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Workers’ Compensation – The Common Misconception

by Jim Marasco, CPA, CIA, CFE

Fraud Matters, Winter 2012

While discussing the impact that workers’ compensation fraud has on insurance costs, there was a hotly contested debate over who was to blame as premiums were rising out of control a few years ago.  There are compelling arguments made by those who feel employees or claimants are solely responsible for the fraud perpetrated against this program, 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 1980’s and 1990’s, numerous states passed anti-fraud legislation and created task forces to initially deal with this issue from the claimant side.  News programs highlighted claimants caught on hidden camera performing strenuous tasks or working off the books while collecting or suing for benefits.  Insurance companies rode this wave to explain the increase in premiums.

The Varying Types of Workers’ Compensation Fraud

Abuse of the program by employees has been well-documented.  For example, an employee injuries themselves playing football over the weekend; comes into work on Monday and claims they got hurt at work to receive paid time off.  In other cases, an employee overstates the extent of an injury to take the summer off while being paid and manages to paint their house, landscape their lot, etc.  However, there are powerful statistics that indicate employers commit more fraud than employees.

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 workforce 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 trued-up 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 their risk rating

Fraud Impacts Everyone Whether the employees are falsifying their claims or the employers are directly cheating the insurance companies, these actions adversely impact everyone else.  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. – James Marasco, CPA, CIA, CFE

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