A long-anticipated crackdown on workers' compensation insurance fraud is yielding some results as more local employers, contractors, insurance agents and medical providers have been targeted for investigation and prosecution.


In the last two weeks, arrests have been announced in two separate L.A.-area cases, one employer has been sentenced and one insurance agent fined. In all these cases, the defendants allegedly came up with schemes to lower workers' compensation insurance premiums, which have remained stubbornly high despite two rounds of reforms in the last 18 months.


For the fiscal year ended this past June 30, there was a 25 percent jump in the number of claims reported to state insurance officials 5,122 claims in all while 868 new cases were opened for investigation. (Figures for new cases opened in the 2002-03 fiscal year were not available. A recent Department of Insurance report said that as of July 1, 2003, 955 cases were open, with many of those open more than a year.)


Over the next year, many of these cases are likely to be handed over to district attorneys throughout the state for prosecution.


"No question law enforcement and insurance agencies now have a better grip on fighting fraud," said Laura Clifford, executive director of the Employer's Fraud Task Force, an Anaheim-based consortium devoted to combating workers' compensation insurance fraud.


While most cases still center on people filing injury claims, other fraud schemes have been targeted, including under-reporting of payrolls to lower premiums and employers going without workers' compensation insurance altogether. These types of fraud typically involve more money than single individuals filing claims.


"We're shifting our focus now toward higher impact cases," said Kathryn Scholz, bureau chief of the workers' compensation anti-fraud program with the state Department of Insurance.


New anti-fraud efforts


On Dec. 2, Randy Greenberg, who owned an L.A.-area picture framing business, was sentenced to pay $1.8 million in restitution and fines after being found guilty for under-reporting wages by $7 million in an attempt to reduce his workers' compensation premiums with State Compensation Insurance Fund and American International Group. Greenberg, according to a statement from state Insurance Commissioner John Garamendi, used shell corporations, under-reported payroll and changed employee classifications.


The day before, the L.A. County's District Attorney's Office announced the filing of charges against Charles Yi, a contractor whose firm paints dorm rooms on the UCLA campus and provides janitorial service for the Rose Bowl. Yi was charged with under-reporting the number of workers at his firm when applying to purchase workers' compensation insurance. Prosecutors allege he employed between 300 and 400 people but only claimed he had 15 to 18 employees on his payroll.


Yi pleaded not guilty on Nov. 30; a preliminary hearing is set for next week. He did not return a call.


Actually, the Los Angeles County District Attorney's workers' compensation fraud division recorded a drop in the number of cases opened and charges filed in the fiscal year. Much of the decline is attributed to a new anti-fraud program targeting medical providers that resulted in two of the 11 investigators from the workers' compensation fraud unit being reassigned.


This new fraud interdiction program uses tax records to trace cash flows into and out of medical clinics. The aim is to find inflated claims and go after the clinics on tax fraud charges.


Albert MacKenzie, the deputy district attorney brought out of retirement to head the new unit, said a significant portion of the 50 cases his unit has opened this year involve workers' compensation medical clinics. One such clinic now under investigation grossed $32 million in 2003 but reported only $15,000 in income.


The war against workers' compensation insurance fraud is also spreading to other fronts. Investigators and prosecutors say there's been a re-emergence of schemes in which employers lease their employees to a third party that promises to provide workers' compensation and other benefits for that employer at much lower rates.


Many of these third parties either do not have required licenses or fail to pay claims. When employers or investigators catch on, they close up shop and re-emerge under another name in another location.


Similar schemes cropped up in the early 1990s, but went away after the workers' compensation insurance market was deregulated in 1995 and rates plummeted.


This time, many of these entities are allegedly obtaining workers' compensation insurance policies from Indian tribes. Because the tribes claim they are sovereign nations, they say they don't need licenses from the state to sell insurance policies and thus don't need to meet the extensive capitalization requirements for traditional insurers.


Cutting out insurer


State insurance officials disagree and last month, the Insurance Department revoked the license of an Agoura Hills insurance agent for selling allegedly illegal workers' compensation insurance obtained from an Indian tribe not authorized to sell insurance products. The agent, Daniel Matthew DeBeikes, was ordered to pay $100,000 in restitution and fines.


Another trend has been the increasing use of direct billing, where employers pay medical providers directly to treat workers' comp injuries, cutting out the insurer entirely. That practice is illegal for companies that don't self-insure, since every injury that occurs on the job must be reported to a licensed workers' compensation insurer, no matter how small.


"In many cases, the employer won't even give the name of their workers' comp carrier," said Dr. Ronald Crowell, medical director of HealthFirst Medical Group in Santa Fe Springs. "They are that paranoid about word of an injury ever getting back to their insurer," who would then set aside more in reserves against that employer and thus charge more in premiums.


The question is whether this and other types of workers' compensation insurance fraud will decline. So far, premiums have only edged down an average of about 5 percent to 10 percent this year. Many companies particularly those in high-risk sectors are still seeing premium increases.

For reprint and licensing requests for this article, CLICK HERE.