Like the other parties we’ve discussed in previous articles (i.e., employees and medical providers), workers’ compensation fraud also takes place at the employer level. Unlike employees and providers, however, the most prevalent type of comp fraud perpetrated by employers does not necessarily relate directly to a specific injury—rather, it occurs administratively.
In order to understand this type of fraud, one must first have the concept of how workers’ compensation premiums are calculated. Premiums are based on many factors including payroll, employee classifications and employer size. Using standard calculations, these variables are used to produce workers’ compensation premiums. When these are altered, premiums are raised and lowered. For example, if a secretary sprains an ankle, the premium may be affected to a lesser extent than if a boilermaker sprains an ankle. Given these factors in figuring rates, some employers may deliberately misstate these factors, thus reducing their comp rates. Another way this may occur is when an employer reports its payroll inaccurately.
There is also another method of workers’ compensation fraud that has been reported. Many states, including Illinois, allow business owners or partners to exclude themselves from the workers compensation system. In turn, the company legally reduces the reported payroll to an underwriter, thus reducing the premium since these people have little or no exposure for workers compensation accidents. Fraud enters the picture when the company turns in a claim for an executive that is exempt from the workers’ compensation system.
Workers’ compensation is a necessity of business. Its direct and indirect costs have significant impacts on an employer and the economy. Add comp fraud to the equation—whether perpetrated by the employer, employee or provider—and the costs multiply. As a point of reference, here are a few final parting statistics that you might consider:
• The Insurance Research Council states that one of their studies indicate that almost 17 percent of U.S. adults say it is acceptable to collaborate with professionals in filing false workers’ compensation claims.
• According to one insurance company, each one of us spends an additional $200 a year in insurance premiums because of insurance fraud.
• National Insurance Crime Bureau studies estimate workers’ comp fraud to cost the insurance industry about $5 billion and consumers an additional $20 billion annually. IBI