Estimates of the annual cost of workers compensation insurance fraud range from $1 billion to $20 billion nationally. This disparity demonstrates the difficulty in pinpointing where, when and how often workers compensation fraud occurs.
Detecting workers compensation fraud is a big job that has gotten bigger. According to the Coalition Against Insurance Fraud, all forms of workers compensation have grown "significantly" since the early 1980s. That includes worker claims fraud and employer premium fraud. But a new tool designed to help detect both types of fraud has proven more than effective, nearly doubling the fraud recovery rate for the Workers Compensation Fund of Utah (WCF-Utah).
Before implementing HNC Insurance Solutions VeriComp Claimant and VeriComp Employee solutions in 1998, WCF-Utahs fraud recovery rate was between $3 million and $4 million. That rate increased to $7.3 million last year.
"To a lot of companies, that might seem like a drop in the bucket," said Bob Short, senior vice president of WCF-Utah. "But [we have] around $120 million in premiums, so when you talk about $7 million that youd otherwise be paying out, youre talking about 5 or 6 percent probably."
A less measurable effect of the new technology is the deterrence factor. Individuals or employers in Utah know they are being watched more closely and are, therefore, less likely to commit fraud. "The significance of this fraud program is that the employers in Utah pay less money for workers compensation insurance because were cutting out the fraud," Short said.
The technology has been adopted by other states as well, including North Dakota and Nevada.
Nabbing the Culprit
Predictive technology works by sifting through claims and "predicting" which are likely to be fraudulent. After searching for any of 31 data elements that might be indicators of fraud, the software then provides a score from one to 1,000 based on the assessment of the data. A higher score indicates a higher probability of fraud.
The data elements examined in VeriComp Claimant are based on statistics derived from legitimate employee claims. They include the length of time it should take for a particular injury to heal; the age and sex of the claimant; the nature of the injury; and how much money the benefit is paying. This data is compared to the norm and anything out of the ordinary is examined more closely.
VeriComp Employer looks at employer information, including size and industry category, the reported payroll information of a company compared to its peers and changes in employer characteristics over time. VeriComp Employer data elements target claims that tend to be suspicious.
Although a high score by the VeriComp system doesnt necessarily mean fraud, it does give adjusters a target on which to focus. This is a far cry from the "old days" when selective random auditing was about the only way to detect fraud.
"A normal adjuster may work on about 150 to 200 claims, conservatively," said Laki Balaji, vice president of property and casualty predictive software of HNC. "On any given day, theyve got probably 100 bills. Its humanly impossible to check every claim, and thats the power of this neural network technology; its able to analyze an innumerable amount of data elements at a given snapshot in time, which the human brain could never do."
Weaving into the System
WCF-Utah has about 28,000 employer policies, 15,000 to 20,000 of which are very small policies, said Short. Previous to the VeriComp systems, the only way to detect fraudulent claims was to do random audits on the companies with the largest policies. There werent enough resources to check on the rest.
"It is a huge improvement in our allocation of resources," Short said. "When we [did] selective random audits, we used to get a recovery or payback on 60 percent of the cases that we audited. Now we get a 90 percent hit on the recovery."
Employer fraud is more difficult to catch than claimant fraud, especially before the new technology. "I always knew it was there," Short said. "This [technology] lets us do something about it."
There is more money involved in employee fraud and it is difficult to prove intent, which is necessary to prove fraud. Employers can easily deny an accusation claiming they have little or no knowledge of a situation. "Very often they say, Gee, we didnt know," Short said. "But nevertheless, we do get them and we do prosecute employers."
The technology is a breakthrough as far as being able to quickly sift through data, find patterns and assess the probability of fraud in a claim. "This technology actually does all its work behind the scenes with no additional keystrokes from a person," Balaji said. "This is regular data thats going through the system and we capture it and score it."
Then its up to the auditors to assess the scores and determine what action to take. "It not only provides scores but the reasons why the scores were so high," said Balaji. "Thats where the human component comes in."
After finding a claim that deviates from the norm, auditors have several choices to make. They may gather more data, such as witness statements or more information from a treating physician, or they may choose to do surveillance. They also may opt to send the claimant a letter, letting him know that he is being watched. "That one letter makes a huge difference," Balaji said. "You can let it go for a long time and then you can catch them, but if you can nip it in the bud, thats better. Thats what this technology helps you do."
The technology recently helped nab a Utah resident who had been on workers comp for quite some time before the system was implemented. "Hed been on disability for a couple of years at the time we introduced VeriComp," Short said. "His score came in at like 892, so we sent surveillance to California and found the guy hang gliding and doing all kinds of things."
There are other examples of people who had been on workers comp for months or years before the system raised questions and enabled auditors to step in. But one of the goals of WCF-Utah is to prevent fraud before it starts. "Weve advertised throughout our state through television or magazines that were serious about fraud and that we prosecute," Short said. "Its impossible to measure what the deterrent factor is but its there."
Workers compensation insurance fraud is a tax on a system that was designed to provide relief for injured workers. It has penalized honest workers and businesses. But predicative technology is helping cut into some of the costs and free up the resources needed to put a larger dent in the deficit by doing a large portion of the work for adjusters.
"It makes good adjusters better and bad adjusters better," said Short. "Its a good management training tool as well as an identifier of bad employers and bad workers."