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Fraud Detection and Prevention

August 2001


Acknowledgements
The Research and Oversight Council on Workers’ Compensation (ROC) would like to thank a number of individuals for their help in providing information necessary for this review of fraud detection and prevention in Texas and in other states.

At the Texas Workers Compensation Commission: Steve Quick, Bob Esparza, Linda Bayless and Bob Shipe; at the Texas Department of Insurance: Dennis Pompa and John Watson; at the Texas Workers’ Compensation Insurance Fund: Mary Nichols, Elliot Flood, Terry Frakes and Jaelene Fayhee; at the State Office of Risk Management: Jonathan Bow; at the State Auditor’s Office: Bill Weber; at the Comptroller of Public Accounts: Cindy Wiley; at the Texas Insurance Council: Steve Nichols; and at the American Insurance Association: Janet Bachman.

This review was authored by Scott McAnally, who also conducted the interviews and the necessary research.  Jon Schnautz reviewed earlier drafts of the report; Jerry Hagins edited and formatted t he final report.

 I. INTRODUCTION

The detection and prevention of fraud has been an issue of concern in the Texas workers’ compensation system for some time.  In addition, its implications are not limited to one, easily-defined category of fraud.  Perceptions of the severity of fraud in the system, and of what types of activities should be the focus of fraud prevention efforts, vary among stakeholders including insurance carriers, employers, workers, attorneys and health care providers.

In order to identify opportunities to improve workers’ compensation insurance fraud detection and prevention in Texas, the Research and Oversight Council on Workers’ Compensation (ROC) conducted a review of systems in place here and in other states.  The background information for this review was gathered during the fall of 2000 and involved interviews with both the key workers’ compensation and insurance regulatory agencies in Texas and selected insurance fraud experts here and in other states, along with a review of published and Internet-supported information.

It attempts to provide answers to three basic questions:
1. What is the extent of fraud in workers’ compensation and other insurance lines, and what are Texas’ current efforts to detect and prevent fraud?;
2. How does fraud detection and prevention in the workers’ compensation system, or in insurance generally in Texas, compare to that in other states?; and
3. What policy options exist to improve insurance fraud prevention programs in Texas?

Following this introduction is a discussion of the extent of fraud in the workers’ compensation system. This is followed by an overview of current programs and recent regulatory efforts in Texas, and an examination of programs in six other states, chosen because they utilize comparatively aggressive approaches to fraud.

 II.  DEFINITION AND EXTENT OF THE FRAUD PROBLEM

There is no one, clear label that can be placed on the various activities in the workers’ compensation system that could be construed as fraud.  Stakeholders in the system often carry different perceptions of the activities that constitute fraud, as well as the responses that constitute effective anti-fraud efforts.

For example, insurance carriers and employers have historically viewed fraud by workers’ compensation claimants as a major problem. Conversely, workers, attorneys and health care providers often contend that employer and insurance carrier actions to deny or delay benefits constitute fraud, and that regulatory agencies should investigate such allegations.

In the workers’ compensation system, broad categories of fraud can be defined as follows:

  • workers who receive improper benefits through intentional deception;
  • health care providers, attorneys, and others who bill for services not rendered, misrepresent their services, receive kickbacks for referrals and/or contribute to a worker receiving improper benefits;
  • employers who avoid payment of proper insurance premiums, often to gain a competitive advantage in the marketplace;
  • employers, carriers, and medical agents/experts who knowingly act to deny or dispute legitimate claims by workers; and
  • officers and agents who market illegal insurance products and those who raid the assets of insurance companies, creating financial distress.


Efforts have been made to assess public sentiment about insurance fraud, and these have also revealed divergent views.  A recent survey of public attitudes found that 90 percent of respondents believed that fraud increases insurance costs – by an average estimated increase of 37 percent – but that only a slight majority, or 57 percent of those responding, believed that a person should be prosecuted for falsifying insurance-related information.1   Historically, the public has often viewed fraud as a “victimless” crime, and prosecutors have made violent crime a higher priority for prosecution.2

A review of literature reveals that no solid method exists to quantify the extent of fraud that occurs in workers’ compensation – or, for that matter, in any other insurance line.  Devices such as claim audits and fraud indicators are commonly used in private and public insurance programs to identify suspicious patterns that could point to fraud.  However, most regulatory efforts, including those by workers’ compensation regulators, account for fraud in the system by tracking fraud referrals and the prosecution of those referrals, a process that only accounts for reported cases.  In addition, many of these regulatory programs include processes that are useful as auditing tools but not necessarily for detecting fraud. Undetected fraud cannot, of course, be factored into an assessment of the extent of the problem in Texas or in any other state.3

With these caveats and limitations, there are indications from existing fraud programs and other data that point to both the extent of the fraud problem and the cost savings to be realized by addressing it.  For example, the Coalition Against Insurance Fraud (CAIF), a non-profit, nationwide anti-fraud organization, in 1997 estimated the annual cost of insurance fraud in all lines nationwide at $79.7 billion,4  a figure that on a per capita basis would suggest about $6 billion in annual fraud-related losses in Texas that year.

Other estimates specific to health care fraud place its cost at between 3 and 10 percent of the country’s annual health expenditure of $1 trillion.5   The National Insurance Crime Bureau (NICB), a non-profit organization supported by about 1,000 insurance companies, recently called workers’ compensation fraud the fastest-growing segment of insurance fraud, and estimates that it costs the insurance industry nationwide about $5 billion a year.6

There are obvious implications in these estimates for fraud in the workers’ compensation system.  More than half of workers’ compensation benefit payments are for medical services, so the connection to health care-related fraud is clear.  In addition, the experience of other medical benefit programs suggests that the implementation of aggressive fraud and abuse prevention programs in workers’ compensation medical services may pay significant rewards.  As an example, a U.S. Department of Health and Human Services Medicare/Medicaid fraud hotline generated 450,000 callers in five years, and Operation Restore Trust, a multi-faceted national Medicare/Medicaid fraud and abuse detection effort, recovered $23 for every $1 expended for fraud and abuse detection and prosecution during a two-year demonstration period.7

 III. CURRENT WORKERS’ COMPENSATION FRAUD PREVENTION EFFORTS IN TEXAS

Fraud Responsibility and Resources
Two state agencies and the statutorily-created competitive state fund in Texas share responsibility for insurance fraud prevention.  The Texas Workers’ Compensation Commission (TWCC) is charged with workers’ compensation insurance fraud investigation authority under Chapter 414 of the Texas Labor Code, although police powers are not granted that agency.  In 1991, the Texas Department of Insurance (TDI) was given a law enforcement mandate regarding insurance fraud under Article 1.10 of the Insurance Code.  Also that year, the legislature recognized the importance of fraud prevention to Texas policyholders and charged the Texas Workers’ Compensation Insurance Fund (“Fund”, now renamed the Texas Mutual Insurance Company) with combating fraud under Insurance Code Article 5.76-03.

The state agencies and entities charged with fraud investigation responsibility in Texas dedicate between $4 million and $5 million annually to detect and combat workers’ compensation and all other lines of insurance fraud.  About $2.5 million of this total is dedicated directly to workers’ compensation fraud through TWCC, the Fund, the State Office of Risk Management (SORM), and other agencies involved in workers’ compensation claim programs.8

The following is a breakdown of current anti-fraud efforts by state agencies and the insurance industry in Texas:

Texas Workers’ Compensation Commission:  TWCC’s Office of Investigations is a department within the Division of Compliance and Practices. Its fiscal year (FY) 2000 budget was about $1 million to fund the work of 18 civilian investigators and limited support staff.

The number of fraud referrals produced by the office has ranged from 500 to 650 per year.  In calendar year (CY) 2000, the unit received 648 fraud referrals, 325 of which were referred internally for administrative fraud investigations and 323 of which were referred for criminal investigation.  The average time from fraud referral receipt to referral to prosecuting authorities was 145 days for fraud involving workers and 644 days for fraud involving health care providers.  The unit completed 236 criminal fraud investigations during calendar year 2000 and referred to prosecutors 43 criminal charges estimated to involve $3.4 million in losses.  Thirty-three of these criminal charges referred and $2.8 million of the estimated losses involved suspected fraud by health care providers.  Fourteen indictments and 23 convictions were reported during CY 2000.  The administrative fraud unit completed 331 investigations in this period, issued $39,889 in fine notices, and received $2,939 in penalties, paid by one worker, one employer, and on e health care provider.  Since 1995, the number of criminal convictions has ranged from 7 to 23 per year.  Additionally, the division collected about $2.4 million in administrative penalties for various violations of the state Workers’ Compensation Act in CY 2000, roughly three times the amounts collected in 1998 or 1999.9

In the first six months of CY 2001, 290 fraud-related allegations were referred to TWCC.  Ninety-eight criminal fraud investigations were completed during this period, the majority of those – 77 – during the first three months of the year.  No indictments and two convictions were reported during the first six months of CY 2001.  One change in TWCC’s fraud referral process noted during the first six months of CY 2001 that should be the subject of ongoing observation is an increasing tendency to refer fraud allegations for criminal rather than administrative investigation.  During the first three months of the year, 102 of the 113 referrals received were referred to the criminal side; between April and June, the disparity was even more striking, with all 177 referrals received referred to the criminal rather than administrative process.10

The Texas Workers’ Compensation Insurance Fund:  The Fund’s Special Investigation Department (SID) in FY 2001 budgeted about $1.3 million to support 14 investigators, three managers, and two support positions.  This sum included a $150,000 grant to the Travis County District Attorney’s office for prosecution support.11   Year-to-date activity through July 2001 indicated that 185 worker fraud cases were open, 12 had been presented to prosecutors, three convictions had been made, and $19,097 collected in restitution, with an estimated $1,174,873 in losses avoided.  The SID also reported 125 open health care provider fraud investigations, four presentations to prosecutors, and 11 convictions during this period.  Restitution of $8,113 was collected, and estimates of fraud identified or prevented totaled $843,653.  Additionally, 93 employer premium fraud investigations were open, with three referrals for administrative or civil prosecution, four referrals for criminal prosecution, and one conviction reported during this period.  The total premium identified in these cases was $1,699,488.  The Fund also operates a fraud stopper reward program to encourage reports, and distributes informational posters and fraud indicators to policyholders.

Texas Department of Insurance:  In addition to the dedicated workers’ compensation fraud resources described above, TDI’s Insurance Fraud Section is designated as a law enforcement unit under Article 1.10 of the Insurance Code.  The unit refers all workers’ compensation fraud allegations to TWCC for action.  It was budgeted $1.8 million for FY 2002 to support 36.5 staff members, including 14 investigators, of which 12 are certified peace officers.  As of August 2001, eight investigator positions were vacant, four due to staff turnover and four because those positions are new for FY 2002.  The unit operates a fraud hotline and received 2,570 referrals between November 1, 2000 and July 31, 2001.  The unit also works heavily with the Travis County District Attorney’s Public Integrity-Insurance Crimes Unit for prosecution, and with other district attorneys.  Activities in FY 2001 through July 31 had resulted in 151 referrals to district or U.S. attorneys, 57 convictions, and $7.5 million in restitution orders.

Insurance carriers are provided limited immunity for good faith referrals of fraud to TDI, and carriers are required under Article 1.10 (d) of the Insurance Code to report suspected fraud to TDI or any law enforcement agency within 30 days.  TDI also sponsors a quarterly health care fraud task force meeting that focuses on information sharing and education of th e members who represent state, county, and multi-line insurance company investigators.

State Office of Risk Management  and others:  SORM and other state agencies commit investigation resources estimated at $500,000 a year toward workers’ compensation fraud.12

Insurance Industry Resources:  TDI staff confirmed TWCC’s report that, other than the Fund, minimal insurance carrier special investigative unit assistance is seen on criminal investigations or prosecutions of workers’ compensation fraud.  The American Insurance Association (AIA) advises that property and casualty insurance companies writing policies in Texas allocate a minimum of 267 Special Investigative Unit (SIU) investigators to the state, representing about 6.7 percent of the total commitment nationwide.  This number includes the Fund’s SID staffers.13   As noted, the insurance industry supports other fraud-fighting initiatives through the National Insurance Crime Bureau, the Coalition Against Insurance Fraud, the Insurance Services Office, the National Health Care Fraud Association, and various regional fraud task force efforts.  A ROC inquiry into SIU resources deployed by large carriers operating in the state received only one response: Liberty Mutual Insurance Company indicated that it employs eight full-time fraud investigators in Texas, although these resources are not dedicated to workers’ compensation.

Recent Anti-Fraud Policy Activity in Texas

Recognizing the significance of the fraud issue and the potential benefits of addressing it, insurance organizations and state and federal agencies have increased their efforts in fraud prevention during the last decade, especially in health care fraud and abuse in publicly-funded programs.

In 1997, the 75th Texas Legislature identified the area of workers’ compensation fraud as one of particular concern, and appropriated $83,294 under a contingency rider for fiscal year 1998 to be used by TWCC for grants to district attorneys to encourage prosecution of workers’ compensation fraud cases.14   Although the results of the grant program were not as encouraging as hoped – primarily because the amount of funding was too limited to encourage a district attorney to staff a prosecutor focused on workers’ compensation – it did provide insight into better approaches to the problem of limited prosecution interest.

In 1999, the 76th Legislature considered but took no final action on several insurance fraud-related bills which included provisions similar to those suggested in the National Association for Insurance Commissioners’ (NAIC’s) or the CAIF’s Model Fraud Acts, which provide a framework for a multi-faceted fraud prevention effort. These included HB 2096 by Davis (John) and Eiland and HB 3603 by Thompson, Davis (John), Eiland, Dukes; Fraser.  HB 3603 would have required TDI to take the lead role in insurance fraud prevention by charging the agency with responsibility to receive and report on fraud outcomes annually, require insurer anti-fraud programs and plans, require fraud notices and warnings on policy forms, require reports of fraud convictions be provided to professional licensing agencies for disciplinary action, and establish mandatory suspension of a professional license for unprofessional conduct and a definition of same, along with various other provisions.

Other fraud-related legislation proposed that year included HB 3730, to require the creation of an Insurance Fraud Prevention Authority; SB 1589, to require fraud detection and reporting plans in state programs; and HB 2315, to require the State Office of Risk Management (SORM) to implement fraud programs, especially in health care, and calling for studies of Medicaid fraud.

Additional recent related activity included a January 1998 ROC study of fraud efforts in Texas and in other states which found some states, notably California, were much more aggressive in fraud prevention and prosecution.  This study recommended that Texas’ efforts be directed at more costly types of fraud, such as health care provider and employer premium avoidance.15

77th Texas Legislature

In the 77th Legislature in 2001, House Bill 1562 (introduced by Rep. Senfronia Thompson) was the most significant bill approved related to insurance fraud detection and prevention.  It requires the Insurance Fraud Unit created under Article 1.10D to report annually to the commissioner of insurance on fraud activity and the cases it has completed, as well as make recommendations for new regulatory and statutory responses to fraud.  The bill also expanded a good faith immunity provision for those reporting suspected fraud to include reports to fraud investigators working for insurers, and specified confidentiality and other duties for insurers receiving the information.  HB 1562 also requires fraud warning statements on insurance claim forms; requires any insurer that collects direct, written premium to adopt an anti-fraud plan; and defines and stipulates penalties for health care providers committing fraud.

HB 2600 (introduced by Rep. Kim Brimer), the omnibus workers’ compensation bill approved during the 77th session, also included fraud prevention-related provisions.  Articles 1 and 6 of the bill require health care providers in the workers’ compensation system to disclose financial interests in other health care providers, using the definition of financial interest adopted for Medicare.  This provision does not prohibit self-referrals that do not involve kickbacks.

Other bills involving insurance fraud prevention and detection were also proposed during the 77th session but failed to win approval.  HB 338 (Rep. Kip Averitt) would have provided protection from civil action for insurance carriers and other entities sharing information related to fraud detection and prevention, provided the sharing is not done with malice or intent to defraud.  HB 2527 (Rep. Rob Junell) would have established specific requirements for certificates of insurance used to show the existence of certain insurance coverage, including workers’ compensation coverage, in order to make it more difficult for certificates to be used in a fraudulent manner.  SB 892 (Sen. Mike Moncrief), similar to HB 1562, included provisions on anti-fraud planning and reporting by insurers, warnings on policy forms, and unprofessional conduct.

Related Fraud Programs

Other fraud-related policy actions in recent years also represent possible models for a broader state effort to detect and prevent insurance fraud.  The Texas Auto Theft Prevention Authority (TATPA) was established by the Legislature in 1991 and supports a statewide law enforcement network through grants, theft reduction initiatives, and education/public awareness, among other programs.  The TATPA is funded through a $1 a year fee on every automobile insured in the state.  Since the program’s inception, the auto theft rate in Texas has fallen by about 50 percent.16   In the health care field, a memorandum of understanding between the Office of the Attorney General and the Health and Human Services Commission governs those agencies’ duties in carrying out SB 30 from the 75th Legislative session, which mandated increased activity in Medicaid fraud investigation.  In 1999, the Medicaid Fraud Control Unit opened 261 cases and obtained 43 indictments and 32 convictions, with $7.6 million in misappropriations or overpayments identified.17

Federal Activity and Effect on Texas

In 1996, Congress recognized the impact of fraud in federally-chartered employer pension, health, and welfare programs, enacting and implementing the Health Insurance Portability and Affordability Act (HIPAA).  Among other provisions, this law dedicated hundreds of millions of dollars a year to conduct audits and prosecute fraud in the benefit and health plans that are the cornerstone of pension and health coverage for the aging population.18   The federal mandate recognized that health care, pension, and insurance fraud increasingly involves organized networks working collectively to defraud insurance and public programs, and that equally organized and systematic approaches are required to identify and prosecute these abuses.19

The states have benefited from these federal fraud prevention efforts, partly because fraud detected in these programs often crosses into private insurance and state-administered health, welfare, and injury compensation plans.  Federal health care fraud task forces were established to fight fraud in the states under the direction of the U. S. Attorney’s Office, and four such task forces have been established in Texas.  Conversations with TWCC, TDI and Fund officials indicated that these agencies coordinate many of their health care fraud activities through the federal task forces, especially the larger cases.

Coordination with the federal and/or district attorneys provides access to evidence needed to establish the extent of organized fraud.  TWCC and TDI typically work closely under their direction to ensure adequate coordination.  However, the timeframe for completing fraud prosecution in these programs is rarely within the control of the state agency that investigates the offense.  While participation in the federal effort has many positive aspects, the state agencies lose significant control over the timing and scope of investigations when participating in an investigation directed by a U.S. attorney’s office.

Also, because of the expense associated with prosecuting a health care fraud case, agency officials report that the federal task forces are reluctant to take on cases that involve less than $1 million in losses.  A single insurer that detects a pattern of health care fraud is typically unable to establish $1 million worth of fraud within its own policies.  Therefore, TWCC, TDI, or other regulatory agencies must use their automated data sources and investigative staff to prove that the same fraud scheme involves other insurance carriers to identify fraud sufficient to merit federal prosecution.

High monetary loss thresholds for prosecution are also a factor in non-federal efforts.  Insurance fraud investigative organizations in Texas report that most district attorneys are reluctant to prosecute complex “white collar” fraud cases involving less than $100,000 in losses.  This is understandable, given that these district attorneys are charged primarily with protecting citizens from violent crime, and that many districts, including Travis County, have a significant backlog of criminal cases.  Therefore, a number of significant but relatively small criminal fraud cases are not likely to be prosecuted in either federal or state systems.  This lack of prosecution of small offenses can be a source of frustration for employers, insurers, policyholders, and investigators.  In real terms, the system is extremely vulnerable in that it does not effectively prosecute “white collar” fraud involving less than $100,000.

 VI. FRAUD EFFORTS IN OTHER STATES

Other states have made significant improvements in their fraud detection and prosecution efforts in the last decade by adopting statutes similar to those found in the NAIC or CAIF model fraud act provisions.

Authorities referenced the programs of Massachusetts, New Jersey, New York, Pennsylvania, Florida and California as comparatively strong, aggressive insurance fraud programs.  These states have not only adopted laws similar to the referenced models, but they have committed greater resources, public and private, to fraud prevention and detection efforts than has Texas, as reflected in the state-by-state breakdowns that follow.

While all the state programs included are geared toward fraud prevention, and all include efforts to combat workers’ compensation fraud, there is significant variation in the specific approaches adopted by each state.  For example, some of these states’ programs are limited to insurance, while others include fraud prevention in a broader range of state-run programs, such as Medicaid and unemployment insurance.  Most are partially or fully funded through insurance company assessments, and many require carriers to adopt fraud prevention plans and to maintain Special Investigation Units (SIUs) to help combat fraud.  Some charge state agencies with fraud prevention and others – such as the programs in Massachusetts and Pennsylvania – create fraud bureaus funded through statutorily-created private entities, an approach similar to that adopted by Texas in the creation of the TATPA for auto theft prevention.

What follows is a look at the specific features and outcomes of programs in the states referenced:

  • New Jersey, a state with about 40 percent of Texas’ population,20  dedicated about $25 million in FY 2001 for the state’s Department of Law and Public Safety’s Office of the Insurance Fraud Prosecutor (OIFP).21   This office conducts criminal and civil fraud investigation, prosecution, training and coordination with industry and county/city prosecutors’ offices.  The office also includes a Medicaid fraud control unit.  The Insurance Fraud Unit includes 22 deputy attorneys general, 57 investigators, and other support staffers. In 1999, 482 criminal investigations were completed involving 1,270 persons and resulting in 78 convictions, $1.1 million in fines, and $5.2 million in restitution.&nbs p; About $1.2 million is also allocated annually for public awareness campaigns.22   This office also prepares a comprehensive annual report.
  • New York, with about 90 percent of Texas’ population, supports a 66-person Insurance Fraud Bureau.  This unit of the state’s Department of Insurance includes designated peace officers and received 22,247 fraud referrals in 2000, of which 862 involved workers’ compensation.  Fraud activity in 2000 resulted in 503 arrests and 318 convictions. New York insurance carrier fraud plan reports for 1999 list more than 900 Special Investigation Unit staff members, covering all insurance lines in that state.23
  • California, with about 160 percent of Texas’ population, committed $30 million from insurance company assessments to insurance fraud programs and prosecution support in 2000.  The funding was split about equally between the Department of Insurance and county prosecutors.  This investment resulted in 2,765 workers’ compensation fraud referrals in 1998 and about 300 arrests annually, with 299 convictions in 1997 and 268 convictions in 1998.  Almost three of four convictions involved workers, although health providers and employer premium fraud convictions were also significant outcomes.24
  • Florida, with about 75 percent of Texas’ population, committed $9.4 million in FY 1999 to fund the Division of Insurance Fraud (DIF) within the Department of Insurance.  This effort includes 120 sworn peace officers and 50 civilian staffers.  In that year, DIF received 8,157 inquiries and referrals resulting in 1,226 criminal investigations, 451 arrests, and 366 criminal convictions. Within the DIF is a Bureau of Workers’ Compensation Fraud.  Prosecution responsibilities are performed by the Office of the Statewide Attorney and the Office of Statewide Prosecution, which are authorized to recover specific costs for prosecuting insurance cases.25
  • Massachusetts, with about 30 percent of Texas’ population, committed $5.3 million in CY 2000 through a grant provided by the Insurance Fraud Prevention Authority, a statutorily-created authority funded fully by the insurance industry, to fund the Insurance Fraud Bureau.  The IFB accepted 443 – or 30 percent – of its 2000 case referrals.  Ninety-eight of the referrals accepted involved workers’ compensation fraud.  The Massachusetts IFB made 50 case referrals to the Office of the Attorney General, U.S. Attorney, or district attorneys in 2000.  Also in that year, the IFB assisted with the prosecution of 39 individuals.26
  • Pennsylvania, with about 60 percent of Texas’ population, commits an annual $8 million assessment from insurance carriers to the Pennsylvania Attorney General’s Insurance Fraud Section, through a grant from the Insurance Fraud Prevention Authority.  Information from that state’s Fraud Examination Unit of its Insurance Department indicated that 156 suspected cases of workers’ compensation insurance fraud were reported to law enforcement authorities in 1999.  Another section within the Pennsylvania Attorney General’s Office’s Criminal Law Division houses the Medicaid fraud control unit and other enforcement units.  The Office of the Attorney General (OAG) has statewide jurisdiction over some crimes and shares jurisdiction with district attorneys on other crimes.  The OAG’s Insurance Fraud Section handled more than 550 referrals in 1996, its first year of operation.27


Common Factors in Aggressive State Programs

While the specific features vary, an examination of these programs does reveal some common factors.  At least five broad characteristics of effective fraud detection and prevention programs can be identified:

1. The state identifies a focal point for insurance fraud prevention responsibility, although separate agencies and prosecuting authorities may be involved.  These focal points are most commonly placed with the office of the state’s attorney general (OAG) or with the insurance commissioner/department of insurance (DOI).  These agencies are chosen typically because of the OAG’s civil and criminal prosecution authority, or, in the case of the DOI, because of its strong insurance control authority.  In practice, the two agencies work hand-in-hand on fraud investigation and prosecution where states chose to split the responsibility.
2. The state commits dedicated legal resources to insurance fraud prosecution, and establishes some form of statewide prosecution authority.  The state commits to insurance investigation training programs to make prosecutors feel more comfortable taking on insurance fraud cases, and includes very specific insurance fraud statutes in its penal code to improve prosecutor familiarity and juror understanding of the prohibited conduct.
3. The state adopts a high-profile public awareness campaign to deter fraud.  Included in this effort can be mandatory fraud warnings on insurance documents, medical billing statements, and benefit checks, advertising the names and facts surrounding convictions, the establishment of fraud-stopper reward programs, and/or requirements that insurance companies report suspected fraud to a central fraud bureau.  The public awareness campaigns are designed to deter opportunistic fraud, help the public recognize the cost to consumers, and to help the public recognize and report suspicious conduct regarding insurance.  These states also generally make effective use of the media to publicize programs and reinforce desired behavior.
4. The state recognizes that systematic fraud detection requires significant data automation and research capabilities, and it requires coordination among state agency programs and insurance carriers.  The state also takes steps to identify barriers to information exchange between state agencies and insurance companies, and begins to coordinate detection and prosecution support programs, with appropriate privacy and confidentiality safeguards.
5. Adequate funding is provided primarily through insurance assessments.  These aggressive state programs require insurance companies to fund the programs through assessments, and, as noted, they commit significantly greater funding for fraud prevention overall than does Texas.

Conclusion

The enactment of HB 1562 in 2001 sets the stage for additional progress in reducing insurance fraud in Texas.  Examination of opportunities to reduce information exchange barriers across insurance and public programs while maintaining adequate privacy standards will be critical to the detection and prosecution of organized fraud schemes.  The Research and Oversight Council on Workers' Compensation will continue to monitor anti-fraud efforts in Texas to assess whether additional elements identified in other states and programs might benefit the Texas system.

Notes 1.  See Coalition Against Insurance Fraud Executive Summary: “Four Faces: Why Americans Do and Don’t Tolerate Insurance Fraud,” p. 1-2, available online at http://www.insurancefraud.org/FourFaces.html. 2. See Coalition Against Insurance Fraud’s website http://www.insurancefraud.org/facts.html, link to page “Insurance Fraud: The Hidden Tax,” p. 4.  The website cites a 1995 Roper Study for the Insurance Research Council that reported that 24 percent of those polled felt it was acceptable to “pad” an insurance claim to make up for premiums paid in recent years. 3. For an assessment of several current fraud detection methods, see Malcolm K. Sparrow & Spelman, “Fraud Control in the Health Care Industry: Assessing the State of the Art,” National Institute of Justice Research in Brief, December 1998, U.S Department of Justice. 4. See Coalition Against Insurance Fraud Fact Sheet: “Insurance Fraud: The Hidden Tax,” p. 2, cited previously.  It should also be noted that the CAIF is currently updating its fraud estimate methodology to produce more accurate estimates, given the inherent uncertainty in quantifying losses to covert activity.  The $79.7 billion figure is the most recent available. 5. See National Health Care Anti-Fraud Association Fact Sheet: “Estimated Financial Loss to Fraud,” p. 2; available online at http://www.nhcaa.org/factsheet_impact_loss.htm.  Losses from fraud and abuse of the health care system are also estimated to exceed ten percent of the nation’s roughly $100 billion a year health care expenditure.  See also Sparrow’s “Fraud Control in the Health Care Industry: Assessing the State of the Art,” National Institute of Justice Research in Brief, December 1998, U.S Department of Justice, p.1. 6. See estimates available from the fact sheet, “Fraud on the Job: Workers’ Compensation Fraud,” p.1, on the NICB website at http://www.nicb.org/reportripoff/factpages/WorkersCompFraudOverview.html. 7. See U.S. Department of Health and Human Services Fact Sheet: “A Comprehensive Strategy the Fight Health Care Waste, Fraud and Abuse,” March 9, 2000, p. 2; available online at http://www.hhs.gov/news/press/2000pres/20000309a.html. 8. The University of Texas and Texas A&M University, for example, administer their own workers’ compensation insurance programs.  Neither these programs nor any other government-initiated efforts not mentioned in this review are known to contain significant fraud-fighting elements. 9. See TWCC’s June 2000 system data report at http://www.tdi.state.tx.us/wc/sdr/sdr6-3-00.html#Compliance.  During 2000, the Commission concluded a number of audits for which field work had been completed in previous years and began conducting audits of information collected via Electronic Data Interchange.   As a result, the number of audits completed, violations issued, and penalties proposed and collected are higher than usual. 10. See TWCC’s System Data Report, December 2000, and Quarterly Reports for the 4th quarter of CY 2000 and second quarter of CY 2001. 11. All state agencies dealing with workers’ compensation fraud in Texas work closely with the Travis County District Attorney’s Office and its Public Integrity-Insurance Crimes Unit, which has statewide prosecution authority.  Both the Fund and TDI provide financial support to the unit.12. Research and Oversight Council on Workers' Compensation staff estimate, 2001.13.  These figures are taken from conversations with AIA and Coalition Against Insurance Fraud officials.14. See House Bill 3522, 75th Texas Legislature.15. See Research and Oversight Council on Workers’ Compensation, Fraud in the Texas Workers’ Compensation System, January 1998.16. See TATPA website, http://www.txwatchyourcar.com/aboutus/index.html.17. See Office of the Attorney General’s website http://www.oag.state.tx.us/oag_hhsc.htm and www.oag.state.tx.us/newspus/ask_the_ag/2000/0300mfcu.txt.18. HIPAA greatly expanded the definition of health care fraud and established that an individual convicted of a felony related to such fraud cannot participate in Medicare and state health programs for a minimum of three years.19. See U.S. Department of Health and Human Services Fact Sheet: “A Comprehensive Strategy to Fight Health Care Waste, Fraud and Abuse,” March 9, 2000, p. 1.20. All population figures are taken from the U.S. Census Bureau’s figures for April 1, 2000.21. See Analysis of the New Jersey Fiscal Year 2000-2001 Budget, New Jersey Department of Law and Public Safety, Office of Legislative Services, New Jersey Legislature, April 2000.22. See the New Jersey Department of Law and Public Safety Division of Criminal Justice’s Office of the Insurance Fraud Prosecutor’s 1999 Annual Report, March 1, 2000, pp. 19-20, 47.23. See 2000 Report to the Governor and the Legislature of the State of New York on the Operations of the Insurance Frauds Prevention Act (Article 4 of the Insurance Law), State of New York Insurance Department.24. See Report on the Campaign Against the Workers’ Compensation Fraud, Commission on Health and Safety and Workers’ Compensation, pp. 1, 3-4; available online at http://www.dir.ca.gov/CHSWC/Fraud/FraudRpt.html.25. See Florida Division of Insurance Fraud’s 1999 Annual Report, pp. 8, 20, 24.26. See Insurance Fraud Bureau of Massachusetts Annual Report.27.  Statistics from unaudited, unpublished numbers from the Pennsylvania Insurance Department’s Fraud Examination Unit.  More information on the Pennsylvania program is available online at http://www.attorneygeneral.gov/cld/insura.shtml.


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