The High Cost of Fraud
Workers’ compensation fraud is prevalent and is costing employers and insurance carriers significant dollars each year.
There are many degrees of fraud. There are blatantly false claims, such as someone faking a fall or accident, to more subtle examples, such as complaining of false or lingering pain to get more time off of work.
All forms of fraud cost money. Recognizing fraudulent claims and controlling them can be difficult. Below are two of the many ways that workers’ compensation fraud can be controlled.
Get the Facts
The initial investigation is the first step, and one of the most important in preventing and controlling fraud. When an employee reports an injury, ensure that an accurate report is received.
Investigate every claim in detail. No matter how minor the injury, it is important to complete a thorough investigation.
How many times has that “minor” claim turned into a large exposure? An effective way to investigate is by interviewing the employee. Question the employee about how exactly the incident happened, who witnessed it and what could be done to avoid it in the future.
Specifically ask them to name all body parts that were injured. One form of fraud is an attempt to add non-related injuries to the claim by expanding reported injuries to different body parts as time goes on.
Ask them questions about their life. What are their hobbies, do they have other employment, and do they have a spouse and children?
These questions help document the accident and provide great information if there is a need to investigate the validity of the claim. Having their version of the accident in writing makes it less likely that the facts will change.
Nurse Case Management
Nurse case management is useful in many ways to help ensure proper treatment, mitigate costs and return the worker to full duty. It is also a way to help manage situations where there is suspected claims fraud.
The nurse can observe and establish a relationship with the claimant. The nurse should attend medical appointments with the injured worker and ensure the worker is being forthright with the doctor about their injury and job duties.
He/she should have a detailed job description so there is no question what restrictions the doctor should or shouldn’t place on the injured worker. The nurse can present information to the doctor about the worker’s hobbies and lifestyle.
If investigation reveals that an employee is performing activities that he/she states they cannot do, the nurse can present this to the doctor in the hope of getting a full duty release.
There are numerous ways to reduce or prevent claims fraud. Initial investigation and nurse case management are valuable tools.
While some fraudulent claims are prosecuted, most are not. The evidence of fraud can be used to limit exposure of the claim.
Use the information to bring the worker back to full duty as soon as possible. These tools can help shorten the length of a claim and save the company money.
States Crack Down on Premium Fraud
2014 has been a busy year so far for workers’ comp reform. Recent months have seen state governments cracking down on premium fraud, investigating companies and stepping up criminal prosecution.
Headlining the movement is New York’s Grand Jury investigation from September, 2013 to February, 2014.
The panel found that employee misclassification was a common practice among employers in the construction industry looking to avoid high premiums, costing the city and state millions in lost revenue and uncovered healthcare costs. The investigation built on a June 2013 study by the Fiscal Policy Institute that estimated that employer fraud in the construction industry cost New York about $500 million in 2011.
“We were looking at financial transactions involving workers’ comp fraud, and that developed into a series of investigations. I was then able to see that there were aspects of the system that could use some legislative and administrative changes” said Gilda Mariani, Assistant DA in the New York County District Attorney’s Office.
The Grand Jury found that it was far too easy for “unscrupulous” employers to submit false information on the applications to the New York State Insurance Fund, which covers 40 percent of the state’s workers’ comp needs. While misclassification was the most common offense, employers also skirted high premiums by paying employees off the books, under-reporting the number of employees on payroll, or neglecting to secure insurance altogether.
When companies don’t pay the appropriate premium, “it affects a lot of people,” Mariani said. “The employers who are really legit have to pay all of this overhead. The employees get hurt because they’re probably not getting withholding, or benefits, or all their rights as an employee. It affects consumers and taxpayers as well.”
Michael Newman, partner at Barger & Wolen LLP, a law firm specializing in insurance litigation, agreed that injured employees suffer at the hands of fraudster employers.
“An injured employee who is improperly designated as an independent contractor is not able to obtain the benefits of workers compensation protection,” he said. “If injured on the job, their only recourse is to sue the business for negligence, which may or may not garner them a full recovery.”
The Grand Jury report recommended that New York’s workers compensation law be revised to include stronger criminal provisions, like gradating the degree of felony offense proportionate to the fraud. It also suggested that criminal fines be increased and that judges have the power to impose fines as large as two or three times the amount of the fraud. Currently, fines are sometimes lower than the amount of fraud committed.
The report also recommended the creation of a standard electronic application form for all carriers to be submitted through the Workers’ Compensation Board, as well as an integrated database storing application, audit reports and certificates of insurance.
Finally, the report highlighted the vast trickle-down effects of premium fraud by calling for educational initiatives with a community approach that include both employers and employees.
“We did a joint program with a bar association where we did a series of two-hour classes for small businesses in the community that covered what their obligations are,” Mariani said. “We partner with community leaders and we also reach out to first responders so they can be more aware of what info to collect on the scene of an injury.”
Education is a key component as well in Tennessee initiatives. Earlier this month, Tennessee’s Department of Labor took action on several recommendations made by the Employee Misclassification Advisory Task Force to identify employer fraud. In addition to providing speakers at conferences around the state, the Workers’ Compensation Division also launched a website delineating the differences between employees and independent contractors.
Also similar to New York, Tennessee took a more aggressive approach to criminal prosecutions with the establishment of a referral process, hiring of three additional investigators, and planned implementation of fraud detection software.
California and New Jersey are playing offense as well.
In May, the California Department of Insurance announced that it had issued $95 million in grants over the past three years to district attorneys to target workers’ comp fraud. According to the department website, the district attorneys reported a total of 819 arrests in fiscal year 2011-2012, with 708 convictions. The total chargeable fraud was $341,084,553.
In New Jersey, a roofing company executive got hit with jail time in addition to a hefty fine when he was found guilty of misrepresenting his company to carriers. By asserting that his company did not, in fact, deal with the installation and maintenance of roofs, but rather used subcontractors, he avoided $265,044 in workers’ comp premiums.
“There is no question that employee misclassification in the workers’ compensation context has begun to get more attention from governmental entities in recent months,” Newman said. “It appears that prosecutions are indeed on the rise.”
Beware of Medical Hyper-Inflation!
Historically, medical inflation rates nationwide have been fairly consistent. However, data is now showing that medical inflation is not a “one size fits all” phenomenon, with hyperinflation spikes occurring in some locations…but not others.
This geographical conundrum means hyperinflation can occur as narrowly as two hospitals having dramatically different charges on the same street in Anytown, USA. So, uncovering these anomalies is akin to finding the proverbial needle in a haystack.
“In recent years, workers’ compensation saw claim frequency decline, while severity rates went up. This basically means that increased job safety has offset increased medical costs,” explained Jason Beans, CEO of Rising Medical Solutions, a national medical cost management firm. “So, whenever a client’s average cost-per-claim went up, it was almost always caused by catastrophic, outlier-type claims.”
But beginning in 2013 and extending into 2014, Beans said, things changed. “I’ve never seen anything like it in my 20-plus years in this industry.”
“Our analytics made it very clear that small pockets around the country are experiencing what could only be described as medical cost hyperinflation. The big spikes in some clients’ claim costs were driven by a broader rise in medical costs, rather than catastrophic claims or severity issues.”
– Jason Beans, CEO, Rising Medical Solutions
Data dive uncovers surprising findings
On a national level, most experts describe medical costs increasing at a moderate annual rate. But, as often is the case, sometimes a macro perspective glosses over a very different situation at a more micro level.
“Our analytics made it very clear that small pockets around the country are experiencing what could only be described as medical cost hyperinflation,” explained Beans. “The big spikes in some clients’ claim costs were driven by a broader rise in medical costs, rather than catastrophic claims or severity issues.”
This conclusion is supported by several key data patterns:
- Geographic dependency: While many payers operate at the national level, only relatively small, geographically clustered claims showed steep cost increases.
- Median cost per claim: The median cost per claim, not just the average, increased greatly within these geographic clusters.
- Hospital associated care: Some clusters saw a large increase in the rates and/or the number of services provided by hospital systems, including their broad array of affiliate locations.
- Provider rates: Other clusters saw the same hospital/non-hospital based treatment ratios as prior years, but there was a material rate increase for all provider types across the board.
- Utilization increases: Some clusters also experienced a larger number of services being performed per claim.
One of the most severe examples of hyperinflation came from a large Florida metropolitan area which experienced a combined 47 percent workers’ compensation healthcare inflation rate. Not only was there a dramatic increase in the charge per hospital bill, but utilization was also way up and there was a shift to more services being performed in a costlier hospital system setting.
“The growth of costs in this Florida market stood in stark contrast to neighboring areas where most of our clients’ claim costs were coming down or at least had flat-lined,” Beans said.
An Arizona metropolitan area, on the other hand, experienced a different root cause for their hyperinflation. Regardless of provider type, rates have significantly increased over the past year. For example, one hospital system showed dramatic increases in both charge master rates and utilization. “Even with aggressive discounting, the projected customer impact in 2014 will be an increase of $773,850 from this provider alone,” said Beans.
ACA: Unintended consequences?
So what is going on? According to Beans, a potential driver of these cost spikes could be unintended consequences of the Affordable Care Act (ACA).
First, the ACA may be a contributing factor in recent provider consolidation. While healthcare industry consolidation is not new, the ACA can prompt increased merger and acquisition efforts as hospitals seek to improve financials and healthcare delivery by forming Accountable Care Organizations (ACO). ACOs, the theory goes, can take better advantage of value-based fee arrangements in existing and new markets.
“As hospital systems grow by acquisition, more patients are being brought under hospital pricing structures – which are significantly more expensive than similar services at smaller facilities such as independent ambulatory surgery centers and doctors’ offices,” Beans said.
Unfortunately, there is little evidence that post-consolidation healthcare systems have become more efficient, only more expensive. For example, a recent PwC study reported that hospital IT infrastructure consolidation alone is projected to add 2 percent to hospital costs in 2015.
Another potential ACA consequence is group health insurers may have less incentive to keep medical costs down. An ACA provision requires that 85% of premium in the large group market must be spent on medical care and provider incentive programs, leaving 15% of premium to be allocated towards administration, sales and subsequent profits. “Fifteen percent of $5000 in medical charges is a lot less than 15% of $10,000,” said Beans. “This really limits a group health carrier’s incentive to lower medical costs.”
How do increased group health rates relate to workers’ comp? In some markets, a group health carrier may use its group health rates for their work comp network so any rate increase impacts both business types.
In the end, medical inflation is inconsistent at best, with varying levels driven by differing factors in different locations – a true “needle in the haystack” challenge.
What to do?
Managing these emerging cost threats, whether you have the capabilities internally or utilize a partner, means having the tools to pinpoint hyperinflation and make adjustments. Beans said potential solutions for payers include:
- Using data analytics: Data availability is at an all-time high. Utilizing analytical tools to spot problem areas is critical for executing cost saving strategies quickly.
- Moving services out of hospital systems: Programs that direct care away from the hospital setting can substantially reduce costs. For example, Rising’s surgical care program utilizes ambulatory service centers to provide predictable, bundled case rates to payers.
- Negotiating with providers: Working directly with providers to negotiate bill reductions and prompt payment arrangements is effective in some markets.
- Underwriting with a micro-focus: For carriers, it is vital that underwriters identify where these pockets of hyperinflation are so they can adjust rates to keep pace with inflation.
“This trend needs to be closely watched,” Beans said. “In the meantime, we will continue to use data to help payers of medical services be smarter shoppers.”