Texas Department of Insurancewww.tdi.state.tx.us - Consumer Helpline 1-800-252-3439
Texas Monitor, 2:4 (Winter 1997)
FRAUD IN THE TEXAS WORKERS' COMPENSATION SYSTEMWorkers’ 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 profits from the deceit.1 There are five types of fraud in the Texas workers’ compensation system: injured worker benefit fraud, employer premium fraud, health care provider fraud, insurance carrier fraud, and attorney fraud. From 1992 to 1996, the Texas Workers’ Compensation Commission (TWCC) detected almost $20 million do llars 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 Current Fraud Processes in TexasCurrently anyone who suspects that fraud may have occurred in a workers’ compensation claim may either report the case to the TWCC for investigation or directly to the local district attorney’s office for criminal prosecution. Once fraud is reported to TWCC, it has two options:
Until now, research has been lacking on the amount and types of fraud found in the Texas workers’ compensation system. This article 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 carriers 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 (see Table 1). In 1996, health care provider fraud was the most expensive type of fraud detected in the Texas worke rs’ compensation system in terms of total dollars lost ($1,200,952), accounting for over eight times the dollar amount of injured worker benefit fraud ($134,351) (see Table 2). For this project the ROC surveyed insurance carriers that write workers’ compensation coverage in Texas. 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 the nineteen carriers in 1996 involved injured worker benefit fraud (4,077 cases) compared to health care provider fraud (205 cases), employer premium fraud (343 cases), and attorney fraud (19 cases). Of the 4,644 cases investigated by the nineteen carriers in 1996, only 28 resulted in a criminal conviction. How is workers’ compensation fraud investigated in Texas?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 provider billing injured worker for medical services provided on a workers’ compensation claim; and incorrect information on attorney bills or duplicate billing. Very few of the insurance carriers that responded to the survey currently use computer software to identify injured worker benefit, employer premium, health care provider, or attorney fraud. Virtually none of these carriers enter any of the previously mentioned fraud indicators into a database in order to flag potential fraud case s. Insurance carriers spent more money investigating injured worker benefit fraud than any other type of workers’ compensation fraud. In 1996, insurance carriers spent an average of $1,257 per injured worker benefit fraud investigation, compared to $991 per employer premium fraud investigation and $823 per health care provider fraud investigation (see Figure 1). Even though more money was spent investigating injured worker benefit fraud, insurance carriers spent less time investigating an injured worker benefit fraud case (three to six months) than an employer premium fraud case (six months to one year), a health care provider fraud case (six months to one year), or an attorney fraud investigation (one to two years). ConclusionWhile estimates on the amount of fraud in the Texas workers’ compensation system vary widely, 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 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 has been paid to investigating and prosecuting injured worker benefit fraud. While injured worker benefit fraud is the most often investigated form of workers’ compensation fraud, it is far from the most costly. In 1996, only 18 injured worker benefit fraud cases were referred to district attorneys for criminal prosecution by TWCC accounting for $134,351 worth of fraud (an average of $7,464 per case), compared to 46 health care prov ider cases which accounted for $1,200,952 in 1996 (an average of $26,108 per case). It is clear that more resources should be spent fighting the most expensive and overlooked types of workers’ compensation fraud: employer premium and health care provider fraud. Finally, much can be done to improve the way insurance carriers spend money to combat workers’ compensation fraud. In 1996, the nineteen insurance carriers surveyed in this report spent over $5.5 million investigating workers’ compensation fraud in Texas, yet only recovered a total of $1,520,179. Of the 4,644 fraud cases they investigated in 1996, only 28 resulted in a criminal conviction, 33 cases were settled out of court, 7 cases were brought to a civil trial, and 83 cases were resolved internally. The first step insurance carriers can take to improve the efficiency of their workers’ compensation fraud investigations is to collect fraud data not only to track trends in workers’ compensation fraud, but also to justify the millions of dollars spent every year fighting fraud in the Texas workers’ compensation system. CALIFORNIA'S 1991 WORKERS' COMPENSATION FRAUD REFORMLike many other states in the late 1980s and early 1990s, California adopted extensive workers’ compensation reform legislation.5 These reforms were fueled by allegations from employers that workers’ compensation costs were too high and that fraud was rampant in the system. In an attempt to reduce workers’ compensation costs and fraud, California reorganized its entire workers’ compensation benefit structure in 1989. Prior to the 1989 reform, it was estimated that fraudulent claims constituted 25 percent of employer’s workers’ compensation costs and accounted for 10 percent of all workers’ compensation claims in California .6 Even with the 1989 reform, however, fraud continued to be a major problem. This was due, in part, to the lack of investigation and reporting of alleged fraud cases by employers and insurance carriers. Between 1979 and 1991, insurance carriers in California reported only 532 cases of alleged fraud.7 This lack of reporting resulted from several factors. Many insurance carriers had few, if any, staff dedicated to the investigation of workers’ compensation fraud. Furthermore, many insurance carriers and employers feared retaliatory litigation as a result of pursuing a suspected fraud case. California district attorneys also contributed to the problem. Local district attorneys were often unwilling and financially unable to prosecute these often complex and time-consuming cases. Additionally, the California Department of Insurance Fraud Bureau, charged with investigating suspected insurance fraud, was understaffed and underfunded. As a result, the Fraud Bureau could not properly address the problem of workers’ compensation fraud. The Insurance Frauds Prevention Act of 1991In an effort to strengthen the impact of the 1989 workers’ compensation reform, the California legislature adopted major fraud reform legislation in 1991. Senate Bill 1218, also known as the Insurance Frauds Prevention Act, made several changes in the way fraud cases were investigated, reported, and prosecuted in California. The Insurance Frauds Prevention Act provided insurance carriers with immunity from civil liability for reporting suspected fraud to the appropriate government agencies. This legislation also mandated that insurance carriers simultaneously report suspected fraud to both the California Department of Insurance Fraud Bureau and local district attorneys. Penalties associated with workers’ compensation fraud were also increased to jail terms of up to five years and fines reaching $50,000 or double the amount of the fraud. Additional legislation was enacted in 1992 mandating that workers’ compensation insurance carriers establish Special Investigative Units (or SIUs) to investigate suspected cases of workers’ compensation fraud. The Insurance Frauds Prevention Act also required the Fraud Bureau to increase its emphasis on the investigation of suspected workers’ compensation fraud. In order to fund this mandate, the California Legislature created the Fraud Assessment Commission (FAC) which has the power to assess employers.8 Half of the funds raised by the FAC are used by the Fraud Bureau to investigate workers’ compensation fraud, while the other half of the money is divided among local district attorneys for the prosecution of workers’ compensation fraud cases.9 Results of the California Insurance Frauds Prevention Act of 1991After Senate Bill 1218 became effective in 1991, the number of suspected workers’ compensation fraud cases referred to the Fraud Bureau soared to an all time high of 8,342. Since that time, the number of fraud referrals has dropped by over 60 percent to 3,281 in fiscal year 1996/1997. Although the number of fraud referrals has steadily declined over time, the number of cases being assigned to Fraud Bureau investigators is increasing as staff is able to address the backlog of fraud referrals (see Table 3).10 Although fraud referrals are down, the number of arrests and convictions for workers’ compensation fraud has increased substantially since 1992 (see Table 4). Drawbacks of the 1991 ReformAlthough the Insurance Frauds Prevention Act of 1991 dramatically increased the number of w orkers’ compensation fraud arrests and convictions, this change has not come about without problems. One problem has resulted from the fact that the California Department of Insurance Fraud Bureau is responsible for not only investigating suspected cases of workers’ compensation fraud, but also automobile insurance fraud, medical insurance fraud and all other types of insurance fraud. In order to meet the increasing demand for investigations and prosecutions, especially in the area of workers’ compensation, the Fraud Bureau has had to increase its staff size from 68 people in FY 1991/1992 to over 228 today. However, the lack of agency policies and procedures relating to the investigation of fraud, and the steep learning curve associated with prosecuting workers’ compensation fraud, initially caused problems within the agency including a large backlog of cases that have yet to be investigated. As a result of an independent audit report, an effort is currently underway within the Fraud Bureau to track resources and expenditures more carefully; handle fraud referrals in a more timely manner; manage fraud cases more effectively; and impose accountability on investigators, supervisors and managers.11 Additionally, all fraud referrals are now received through the Fraud Bureau’s central office in Sacramento and routed to the appropriate field office within 24 hours.12 Each field office is required to contact the referring insurance carrier and make a decision about whether to investigate the case within 10 days. ConclusionAfter taking a close look at California’s experiences with workers’ compensation fraud reform, the question remains: How can Texas improve its workers’ compensation fraud efforts without falling into some of the “potholes” experienced by California? California improved its workers’ compensation fraud efforts by requiring that all fraud cases be reported simultaneously to the Fraud Bureau and local district attorneys’ offices. Texas currently does not require that workers’ compensation fraud referrals go through the Texas Workers’ Compensation Commission (TWCC) before they are forwarded to a district attorney for criminal prosecution. As a result, Texas has no way to accurately track the number of alleged fraud cases in the workers’ compensation system. One way to correct this problem would be to require that all fraud referrals made directly to district attorney’s offices be simultaneously reported to the TWCC and that the TWCC be responsible for tracking the outcomes of these fraud investigations. California’s experience also shows that in order for fraud reforms to work properly, a strong administrative infrastructure must be in place to quickly address and investigate alleged fraud cases. Although California spent millions of dollars to increase the reporting, investigation and prosecution of workers’ compensation fraud, the resulting large numbers of incoming cases became backlogged at the Department of Insurance Fraud Bureau. Only now that fraud referrals have decreased significantly in California have investigators been able to address this backlog of cases. To avoid this pitfall, Texas should take care to see that the TWCC has an adequate administrative infrastructure in place for any program that is implemented. California improved its workers’ compensation fraud arrest and conviction rates by giving local district attorneys a large amount of money to investigate and prosecute workers’ compensation fraud. However, some now argue that district attorneys have become dependent on this consistent source of funding to maintain their current staffing levels. The TWCC should encourage local district attorneys to pursue workers’ compensation fraud by giving them funds to prosecute workers’ compensation fraud cases.13 However, the TWCC needs to have a mechanism in place to control spending so that district attorneys do not become overly dependent on this source of funding. One way to control such spending would be to provide district attorneys with funds only after a criminal conviction is obtained or a case is settled out of court. This way, funding is based solely on the district attorney’s performance rather than on projections as done in California. CERTIFIED SELF-INSURANCE AND THE FREQUENCY AND SEVERITY OF WORKPLACE INJURIESAmong the choices provided to Texas employers regarding workers’ compensation (WC) is the option to self-insure. Self-insurance, in the context of WC, is a program under which a company assumes the risk for the vast majority of its WC liabilities, and purchases some form of excess, or stop-loss coverage, designed to protect the employer from catastrophic losses. This article summarizes a study that tested the relationship between self-insurance and the frequency and severity of workplace injuries in Texas. We examined a group of employers who became self-insured in 1993 and 1994, and compared their WC claims experience with a comparable set of employers who obtained WC coverage from an insurance carrier.14 Differences in injury frequency (through an investigation of three different claim rates) and injury severity (as measured by duration of TIBs payments) were examined in order to address three research questions:
Impact on Claim FrequencyThis an alysis determined whether there are statistically significant differences in the frequency of workplace injuries between self-insured firms and employers who were commercially-insured. It should be noted that all of the employers in the commercially-insured group were experience-rated, and it is likely that most of the firms in this group have WC insurance policies with large deductibles or retrospective rating provisions.15 Thus, the differences between the two groups are expected to be very subtle because both self-insured firms and employers with deductibles or retrospectively-rated policies have many of the same cost-saving incentives. It is for this reason that we thoroughly test the impact of self-insurance on three different claim rates to determine if there is an effect on claims with different levels of severity. Key findings included: Self-insured employers had significantly lower WC claim rates than employers who chose not to self-insure. It is likely that this is a result of the strong emphasis on safety that TWCC places on potential self-insureds during the application process. Self-insured employers in high-risk industries had significantly higher claim rates than high-risk employers who did not self-insure. This finding may be related to self-insured firms in the manufacturing and construction industries placing an emphasis on claims reporting as a component of their safety programs which resulted in higher reported claim rates for these sectors. Though self-insureds had lower WC claim rates than employers who did not self-insure, there was no difference in the change in frequency of claims filed over time for the two groups of employers. That is, self-insurance did not impact changes in claim frequency. This is not surprising because all of the employers who were not self-insured were fully experience-rated, and it is likely that most of these employers also had loss-sensitive insurance arrangement s, such as retrospectively-rated policies and deductible policies, which carry many of the same cost containment incentives as self-insurance. Firms who paid their workers higher wages experienced significantly lower WC claim rates. Regardless of self-insurance status, employers in South, East and North Texas tended to experience significantly lower claim rates than firms in West Texas. Impact on Claim SeverityInjury severity is measured by the duration of temporary income benefits (TIBs) payments. This analysis determines if the duration of TIBs payments for self-insured claims is changing at a different rate than for commercially-insured firms when comparing the period prior to the self-insurance effective date and the first year of the self-insurance arrangement. Key findings included: Self-insured firms had a stronger tendency to be able to reduce the number of weeks TIBs were paid over time than commercially-insured employers. Furthermore, the impact was immediate and found to be significant in the first year of their self-insurance arrangement (see Figure 2). This reduction in the TIBs payment duration is likely the result of self-insured employers implementing more effective loss control and claim management strategies after becoming self-insured in 1993 or 1994. It is also possible that third-party administrators (TPAs), particularly TPAs which are wholly-owned subsidiaries of the self-insured firm, have more of an incentive to control claim costs and be more effective at managing claims than insurance carriers (many of whom have transferred the majority of policy risk to employers through deductibles or retrospectively-rated policies). This added incentive to TPAs to control costs may have also contributed to the reduction in TIBs payments. Self-insured firms are experiencing reductions in TIBs durations over time when compared to commercially-insured firms.< /p> Predictors of longer TIBs duration for workers employed by both self-insured and commercially-insured firms were: higher impairment ratings, older workers, back injuries, and sprains. Male workers, lower wage workers, and shorter job tenure were associated with shorter TIBs payment durations. ConclusionDo self-insured firms have safer workplaces than commercially-insured firms? This study found the answer to be yes. The stringent financial requirements and emphasis on workplace safety make the Texas Certified Self-Insurance Program one of the more rigorous in the country. Therefore, it is not surprising that this study found that self-insured employers had significantly lower workers’ compensation claim rates than employers who did not self-insure. The self-insurance program was designed to attract employers with better safety programs and records and that is exactly what we observed. Does the decision to self-insure have an impact on claim rates? The answer to this question of a causal relationship is apparently no. We did not detect any statistically significant differences between self-insured and commercially-insured employers in the change in claim rates over time. That is, self-insurance did not significantly impact changes in claim rates when the period before self-insurance is compared to the two years after self-insurance. This finding may be the result of several factors. First, the control group of commercially-insured firms to which self-insured firms were compared was subject to experience rating, and many of these firms also had large deductible or retrospectively-rated policies. Due to the similarity in incentives to keep a safe workplace, it is reasonable to assume that the behavior of self-insured employers and those under deductible or retrospectively-rated policies would be similar. Second, because self-insurance was implemented in 1993, it was only possible to compare two years of post self-insurance claims data to the year which preceded self-insurance. It is possible that there may be a delayed effect associated with the implementation of an effective safety program and the subsequent impact on claim rates. Third, as observed above, self-insurance attracts many employers with better safety programs and records that may have previously exerted downward pressure on claim rates prior to the self-insurance period. Does the decision to self-insure have an impact on claim severity? The answer is yes. This study found that injury severity—as measured by duration of temporary disability payments—was being reduced at a faster rate for self-insured firms. Over time, the number of weeks TIBs were paid dropped at a significantly faster rate for self-insureds than for commercially-insured firms. This impact was observed immediately in the first year of the self-insurance arrangement. In conclusion, this study has demonstrated that the TWCC’s Certified Self-Insurance Program has been successful in two primary ways. First, it has attracted a group of employers who maintain a relatively safe workplace when compared to commercially-insured employers. Second, though self-insurance itself did not prove to impact the frequency of claim rates over time, it was shown to have a significant and immediate impact on the severity of workplace injuries. Firms that chose to self-insure were shown to have reduced the length of time TIBs were paid to injured workers at a faster rate than commercially-insured firms. COMPARISON OF STATE AND PRIVATE INDUSTRY WORKERS' COMPENSATION MEDICAL BILL PAYMENTSOver the past twenty years, workers’ compensation medical costs have risen sharply. Medical expenditures now account for over 50 percent of all workers’ compensation benefit payments in Texas.16 In an attempt to curb rising m edical costs, many states, including Texas, instituted medical fee guidelines.17 Medical fee guidelines are used to contain rising medical costs by setting the maximum costs payable by insurance carriers, including the State of Texas, for specific medical procedures. For example, a physician might charge $20 for a tetanus shot given to an injured worker, but the insurance carrier only has to pay $13 since that is the maximum allowable reimbursement (MAR) for a tetanus shot in the current Texas Workers’ Compensation Commission (TWCC) Medical Fee Guideline.18 The current TWCC Medical Fee Guideline went into effect on April 1, 1996. This article looks at whether the State of Texas overpaid medical bills for injured state workers based the MAR levels indicated in the TWCC Medical Fee Guideline, and compares the performance of the State with private insurance carriers. The workers’ compensation program for State of Texas employees is currently administered by the State Office of Risk Management (SORM). The SORM was created on September 1, 1997 by merging the duties of the Risk Management Division of the TWCC with the Workers’ Compensation Division of the Attorney General’s Office.19 The SORM manages workers’ compensation claims just like a private insurance carrier except that it is funded partially through an allocation program to help pay for workers’ compensation benefits. Each state agency must reimburse the State of Texas General Revenue Fund for 25 percent of the workers’ compensation benefits paid out by SORM on behalf of that agency. As a result, the SORM is responsible for reducing the workers’ compensation losses of each state agency by promoting effective risk management programs and managing all workers’ compensation claims efficiently and cost-effectiv ely. DataThe results presented here are based on an analysis of 24,794 medical treatments (12,397 treatments that were paid by SORM, formerly the Workers’ Compensation Division of the Attorney General’s Office, and 12,397 treatments that were paid by private insurance carriers) extracted from the TWCC medical database. This analysis focused on the top 50 most frequent medical treatments provided to injured workers. All of the records examined in the sample had treatment dates from April 1, 1996 to March 31, 1997, the first year that the current Medical Fee Guideline was in place.20 In order to determine whether an overpayment had been made for a medical treatment, the amount of money actually paid for a medical treatment (for example, massage therapy) by either the State of Texas or private insurance carriers was compared to the MAR amount specified by the TWCC Medical Fee Guideline for that particular medical treatment. ResultsDid the State of Texas overpay more workers’ compensation medical treatments than private insurance carriers? The answer to this question is no. Of the 12,397 medical treatments paid for by the State of Texas, 2.3 percent were paid over the MAR level set by the TWCC Medical Fee Guideline, compared to 2.8 percent of medical treatments paid for by private insurance carriers. Of those treatments that were overpaid, most involved physical therapy and rehabilitation treatments ( see Table 5 for the top five treatments receiving overpayment). The most frequently overpaid medical treatment for the state was therapeutic exercise; the most frequently overpaid treatment for private industry was physical performance testing or measurement. How much did the State of Texas overpay compared to private insurance carriers? On average, the amount the State of Texas overpaid on medic al treatments for workers’ compensation claims was higher than the amount overpaid by private insurance carriers. The average medical treatment overpayment made by the State of Texas was $10.81, compared to $9.29 for private insurance carriers. Other findingsAlmost all (97 percent) of the medical treatments overpaid by the State of Texas had an exception code “M” attached to the medical record indicating that the payment was reduced to fair and reasonable. One quarter (25 percent) of the medical treatments overpaid by private insurance carriers had an exception code “F” attached to the medical record indicating that the payment was reduced according to the TWCC Medical Fee Guideline. It is curious that these overpayments had an “M” or “F” exception code attached in the medical record since these codes are reserved for payments that have been discounted to (or below) the MAR level set by the TWCC Medical Fee Guidelines. This is perhaps the result of miscoding by SORM or private insurance carriers. It should be noted that all of these overpayments can only be labeled as “suspected overpayments” until TWCC Compliance and Practices Division is able to audit each of these overpaid medical bills individually. ConclusionIt appears that when the fifty most frequent medical treatments were examined for overpayments in this analysis, the State of Texas compared favorably with private industry. The state tended to overpay more for physical therapy exercises, massage therapy, and hot and cold packs, while private insurance carriers tended to overpay more for physical performance tests. This analysis focused on the fifty most frequent medical treatments. Future Monitor articles will determine the average overpayments for the fifty most expensive medical treatments, which may make the average overpayment much higher. Footnotes:
For further information, contact: PIO@tdi.state.tx.us
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