Fight Fraud Like Running a Business

Saturday, March 24, 2007 | 1

Fight Fraud Like Running a Business By David J. DePaolo

I wrote several months ago that this industry needs to stop the hypocrisy, and bust the white collar criminals who are the real culprits behind skyrocketing premiums and inequitable treatment of injured workers. I got quite a bit of compliments on that column from readers who appreciated the honesty. I even was contacted the by the California State Senate to get more insight in to my point of view. But what I was really complaining about in that column ("Stop the Hypocrisy"  see link at the right) was this industry's apathy toward white-collar crime and the seeming ambivalence towards it by the law enforcement agencies tasked with ensuring compliance.

This week State Fund announced the [forced] resignations of president and long time SCIF crony James Tudor and his hand picked Vice President in charge of group insurance, Renee Koren.

The Workers' Comp Executive speculates that criminal proceedings aren't far behind either, alluding to "Tammany Hall-style political intrigue and possible payoffs that have surrounded the group safety program scheme for years."

Indeed, my own reporting staff seems to believe that criminal indictments will follow and that the group programs have been rife with abuse, conflict and fraud from the get go. And perhaps this time, given the big fish political windfall that taking down the top guys at SCIF is sure to generate, in fact will occur.

Finally, we have bills before the Legislature with good chance of passage that promise to restructure SCIF, make its operations and finances more transparent, and bring some accountability to the organization and its management.

But why is it that it takes the downfall of the president of the largest workers' compensation insurance company in the nation to bring attention to this ongoing, deeply festering problem? For years SCIF has fought with a ferocity seen only by privately held companies to defeat any measure that challenged its autonomy, has defeated time and again any attempt to open its operations to scrutiny, and most recently claimed it was not subject to the same laws that govern all other workers' compensation insurance companies that operate in California (see former Insurance Commissioner John Garamendi's attempt to force SCIF to open its books and comply with risk based capitalization rules).

Didn't anyone think that something was up then? Or were we saddled with eunuchs for law enforcement? Or perhaps it is simply that the incentives for tackling big white collar crime in workers' compensation were either not in place, or were also perverted to escape oversight and accountability?

In large measure, I believe, the greed that pervades, and perverts, this industry can be blamed on the uneven enforcement of the rules and regulations that were intended to discourage and punish fraud. And this is due to the way that the Fraud Commission doles out money to the various district attorneys in this state.

This problem was specifically addressed by the California State Auditor, in its most recent, blisteringly critical assessment of the tomfoolery we call in this state the "Fraud Commission":

"A review panel comprising fraud commission members, representatives of the fraud division and Industrial Relations, and an independent criminal expert makes recommendations to the insurance commissioner regarding how to allocate fraud assessment funds to district attorneys who have applied for grants. In making its recommendations, the review panel evaluates grant applications and uses the recommendations it receives from fraud division staff who also conduct a review of the grant applications. However, both the fraud division and the review panel fail to consistently apply criteria or document the rationale they use in making funding recommendations. Rather, each review panel member uses a personal, subjective set of criteria when developing recommendations for grant awards, without retaining any evidence of the basis of any decision.

"Further, the panel members do not share their decision-making criteria or rationale with the district attorneys or with other review panel members. Nor does the fraud division retain documentation showing the reasoning it used to arrive at its funding recommendations to the review panel. As a result, neither the review panel nor the fraud division staff can provide evidence justifying their decisions to recommend specific grant awards, leaving the process open to the perception that it may not be equitable. Finally, the review panel did not always comply with open-meeting requirements when developing funding recommendations."

The report is here:
http://www.insurance.ca.gov/0300-fraud/0100-fraud-division-overview/ 0500-fraud-division-programs/workers-comp-fraud/index.cfm

In other words, even the Fraud Commission is, by the California State Auditor's assessment, cloaked in secrecy, conflicts of interest, and lack of accountability.

How do we change this? I propose that the state mandate that fraud assessment money get doled out to district attorneys based primarily on the amount of money that is proven to be the fraudulent windfall of the convicted criminals.

Certainly this can not be the sole criteria, but it is certainly better than what the present vague formula is now  where DAs are rewarded on the amount of money they SPEND allegedly fighting fraud, rather than the monetary results of such efforts. The present system rewards DAs for the quantity of cases brought. This terribly skews the financial and economic damage of workers' compensation fraud for it is far easier to prosecute a low level criminal accused of bilking the system of a few thousand dollars, than it is to take down the president of a multi-billion dollar quasi-public insurance company accountable only to a Board of Directors hand picked to ensure the sanctity of insider dealings.

I was asked by a representative of the Senate Labor and Industrial Relations Committee as to what sort of legislation would be needed to arrest the conflagration of white collar crime in workers' compensation. My answer was that no legislation was needed, just enforcement of what is there.

I stand corrected now, because part of the Legislature's job in passing law is to direct HOW money is spent. The lesson  spend it wisely by demanding meaningful and measurable results based on standards that are backed by monetary results.

Fighting fraud in workers' compensation is big business  how come it isn't run like a business?

David J. DePaolo is a California attorney (CBL 116237) and is the president and CEO of WorkCompCentral.

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The views and opinions expressed by the author are not necessarily those of workcompcentral.com, its editors or management.