Why Fighting Fraud Will Never Work

Fraud.

Mention workers' compensation to nearly any lay person on the street and nearly everyone knows someone who has defrauded the system as either a lying, cheating worker, or as a lying, cheating employer.

Even in our own ranks we all believe that there is fraud in abundance, and that it not only pervades the system but contributes disproportionately to the costs of procurement and administration.

Consequently many states have special funds to collect and distribute money in an effort to curb fraud and other programs intent on combating abuses.

Yet, it seems, these funds and programs are not particularly effective. Criminals will engage in criminal behavior regardless of programs designed to discourage such behavior.

In his book "The Immortality Complex" Jerome Schulte, MD, a forensic psychiatrist who has worked with the criminal mind for over 40 years, basically concludes that the criminal is going to engage in crime regardless of the consequences. There are certain issues in the criminal mind that make it work the way it does.

Yet we spend oodles of money trying to get people to comply with the law by prosecuting "fraud."

For instance, the California Fraud Assessment Commission controls how $51 million in funding from an assessment on employers is granted to fight fraud this year. An estimated $31 million is divvied up among county district attorneys statewide that apply for funding help in their fraud investigative units.

The new chairman of the commission, Don Marshall, is very frustrated that despite all of the funding workers' compensation fraud seems to run rampant.

"I am very aware of the fraud that is currently ripping the workers' compensation system apart," said Marshall. "I believe it's that bad."

"We've got to look at better ways to go after this fraud," he said. "It's continuing."

Fingers get pointed at the district attorneys that receive money from the commission for not doing their jobs. Other fingers get pointed at the Department of Insurance for not sharing data. Still other fingers get pointed at the industry itself for not taking the issue seriously.

Competitive strategies are implemented to get various entities and people to engage in crime fighting tactics, and rewards are placed to bait others into action.

Yet the "fight" against "fraud" seems ludicrously ineffective, and fails to make any substantial return on investment.

For instance, the California Department of Insurance says that, for fiscal 2011-2012 the Fraud Commission was allocated $53 million from employer assessments. District attorneys reported a total of 819 arrests, which also included the majority of Fraud Division arrests (only 132 arrests). During the same timeframe, district attorneys prosecuted 1,332 cases with 1,565 suspects, resulting in 708 convictions. Restitution of $53,006,082 was ordered in connection with these convictions and $5,943,570 was collected during Fiscal Year 2011-12.

Yet the Fraud Division of the DOI says that total estimated damages from workers' compensation fraud totals nearly a half billion dollars.

And doing the math, no reasonable business person would spend $100 to recover $10. That's a huge negative return on investment.

Comments to the WorkCompCentral story last week about the Fraud Commission thus far total 23 - fraud is a very emotional topic for nearly everyone in the system. With all that passion, you'd think we could do something about it.

Commissioner Joel Sherman said "it's disconcerting" at the end of funding years to learn that no progress has been made in the fight against workers' compensation fraud. He, too, noted that criminals are evolving.

District attorneys are tasked with prosecuting criminals. But one of the problems is that there are so many criminals! And most of those criminals aren't too concerned with workers' compensation...

Here's the deal - we won't and can't stop fraud. That will never happen. The absolute best we can do is slow it down and minimize the impact, and even then such efforts are questionable.

Why? First off, fraud is extremely difficult to prove in a criminal court of law. Not only must the prosecutor prove beyond a reasonable doubt that the alleged had a specific intent to make a false representation of a present or past fact, there must be action in reliance upon such representation to the detriment of another, and there must be damage as a result.

Second, the prosecutor must convince 12 people of this. All 12 people, and if just one doesn't agree then the alleged goes free. What you and I think of as fraud may not, in the eyes of the law, be fraud.

The problem with our efforts to stem fraud in workers' compensation is because it is so emotional. When we humans get emotional we make irrational decisions.

Like trying to throw money in all the wrong places for all the wrong reasons.

Why are we funding district attorney's offices with excess money in a competitive game to see who can get more fraud convictions? Sure this may seem like a cause and effect representation of the efforts, but as noted above, it hardly makes any economic sense. And it simply encourages district attorneys to take on the easy cases for easy convictions to get easy money on an annual basis.

Commissioner Jiles Smith at the Fraud Commission meeting last Wednesday called for a three-year strategic plan to increase the effectiveness of fraud investigations.

We don't need three years nor do we need more effective fraud investigations.

District attorneys rely on the collection of evidence by system participants, namely workers' compensation insurance company Special Investigation Units. These SIUs have gotten much, much better at acquiring, collecting, preserving and presenting evidence since I was a young attorney, but the truth is that they are still largely ineffective as noted in the dismal rate of prosecution and poor return on investment.

We get anecdotal evidence of small time fraud prosecution due to the collective efforts of these SIUs and district attorney involvement, but what about that $53 million in funding? Remember that does not count the cost of an insurance company's SIU. Add that in and the actual money spent combatting fraud (and ergo, the pathetic return on investment) grows substantially.

What we don't need is better workers' compensation fraud investigation. What would bring a better result is the income tax evasion that results from fraudulent workers' compensation activity.

What brought down Al Capone? It wasn't his criminal misdeeds - it was failure to state income on his returns.

Want to bring down a criminal medical enterprise? Investigate the sources and reporting of income.

What to stick it to the premium skirting payroll falsifying employer? Check those income returns for false statements (they're there ... guaranteed payroll expenses are buried as some form of "other" deduction).

Need to find the injured worker who is still getting benefits along with other income? You got it - look at the tax records.

It's not all that hard. Yep, income taxes have a level of confidentiality to them and certainly they are protected from someone just sniffing around, but guaranteed if there's reasonable suspicion to issue a subpoena then the evidence is in the numbers.

The funding shouldn't be going to district attorneys offices. The funding should be going to the Treasury Department.

Battling workers' compensation fraud directly is like trying to enforce the prohibition against alcohol (and in modern times marijuana). It didn't work then, and it won't work now.

Get the tax records and find your crime.

But try to prove to 12 people that someone intentionally misrepresented a fact for the purpose of cheating the workers' compensation system and you get a prosecution rate of point zero three percent.