This Frontline report documents the extent to which the insurance industry's focus on employee fraud has advanced workers' compensation reforms that cut benefits for injured workers. Responding to media reports that innacurately cite claimant fraud as the driving force behind rising costs, the report addresses the significantly higher rates of employer fraud within the system.
Source: Cullen, Lisa. “The Myth of Workers’ Compensation Fraud.” Frontline: A Dangerous Business. (January 9, 2003).
In recent years, the insurance industry's focus on cheaters and malingerers helped push through national workers' compensation reform, a profitable cost-cutting campaign supported by outrage over alleged abuse of the system. The problem, however, is that the fraud image is false for the vast majority of workers' compensation cases. Studies show that only 1 to 2 percent of workers' compensation claims are fraudulent. 1 2 Certainly, the tens of thousands of workers killed every year were hardly aiming for a free ride on their employer's tab.
A national prime time television show aired a show on workers' compensation fraud, opening dramatically with footage of an old man working on a farm and a lawyer interviewing that same old man.
One of the many incendiary messages in this show is in the announcer's very first line when the viewer is informed that "money is taken right out of their pocket." Seconds later, the announcer again informs viewers that the supposedly injured man was throwing hay bales "while collecting money from you."
Money does not mysteriously float out of viewer's pockets as portrayed by the sensationalized lead into this segment. First, money paid to workers' compensation claims, including fraudulent ones, comes directly from insurance industry profits. Only after dipping into insurer profits does the cost get passed onto employers purchasing workers' compensation insurance. Then, the costs are spread over the entire group of policyholders; costs are not charged back to each employer dollar for dollar with their injuries. If employer rates do increase, the employer pays for it by one or more of the following ways: taking it out of the company profits; reducing wages; and passing it on to consumers. For the smaller number of companies that choose to self-insure, they pay the claims directly rather than pay premiums for workers' compensation insurance. Then, and only then, does it come out of the general public's pocket IF the public chooses to purchase the specific products made by companies with high workers' compensation rates. In neither case does money flow out of unsuspecting people's pockets as portrayed by the insurance industry. ...
The show neglected to mention that in 1998, workers' compensation costs were only 1.35% of payroll down from a peak of 2.17% in 1993. It also failed to explain that between 1992 and 1998, workers' compensation costs to employers decreased 38% as a percentage of payroll while benefits to workers declined 35%.4
Instead, in the middle of the segment, reporter John Larson asserts, "After all, workers' compensation fraud is quite common. The industry estimates it adds up to $5 billion a year."5 The American Federation of Labor and Congress of Industrial Organizations6 (AFL-CIO) has heard this $5 billion claim before. The union's workers' compensation newsletter explained, "These allegations have absolutely no relationship to fact but are based on 'attitudes' about fraud (when respondents say they 'know' of someone supposedly on workers' comp even though he or she might be capable of working). A similar claim put workers' compensation fraud at 20 percent of the total of all claims in California in 1996; the truth was that suspected fraud that year, according to the state's Department of Insurance, was three-tenths of one percent!"7
In the summer of 2000, an independent team of experts -- J. Paul Leigh, Ph.D., Steven Markowitz, M.D., Marianne Fahs, Ph.D., M.P.H., and Philip Landrigan, M.D. -- published a book titled, "Costs of Occupational Injuries and Illnesses." In it, they estimated the national price tag for fraudulent claims to be 1.2 billion dollars, roughly one-fourth of the insurance industry estimate. Conceding that $1.2 billion is still a lot of money, the Leigh team put it into perspective by explaining that it was only about two-percent of all workers' compensation dollars spent in their sample year of 199.8 Whether the true fraud rate is less than one-percent or as high as two-percent, it is hardly "quite common."
The Dateline show provoked a response from the AFL-CIO Department of Occupational Health and Safety, which wrote:
From the opposite side of the country, Robert Stern of the Washington State Labor Council, AFL-CIO also sent a letter to Dateline reporter Tom Brokaw. He received no response.
In the 1970s, benefits to injured workers sunk so low that President Nixon appointed the National Commission on State Workmen's Compensation Laws to study the issue. It recommended that all states pay totally disabled workers at least two-thirds of their salary up to a maximum of the state's average weekly wage. Still, 17 states have not complied with the Commission's recommended standard wage.11
Studies support Stern's assertion that employer fraud is much greater than claimant fraud. In Florida, a 1995-1996 compliance audit found that of 22,758 employers contacted, 13.1% were operating without legally required workers' compensation insurance. In just the next year, the auditors found the rate grew another half percent.12 Stating that 13.6% is probably an underestimate, the audit report explained that in addition to the large number of employers making no attempt to buy the insurance, still others cheat the system by intentionally under-reporting or misclassifying its payroll and by falsely representing employees as independent contractors.13
In a 1997 press release, the Wisconsin Department of Workforce Development stated that workers' compensation fraud in the state was less than six-tenths of one percent.14 As recently as November 1, 2000, the same department reported on fraud from 1994 to 1999 concluding, "The public perception of workers' compensation fraud is exaggerated," and "The documented level of workers' compensation fraud in Wisconsin is minimal."15
A few months after the Dateline show aired, the LA Times printed, "Anti-Fraud Drive Proves Costly for Employees," and found, "Over the last decade, employers and insurance carriers have saved billions of dollars as legislatures in many states rolled back benefits, more narrowly defined workplace injuries and introduced impediments to collecting for them."16
And the J. Paul Leigh team concluded, "The dollar amount of fraudulent workers' compensation claims submitted by workers pales in comparison to the amount for claims never filed and, more importantly, the overall small amount of total costs paid by workers' compensation systems. Moreover, fraud committed by insurance companies at workers' expense is likely to be significant."17
The Leigh team further estimated that workers' compensation covers only 27 percent of all occupational illness and injury costs and that taxpayers bear a financial burden of 28.5 billion dollars -- close to six times the estimate of workers' compensation fraud -- through Medicare, Medicaid, and Social Security. Further, they discovered that costs were borne by injured workers and their families, by all workers through lower wages, by employers with lower profits and by consumers with higher prices. Specifically, they estimated that injured and ill workers and their families absorbed about 44% of the costs.18 Now that is an injustice worthy of outrage. ...
Workers' compensation is hardly the gold mine insurers portray it as. Fat lawsuits and big settlements are usually completely out of the question.
"When I tell distraught families who just lost someone in a workplace fatality that they cannot sue the employer, they are shocked. Sometimes it takes attorneys to tell them the same thing until they believe it," says Ron Hayes, founder of Families in Grief Hold Together (The FIGHT Project). "I've had families go to three or four attorneys until they would accept it. It depends on how angry they are."
The National Academy of Social Insurance, a private non-profit, non-partisan resource center explains the workers' compensation arrangement this way:
In other words, exclusive remedy safeguards employers from large punitive awards but impedes justice in the many cases that might be better served in court. The bottom line is that in all but the most willfully negligent circumstances, injured and ill workers cannot sue their employer for making them injured or ill.
Discussing exclusive remedy in an online article, the law firm of Boxer & Gerson explained a California case this way:
Hayes explains, "In a handful of states, there are certain exceptions that let people sue, such as when a person behaves criminally. But usually, they cannot sue their direct employer. Instead, they have to sue other employers that were involved (like on a multi-employer construction site) or they can sue under product liability, like when someone killed by a drill rig sues the manufacturer of the equipment rather than the employer who did not maintain it or train workers on it."
"But," cautions Ron, "what people don't realize is that if they win these lawsuits, they then have to return all money received under workers' compensation because winning the suit will actually prove someone else was at fault. So here are these families that fight to win in court and then they discover that of any award they received, they have to pay the lawyers 30-40% off the top, return any workers' compensation they have received back to the insurance company (sometimes a lump sum of $20,000 or more) and they won't receive any more payments under workers' compensation. The employer's insurance company actually ends up getting their money back." Ron describes the whole mess, saying "It's like the lawyers need to hire economists to figure out if the families will end up with anything." ...
The flip side of the exclusive remedy coin is that workers are paid even if an injury was partially their fault. If a person missteps and falls off a ladder, for instance, he or she is still compensated. The exclusive remedy trade-off works for many short duration injuries and illnesses where the system achieves the goal of prompt compensation without lawsuits. For most seriously injured and ill workers, however, the system does not work fairly.
After lengthy investigation, Executive Director Greg Tarpinian from Labor Reseach Associates concludes, "The presumption of widespread malingering and dishonesty undercuts any meaningful discussion of the adequacy of benefits and provides a convenient response for those opposed to the benefit increases that are so critically needed in many states. Until the misplaced focus on claimant fraud is overcome, district attorneys will continue to fry the small fish while the big fish go free, and the voting public will remain distracted by anecdotes. The emphasis on fraud and costs also distracts the public and lawmakers from the workplace hazards and flagrant safety violations that are the real cause of the problem of worker injuries and workers' compensation costs."35
4. National Academy of Social Insurance. "Workers' Compensation: Benefits, Coverage and Costs, 1997-1998 New Estimates." May 2000.http://www.nasi.org/publications2763/publications_
11. Harris, Marlys. "Workers Comp: Falling Down on the Job." Consumer Reports. February 2000. pg. 29. (Since workers' compensation is not taxed, theoretically, workers don't need their full wages; hence the Commission's two-thirds pay recommendation.)
32. National Academy of Social Insurance. "Workers' Compensation: Benefits, Coverage, and Costs, 1997-1998 New Estimates." May 2000.http://www.nasi.org/publications2763/publications_
33. Young, Julius. "Workers' Compensation Reform: Why Is It Needed?" Boxer & Gerson, 171-12th Street, Suite 100, Oakland, CA 94612. (510) 835-8870. (Article text taken from a white paper prepared by Doug Kim for the California Applicant's Attorney Association. Mr. Duncan testified before the SB 996 Conference Committee hearing on Temporary and Permanent Disability Benefits, on May 8, 2000 at the State Capitol, Sacrament, CA.) http://www.boxerlaw.com/bg04024b.htm
35. Tarpinian, Greg. Labor Research Council, "Workers' Compensation Fraud: The Real Story," June 1998. http://www.laborresearch.org/ind_temps/work_comp_fraud._rpt.html