there were 422 prosecutions and 198 convictions (46.9%). During Fiscal Year 1995-1996, there were 346 prosecutions and 248 convictions (71.7%). An issue about which figures may not be available is the percentage of convictions based on trials versus plea bargains. Given the general nature of criminal proceedings, it is assumed that the number of convictions based on plea bargains is high. Factors influencing conviction rates and the extent of plea bargains are not known.

Geographically, the great majority of suspected fraud cases come from Southern California. Fraud Division referral counts, broken down by county, show 62.7% of the suspected fraud cases reported between 1992 and 1994 came from Los Angeles County, 10.5% from Orange County, 3.2% from San Bernardino County and 2.8% from Riverside County. More recent CWCI figures for the second quarter of 1999 reflect that 30.1% of the documented referrals originated in Los Angeles County, 13.7% in San Diego County, 9.6% in Orange County and 4.6% in Riverside County. Other areas with higher numbers of referrals were Contra Costa County with 6.4% and Fresno County with 4.1%.

The data collected by CWCI is obtained from periodic surveys of insurers and larger self-insured employers. Normally, 42 to 50 carriers participate in the survey, along with 6 to 13 self-insured employers with quarterly payroll in the $2 billion to $3 billion range. Generally, 10% of the companies surveyed account for two-thirds of the workers’ compensation fraud referrals, 60% of the companies surveyed account for the remaining one-third, and 30% of the companies report no fraud referrals during the period. Results are even more focused with regard to convictions. About 10% of the companies surveyed account for two-third’s of the convictions obtained, while roughly 65% of the companies report no convictions at all.

From 1992, when CWCI reported 7317 fraud referrals, to 1998, when only 2765 referrals were reported, there has been a significant decline in the annual number of fraud referrals. Several possible explanations have been suggested. First, much of the fraud may have been wrung out of the system by closure of med-legal claim mills, imposition of felony penalties, and the "sentinel effect" of the high profile anti-fraud effort. Further, claim frequency has been in sharp decline during this period, and with fewer claims, there is less opportunity for claimant fraud. In August 1998, the CWCI Bulletin reported that "the decline in the fraud referral rate since 1992 has coincided with the ongoing drop in indemnity claim frequency, with the downtrends in both rates leveling off considerably over the last couple of years." However, in October 1999, the Bulletin reported that this "pattern may be changing, ... as the increase in the fraud referral rate between the final quarter of last year and the first quarter of this year far outpaced the 5.3 percent increase in indemnity claim frequency during the same period."

Another issue concerns the types of cases investigated and prosecuted. It appears from material provided to the Commission by the Department of Insurance that the Fraud Division is willing and prepared to investigate suspected workers’ compensation fraud of all types, including that by employers and insurers. For example, in July 1996, the Fraud Division and the San Diego County District Attorney’s office formed a Premium Fraud Strike Force. Its goal was to "identify, investigate, and prosecute individuals and entities that under-insure workers’ compensation benefits and commit workers’ compensation insurance fraud." According to the Department, the strike force "has helped yield timely and efficient criminal investigations of workers’ compensation fraud."

However, it appears that the primary focus of the Fraud Division is investigating and prosecuting suspected fraud by workers and medical providers. According to the Department, it "has increased enforcement and prosecution of both claimant and medical providers who file false workers’ compensation claims or inflated medical bills." It is unclear how much effort is devoted to investigating employers and insurers who (1) make knowingly false material statements for the purpose of denying compensation, (2) present knowingly false material statements in opposition to any claim for compensation, or (3) make knowingly false statements with regard to entitlement to benefits with the intent to discourage an injured worker from claiming benefits or pursuing a claim. Each of these actions is proscribed by Insurance Code section 1871.4, the same statute under which many workers and medical providers are prosecuted.

It may be that less of this latter type of workers’ compensation fraud is occurring. Despite complaints by applicants’ attorneys that some of the things that insurance companies have done constitute fraud, it does not appear that district attorneys are being provided with specific information. Part of the reason may be lack of public awareness of these provisions. There is a statutory warning regarding criminal penalties for workers’ compensation fraud by injured workers that is included on or with checks for temporary disability benefits. Also, any advertising directed toward workers by attorneys or medical providers must include a statutory notice that "making a false or fraudulent workers’ compensation claim is a felony subject to up to 5 years in prison or a fine of up to $50,000 or double the value of the fraud, whichever is greater, or by both imprisonment and fine." Although there are the same criminal penalties for employer and insurer fraud as referred to above, there is no similar statutory warning or required advertising notice.

In this regard, attached as attachment "A" is a memorandum from Tom McBirnie, a Commission consultant, to Christine Baker, Executive Officer of the Commission, recommending statutory changes that would require notices or warnings to employers and insurers similar to those given to workers. Such notices or warnings could either be specifically targeted toward employers and insurers or could be combined with existing notices and warnings and disseminated to all elements of the public. Examples of each alternative are included in the final two paragraphs of the attachment.

In addition, insurers and self-insured employers are under a statutory mandate and regulatory compulsion to report cases of suspected workers’ compensation fraud to the Fraud Division. Presumably, the cases they report generally involve suspected fraud by workers, medical providers and attorneys. Other than premium fraud, they are unlikely to be reporting cases of workers’ compensation fraud by employers or insurers. There is no well-established or publicized program for reporting suspected employer or insurer fraud.

Finally, Insurance Code sections 1872.83 and 1872.9 require the Department of Insurance to report on an annual basis to the Legislature and WCFAC on the activities of the Fraud Division and local district attorneys supported by fraud assessments. In 1995, legislation was passed that, according to the Department, postponed the requirement for most state departments and agencies to provide an annual report of their activities to the Legislature and Governor (Government Code section 7550.5). Insurance Commissioner Quackenbush did provide the Commission with a copy of the Department’s "Report of Accomplishments 1995-1998," which does contain some information on the Fraud Division’s activities in the area of workers’ compensation fraud. However, it appears that further interdepartmental exchange of information would be helpful to the Commission in understanding the extent of workers’ compensation fraud and recommending possible measures to make existing anti-fraud statutes and regulations fairer and more effective.

Encl: Attachment "A"

March 31, 2000

From:         Tom McBirnie

To:             Christine Baker

Subject:     Proposed recommendation for CHSWC annual report concerning deterrence of workers’ compensation fraud by employers and insurers

Insurance Code section 1871.4 states, in part, that it is unlawful to (1) make or cause to be made any knowingly false or fraudulent material statement or material representation for the purpose of obtaining compensation, or (2) present or cause to be presented any knowingly false or fraudulent written or oral material statement in support of any claim for compensation for the purpose of obtaining compensation. The criminal penalties for violations of this section are specified in the statute.

To deter employees from committing workers’ compensation fraud, the Legislature has specified various notices. For example, Labor Code section 5432, subdivision (a), states:

"Any advertisement which solicits persons to file workers' compensation claims or to engage or consult counsel or a medical care provider or clinic to consider a workers' compensation claim in any newspaper, magazine, circular, form letter, or open publication, published, distributed, or circulated in this state, or on any billboard, card, label, transit advertisement or other written advertising medium shall state at the top or bottom on the front side or surface of the document in at least 12-point roman boldface type font, except for any billboard which shall be in type whose letters are 12 inches in height or any transit advertisement which shall be in type whose letters are seven inches in height and for any television announcement which shall be in 12-point roman boldface type font and appear in a dark background and remain on the screen for a minimum of five seconds and for any radio announcement which shall be read at an understandable pace with no loud music or sound effects, or both, to compete for the listener's attention, the following:

NOTICE

Making a false or fraudulent workers' compensation claim is a felony subject to up to 5 years in prison or a fine of up to $50,000 or double the value of the fraud, whichever is greater, or by both imprisonment and fine."

Further, Labor Code section 5432, subdivision (b), provides:

"Any television or radio announcement published or disseminated in this state which solicits persons to file workers' compensation claims or to engage or consult counsel to consider a workers' compensation claim under this code shall include the following spoken statement by the announcer of the advertisement:

‘Making a false or fraudulent workers' compensation claim is a felony subject to up to 5 years in prison or a fine of up to $50,000 or double the value of the fraud, whichever is greater, or by both imprisonment and fine.’"

In addition, Insurance Code section 1871.8 provides:

"An insurer or self-insured employer may provide the following notice to an injured worker on or with a check for temporary disability benefits:

Warning: Acceptance of employment with a different employer that requires the performance of activities that you have stated that you cannot perform because of the injury for which you are receiving temporary disability benefits could constitute fraud and could result in criminal prosecution. If convicted, you could lose your rights to workers' compensation benefits and face imprisonment for up to five years and a fine of up to fifty thousand dollars ($50,000) or double the amount of the fraud, whichever is greater."

There also are various statutory prohibitions against equivalent conduct by employers and insurers. For example, Insurance Code section 1871.4 states, in part, that it is unlawful to (1) make or cause to be made any knowingly false or fraudulent material statement or material representation for the purpose of denying compensation, (2) present or cause to be presented any knowingly false or fraudulent written or oral material statement in opposition to any claim for compensation for the purpose of denying compensation, or (3) make or cause to be made any knowingly false or fraudulent statement with regard to entitlement to benefits with the intent to discourage an injured worker from claiming benefits or pursuing a claim. The criminal penalties for employer and insurer violations of these provisions are the same as those for employee violations of the section. There are similar criminal provisions and penalties in Penal Code section 550, as well as civil penalties for such conduct under Labor Code section 3820.

In addition, Insurance Code section 11760, subdivision (a), states, in part, that it is unlawful to make or cause to be made any knowingly false or fraudulent statement of any fact material to the determination of the premium, rate, or cost of any policy of workers’ compensation insurance, for the purpose of reducing the premium, rate, or cost of the insurance. The criminal penalty for violation of this provision is up to 5 years in prison or a fine of up to $50,000 or double the value of the fraud, whichever is greater, or by both imprisonment and fine. There are similar criminal provisions and penalties in Insurance Code section 11880, as well as civil penalties for such conduct under Labor Code section 3820.

Despite the fact that there are equivalent statutory provisions applicable to employers and insurers, there are no statutory notices or warnings for them that are similar to those given to workers. In Insurance Code section 1871, the Legislature declared that workers’ compensation fraud "harms employees by undermining the perceived legitimacy of all workers’ compensation claims." This would include fraud committed by employers and insurers. In the same statute, the Legislature declared that the actions of employers who fraudulently underreport payroll or fail to report payroll for all employees in order to pay a lower workers’ compensation premium "result in significant additional premium costs and an unfair burden to honest employers and their employees."

The February 2000 issue of Consumer Reports, at page 32, refers to the "one-sided attack on [workers’ compensation] fraud." The article states that in almost all jurisdictions, the target is the claimant, "[y]et fraud by medical providers and employers is much more significant." The article goes on to say that "Florida, Minnesota, Arkansas and California have started efforts to prosecute employer fraud, but in many states it’s not a priority."

In order to broaden the campaign against all types of workers’ compensation fraud and to promote a more evenhanded approach to the problem, it is suggested that legislation be recommended requiring notices or warnings to employers and insurers similar to those given to workers. Such notices or warnings could either be specifically targeted toward employers and insurers or could be combined with the existing notices and warnings and disseminated to all elements of the public.

One alternative might be to require that any advertising or solicitation of business by workers’ compensation insurers to employers include an appropriate notice that "making a false or fraudulent statement for the purpose of denying workers’ compensation, or to discourage an injured worker from claiming benefits, or to reduce the premium, rate or cost of workers’ compensation insurance is a felony subject to up to 5 years in prison or a fine of up to $50,000 or double the value of the fraud, whichever is greater, or by both imprisonment and fine."

Alternatively, the present Labor Code section 5432 could be amended to include notices in any advertisement for or solicitation of workers’ compensation business, including insurance, that "making a false or fraudulent statement for the purpose of obtaining or denying workers’ compensation, or to discourage an injured worker from claiming benefits, or to reduce the premium, rate or cost of workers’ compensation insurance is a felony subject to up to 5 years in prison or a fine of up to $50,000 or double the value of the fraud, whichever is greater, or by both imprisonment and fine."