Workers' compensation insurance is a vital (and, for 49 states, mandatory) part of any business and, like any requirement, has individuals frequently trying to find ways around the conditions to cheat the system.
Workers' comp fraud costs American employers, workers, consumers and shareholders around $7.2 billion each year, according to the National Insurance Crime Bureau. Almost anyone involved in the system can commit fraud; thus, employees and businesses alike are liable to fall victim to workers' compensation fraud. [Related: What your small business should know about workers' comp]
There are, however, many ways to prevent it. Read on to find out what red flags insurance experts look out for, how to prevent workers' compensation fraud and what to do if it happens to you.
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Types of workers' compensation fraud
There are two types of workers' compensation fraud: premium fraud, which is when a business attempts to misrepresent its workers' comp coverage to lower its insurance costs; and claimant, or employee, fraud, when an employee falsely claims to have suffered a work-related injury to gain workers' comp benefits.
The Leavitt Group identified four main categories of employee fraud:
- False claims: The injury did not occur or was staged to allow the worker to collect benefits.
- Exaggerated claims: The injury did occur, but the employee overstated the severity to get more benefits.
- Off-the-job injuries: The employee was injured elsewhere, but claims the injury occurred at the job site to collect benefits.
- Collecting benefits while working: The employee "double dips" by working another job while collecting benefits for a job-related injury. This is one of the most common types of employee fraud.
It is important to note that any employees who encourage or cover up for another employee committing fraudulent activities are complicit and also committing fraud.
Fraud can hurt your business from top to bottom. "Not only is workers' compensation fraud illegal, it can strain operations as well as lead to higher insurance-related costs for honest businesses," said Ranney Pageler, vice president of the fraud investigations department for business insurance carrier Employers. "It ultimately hurts honest workers by undermining the perceived validity of all claims."
What to look out for
Workers' compensation fraud can often be difficult to identify due to its nature of covering injury and illness. The network of fraudulent participants can also be dishearteningly wide: Dr. Carole Lieberman, a forensic psychiatrist and expert witness, said there are "workers' comp doctor mills" where doctors are paid to find things wrong with employees, as well as "cappers" that target low-paid workers and persuade them to make fraudulent workers' comp claims on behalf of medical or legal service providers.
Pageler listed the following 10 red flags for claimant fraud. If an employee's workers' compensation claim fits one or more of these scenarios, it may be time to launch an investigation.
- Monday morning injury reports: The alleged injury occurs first thing on Monday morning, or it occurs late on Friday afternoon but is not reported until Monday.
- Employment change: The reported accident occurs immediately before or after a strike, job termination, layoff, end of a big project or the conclusion of seasonal work.
- Suspicious providers: An employee's medical providers or legal consultants have a history of handling suspicious claims, or the same doctors and lawyers are used by groups of claimants.
- No witnesses: There are no witnesses to the accident and the employee's own description does not logically support the cause of the injury.
- Conflicting descriptions: The employee's description of the accident conflicts with the medical history or injury report.
- History of claims: The claimant has a history of suspicious or litigated claims.
- Treatment refused: The claimant refuses a diagnostic procedure to confirm the nature or extent of an injury.
- Late reporting: The employee delays reporting the claim without a reasonable explanation.
- Claimant hard to reach: The allegedly disabled claimant is hard to reach at home and does not respond promptly to messages.
- Frequent information changes: The claimant has a history of changing physicians, addresses or jobs.
How to prevent workers' comp fraud
Along with being aware of red flags, there are many things you can do to actively prevent fraud in your workplace – and avoid raising the costs of running your business by having fraud raise your premiums.
1. Screen applicants.
Start by carefully screening all job applicants before hiring them. Common predictors include criminal backgrounds and a history of frequent, suspicious injury claims.
2. Listen to your employees.
"The best way for businesses to prevent fraud is by giving workers regular opportunities to express their grievances," said Lieberman, "and trying to keep happy employees who want to work."
A consistently disgruntled workforce is going to take action one way or another, and you want to avoid that action being one that will harm your business. Allow your employees to share their thoughts and then act on their requests, showing that you hear them and respect their wishes.
3. Have detailed procedures.
In the event that something does happen to an employee, make sure you have detailed procedures in place that are followed consistently for every incident that takes place. Ensure there is ample documentation – interview the injured or ill employee and anyone who witnessed the incident, and get written statements.
4. Stay in contact.
After an employee is injured or becomes ill, be sure to stay in regular contact. This will help the employee feel valued and missed and discourage fraud because they'll feel that you are paying attention. When the employee does return to work, you should have a modified duty plan in place to reduce medical costs.
Make sure all your employees are well aware of their benefits under their workers' compensation coverage, as well as what constitutes fraud and the consequences – for them and the business – of committing fraud. Emphasize the fact that fraud hurts the entire business. It should be easy and confidential for an employee to notify management of fraud. Make sure there is a process that all employees are aware of and follow it in the event that someone does report.
What to do if you suspect fraud
The first thing you do should be to make sure you have a good reason for reporting. Accusing someone of lying about an injury or illness can land you in hot water, so you'll want to have thorough reasoning and/or evidence behind you.
Then you will report the case to your state. State regulations will vary, so be as detailed as possible in your report. Be sure to include a statement of what happened, written statements from the injured employee and any witnesses, why you believe fraud is being committed, and any other information you deem helpful.
After you file the report, there shouldn't be anything more you need to do. The state will investigate and determine if fraud is being committed and apply penalties.
Additional reporting by Nicole Fallon. Some source interviews were conducted for a previous version of this article.