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Workers' Compensation

Employer Fraud in Workers’ Compensation – Just How Significant Is It?


If there is one topic that unifies all parties involved in workers' compensation, that topic is the desire to eliminate fraud.  Whether it is created by the employer/insurance company or the employee, there is no place for fraud in the system and legitimate efforts to eliminate it are worthwhile.  Thirty-four states have fraud units in place, but until recently the primary emphasis has been on employee fraud.

For example, a report in 1994 by the National Insurance Crime Bureau, a group that receives support from approximately 1,000 property and casualty insurance companies, estimated workers’ compensation fraud losses at approximately $5 billion per year, yet it could only document 99 fraud prosecutions in 1994.1  As recently as 2006, this fraud figure of $5 billion per year was referenced in an insurance trade journal, without any comment on the reliability of the figure cited.2 

A widely-quoted 1996 Conning and Co. report asserted that claimant fraud was as high as 25%.3  However, that figure had no statistical reliability.  It was based on a survey in which 25% of the respondents (the number and the identity of those surveyed is unknown) claimed they knew of individuals collecting workers’ compensation benefits whom they believed were capable of employment.  In 1997, a television station in North Carolina heard about this report and actually told its viewers that employee fraud was as high as 25%.4  However, it’s been generally recognized through studies that employee fraud is less than 1% of all claims.5

As a result of these earlier perceptions concerning the extent of employee fraud, many states imposed stiff criminal penalties and are aggressively pursuing fraud prosecutions, but convictions are relatively few.   Yet a surprising development has occurred.  In some states where fraud of any kind has been pursued, it appears that employer fraud may be much more significant than originally thought.  This article attempts to shed some light on these recent findings.

Root Causes of Fraud

In his book, The Cheating Culture:  Why More Americans Are Doing Wrong to Get Ahead, David Callahan argues that the potential payoff is so great and so enticing when compared to the risk associated with the discovery of fraud, many individuals and/or companies are willing to take that risk.  For some, the payoff far exceeds the risk of punishment, disgrace, and even jail time for the perpetrator.  In short, society has created an environment where there are huge incentives to cheat and there is a perception that “everybody does it.”  As Callahan states:

“Why not inflate earnings reports if the chances of being prosecuted are next to nil?  Why not commit a fraud that gets you $70 million when a year or two at a federal prison camp is the worst possible punishment?”6

Are the incentives as great for an employee making $540.00 a week, or for a company that stands to make millions off a fraudulent scheme?  The answer seems obvious.

As one outraged workers’ compensation expert stated in 2006, after it was revealed that two California State Compensation Insurance Fund (SCIF) directors resigned after questions were raised about the appropriateness of serving on the board when they operated businesses that collected millions of dollars in fees from the fund:

“The pervasive greed of those feeding off of the workers’ compensation gravy train is so endemic that there is no sanctity, no island of honesty, not one bit of redemption that any amount of reform or public humiliation can rectify.

The brokerage community has been successful for many years in steering the fraud debate towards the most minuscule part of fraud:  injured workers, a segment of the fraud population that is so small that insurance companies comically seek big attention for thwarting a criminal act that typically does not amount to more than $10,000 in damage.

Where is the outcry, however, when brokers suck $4 billion out of a system on clever reinsurance they can make a half-billion dollars in fees?  Why aren’t the Employer’s Fraud Task Force and other self-appointed overseers of malicious intent and do-gooders directing their energies towards identification of the white collar criminals guilty of bid rigging?

* * * *

I am sick and tired of the self-congratulatory insurance company press releases boasting about small-time fraud busts (SCIF is ironically guilty of this media puffery).  I am sick and tired of employers blaming injured workers for their sky-rocketing insurance premiums when typically the blame more often than not should be directed at recalcitrant brokers milking a commission schedule because of under-regulation.

* * * *

But mostly I’m sick and tired of us in the industry putting up with this...  The news of this scandal, and follow-up stories, barely registered in the top 30% of all news published on WorkCompCentral for the month.  In fact, some comments made about the story were indicative not only of apathy, but virtual acceptance.  As if it were OK to rip off the system if you have a white collar on!”7

Throughout the United States the total amount spent on workers’ compensation is $56 billion per year and approximately 125.9 million workers are covered.8  As Congressman Henry Waxman (D-Calif) recently stated during congressional hearings concerning the new “Part D” Medicare plan for prescription drugs, “…the new program is going to cost $1 trillion over 10 years - $50 billion over this next year.  That program’s got to be as ripe for fraud as any other.”9 With a similar amount of money in the workers’ compensation system, fraud has to be a concern to policy makers and law enforcement officials in every state.

Employer vs. Employee Fraud

As to employee fraud, there is a relatively small amount involved in the individual claim when compared to employer fraud, which potentially involves hundreds or thousands of fraudulent transactions.  The wider the net, the more the fraud.  When thousands of employers across the country intentionally fail to pay required workers’ compensation premiums or misrepresent the job classification of employees who are covered, the fraud perpetrated on the system vastly exceeds the dollar amount of employee fraud.  

Although anecdotal evidence of fraud is always suspect when trying to evaluate the scope and breadth of the problem, a few examples may shed light on the type of incentives involved in corporate fraud in the United States.

Many of these fraudulent cases were unearthed through the federal whistleblower statute (The False Claims Act, 31 U.S.C. §§ 3729-3733), which was enacted in 1863 to prohibit private contractors from profiteering on war supplies during the Civil War.  Tainted meat, broken rifles, useless ammunition, and lame horses and mules had been sold to the government.  Lincoln condemned these corporate criminals.10  Harry Truman, before his presidency, used this legislation to go after profiteering during World War II.  “He had the power to shut down an offending company or contractor, and he used it.” 11 The law was made tougher in 1986 and since then over $12 billion has been recovered, all from large corporate employers (56 are in the health care field).12 

The top 21 cases are listed below.13

In early 2007, federal prosecutors acknowledged a backlog of more than 150 cases involving pharmaceutical companies accused of defrauding federal and state healthcare programs.  Why?  According to an associate deputy attorney general, the department lacks sufficient lawyers and investigators, even though he estimates fraud cases produce $15 in payments and penalties for every $1 spent.14    All the claimant fraud in all 50 states combined wouldn’t begin to touch some of the settlements in the False Claims Act litigation.

Workers’ Comp Fraud by Employers

Obviously, employee fraud does exist.  It occurs when a claimant falsifies an accident report, continues receiving disability payments when the employee is actually working, falsifies his/her medical condition to a health care provider, or otherwise intentionally attempts to defraud the system. 

Employer/insurance fraud comes in many varieties: 

  • the employer intentionally refuses to purchase insurance for its employees, thus forcing the taxpayer to pick up significant medical bills through Medicare or Medicaid;
  • misclassifies its work force and the nature of the work being done by its employees in order to obtain reduced premiums;
  • denies valid claims, hoping the employee will not pursue the matter;
  • issues late disability checks;
  • refuses to pay for needed medical attention and prescription drugs; 
  • allows healthcare insurance policies to pick up costs it should be paying (they sometimes even reimburse the employee for co-pay on the health insurance policy); 
  • gives managers and adjusters incentives to either deny claims or to offer unreasonable settlement amounts; engages in bid rigging on insurance contracts; 
  • provides “ghost policies” to independent contractors who are really employees; 
  • incorrectly calculates the average weekly wage; 
  • refers injured workers to unscrupulous heath care professionals who deny care, give low permanent impairment ratings, and prematurely return injured employees to work;
  • classifies employees as independent contractors in an attempt to evade paying premiums; 
  • denies clear-cut occupational disease claims, forcing the employee to litigate the case; 
  • lays off the employee once a claim is filed, to send a message to other employees; or
  • videotapes a job that has been dramatically altered to deceive a physician or administrative law judge.

Some states are more aggressive about workers’ compensation fraud than others.  It would seem that the states with the most claims would be more interested in prosecuting fraud at all levels.  The top 20 states are the following (in number of claims filed per year, according to the most recent data available): 

Over a decade ago, statistics showed that prior estimates of employee fraud had been grossly exaggerated, but what do more recent reports show?

In Florida, one of the more aggressive states in attacking fraud, out of 54,854 claims filed in 2005 there were 178 convictions (and 130 were against employers). 

In Kansas, out of 66,469 workers’ compensation claims filed in 2006, there were 798 fraud complaints reported and 718 were against employers. 

In Rhode Island, out of 6,971 injuries filed in 2005, there were 5,219 fraud claims reported and 5,174 involved employers (primarily from late filing or non-compliance).15

In Tennessee, a penalty program was initiated in 2004 as part of the Workers’ Compensation Reform Act.  Since that time the program has collected nearly $300,000 from carriers and employers.16

In New York, a 2007 report by the Fiscal Policy Institute concluded that 25-30 % of all companies in New York are not purchasing workers’ compensation insurance and that non-compliance (failure to buy required insurance) was a growing problem in New York, which in turn increased premiums and shifted the cost of medical care to injured workers, taxpayers and other employers.   It also concluded that between $500 million and $1 billion was being lost to the system annually.17

In Texas, a judgment of $8.2 million (including interest) was entered against United Crane Inc. on February 6, 2007 after a jury determined that the company committed fraud by misrepresenting its payroll by tens of millions of dollars.  The fraud increased workers’ compensation premiums for others and made it more difficult for other crane operators to compete.18

Fraud statistics published by Texas Mutual Insurance Company, which has a “zero tolerance for fraud” policy, shows $446,826 in claimant fraud in 2005.  During that same period it discovered $12 million in employer fraud.  Texas Mutual readily acknowledges that “healthcare and premium fraud are the costliest types of fraud.”19

In Massachusetts, in December of 2006, the president of Ranger, Inc., primarily a demolition company, was arraigned on charges that he misrepresented the work the company does in order to obtain lower workers’ compensation premiums.  By defrauding the insurance carrier on work performed on 50 demolition jobs, he avoided paying approximately $200,000 in workers’ compensation premiums.20

In California, a construction contractor who had been doing business in Monterey County for approximately 26 years was charged in January 2, 2007 with leaving his employees uninsured for many years.21 

The owners of a roofing company in San Diego recently pled no contest to conspiracy and insurance fraud.  They were ordered to pay $3 million in restitution to the State Compensation Insurance Fund (SCIF).  They prepared false payroll records for 450 employees and underestimated premiums due.  The fraud was uncovered by a routine audit by SCIF.22 

On February 15, 2007, the owners of a shuttle company in San Jose were charged with defrauding the workers’ compensation carriers of $2.2 million.  The company had 30 employees. 

The California Department of Insurance has recently estimated that approximately 30% of the 800,000 employers in California do not have workers’ compensation insurance.23  If each employer had only 5 employees, that would mean over a million workers in California are working without the required protection of workers’ compensation insurance.  That is a serious problem.

In Florida, three people were charged with fraud and conspiracy for allegedly providing hundreds of workers with falsified workers’ compensation insurance certificates, which were submitted to over 300 Florida construction contractors.  A federal grand jury indicted them in a scheme that involved about $20 million in construction contracts in 12 counties.  They were able to undercut area labor providers because they failed to pay an estimated $4 million in workers’ compensation insurance premiums.24

In Ohio, one of the more bizarre fraud cases was discovered in 2005 when Tom Noe, a prominent GOP fundraiser and coin dealer, was charged with embezzlement of $13.7 million out of $50 million given to him by the Ohio Bureau of Workers’ Compensation.  He was going to invest the money in coins.  He was given $25 million in 1998 and $25 million more in 2001.  After the first installment, he wrote himself $1.8 million in checks, bought a boat, and gave $1.5 million to contractors and vendors.  He only purchased a few coins.  By October of 2004 his investment company realized the entire investment had been lost, but kept that information hidden until June of 2005.25

As to insurance companies, one of the largest workers’ compensation companies in Pennsylvania was Reliance.  Saul Steinberg, its Chairman, received more than $48 million in salary and bonuses and over $100 million in dividends between1991 – 2001.  Members of his family received millions more as he drove the company toward a bankruptcy which exceeded $2 billion, leaving other insurance companies and taxpayers to pick up the losses.26

Former AIG Chairman and CEO Maurice “Hank” Greenberg resigned in 2005 after a lawsuit alleged he engaged in fraud which reduced the company’s net worth by about $2.7 billion.  On March 11, three days before resigning as CEO, he gave his wife, Corinne, a total of 41,399,802 shares of stock worth approximately $2.2 billion.27 

In 2006, Zurich American Insurance agreed to pay $153 million to thousands of companies and governments who had been defrauded in a bid-rigging scheme.28


The law of unintended consequences may be catching up with insurance companies, employers, lobbyists, public relations firms, and others who for the past 20 years have been attacking injured workers with a fraud bat.  As ethical fraud units and various justice departments are discovering, white collar crime dwarfs the amount of claimant fraud in the workers’ compensation system.  All states are encouraged to adopt an aggressive policy toward uninsured employers and others who try to cheat.

Effective systems need to be in place to guarantee that required policies are purchased, that annual audits of employers are conducted, and that fraud investigators are authorized to shut down construction sites and other places of employment when the employer has not purchased insurance.

Each state should also adopt a Whistle Blower statute (see California ’s False Claims Act, Cal. Gov’t Code §§ 12650-12655).  These efforts will keep costs down and keep the playing field neutral for employers.


1  “Workers’ Compensation Fraud:  The Real Story,” Labor Research Association Report, June, 1998.
2  “Fighting Workers’ Compensation Fraud,” Claims, Volume 54, Number 9, p. 33, September, 2006.
3  “Insurance Fraud: The Quiet Catastrophe,” Conning & Co. , 1996, pp. 50-51.
4  WRAL-TV News Special:  Workers’ Compensation Fraud, CBS television broadcast, Oct. 30, 1997.
5  Lisa Cullen, “The Myth of Workers’ Compensation Fraud,” Frontline:  A Dangerous Business, January 9, 2003; “Workers’ Compensation:  Falling Down on the Job,” Consumer Reports, p. 32, February 2000; “Workers’ Compensation Fraud:  Perception and Reality,” Trial Briefs, July 1999;  Amy Widen, “Workers’ Compensation, A Cautionary Tale,”  The Center for Justice and Democracy, published in Workers’ First Watch, Workers’ Injury and Law Advocacy Group (WILG) Special Edition, (2006-2007).
6  David Callahan, The Cheating Culture:  Why More Americans Are Doing Wrong to Get Ahead, Harcourt Press (2004) p. 21.
7  David J. DePaolo, “WorkComp Fraud; Stop the Hypocrisy,” printed November 18, 2006; Depaolo is the President and CEO of WorkCompCentral.
8  National Safety Council, Injury Facts, 2007 Edition (based on 2004 data, the latest available).
9  “Backlog of Healthcare Fraud Cases Top 150,” Cox News Service, February 10, 2007.
10  Top 20 Cases, Taxpayers Against Fraud., printed February 12, 2007.
11  Joseph L. Galloway, “Tons of Money, Squandered,” McClatchy-Tribune Information Services, February 12, 2007.
12  “The Top 100 False Claims Act Settlements,” Corporate Crime Reporter, December 30, 2003. 
13  Top 20 Cases, Taxpayers Against Fraud., printed February 12, 2007.
14  “Backlog of Heath Care Fraud Cases Top 150,” Cox News Service, February, 2007.
15  These statistics were gathered from individual state websites and telephone calls to fraud departments in each state between January 15 – February 15, 2007.  New Mexico and Tennessee were the only states that failed to cooperate in providing information.
16  “State Workers’ Compensation Program Collects Nearly $300,000 in Penalties”  WorldNow and WMCTV Report, printed February 9, 2007.
17  “ New York State Workers’ Compensation:  How Big is the Shortfall?,” Fiscal Policy Institute Report, January 25, 2007.
18  “Judge Awards Texas Mutual $8.2 Million,” Houston Business Journal, February 14, 2007.
19, printed February 16, 2007.
20  “Sutton Couple Arraigned on Workers’ Compensation Fraud Charges,” Massachusetts Attorney General’s Office Press Release, December 8, 2006.
21  “ Monterey County Contractor Faces Workers’ Comp Charges,” San Jose Business Journal, January 17, 2007.
22  “State Fund to Receive Over $3 Million in Restitution From San Diego Businessman in Historic Workers’ Compensation Fraud Case,” Financial News-Yahoo!, December 14, 2006.
23  " Monterey County Contractor Faces Workers’ Comp Charges,” San Jose Business Journal, January 17, 2007.
24  “3 Charged in Huge Worker’s [sic] Compensation Fraud Scheme,” Associated Press Release, February 7, 2007.
25  John Seewer, “ Ohio GOP Fundraiser Sentenced,” Associated Press, November 21, 2006.
26  Dan Ackman, “Forbes Face:  Saul Steinberg,”, June 18, 2001.
27  Elliot Blare, “AIG Greenburg Accused of Fraud,” Today, May 26, 2005.
28  “$153 Million For Insurance Deal,” The Associated Press, March 28, 2006.

1. Tenet Healthcare ……….............................$900 Million
2. HCA (the Health Care Company) …….........$731.4 Million
3. HCA, Inc. (formerly The Health Care Company) …...$631 Million
4. Sereno (Drug Company) .…......…$567 Million
5. TAP [Taketa-Abbott Pharmaceutical] Pharmaceutical Products, Inc.  ….$559.5 Million
6.  Abbott Labs  ………$400 Million
7. Fresenius Medical Care of North America (National Medical Care)  …. $385 Million
8. SmithKline Beecham Clinical Laboratories, Inc. d/b/a GlaxoSmith Kline  .$325 Million
9. HealthSouth  ........$325 Million
10. Gambro Healthcare  ..…$310 Million
11. Schering-Plough (Drug Company)  .....$292.9 Million
12. AstraZeneca Pharmaceuticals  …..$266.1 Million
13. St. Barnabas Hospital  …...$265 Million
14. Bayer Corporation  ……….$257.2 Million
15. Schering-Plough  …………..$255 Million
16. First American Health Care of  …….$225 Million
17. BankAmerica  …………..$187.5 Million
18. Laboratory Corporation of  …....$182 Million
19. Beverly Enterprises Inc. (Nursing Home Company)  ….$170 Million
20. Medco Health Solutions (tentative)  ……$163 Million
21. Pfizer/Warner-Lambert ….... $152 Million

THE TOP 20 STATES – NUMBER OF CLAIMS FILED (in number of claims filed per year, according to the most recent data available):

Rank­  State­                    Number of Workers’ Compensation Claims­

#1­       California­.................. 644,888 (2006)
#2­       Michigan­.................. 364,984 (2005)
#3­       Washington­.............. 191,501 (2005)­
#4­       New Jersey­.............. 190,000
#5­       Ohio­........................ 167,053 (2006)
#6­       Missouri­................... 145,378 (2005)­
#7­       New York­................. 142,611 (2005)
#8­       Virginia­.................... 140,603 (2005)­
#9­       Arizona­.................... 139,121 (2005)
#10­     Texas­...................... 134,672 (2004)­
#11­     Minnesota­................ 123,960 (2004)
#12­     Pennsylvania­............ 102,259 (2005)­
#13­     Nevada­...................... 91,948 (2005)­
#14­     South Carolina­............ 87,441 (2005)­
#15­     Kansas­...................... 66,469 (2006)
#16­     Indiana­....................... 65,410 (2005)
#17­     North Carolina­............ 64,975 (2006)­
#18­     Illinois­........................ 58,715
#19­     Oklahoma­.................. 55,844 (2005)
#20­     Florida­....................... 54,854­.  

© Copyright 2008 by Workers Injury Law & Advocacy Group. All rights reserved. Reprinted with permission.

  • Country Alaska cast a ballot generally blue yet the numbers will never remain against the enormous military and oil workers who need help with worker's compensation restrictions.  With the exception of in Alaska where two of the three populace focuses have a stranglehold on the remainder of the state.