Some Cautionary Thoughts on Employers' Workers Comp "Fraud"

Been seeing a number of blog posts and articles about when employers commit "fraud" in relation to Workers Compensation insurance. Now, don't get me wrong--there are indeed employers out there who are gaming the system to lower premiums. And by gaming, I mean deliberately misrepresenting the nature of their operations or the nature of the work done by certain workers.  I've seen my share of cases where that was done, so I'm not being naive about the problem.

But I've also seen more than a few instances where the actual facts of the case were more complicated than the tales of greed painted by insurers and prosecutors.

I know of a high profile case where the business owner got pressured to plead guilty by an ambitious prosecutor in order to save a pending sale of a separate company that was going to greatly benefit his family. His choice was to fight the fraud charges that his attorney strongly felt he could defeat but scuttle a huge financial windfall for his family, or fall on his sword, plead guilty, and let his family benefit from a huge payday from the sale of the other company. It had been made clear to him that the sale would not go through if the unrelated company got dragged in, and it was also made clear that if he fought the charges that unrelated company would, indeed, get dragged in. What limited technical knowledge I have of the case suggests to me that the "misrepresentation" charged was exaggerated and that the fraud charges might not have held up under closer examination.

But cutting a deal with the prosecutor meant that such closer examination never happened. But the sale of the unrelated company went through.

I once saw a case where two insurance brokers were convicted on criminal charges over premium fraud committed by the policyholder. My own careful review of the evidence convinced me these brokers had done no wrong, had only sent in applications for WC coverage that had been based on prior audits by other insurers.  But I suspect the prosecutor wanted these brokers to roll over on the policyholder, who was politically connected to a well known (now retired) Chicago politician. So the prosecutor got the jury to convict the brokers, even though the policyholder had already reached a plea deal before the trial began. So there was indeed fraud there, but no indications that the brokers had been in on it. Didn't matter.

I saw another case where an inexperienced businesswoman was convicted of Workers Comp premium fraud even though it seemed to me she pretty clearly was not the mastermind behind the scheme. But she had made the mistake of hiring a woman she met at church--a woman who had served time in the past for Workers Comp premium fraud. The businesswoman was sure this nice lady from church had learned her lesson and would never risk going back to jail again by repeating her offense. So she hired her as an office manager for her new PEO--and guess what?

Only the repeat offender cut her deal with the prosecutor first, while the naive businesswoman fought on, believing that an innocent person had nothing to fear from our legal system.  For that assumption, she went to jail and lost her business, her reputation, and her marriage.

Keep in mind, the system for calculating Workers Comp insurance premiums is complex and often counter-intuitive. The system is complex enough that insurers make plenty of mistakes in administering it. So it should not be surprising that policyholders sometimes make the mistake of applying common sense to issues such as proper classification codes.  The manuals that spell out the technical details of classifications (including instances where common sense doesn't really apply) and audited premiums are not available to policyholders (and even if policyholders knew how to purchase them it would be a difficult read). So it can be difficult, if not impossible, for many policyholders to understand many of the fine points of WC premium computations.

I'm not saying there aren't genuine crooks out there looking to rip off the system--God knows, there are plenty of them. Some employers know from experience lots of ways to shave premiums by being less than honest.

I'm just saying it's not always as cut-and-dry as some in the insurance business (or the prosecutor's office) might have you think. So the next time you see some newspaper article painting an employer as the biggest crook since Yellow Kid Weil, take it with at least a small grain of salt.

Michigan Clarifies Independent Contractor Rules

The Michigan Supreme Court has clarified the criteria for when a worker is to be considered a true independent contractor rather than an employee. The Michigan Supremes ruled, in Auto-Owners Ins. Co. v. All Star Lawn Specialists Plus, Inc., that if just one of the three statutory criteria is met, the worker is an independent contractor.

The three statutory criteria are that the worker:
1.  maintain a separate business;
2. hold himself or herself out to and render service to the public;
3. be an employer subject to this act.

The Court of Appeals had earlier ruled that the worker had to meet all three criteria to be an independent contractor rather than an employee covered by Workers Comp of the entity using his or her services. The Supreme Court ruling overturned that, saying that meeting just one of the three standards is sufficient to make the worker an independent contractor.

In this particular case, the worker wanted to be an independent contractor, rather than an employee limited to the exclusive remedy of Workers Compensation benefits. But this sword should cut both ways--it also changes the standard for when an insurer can pick up payments to a 1099-type worker in Michigan for inclusion in the WC premiums of the party that purchases their services.

We shall see how carefully insurers observe this new standard.

I really gotta up my game...

Sigh. LexisNexis has announced, as they are wont to do this time of year, their choices for best Workers Comp blogs. This blog is not one of them. Again.

But the winners are really great sources of info, so those who read this modest effort would be well advised to check them out.

Interesting Phone Call Today

We had a long, long phone call today with someone at NCCI, the Workers Comp rating bureau in most states. We had found an error in an experience modification factor, an error by NCCI itself and not in the data that an insurer had reported. The person at NCCI, at one point, assured us, "NCCI never makes mistakes."

Except they had, in this case. And it took a lot of patient but persistent explanation to get this person to finally look at the right document and really understand what she was seeing, before she finally realized that oops, NCCI had indeed made a mistake in this instance.

The good news is that the experience mod for this client will be recalculated. But it definitely illustrates how resistant the system can be to catching and fixing some of these technical errors.

Feeling Like Bob Hope At The Oscars

Did you know there was something called the Comp Laude Awards? Neither did I, until I got an email today. Dammit, the post office lost my nomination again this year. Still, I have my "Curmudgeon Of The Year"award  to console me. Oh, and my second-place ribbon in the "Runner-Up Of The Year" contest.

Texas And The New NCCI Experience Mod Formula

Based on a little research that I've been doing, it looks like a lot of Texas employers are going to be getting some really unpleasant surprises in their experience modification factor calculations, starting July 1, 2015.

Regular readers know I've been writing a fair bit about the changes NCCI has made in their experience rating formula. Basically, NCCI has been implementing increases in how much of each individual claim gets fully counted in calculating experience modifiers. Until recently, only the first $5,000 of each claim counted fully--everything over this was discounted. But that changed in 2013, and the "split point" has been significantly increased in steps. At the moment, the first $13,500 of each claim gets fully counted. Next year, it goes up to the first $15,500 of each claim.

Now, Texas, until recently, wasn't really an NCCI state. Texas outsourced and licensed manuals from NCCI but kept the $5,000 set point. That's going to change, starting July 1, 2015, when Texas officially starts using the NCCI experience rating plan manual rules.

And rather than implement the higher set point in increments, according to the Texas Register (official publication of the Texas Secretary of State) "NCCI and staff recommend
implementing the proposed changes in their entirety, as opposed to transitioning the implementation over time."

So for Texas employers, the set point will just jump from $5,000 to $15,500. That means, for Texas employers that have any claims in the past three years that were greater than $5,000, their experience mods are going to jump.

We've already written about how we've seen a considerable increase in the number of employers contacting us who are desperate to reduce their experience mod because it's shot up over that magic 1.00 threshold. Texas employers are about to learn the hard way about the effect of this change, and they won't even get the changes implemented in increments--they get the full shot all at once.

Get ready to hear some screams from Texas employers sometime around the middle of next year, as these new experience mods start being promulgated.

A Perfect Storm For Experience Modiers

I keep returning to the subject of experience modifiers, because for so many of our clients in the construction or staffing industries, experience modification factors are vitally important in two ways. First, of course, they directly impact Workers Compensation insurance premium charges (a 1.25 e-mod means a 25% surcharge while a .75 mod means a 25% discount) but also because more and more of their customers and potential customers are using the experience mod calculation as a benchmark for even quoting on work.

The way this works is a client says, "to bid on this project, your experience modifier must be 1.00 or lower". They may set the bar slightly higher sometimes, say, at 1.05, but you get the idea. This rating factor that was developed for the purpose of adjusting insurance premiums is now being used as the be-all and end-all determination of workplace safety. And it's a bad, misleading measure.

It's also becoming the "perfect storm" for a lot of companies because of two changes in the insurance industry: a change in the NCCI rating formula and decreases in manual rates in many states.

I've written before about the new formula that's been devised by NCCI to calculate experience mods--the main difference is that more of each claim is being fully counted in the formula. In the prior formula, everything above the first $5,000 of each claim was discounted. Now, that "set point" has been raised, in increments, so that now the first $13,500 of each claim is counted (increasing next year to $15,000).  This means that the historical loss data used to compute a company's X-Mod has increasing impact on the mod calculation, if there are any losses in excess of $5,000 apiece.

But the second element that is driving modifiers up is that, in many states, manual rates have been declining in recent years.

Now, that's typically touted as good news for employers. Here in my home state of Illinois, for instance, politicians have been hyping the decline in manual rates as proof that recent 'reforms' have paid off for employers.

That's not really such an obvious truth--insurers have lots of ways to keep premiums high even when manual rates decline. But what hasn't been hyped so much is that when manual rates decline, so too do the "Expected Loss Rates" that are used in experience mod calculations--and those declines aren't such good news for employers.

Expected Loss Rates, or ELRs, are the way NCCI calculates what they think losses should have been for the average employer of your type and size in your state. They compare that to what's been reported for your past losses to calculate your experience mod.

So here's what's happening, thanks to these two unrelated changes. The change in the rating formula means that your historic losses have greater impact on your mod, while the decline in ELRs means your historic payroll info has less impact than it used to. So everything else being equal, with the very same prior loss and payroll data, your experience mod is likely taking a big jump.

So at the very same time that more and more customers are using the experience modifier as a make-or-break factor in bidding on work, behind-the-scenes changes in insurance rating and manual rates are pushing up modifiers, making companies look less safe than they used to be, even when you control out changes in losses.

Worse yet, these X-Mods are shutting out perfectly safe companies from bidding on new projects.

We're getting more and more calls from clients asking us to review their experience mods, to see if something can be done to reduce a suddenly disastrous mod calculation that threatens to put the client out of business. Often, we can find ways to reduce these mods. Often, but not always.

I'm not sure what the solution is, other than getting the word out that an experience modifier is not a fair or reliable benchmark for workplace safety, and that these technical changes made by the insurance industry have significantly re-set the mod formula and tilted mods higher for many employers without there being any change in their safety record or operations.