The Key Elements Of Claimant Insurance Fraud
The following in an edited excerpt from the book, Red-Handed: Conducting Smarter Workers’ Compensation Investigations to Reduce Fraud and Claims Cost, by JR Robles.
Twenty-nine-year-old Joe had been on the job fewer than ninety days when he got hurt, so he was still in his probationary period. Although every employer varies in regard to their probationary period, in Joe’s case it meant he didn’t yet have health coverage.
While playing softball on a Saturday two days earlier, he tore a tendon in his knee sliding into third base. It wasn’t a work-related injury. It wasn’t even the company team. Because he didn’t have health insurance, Joe didn’t go to urgent care.
Instead, he returned to work Monday morning, clocked in, got his delivery sheet manifests, loaded up his truck, and drove off. About an hour later, he called his boss saying he had hurt his knee while lifting a heavy package. There were no witnesses.
The company sent out another driver to cover the route, and they took Joe to urgent care. Sure enough, his knee was torn up and needed surgery, so the company immediately began the claims process.
The claims examiner knew there was nothing inherently suspicious about a delivery driver getting hurt lifting a heavy package. Still, Joe was a new employee, and nobody had witnessed the injury. If these aren’t exactly red flags, they’re certainly yellow flags. Just to be thorough, the claims examiner decided it was worth looking into further, so they referred the claim to us for investigation.
The first thing any investigator does is a background check. After completion of an initial criminal and civil background check, we found nothing either derogatory or helpful to the claim.
The next step was a social media search. In doing so, we found out the injured worker played on a softball team. We obtained the schedule and learned he had been in attendance on the previous Saturday. During additional research, we didn’t find any videos of the game on YouTube.
Joe’s Facebook profile was blocked to the public, but the softball team had its own public page. We looked at that page and found other players with open profiles. On their pages, we saw messages to Joe that said things like, “Hey, Joe, tough break at the game. Hope your leg gets better soon.” We even saw pictures of Joe at that very game. It was clear Joe had injured himself at the softball game the Saturday before the claim was filed.
During the AOE/COE (Arising Out of Employment/Course of Employment) portion of the investigation, we asked directly if he had been injured at any time before that Monday morning when he made the claim. He said no. We asked him if he played any sports. He said he occasionally played softball, but he didn’t say anything about playing recently. He denied being at the game on Saturday, and, in fact, claimed he hadn’t played during the whole season. We didn’t reveal that we knew otherwise.
Next, we obtained the medical reports. Joe had also lied to the doctors about the injury. We reported back to the claims examiner and Special Investigation Unit (SIU) director within the TPA, and they denied the claim. However, Joe had already undergone surgery and wanted to make sure the company was going to pay for it. He couldn’t go back to work. The injury was legitimate, even if it wasn’t work related, so he hired a workers’ compensation lawyer in an attempt to fight the denial.
We produced witnesses — teammates and players from the other team — who testified under oath that Joe had hurt his knee during the game. At that point, Joe was cornered. He tried to say the knee injury he’d sustained on Saturday was minor, and that he had suffered the actual tendon damage on Monday.
An independent doctor was brought in, and after he examined Joe’s knee, the doctor determined the injury was consistent with an injury one might sustain playing softball and not an injury caused by lifting. The employer prevailed and TPA requested that we refer this claim to the district attorney and Department of Insurance for fraud referral. Joe was convicted and ordered to pay restitution, which included the initial medical bills, the claims administration costs, and the cost of the investigation.
The Most Practiced Fraud In The World
The insurance business is highly susceptible to fraud, and, as a result, it has become the most widely practiced form of fraud in the world. Since insurance companies generate such a large cash flow, they create an economic resource that is an attractive target.
Fraud occurs when individuals attempt to profit in some way from an insurance company without complying with the terms of an insurance agreement.
It can happen at any point during an insurance transaction, and it can be perpetrated by individuals applying for insurance, policyholders, third-party claimants, or professionals who provide services to claimants.
Insurance fraud comes in two forms. “Hard fraud” occurs when an accident, injury, or theft of property is fabricated. “Soft fraud” occurs when a legitimate claim is exaggerated.
There are three common types of workers’ compensation claimant fraud:
- False Claims. The injury never occurred in the first place and the applicant knowingly made misrepresentations in order to receive benefits.
- Double Dipping. They work while collecting temporary disability payments or other benefits.
- Exaggerated Claims. Workers initially sustain a legitimate injury but then exaggerate the severity or use “injury creep” to collect more money and stay off the job for a longer period of time.
The Recipe for Fraud
In 1953, American criminologist Donald Cressey developed a theory known as the Fraud Triangle. According to Cressey, three ingredients will be present in any fraud case: need, opportunity, and apathy. This is the unholy trinity of fraud. When each of these conditions has been met, the possibility of fraud exists.
In 2004, David Wolfe and Dana Hermanson in The CPA Journal expanded Cressy’s Fraud Triangle theory with their own Fraud Diamond Theory. In it, they added capability as a new element of fraud. Their theory suggests a fraudster must have both a particular fraud opportunity and the ability to turn it into reality. Capability includes things like position, intelligence, ego, coercion, and deceit.
Most crimes boil down to need or pressure in one way or another. Usually, if someone steals a diamond ring, it isn’t because that person wants a diamond ring; it’s because they need the cash. In the previous illustration, Joe acquired a need when he injured himself. He needed someone to pay his medical bills since he didn’t have healthcare for his nonindustrial injury.
Opportunity is the point in the recipe where fraud occurs. Need and apathy are prerequisites, but when the opportunity arises, all the elements necessary for fraud fall into place. In workers’ comp cases, the opportunity might come in the form of an environment that lacks supervision or video cameras. It could also be a favorable boss or a weak track record of fraud prevention. In Joe’s case, the opportunity came two days after his injury, at a job that required lifting and provided the ability to work unobserved and unsupervised.
Apathy (or rationalization) is probably the easiest ingredient in the recipe. Apathy is a form of rationalization in which a person justifies a crime. In this case, Joe probably thought that he wasn’t really stealing since he was so close to getting his health insurance anyway. After all, who cares about an arbitrary date? Maybe he felt the probationary period was unfair. He was just as likely to be injured in the first ninety days as the last ninety, so why shouldn’t the company cover those costs? Maybe he felt, like most people, that insurance companies ought to be there when you need them, no matter the circumstances. Whatever the case, somehow, he came to believe that lying about the cause of his injury was okay.
Global insurance provider Zurich polled more than two thousand customers to see how they reacted in ethical situations where honesty could have potentially raised their insurance rates. One in five people admitted to lying to their insurance company, even though they knew providing false information could render their policies invalid.
Where Does Fraud Happen?
According to the Coalition Against Insurance Fraud, fraud costs an estimated $80 billion a year across all lines of insurance, of which $7.2 billion is related to workers’ comp. According to NICB (National Insurance Crime Bureau), fraud comprises about 10 percent of the property and casualty insurance losses and loss adjustment expenses each year. It also accounts for between 5 and 10 percent of the claims of U.S. and Canadian insurers. For a third of insurers, fraud represents 20 percent of their total claims cost. The difference between 5 percent and 20 percent is largely the difference between insurers who act aggressively in fighting fraud and those who don’t.
All told, insurance fraud accounts for 7 percent of the overall U.S. gross domestic product. Despite this, only a small percentage of cases are ever investigated. An even smaller percentage of the perpetrators are convicted of crimes. Claims that go uninvestigated send the message that it’s okay to lie, which perpetuates more fraud. Those costs are then written back into the price of insurance premiums and passed on to the customer. Public agencies simply lay off workers, furlough workers, or reduce services.
Applicant Fraud
The cases we’ve looked at thus far have been examples of applicant or claimant fraud, in which someone lies in their claim. Joe, who lied about the cause of his knee injury, is a typical example of applicant fraud. According to California Insurance Code 1871.4(a)(1), it is unlawful to “make or cause to be made a knowingly false or fraudulent material statement or material representation for the purpose of obtaining or denying any compensation.”
Employer Fraud
Employers also commit fraud. Consider, for instance, a family-run construction business in which the owner’s relative — a cousin, let’s say — is hurt in a non-work-related (aka nonindustrial) injury. The owner might be inclined to call it an on-the-job injury and have the company’s insurance cover the costs.
An even more common example involves employee designations. Suppose you own a roofing company with a hundred employees made up of forty roofers, twenty administrative roles, with the rest being roofers’ assistants, drivers, a receptionist, and warehouse workers. The costs of insuring a roofer or a receptionist are quite different. It might cost twenty cents on the dollar for every hour of work the receptionist puts in.
That means, at $10 an hour, it’s going to cost $1.60 per day to cover that employee. The roofer, at $20 an hour, is involved in more dangerous work, which might require fifty cents on the dollar per hour to cover him. That works out to $80 a day in coverage costs. For the other employees, the costs are probably somewhere between those two extremes.
When a roofer gets hurt, the employer might be tempted to misclassify the employee to the insurance company. Maybe she claims the worker was merely an assistant and didn’t do any of the dangerous rooftop work. This relatively small lie represents a substantial portion of insurance fraud.
Provider Fraud
When providers commit fraud, it tends to happen on a larger scale. If a doctor is committing fraud with one patient, he’s probably doing it with all of his patients. We investigated an orthopedic surgeon who specialized in knee and hip replacement. He’d order a bunch of unnecessary MRIs, prescribe unnecessary medical devices, and bill insurance providers for visits that never occurred.
Laws limit a medical provider’s ability to charge on workers’ comp claims, but a doctor might believe his time is worth more than he’s allowed to bill. That fact could create both the need and apathy. The opportunity arises when it’s time to bill.
Proving Fraud
The vast majority of fraud instances go unpunished. One reason for the lack of convictions is a lack of investigations, with even fewer prosecutions, both of which require the limited resources of law enforcement agencies.
To get a conviction, the prosecution must demonstrate that the lie altered the outcome of a claim for financial gain, and that the misrepresentation was material with intent to deceive. Financial losses aren’t always required. Potential loss is sometimes enough. If you tried and failed to rob a bank, after all, you could still be charged with a crime. The same goes for insurance fraud.
Insurance companies are legally required to investigate all suspected fraud. Each state has its own individual statutes, because state governments have a vested interest in weeding out fraud to protect their citizens. To that end, the insurance and self-insurance community maintain a national database in which they store information about all insurance claims, which they can use to cross-check with new claims.
Because insurance companies are on the frontline, they’re charged with stamping it out by providing documentation and reporting back to the state. The cost of investigation and litigation to these companies, however, is measured in time and money — a lot of each. Getting a conviction requires finding the lie and proving the lie was material to the case and done with the intent to deceive — each a hurdle to be overcome.
So, while they’re required to investigate, insurance companies have no control when it comes to litigating suspected fraud cases. This is done at the district attorney level or at each state insurance department’s discretion. In most instances, it’s easier to simply write off the loss as a cost of doing business, then pass the cost on to the consumer in the form of higher premiums.
In addition to the criminal legal process, there’s a separate forum to adjudicate workers’ compensation claims, an appeals system with its own judges that holds its own hearings separate from civil and criminal courts. It’s important to aggressively fight fraud cases here, because even if the incident doesn’t rise to the level of criminal activity, there are malingering and exaggerated cases. Sometimes, injuries aren’t as long lasting or severe as the injured worker insists. If properly investigated, the cost of a settlement can get significantly reduced in such cases.
In terms of cost savings, fighting these claims is well worth the effort. Fighting fraud at the appeals court level and in criminal court sends a message that it’s not okay to lie. Employers who don’t aggressively investigate claims imply that they’re soft on fraud, which only exacerbates the problem.
A Culture of Opportunity
A culture of opportunity exists when an employer has lax policies and procedures in documenting and reporting claimed injuries. It can exist in a mom-and-pop business as well as a Fortune 500 company.
The workers’ compensation process is guided by specific timetables. The moment a worker says they’ve been hurt, the clock starts running: the employer and the insurance company have ninety days to investigate that claim without inflicting heavy costs. If a company doesn’t take immediate action in response to an injury claim, the entire culture suffers, as other employees realize the company probably doesn’t follow other procedures either. Such negligence by an employer also contributes toapathy.
One way employers can reduce opportunity is by establishing a culture in which claims get investigated early. Another method is by establishing rigid safety practices in which employees recognize that a proper protocol exists for all workplace accidents. Awareness is another preventative measure. If you hear about an employee having financial problems at home — the car getting repossessed, the house getting foreclosed — there’s now a need, and you can assume there’s apathy. All that’s left for malfeasance is an opportunity.
By being aware of potential abuses, you can stay one step ahead of fraud.
For more on how to prevent claimant insurance fraud and protect your bottom line, pick up Red-Handed: Conducting Smarter Workers’ Compensation Investigations to Reduce Fraud and Claims Cost by JR Robles.
