Who is to blame when workers’ comp insurance premiums spiral out of control because of fraud?

It’s a hotly contested issue. There are compelling arguments made by those who believe employees or claimants are solely responsible, while documented evidence also supports claims that employers are just as likely to commit fraud.

Background

As workers’ compensation insurance premiums soared in the late 1980s and 1990s, numerous states passed anti-fraud legislation and created task forces to deal with the issue from the claimant side.

News programs highlighted employees caught on hidden camera performing strenuous tasks or working off the books while collecting or suing for workers’ comp benefits. Insurance companies rode the wave to explain the increase in premiums.

Types of workers’ comp fraud

Abuse by employees has been well-documented. For example, an employee injures himself playing football over the weekend, comes to work Monday and claims he was hurt at work to receive paid time off.

Or, an employee overstates the extent of an injury to take the summer off while being paid and manages to paint his house, landscape his lot, etc.

While these types of cases are not unusual, there are powerful statistics that indicate employers actually commit more fraud than employees. Consider these statistics from the Coalition against Insurance Fraud:

• More than 10 percent of New York state’s workers – 704,785 workers – are misclassified by their employers. –Cornell University study
• In California, employers in high-risk industries may hide up to 75 percent of their payroll, or $100 billion. –University of California at Berkeley study
• As many as one in seven construction workers in Massachusetts are hired off the books or illegally classified as independent workers. – Harvard University study

While much of the original focus at the state level was on curbing claimant fraud, premium fraud perpetrated by employers has proved to be just as damaging.

The most common types of employer frauds include:

• Misclassifying employees – This involves intentionally misrepresenting the jobs employees perform to place them in less hazardous occupational categories to reduce their premiums.
• Misclassifying contractors – Employers avoid paying premiums by classifying workers as independent contractors, even though they are legitimate employees.
• Underreporting payroll – Employers avoid paying premiums by paying employees off the books, not paying on parts of their work force or creating subsidiaries to hide employees.
• Misrepresenting claims experience – Previous claims are hidden by employers by classifying employees as independent contractors or leased employees or by creating new entities.
• Underestimating employment projections – Employers deliberately underestimate their anticipated payroll at the beginning of the year so their premiums are lower. This is adjusted at the end of the year, but by then the employer receives the benefit of holding onto the funds.
• Pushing liability to group health coverage – Injured employees are encouraged or instructed to seek treatment under their group health insurance rather than workers’ compensation to protect the company’s risk rating.

Whether employees are falsifying their claims or employers are directly cheating the insurance companies, these actions adversely impact everyone. As a result, insurance companies abandon certain markets or raise premiums to manage their risk. It behooves state insurance departments and the insurance companies to focus their attention on both sides of the equation.