Fraud in the Texas Workers' Compensation System
Executive Summary
Workers' compensation fraud occurs when a person knowingly or intentionally conceals, misrepresents, or makes a false statement to either deny or obtain workers' compensation benefits or insurance coverage, or otherwise profit from the deceit.1 From 1992 to 1996, the Texas Workers' Compensation Commission (TWCC) detected almost $20 million dollars in workers' compensation fraud, while the Texas Comptroller of Public Accounts estimated that fraud accounted for as much as 30 percent of all workers' compensation claims.2
Until now, research has been lacking on the amount and types of fraud prevalent in the Texas workers' compensation system. This project will shed some light on this subject by addressing the following research questions:
How much fraud is in the Texas workers' compensation system?
- It is impossible to determine with certainty the amount of fraud in the Texas system because insurance carrier s are not required to report fraud. Looking at figures from the TWCC, a total of 840 alleged fraud cases were referred to the agency for investigation in 1996 and 925 investigations were completed. The most common type of fraud referred to, and investigated by, the TWCC is injured worker benefit fraud.
- More cases involving health care provider fraud were referred to district attorneys for criminal prosecution than injured worker benefit fraud cases -- even though injured worker benefit fraud investigations outnumbered provider fraud investigations by more than four to one.
- According to the TWCC, health care provider fraud was the most expensive type of fraud in the Texas workers' compenstion system in 1996 (representing a total dollar amount of $1,200,952), accounting for over eight times the dollar amount of injured worker benefit fraud (a total of $134,351).
- For this project, the ROC surveyed insurance carriers that write workers' compensation coverage in Texas. Many had trouble responding to the survey because they do not track fraud or break it down into types of fraud. Based on the surveys of the nineteen carriers that responded (representing 47 percent of the market), 4,644 alleged fraud cases were investigated in 1996. Of these, 3 percent were sent directly to a district attorney and 6 percent were referred to the TWCC for criminal prosecution.
- By far, the largest number of fraud cases investigated by these nineteen insurance carriers in 1996 involved injured worker benefit fraud (4,077 cases). Relatively few fraud cases investigated ever resulted in a criminal conviction or a civil trial.
What types of fraud exist in the Texas workers' compensation system and how is workers' compensation fraud investigated?
- There are currently five types of fraud in the Texas workers' compensation system: injured worker benefit fraud; insurance carrier fraud; employer premium fraud; h ealth care provider fraud; and attorney fraud.
- Insurance carriers use several clues to identify a potential workers' compensation fraud case including: when the injury occurred; past history of workers' compensation claims; frequent change of doctors; employer classification codes not consistent with the duties normally associated with the employer's type of business; multiple businesses located at the same address; duplicate medical billings; health care providers attempting to bill an injured worker for medical services provided on a workers' compensation claim; and incorrect information on attorney bills or duplicate billing.
- According to insurance carriers, on average, attorney fraud cases took the longest time to investigate (one to two years) while injured worker benefit fraud cases took the least amount of time to investigate (three to six months).
- Even though attorney, employer premium and health care provider fraud cases took longer to investigate, the most expensive type of fraud investigation for insurance carriers in 1996 was injured worker benefit fraud.
How effective are California's efforts to reduce fraud and how can Texas learn from California's experiences?
- The California Legislature adopted major fraud-reform legislation in 1991 (the California Insurance Frauds Prevention Act of 1991) which made several changes in the way alleged workers' compensation fraud cases were investigated, reported, and prosecuted. This reform included the creation of the Fraud Assessment Commission (FAC) which has the power to assess employers in order to raise funds. Funds are used by both the California Department of Insurance Fraud Bureau and local district attorneys to investigate and prosecute workers' compensation fraud cases.
- Once the California Insurance Frauds Prevention Act of 1991 became effective, the number of suspected workers' compensation fraud case s referred to the Fraud Bureau rose to an all-time hihg of 8,342 in FY 1992/1993. Since that time, the number of fraud referrals has dropped by over 50 percent to 3,281 in FY 1996/1997.
- Although fraud referrals are down, the number of workers' compensation fraud arrests and convictions has steadily increased since 1992.
- Although the number of fraud arrests and convictions has increased as a result of California's 1991 reform, this change has not come about without problems. In order to meet the increasing demand, the Fraud Bureau increased its staff from 68 in FY 1991/1992 to over 228 today. Even with the additional staff, however, the lack of agency policies and procedures associated with prosecuting workers' compensation fraud initially caused problems within the agency including a backlog of cases that have yet to be investigated.
- In addition, an effort is currently underway within the Fraud Bureau to track resources and expenditures more carefully; handle fraud referrals in a more timely manner; managed fraud cases more effectively; and impose accountability on investigators, supervisors and managers.
- There are several ways in which Texas can learn from California's fraud reform experiences. California improved its ability to track workers' compensation fraud cases by requiring that all fraud cases be simultaneously reported to the Fraud Bureau and local district attorney's offices. Texas currently has no way to accurately track the number of alleged fraud cases in the system. Texas could correct this problem by requiring that all fraud referrals be reported to TWCC and local district attorneys and that TWCC be responsible for tracking the outcomes of these fraud investigations.
- The California Fraud Bureau's lack of strong administrative policies and procedures regarding workers' compensation fraud investigations reulsted in a backlog of fraud cases to be investigated. In developing a program to combat worker s' compensation fraud in Texas, the TWCC must make sure that an adequate administrative infrastructure is in place to address any sharp increase in fraud referrals. It must also ensure that alleged fraud cases are investigated and referred for criminal prosecution or administrative penalty in a timely manner.
- California improved its workers' compensation fraud arrest and conviction rates by giving district attorneys a large amount of money to investigate and prosecute workers' compensation fraud. Some self-insured employers, however, are now arguing that these district attorneys have become overdependent on this source of funding. TWCC should encourage local district attorneys to pursue workers' compensation fraud cases by giving them funds to prosecute workers' compensation fraud without allowing district attorneys to become overdependent on this source of funding.
The estimates on the amount of fraud in the Texas workers' compensation system vary widely, and it is virtually impossible to accurately quantify the amount of fraud in the current system using available data from insurance carriers and the TWCC. Many insurance carriers indicated that they had extreme difficulty responding to the survey for this report because they simply do not collect fraud information or maintain a fraud database. Insurance carriers should be mandated to collect basic fraud information such as the number of alleged fraud cases identified and investigated each year. Insurance carriers should also track the outcome of these investigations, as well as the amount of money recovered in each case.
It also appears that most of the attention in Texas so far has been directed toward identifying, investigating, and prosecuting injured worker benefit fraud. More resources should be spent fighting the most expensive and overlooked types of workers' compensation fraud: health care provider and employer premium fraud.
Footnotes:
- Texas Workers' Compensation Commission, Workers' Compensation Fraud, 1996. Return to Footnote Link 1
- Texas Comptroller of Public Accounts, The Texas Medicaid System - Fraud and Abuse, by National Bankruptcy Information Bureaus, Inc. (Middleton, Wisconsin, September 15, 1996) p. 3. (Consultant's report). Return to Footnote Link 2
