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Workers’ Compensation Fraud and the Myths

Posted On July 25, 2017

Fraudulent workers’ compensation claims are more rare than portrayed in the media. Workers’ compensation reform advocates often rely on misleading reports, such as a Dateline special from 2009, that mischaracterize or fail to provide context of fraudulent workers’ compensation claims to push for tougher screening, higher premiums, and reduced benefits. The unfortunate result is legislation that targets the wrong problems and only serves to reduce benefits to workers with legitimate claims.

Workers’ Compensation: Historical Context

There are many issues with the current workers’ compensation system, including byzantine bureaucracy and politicized reform efforts. However, the current workers’ compensation system is far more preferable than its predecessor, which was no coverage or protection.
Before workers’ compensation, workers only route to compensation for injuries sustained on the job was either (1) negotiating with their employer or (2) filing a lawsuit for negligence or some other tort. Both options resulted in protracted litigation and negotiations to the detriment of the worker (and employer).
The problem was twofold because:

  1. The worker lacked the resources to adequately prosecute a case which could take years and often were unable to work due to their injuries, the result was thousands of workers falling into to poverty due to injury; and
  2. The company was de-incentivized to settle or negotiate with injured employees because it could encourage other workers to file frivolous lawsuits, the result was companies spending substantial sums on legal defense that detracted from business operations.

In response some states based workers’ compensation reform. Workers’ compensation was a compromise between labor and companies. Workers surrendered the right to pursue tort damages and to accept compensation only to pay for their medical expenses and lost wages. In exchange, companies agreed to accept liability and quickly pay compensation. The resulting system saved money for companies while speeding up replacement income for workers, everyone wins.
However, those reforms were passed over 100 years ago. The modern workers’ compensation system is plagued by inefficiencies, insurance companies with perverse profit incentives, companies that improperly classify workers to get lower rates, and reformers who misunderstand the issues.

Workers’ Compensation Fraud: The Popular Myth

The media likes easy stories with easy antagonists. However, reality is much more complicated than what Dateline distilled in a single one-hour long segment. In the particular segment that is a microcosm of the greater misrepresentations, a Dateline interviewer speaks to a man who is allegedly collecting workers’ compensation for an injury while he is “hauling bales of hay.” The implicit message in the visual is that he is cheating the system.
While this particular individual may be a scammer, his actions should not be imputed to the entire workers’ compensation system. Indeed, Dateline takes this single incidence and uses it to imply that the worker is taking money out of the viewers’ pockets and it is due to a corrupt system.

Critiques in the Portrayal

However, despite Dateline’s simplistic approach, workers’ compensation fraud does not “take money” from individual people. Workers’ compensation is paid by one of two entities (1) an insurance company or (2) the employer if the company is self-insured. Therefore, fraud, if it occurs, takes money from insurance companies.
In turn, the insurance company may or may not raise rates on its policyholders (other companies). The rise in the rates could be passed onto the consumer in the form of higher prices for goods and services or lower wages for workers – but the company may take the costs out of its profits. However, by this point, the fraud is so diluted that it cannot be said to take money directly from people.
Moreover, the Dateline special does not do anything to put the fraud in context. Numerous studies have found that workers’ compensation fraud rarely exceeds one to two percent of all claims. The Dateline special portrayed fraud as overwhelming the system when in reality it is very rare.

Actual Fraudulent Claim Rates

Rates of workers’ compensation fraud have decreased for decades. In 1993, fraudulent claims composed about 2.17 percent of payroll. In 1998, it dropped to 1.35 percent. Additionally, over the same period, workers’ benefits dropped by 35 percent while workers’ compensation costs on companies decreased by 38 percent.
Additionally, the Dateline study cited a report which claimed that $5 billion is lost to fraud every year. However, a report commissioned by the AFL-CIO criticized the assumptions in the study which relied on impressions or attitudes – not actual fraud levels. A study published in 2000 found that the price of fraud is actually $1.2 billion. While $1.2 billion is a substantial sum, it is only about two percent of the entire workers’ compensation system.
Finally, the Dateline special does not address fraud perpetrated by companies, such as misclassifying workers, under-reporting payroll, and other actions that deprive workers of their protection.

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