Provider Fraud in California Workers' Compensation

Selected Issues

by Nicholas M. Pace, Julia Pollak

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Research Questions

  1. How can the sources of and remedies for workers' compensation fraud in California be conceptualized?
  2. What data-driven fraud-detection efforts do other governmental social welfare programs use?
  3. What specific aspects of the California approach might need addressing regarding provider fraud?
  4. How can regulators and legislators address them?

Workers' compensation fraud is thought to be one of the fastest-growing forms of insurance fraud, reportedly costing insurers and businesses billions of dollars each year nationwide. This report focuses on one particular form of workers' compensation fraud: the intentional manipulation of rules and procedures by providers, particularly those delivering health care services and supplies. The report conceptualizes the sources of and remedies for workers' compensation fraud in California, discusses various data-driven fraud-detection efforts that other governmental programs use, examines specific aspects of the California approach that might need addressing, and offers some high-level recommendations in that light for the consideration of regulators and legislators. To this end, the authors reviewed academic journal articles on methods used to detect and prevent fraud in the insurance, financial, and public sectors; academic and policy literature on the characteristics and sources of workers' compensation fraud; media articles on the use of fraud-detection technologies and their performance; and legal treatises describing the overall statutory and regulatory scheme for addressing employment-related injuries and illnesses in California. They also attended four days of public roundtables in June 2016 where insurers, employers, labor, government agencies and prosecutors, providers, third-party administrators, and applicant attorneys discussed a variety of issues related to workers' compensation fraud.

Key Findings

Advanced Analytics Is a Promising Means to Fight Workers' Compensation Fraud

  • Advanced analytics techniques that social welfare programs use for detecting fraud have had generally favorable results.
  • These techniques offer California workers' compensation similar promise.
  • Shortcomings in how data are currently collected and accessed should not prevent the Department of Industrial Relations from utilizing these tools.

Postemployment Claims Generating Questionable Medical Liens Lack Cost Controls

  • Employers must furnish up to $10,000 in medical treatment after a claim is filed and can limit the employee's discretion as to the provider; if the employer rejects the claim, the employee can then receive treatment on a lien basis.
  • Postemployment claims have a strong likelihood of denial, and liens that follow are concentrated in certain locations and providers, routinely settling for a fraction of claimed value, which suggests that they remain a significant source of profit.
  • Lien volume and claimed value in denied postemployment claims would be reduced if medical care were subjected to the cost controls available in nondenied cases.

A Medicaid Policy Could Be Used to Prevent Payments to Suspected Fraudsters

  • Many liens are filed by providers who are under indictment or have been convicted.
  • Existing law offers means to stay liens or suspend providers but either require a formal prosecution or affect only a narrow set of liens.
  • A Medicaid policy that suspends payments when there is an investigation of a credible fraud allegation would apply to providers who are only under suspicion and would cover all of their liens.

Recommendations

  • Implement a centralized and permanent workers' compensation fraud data unit to enhance opportunities for detecting and addressing fraud.
  • The California Department of Industrial Relations should take immediate steps to incorporate the use of data analytics into its routine fraud-detection work.
  • To target certain employee-selected providers who repeatedly generate liens large in volume and claimed value, give employers the option of denying a questionable postemployment claim while continuing to offer medical care under their control.
  • Use the payment suspension policy adopted by Medicaid as a tool in addition to those already available under Labor Code §§ 4615 and 139.21 to take active fraudsters out of the workers' compensation system.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    What Constitutes Workers' Compensation Fraud?

  • Chapter Three

    Detection: Using Advanced Analytics to Identify Fraud

  • Chapter Four

    Prevention: Bringing Postemployment Claims Back into the System

  • Chapter Five

    Remediation: Suspending Lien Claims When Holders Are Suspected of Fraud

  • Chapter Six

    Recommendations

The research described in this report was conducted by the RAND Institute for Civil Justice (ICJ), a part of the Justice Policy Program within RAND Justice, Infrastructure, and Environment.

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