According to the National Insurance Crime Bureau, workers compensation fraud is widespread in the U.S., costing the country an estimated $7.2 billion every year. And who pays for these fraudulent actions? Perhaps more surprising than the enormous $7.2 billion figure is the fact that these costs are passed to the insurance company, which means they are in-turn passed onto other policyholders (ie. other business owners) and eventually the general public.
Broadly defined, “fraud” occurs anytime an individual knowingly makes deceptive claims, falsifies documents, or purposefully conceals information for their own financial gain. States legislators are largely in-charge of regulating workers compensation in their local jurisdiction; however, monitoring the relationships between employers, workers, insurers, and health care providers for every state-recognized business is a formidable task. Likewise, workers compensation across the U.S. is largely a “no-fault system”, meaning that workers need not prove their injury to receive immediate benefits.
In other words, for workers compensation to work, there’s a certain amount of trust that must be maintained between employers, state agencies, insurance companies, and healthcare providers. While most parties remain honorable, there are (and will always be) a handful of bad actors that attempt to take advantage of this system.
Importantly, when most individuals think of workers compensation fraud, they envision a dishonest worker fabricating or exaggerating a workplace injury to collect benefits. Although this certainly does happen, it’s really only one piece of the puzzle. Workers compensation fraud comes in three broad varieties:
1. Claim-related fraud is committed by the employee.
It’s the typical example of a worker falsely claiming a workplace injury or illness in order to collect workers compensation benefits. It also occurs when a worker exaggerates an injury to receive extended benefits.
2. Policy-related fraud is committed by the employer.
It occurs when the employer falsifies or withholds information regarding their workforce in order to minimize the required workers compensation premiums.
3. Medical-provider fraud is committed—as the name implies—by the medical provider.
It often occurs when the provider offers unnecessary medical services to collect insurance payments; however, medical-provider fraud can take many other forms as well.
For concerned business owners, the focus should be on policy-related fraud (and perhaps to a lesser extent, claim-related fraud). It’s important for owners to understand: 1) what constitutes as policy-related fraud, 2) why some employers believe they can defraud the system, and 3) the legal consequences for committing workers compensation fraud.
Why do Employers Commit Policy-Related Fraud?
Similar to any other type of insurance, workers compensation is maintained by pooling funds (in the form of premium payments) from all insured parties, which in this case are the employers. In the event of a claim, such as workplace injury or illness, a portion of the pooled funds are then paid-out to the claimant.
Although the large majority of U.S. employers are subject to carry workers compensation insurance, the premiums aren’t equal for every business. Premiums are set by the insurer and depend on a number of factors, such as the type of workplace, its gross payroll, and its claims history. In some instances, employers aren’t required to carry workers comp insurance, and consequently avoid paying any premiums at all. This will depend on the number of workers employed by the business and the type of work they perform.
Policyholders always want to maximize their benefits while minimizing their premiums. The underlying motive of policy-related fraud—also called employer fraud or premium fraud—is to minimize these premium payments or to avoid them all-together.
In an effort to do so, some business owners choose to manipulate or withhold information regarding their workforce in order to reduce or avoid paying workers compensation premiums. The following are all common, albeit illegal, instances of policy-related fraud:
- Knowingly underreporting the business’s gross payroll or workforce size
- Misclassifying employees as positions that are ‘excluded’ from workers compensation coverage (such as contractors, seasonal workers, or high-ranking employees)
- Intentionally failing to carry compulsory workers compensation coverage
Any of these actions will surely reduce a business’s premium obligations, but are undoubtedly illegal and can—and increasingly do—result in severe penalties for wrongdoers.
Consequences of Policy-Related Fraud
For employers, the consequences of committing policy-related fraud vary by-state. Generally, larger and more populous states tend to have harsher penalties for bad actors. For example, in New York, employers that intentionally misrepresent their workforce can be charged with a Class E felony. Similarly, some types of fraud are considered felonies in California, where state legislators established The Workers' Compensation Fraud Program specifically to investigate these kinds of offenses.
More generally, minor cases of fraud tend to result in fines, while the consequences for misdemeanor and felony convictions often take the form of jail-time. It’s also worth noting that employers who encourage or facilitate claims-related fraud from their workers can be held legally accountable.
In any case, the real victims of workers compensation fraud are the honest policyholders and general public, who will—in some form or another—cover the costs incurred by the insurance companies. For business owners, it’s important to understand what constitutes as policy-related fraud and how to avoid it.