New Tactics to Watch for in Workers’ Compensation Fraud Investigations: Risk and Insurance
The Coalition Against Insurance Fraud estimates the burden of workers’ compensation fraud at $32 billion a year. New investigative strategies can help mitigate the damage.
Workers’ compensation fraud takes three main forms – claims fraud, premium fraud and supplier fraud – and the effects on honest employers and employees can be devastating.
A new analysis from the Coalition Against Insurance Fraud has found that the combined burden of fraud on the workers’ compensation line is $32 billion a year. Fortunately, new investigative efforts based on the growth of our online lives can help mitigate the damage.
Competitor fraud in figures
Of the three types of worker compensation fraud, employer fraud far exceeds employee fraud, despite the emphasis on misrepresentation in an often adversarial system, while Medicare far exceeds both.
The Coalition Against Insurance Fraud puts employer premium fraud at $23 billion of the total. Typically, employers manipulate the system by misclassifying employees or using methods of underreporting payroll through “under the table” compensation arrangements.
For corporate executives, the lopsided understanding of how fraud occurs in the compensation system is left to the public imagination.
“Depending on how these are defined, the cost of supplier fraud may well exceed the cost of premium fraud. For the public, the fraudulent claim is perhaps the easiest to understand; it’s easy to imagine someone claiming to be more disabled by injury than they actually are. Maybe they even know someone who has engaged in this behavior,” said Reagan Pufall, president and CEO of Omaha National.
“On the other hand, it may be more difficult for them to imagine how premium or supplier fraud occurs. It is also important to note that sometimes misclassified employees may occur with the fraudulent intent to inappropriately reduce premiums, but sometimes this is an innocent mistake.
Indeed, while difficult to parse, the National Health Care Anti-Fraud Association (NHCAA) underscores Pufall’s point. The organization published a conservative estimate of 3% of total health care spending as fraudulent, while noting that other sources point to a nearly 10% fraud burden in the insurance and Medicare branches, i.e. some $300 billion.
Meanwhile, most studies reveal that only 1% or 2% of employee claims are fraudulent.
“When we talk about claimant fraud, we’re talking about a one-time, individual claim, a single act. These acts are often seen as deeper because the allegedly injured worker is seen performing an act egregious in the public eye, such as climbing a ladder while alleging that they are bedridden,” said David Stacey, director of Sentry’s Special Investigations Unit. Insurance.
“When we talk about misclassification, it’s not as suggestive, and often the public doesn’t see it or hear about it. However, misclassifications are more skewed as they can affect multiple employees, from a handful to hundreds or even entire companies – so the numbers are much larger.
Worse than the dollar-and-cent effect of fraud on every employer, misclassifications and illegal payments jeopardize the health and well-being of employees on the job, especially undocumented or otherwise marginalized workers.
A University of Massachusetts study of construction employers in that state found that the construction industry “almost completely abandoned regularized employees in residential construction,” reducing the cost of employees by 15 to 30 %.
The researchers also warned that their state was no exception and that the regulatory resources dedicated to this type of employer fraud were woefully insufficient, a sentiment confirmed by the low number of regulators dedicated to investigating large-scale fraudulent operations in the high risk industries.
Technology-based (and some old-school) investigative techniques can help
For individual insurance companies, investing in systems within the underwriting and claims intake processes can ease the burden and reassure customers and claimants.
“We are fortunate to design and develop our own software in-house,” Pufall said. “So we can integrate fraud detection functionality directly into our claims application or our underwriting application.
“The best strategy uses a variety of methods such as exception reporting, AI pattern recognition, and automated information gathering from the internet. Social media can be a rich source of information. However, technology can only complement the work of talented human beings, not replace it.
“Many Special Investigations Units now make the mistake of thinking that investigations are done entirely or primarily online, but in reality, real-world investigative techniques are still often the most effective approach.”
For her part, Stacey agreed that the solution can start with technology, but experienced professionals need to back it up every step of the way.
“Tools such as artificial intelligence, machine learning and predictive model audits can identify suspicious indicators and ensure loss matches classification,” he said. “For example, it would be questionable for a window cleaner in a big city to report that he does not work above three floors. Or that a landscaper fell off a bridge.
Towards a fraud-free future
Like top-notch accident prevention and loss control programs, fraud investigation programs have a lofty and lofty goal: to strive for zero. However, the lack of investment in investigating workers’ compensation fraud, perhaps due to the misperception that employees are the root cause, means the goal seems increasingly remote.
“Over the years there has been a focus on compliance in many other areas of insurance, while the workers’ compensation side of the industry has been lacking,” Stacey said.
“Better regulatory controls can hold carriers and their policyholders more accountable. The industry could use more regulatory oversight in this space, because when regulators step up their oversight, insurers step up theirs as well. By aiming to do things right, we help protect the insurer, the insured and the consumer.
For Pufall, the problem is one of complacency as much as a lack of investment.
“Within the industry, some companies view fraud investigations as a heavy obligation that they are legally bound to perform,” Pufall said.
“We don’t see it as a burden but as an opportunity. We protect our customers against unduly inflated claim costs. We protect our injured workers from improper and risky medical procedures. We protect the financial success of our own business. In addition, we protect society as a whole from the costs of insurance fraud. &