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Identifying and Preventing Provider Fraud in Workers Comp Cases

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Claimant fraud and premium fraud are two of the most well-known types of workers compensation fraud. In these cases, a worker may intentionally fake an injury (claimant fraud) or a business owner may misrepresent their employee headcount or incorrectly classify employees to obtain lower insurance premiums. Now, a lesser-known type is occurring with greater frequency: provider fraud.

Provider fraud occurs when a professional other than the injured worker or employer accepts a bribe or illegal kick-back in exchange for patient or client referrals. The circle of potential culprits includes lawyers, translators, doctors, chiropractors, nurses, and telehealth professionals. Opportunity, incentive and rationalization—the “fraud triangle”—are key factors that go into a person’s decision to commit insurance fraud. These factors have been exacerbated in recent years, due in large part to the pressures presented by the global pandemic and the growing reliance upon remote services.

Most schemes involve knowingly billing for medical goods and medical and legal services that are unnecessary or not provided at all. A chiropractor, for example, conducted illegal medical evaluations and billed these evaluations, claiming that he was approved as a medical legal evaluator. In another example, an attorney named his daughter as the owner of a translation services company, while in reality he maintained ownership of the business. Each time the attorney was hired, the translation business was also engaged and billed its services. Provider fraud is increasingly prevalent in California and Florida due to each state’s workers comp rules. For instance, in California, a provider can file their own lien with the Workers’ Compensation Appeals Board, even if the bill was denied. California is the only state that allows providers to file their own adjudication. At a higher rate than in other states, healthcare providers in California and Florida are sometimes found billing for services that were never rendered, billing for more expensive services than were actually provided, ordering unnecessary tests or procedures, and providing kickbacks to referring physicians.

So, how can we pin down provider fraud?

  • Review Provider Invoices and Reports: Risk professionals can spot potential fraud cases and fraud trends by closely reviewing provider invoices and reports and scrutinizing those invoices that are close to, but not at the top of, typical billing charges. In the workers compensation system, there are typically five levels of a doctor evaluation: Level 1 is the cheapest while Level 5 is the most expensive. Fraud often occurs in Level 4 billings since Level 5 would be too obvious. Providers who consistently bill at Level 4 could be a red flag for fraud.
  • Shine a Spotlight on Supplementary Services: Insurers sometimes overlook that provider fraud can occur with supplementary services such as translation and transportation companies, copy services, medical equipment suppliers and pharmacies. It is not uncommon for insurers to discover that these schemes may involve a criminal enterprise (possibly a referral network) orchestrated by individuals who are not medical or legal professionals. While claimants can be complicit, often they are unwittingly involved and potentially subject to treatment that is unnecessary or even harmful. 
  • Consider Emerging Tech to Pinpoint Provider Fraud: Artificial intelligence and machine learning are game-changers for fraud investigations. Through the analysis of historical claims data and insurance adjuster notes, some technologies can help professionals discover fraudulent claims faster. For instance, AI can be particularly effective at the entity level when a doctor or hospital that is identified as fraudulent can be added to a “bad actors” list for review in future claims. If you do not have a fraud feedback loop, start gathering information now. As risk and insurance professionals, we rely on business rules and claims adjusters to catch all the details of a claim and then form a cohesive narrative to investigate. While business rules work, the fraud feedback loop is necessary to effectively train machine learning models to detect patterns and flag anomalies.

Workers compensation insurance provider fraud has become a multi-billion-dollar industry that is bad for business. It is costly for insurance companies to identify and prosecute, it inflates costs for goods and services that honest business owners rely on, and it stokes consumer apathy and distrust in the insurance system. Risk and insurance professionals need to be aware of the warning signs so they can work diligently to detect and prevent it.

Detecting and Confronting Procurement Fraud

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Accountancy firm Crowe and credit rating company Experian have said that large enterprises and governments experienced 59% of procurement fraud in the United Kingdom, costing them $120 billion (£89 billion) collectively. It is estimated that over $2 trillion (£1.6 trillion) total is lost each year due to procurement fraud, or 4-8% percent of an organization’s procurement spending. This figure dwarfs other areas such as corporate tax avoidance, where HMRC estimates that $94 billion (£70 billion) was avoided between 2011 and 2015.

The main difference is that procurement fraud is so varied that it makes it virtually impossible to detect. More importantly, procurement fraud is difficult to detect because it is often embedded in a genuine expense. For example, when a construction contractor submits an invoice for 100 hours of work in a week, eight of those hours may be fraudulent. This may seem negligible, but when you consider that every purchase in an organization can include an element of fraud, the scale of the problem becomes clear. It is not just about the financial loss; there are many reputational issues too.

Why Procurement Fraud? 

There are two main reasons: greed and opportunity. In terms of motive, we see both individuals and groups committing acts of fraud because they want something for themselves. They might be looking for personal gain, or trying to get away from someone else, or simply seeking revenge on a competitor.

Several studies have shown that around 50% of fraudsters are motivated by either monetary reward or benefits gained by committing a crime. For example, in 2018, a Massachusetts Bay Transportation Authority (MBTA) procurement official was indicted for receiving over $300,000 in illegal bribes and gratuities from a construction company that performed work for MBTA.

Individuals may also notice a weakness in a business process, as trivial as a broken approval process, that allows for invoices to be paid to existing suppliers without checking the outstanding purchase order amount. The problem is that weaknesses can surface at virtually every step of the procurement lifecycle, across the entire supply chain. Additionally, fraud often occurs when suppliers become close with an individual with authority inside an organization that can provide undetected access. Fraudsters see an opportunity to profit from weaknesses and begin exploiting them.

What Can Be Done?

Here are three ways to help your business become less vulnerable to fraudulent activity:

1. Use data analytics tools: Data analytics tools give you access to information about how well suppliers perform against agreed standards. You can use this information to identify potential risks early on, which could save your company millions in wasted spending.

2. Choose suppliers carefully: The larger and more complex your supply chain, the greater the risk for procurement fraud. If you buy goods and services from many suppliers, you should try to choose suppliers based on quality rather than price. Quality is not always reflected in the cost, but this means you need to be wary of the cheapest option. Using data to draw definitive conclusions about a supplier’s performance is a good way to remain objective when selecting.

3. Create a robust process: It is important that have a robust supply chain management process in place. You should be able to trace back how a supplier was added to your supply chain, the selection criteria for any awarded contracts, their ongoing financial standing, and the people involved in managing the relationship.

Grow Employee Engagement with a Strong Investigation Process

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In a tight labor market, employers are seeking to gain or retain a workforce with more pay, work for home and other perks. They can also improve retention through a culture of trust and consideration. Improve how you listen and investigate when someone on your team speaks up about compliance. If you investigate with urgency and respond, then you’ll gain trust and build employee engagement.

Here is an anecdotal case, from the perspective of the business: An anonymous report comes in from a small foreign office, that says “It seems like there is something going on between the marketing lead and a partner. I suspect they are wasting marketing funds.” The seriousness of the issue is not entirely clear—maybe the person reporting the issue is questioning the quality of the marketing campaigns. It is a challenge to reach people overseas.  Some initial questions are asked, but the case sits for months before anyone starts reviewing the matter closely. 

After almost a dozen interviews, no one reveals anything useful. The answer has to be found by sifting through years of email. The investigation ultimately uncovers how the company is being taken advantage of. It is shocking how so many people in the office know the marketing lead is stealing company funds, but said nothing. 

After the late start, combined with actual wrong-doing that is festering, the person who reported the wrongdoing and the rest of the office have stopped caring. The business is left with a problem infecting the whole office, instead of having to deal with only one or two bad actors.

Compliance is a Retention Issue

A compliance report may raise questions about potentially uncomfortable topics: harassment, fraud, conflicts of interest or any number of issues highlighted in a typical code of conduct. When a report is substantiated, someone might be disciplined or fired—thus, colleagues may view the person who reported the issue as disloyal to the team. Those who come forward may also fear that their company may not care about the reported issue or try to cover it up, and maybe even retaliate against them.

With the risks reporting presents, it is likely to be the most engaged, loyal employees who report, so you risk losing your best if you fail to listen. This happens when you leave reported issues unaddressed, where you fail to rectify a substantiated report or when you let a report languish unresolved. But if you follow up and respond quickly, you will win trust. When a talented employee feels listened to, they will have higher morale, trust the boss more and be more committed.

Improving Investigations

Listening to a compliance reporter is about taking the issue seriously and expediciously running it to ground. The foreign office scenario above would have gone better had the investigators seen through the vagueness of the report to the potential seriousness of the underlying misconduct and then doggedly pursued a resolution from the start. With those in the office uncooperative in interviews, having access to past email made it possible for the investigation team to close the case.  

Here are five tips to improve and speed up how you investigate:

  1. Have a process: Implement a disciplined approach for following the routine steps in a compliance investigation—assessing the initial report; developing an investigation plan; finding, verifying and analyzing to formulate a decision; and resolving with discipline, prevention, and training.
  2. Be selective when choosing your investigators: Staff your investigative team with individuals who are not wired to let cases sit. Provide them investigation training and consider augmenting with outsourced external investigators if an issue is large or complex.
  3. Define objectives: Set a clear objective for the investigation at the outset to keep investigators on track. The investigation can move on when they have obtained sufficient facts about the objective—finding that “smoking gun” email, for example. When you learn something new that needs further review, flag it for later but do not let it interfere with your first objective.
  4. Use technology: Give your investigators direct access to the data. It is frustrating for an investigator to receive a report and then have to wait for IT to provide the relevant emails or other data, then wait for IT to provide additional materials when the investigator learnes something new. The team’s investigation times accelerate when it has direct access to email and other communications through archiving platforms and other technology.
  5. Track timing: The time to complete an investigation is dependent on the circumstances. The investigation team should set period of time to resolve the investigation when a compliance issue arises.

A business builds a strong culture when it supports those who speak up. Having a strong investigative team, defining objectives, using technology and being aware of completion timing will allow you to quickly learn what is going on. You will also demonstrate that you are not using a haphazard approach.  This will give your employees more confidence in your company and encourage them to stay around.

Combating Fraudulent COVID Unemployment Claims

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As federal and state officials scramble to send unemployment and stimulus funds to help people hit hard by COVID-19 business shutdowns, it has become a perfect storm for cyber fraud.

The payments are an easy target for cybercriminals as hackers and cyber gangs around the world have started to file unemployment claims use stolen identities. Some criminals claim benefits in the names of dead or incarcerated people, while others set up shell companies, “hiring and firing” fictitious employees to collect payments.

For example, cyber gangs in Nigeria have stolen millions in benefits from multiple states using hacked names, Social Security numbers and other information sold for as little as two dollars each on the dark web. In New York, a man was charged with filing more than $1.4 million in false COVID-19 unemployment claims, using the stolen identities of over 250 unknowing victims. According to U.S. attorneys, he was caught in part because he used the same IP address and security question and answer—the name of his family dog, Benji—to submit the applications.

The U.S. Department of Labor estimates fraudsters may already have stolen at least $63 billion through phony jobless claims, while other reports say the losses could be as high as $200 billion. In addition, unsuspecting victims are at risk of receiving surprise tax bills because cybercriminals stole their identities and filed fraudulent claims for COVID-19 unemployment payments.

Watch Closely for Signs of Fraud

The Federal Trade Commission warns that unemployment fraud puts workers at additional risk of identity theft crimes including tax fraud. What can you do to help protect your employees?

Unemployment fraud is often uncovered when employers are notified by state officials that employees have applied for benefits. If they are still working, they may be the victim of identity theft.

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Be alert to the signs of cybercrimes and unemployment fraud. Contact your human resources department or tax administrator and ask them to look carefully at any notices or requests they receive from state unemployment officials. If you get a report about unemployment benefits that an employee did not request or receive, contact the employment division of your state labor department. Unemployment fraud is so widespread that most states have set up special procedures to deal with these situations.

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Warn Your Employees

Let employees know that unemployment scams are a serious problem. Identity theft can also lead to tax fraud, credit card theft and loans taken out in their names.

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Notify a working employee immediately if the state informs you they have filed for unemployment benefits. They may be the victim of identity theft and should file a police report. Officials say workers scammed by cybercriminals do not have to pay unemployment taxes, but they must report the crime to the state labor department. And they should file their federal and state taxes on time for the correct amount of their income. The U.S. Labor Department has created a special website for victims of unemployment fraud.

Review Your Cybersecurity

Much of the personally identifiable information used by cyber thieves comes from data breaches, phishing schemes and other cyberattacks. Remind employees, particularly in human resources and tax departments, to be alert for suspicious emails, telephone calls and text messages about payroll information or W-2 forms.

The threat will continue beyond the pandemic. Business email compromise, in which employees are tricked into paying company funds into fraudulent accounts, is at an all-time high, so make sure employees have regular cybersecurity training. If you haven’t conducted a data inventory, do so now. Once you know what data you keep, you can determine what controls you require to protect that data. Store employee records securely and dispose of personally identifiable information carefully. It is also advisable to use a secure email gateway, which protects from spam, viruses, malware and denial-of-service attacks, and make sure employees working remotely are using secure company devices. Install patches and software updates, setting up automatic software updates whenever possible.

Unemployment or tax fraud targeting multiple employees may indicate a data breach. If you have a theft or cyberattack, contact your insurance carrier and, if necessary, seek expert help to identify the source, the extent of the problem and how best to respond.