Fraud Disables State’s Workers’ Comp Program

Jesus Ayala and four friends all got the same result when they visited a workers’ compensation clinic after quitting their jobs at a Sherman Oaks restaurant: They were declared disabled by stress.

But the medical evaluations were curious. All five kitchen helpers were designated by the clinic as unfit to work for three months--even though at least four already were working at another restaurant.

On top of that, the clinic’s bill was steep. The charge to insurers for the initial psychological reports--before the five workers received any formal treatment or compensation--totaled $14,717. And the medical charges mounted from there.

The case of the five kitchen helpers is the subject of an unusual lawsuit in which Zenith Insurance Co. of Woodland Hills is using federal racketeering laws to strike back at alleged fraud. The kitchen helpers and other defendants have denied any wrongdoing, although a second clinic that treated the workers settled with Zenith last week by, among other things, agreeing to revamp its business practices.

Still, for many people, the case offers yet another example of the nightmare that the state’s workers’ compensation system has become.

Day after day, reports pour forth of costly abuses. Employers recount horror stories of costs driven out of control by employees’ bogus claims and talk threateningly of moving their operations to more hospitable environs out of state.

Other firms blame self-serving insurance companies, bill-padding doctors and unscrupulous lawyers.

Injured workers, for their part, complain that business groups are unjustifiably citing abuses--which employers and insurers are guilty of too--as an excuse to deny legitimate compensation claims and to hold down the state’s already-stingy benefits for employees.

And all the while, state legislators and other officials have failed to stop the hemorrhaging. Even though they could pass a compromise reform package in coming days, many observers note that the Legislature has enacted ballyhooed measures before, only to see them fail.

“You’ve got all the interest groups making a very good living on the system, and they hire very good lobbyists. When you get a workers’ compensation war, it (reform legislation) gets whittled down to where it isn’t very meaningful,” said Casey L. Young, administrative director of the California Division of Workers’ Compensation.

What has gone wrong with California’s workers’ compensation system? And just how bad is it?

In fact, workers’ compensation programs are in miserable shape in much of the country. In such states as Maine and Rhode Island, private insurers nearly have abandoned the market. Minnesota, which like California has suffered from high medical costs, found that its doctors charge twice as much to treat workers’ compensation patients than to treat people suffering the same injuries outside of the workplace.

At the same time, however, some states have managed to control their programs. Even New York has enforced tough regulations that are keeping a lid on costs.

Against this backdrop, California stands out as a bastion of fraud, abuse and waste, with most of the problem concentrated in the Southland. Consider these facts:

- Cheating is so widespread that some insurance company investigators estimate that at least one in every 10 workers’ compensation claims in California is fraudulent. They say fraud and, more often, bill-padding by doctors, psychologists and chiropractors are so common that they account for more than 25% of the money paid on claims here.

- Compared to programs in other states, California’s nearly $12-billion-a-year system costs a lot while delivering skimpy benefits to seriously injured workers. The maximum weekly payment for a totally disabled worker is $336 a week, a sum that puts California’s compensation at the bottom third of the states. Yet a survey of 46 states and the District of Columbia found that California employers pay the sixth-highest insurance rates for workers’ compensation.

- Although workers’ compensation accounts, on average, for less than 5% of companies’ payroll costs in California, insurance premiums can be suffocating for small employers--particularly in low-wage blue-collar businesses, where rates may be five or more times higher. Take Barry J. Lazar, president of Lazar Industries, a furniture manufacturer. Lazar said he pays $400,000 a year in workers’ compensation coverage for 110 employees in Los Angeles. But his bill in North Carolina, where the company has about 50 to 55 employees doing similar work, is $4,000.

- Medical costs related to workers’ compensation claims are sky-high and climbing. Particularly flagrant are medical-legal reports, the evaluations doctors and psychologists submit as expert testimony in disputed workers’ compensation cases. Richard Victor, executive director of the Workers’ Compensation Research Institute, a nonprofit think thank in Cambridge, Mass., said: “In the states we’ve studied, medical-legal reports tend to cost from $200 to $400, but in California it’s $1,200 and up.”

The two sides in a dispute in California can run up “$15,000 to $20,000 in med-legal expenses just to dispense $2,000 worth of benefits” to the injured worker, said Rene Thomas Folse, a workers’ compensation lawyer who represents insurers.

- Claims get into the hands of lawyers and turn into costly legal disputes far more often in California than in other states

For instance, a 1989 survey of 13 states, not including California, showed that lawyers were involved in 17.1% of all cases where cash benefits were paid. In California, according to a separate study, the figure for that year was more than double, 35.8%, and it climbed to 44.8% by 1991.

The turmoil is upsetting a compact dating to 1913 that calls for all California employers, through their insurance companies or self-insurance funds, to compensate employees for workplace injuries. Compensation can consist of just medical care, but it also often includes cash and vocational rehabilitation.

At the same time, there is a huge benefit in the system for employers. Workers’ compensation almost always denies workers the right to sue their employers for damages related to on-the-job injuries--usually even when the employer’s negligence was to blame.

But investigators and social policy analysts say a combination of forces have converged to make California’s workers’ compensation system perhaps the most abuse-prone anywhere.

The single biggest factor, they say, is a loose legal and regulatory setup that makes it relatively easy for workers to get into the system. And loopholes have also made it easy for doctors, clinic owners and some lawyers and vocational rehabilitation specialists to extract lots of money.

Underlying the system is California’s longtime legal tradition of giving injured employees the benefit of the doubt in contested workers’ compensation cases, accepting claims that might be denied in other states.

“The courts have bent over backward to protect the workers,” said William P. Molmen, general counsel for the California Workers’ Compensation Institute, an insurance industry research group. But cumulatively, Molmen contended, the court decisions over the years have “taken us down a path that no one ever designed or intended.”

State courts have held that anytime the workplace plays any role whatsoever in most types of injuries, the patient is eligible for some workers’ compensation coverage--even if the injury stemmed largely from an accident suffered off the job.

For stress claims, the legal standard is only somewhat higher; California law allows for stress benefits when as little as 10% of a psychological injury stems from the job.

One result: Stress stemming from routine or less-than-extraordinary workplace events--an injury that qualifies for compensation only in California and five other states--is becoming a leading type of complaint here.

By one estimate, up to 7% of the claims payments made by California workers’ compensation insurers are for people exclusively suffering from stress or other psychological injuries. An increasing number of workers claiming physical injuries also seek compensation for stress.

Worker advocates say that stress and other psychological injuries are a legitimate, and growing, problem as jobs become increasingly complex and as companies turn “leaner and meaner.” Yet employers often consider stress claims frivolous and are enraged by the many cases filed by laid-off employees.

“You can have marital problems or whatever, but if the boss comes in and looks at you the wrong way, you can make a case for 10% stress,” complained Steven Snyder, vice president for claims with Fremont Compensation Insurance.

The particular character and social makeup of California, especially in Southern California, also contribute to fraud and abuse.

Investigators say some of the area’s large number of foreign-born doctors who apparently have been hampered in building practices by their limited English have been enticed to work for abusive medical mills.

Another major factor is the desperation of low-wage workers who lack health insurance or who have been thrown out of jobs by the tough local recession.

“It’s the vulnerability of these workers . . . that feeds the (workers’ compensation) system,” said Leonard Schneiderman, a UCLA professor of social welfare.

“We’re leaving people desperate and without choices,” he added, “so they become prey” for the scam artists behind workers’ compensation fraud.

Consequently, despite California’s moderate rate of occupational injuries and illnesses, employees here file more workers’ compensation claims than do people in most other states.

Meanwhile, workers’ compensation medical and legal mills prosper, especially in the Southland. They thrive on the high volume of workers brought in by street-corner pitchmen and ever-present billboard, newspaper and broadcast advertising, particularly in the Spanish-language media.

The main financial incentive fueling the abuses, investigators say, is the big money available mainly to those who treat workers’ compensation patients. Half of the money paid out by insurers is for medical bills.

California’s official fee schedule, which is supposed to contain costs, is out-of-date, critics say. They note that the schedule does not cover magnetic resonance imaging (MRI) tests, which often are performed on workers’ compensation patients. As a result, doctors set high fees for the exams and do them too often.

The fee schedule also allows unusually high charges for medical-legal exams, leading to similar, costly results.

At the medical mills, doctors and clinic owners “Ping-Pong the patient from specialist to specialist to specialist. They’ll run every conceivable test that can be run on the human body,” said Eugene P. Taylor, a lawyer who represents insurers.

Ernest C. Levister Jr., president of the California Society of Industrial Medicine and Surgery, said that “a few bad apples” among the state’s doctors are defrauding the system.

But, Levister contended that an anti-fraud law that took effect in January is beginning to curb cheating. Also, he said, he expects new guidelines being drafted by the state’s Industrial Medical Council to curtail excessive treatment, testing and other costly abuses.

Still, the council, stymied by management problems, has moved slowly. Under a major reform package passed in 1989, the council was supposed to impose its guidelines by Jan. 1, 1991, but it has yet to even hold public hearings.

Although California awards workers’ compensation benefits to more of its work force than most states, the money is spread thin.

California is tight-fisted even when the injuries are severe. If you get killed on the job, ordinarily the most your dependents can get from workers’ compensation is $95,000.

Many young families “are going to blow through that in no time at all,” said J. Andrew McKenna, president of the California Applicants’ Attorneys Assn., which represents lawyers for hurt workers.

On a brighter note, McKenna said, Californians still benefit from progressive features of the state’s system. It covers almost everyone, including farmers. California, unlike some states, also covers people with injuries that develop gradually; for instance, painters who come down with lead poisoning or cashiers with carpal tunnel injuries.

Trouble is, McKenna said, workers often have to wait months or years for insurance companies to pay benefits.

First, critics say, insurers commonly send workers to “company doctors” who deliberately downplay their injuries. Then insurers often hire lawyers to contest claims or to delay settlements. In the meantime, disabled workers can be wiped out financially.

The long delays in settling cases can hurt employers too; many employers fume about insurers that jack up their premiums on the basis of unsettled cases.

At the same time, other insurance companies are accused of too willingly paying benefits for fraudulent or inflated claims because it is easier to pass along higher costs to employers than to fight abuses.

Legitimate employers are also stung by unscrupulous competitors who cheat the workers’ compensation system.

Some of the cheaters, including hazardous sweatshops, simply operate underground and break state law by not buying workers’ comp insurance; others hold their rates down by lying to insurers about the number of employees they have in hazardous jobs. In either case, it means higher premiums for the honest firms.

While employers are hurt by the cost of workers’ compensation, the severity of the impact is debatable. Organized labor and some economists maintain that widespread assertions that a flood of employers are leaving the state or going out of business because of workers’ compensation costs are overblown.

For most companies, they say, workers’ compensation costs are too small a share of their overall expenses to cause much damage.

Health care costs are far higher on average, particularly for large companies with lots of white-collar jobs where injuries are rare. The recession, the argument goes, is the real reason for California’s distress.

But don’t tell that to furniture manufacturer Lazar, who claims to pay workers’ compensation rates 50 times higher in Los Angeles than in North Carolina.

Lazar acknowledged that his charges for the Los Angeles employees were driven up by a flood of workers’ compensation claims. Last year alone, the company had 60 claims. But Lazar said most of those Los Angeles cases involve employees who, after being laid off or having their hours cut, filed stress claims that he said are bogus.

In North Carolina, where stress cases normally aren’t recognized, the company had only two workers’ compensation claims last year.

Lazar said if he can’t bring his premiums down in Los Angeles, and if they remain low in North Carolina over the next couple of years, he will probably move most of his manufacturing to the Southeastern plant. “It would be silly not to,” Lazar said.

Employers complain that fraud and related abuses drive their costs up no matter what they do to improve safety.

“All the safety in the world won’t help you if you have an angry employee,” said David M. Snell, vice president of Western Brass Works, a Los Angeles company that makes irrigation sprinklers.

Snell cited the case of an assembly worker at his plant who, he said, simply scraped her heel. Later she quit her job and, eventually, filed a workers’ compensation complaint for “back and lower extremities” injuries.

Already, the medical bills have mounted to $4,100, and Snell said his insurance company is holding nearly $14,000 of his company’s money as a reserve against an anticipated settlement.

“It’s a nightmare,” said Snell, whose 130-employee company is considering moving to Nevada. California’s workers’ compensation mess, he said, is one of the reasons “we want to get the hell out of here.”

One Type of Workers’ Comp Abuse

Workers’ compensation fraud and relates abuses take many forms, but the following is a scenario often cited by insurance industry investigators.

1) Workers who have recently lost jobs or who need money for other reasons notice a newspaper, television or radio advertisement for a workers’ compensation “hot line.” In other cases, workers’ are recruited outside of factories or state employment offices by street-corner pitchmen known as “cappers.”

2) The workers are referred by the hot line to a lawyer to help them file a claim for compensation.

3) The lawyer, in turn, sends the workers to doctors or psychologists who perform costly “medical-legal” evaluations to justify the claims. In some cases, even if the patients do not appear to have legitimate workplace-related injuries, they are diagnosed as having them.

4) The doctors and psychologists then refer the workers to other doctors and health care specialists, including chiropractors and physical therapists, to further run up the medical bills.

5) Bills are submitted to workers’ compensation insurance companies, which decide whether to pay or challenge the claims.

6) Insurers, hit by the costs of paying for or fighting fraudulent claims, impose higher charges on employers who buy their workers’ compensation policies.

Rising Medical Expenses Under Workers’ Compensation

From 1986 to 1991, the cost of medical care under California’s workers’ compensation system rose more than twice as fast as the U.S. rate of inflation. It also outpaced the nationwide increase in expenses for all types of medical care.

Average annual increase in U.S. consumer price index 4.5%

Average annual increase in U.S. consumer

medical care expenses 7.7%

Average annual increase in California workers’

comp medical costs per worker 11.4%