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A study in New York done by the Fiscal Policy Institute reported that an estimated 15% of payroll had not been reported to insurers. How many billions did that cost insurers … and the honest businesses that footed the bill when the costs were passed on?
Now a California study released 4/30/07 has reported that 6% to 23% of workers’ compensation premium between 1997 and 2002 was shaved off of the bottom line by dishonest employers. The report was issued by the Commission on Health and Safety and Workers’ Compensation. This translates to two to five times more in premium needing to be paid by honest businesses that employ workers in high-risk classifications and translates to billions of dollars of lost premiums in just California.
Industries with high worker’s comp costs, such as roofing and steel construction, are the hardest hit. The more honest an employer is, the less chance he has to be competitive against another business that is not accurately reporting their true exposure. Two researchers (Neuhauser and Donovan) from the University of California, Berkeley, developed the estimate by comparing U.S. Census Bureau occupation and industry payroll statistics with payroll reported to California’s rating agency, the Workers’ Compensation Insurance Rating Bureau. Deductions to account for payroll that is not subject to premiums (such as overtime and shift pay differentials to determine “true payroll” over the five-year period) was deducted from the census bureau data.
The numbers are also going UP. When premiums were relatively low in 1997, the data comparison suggests that from 6% to 10% of payroll was not reported to workers’ comp insurers. In 2002, when rates peaked at more than $6 per $100 in wages, those percentages grew to 19% to 23%. It was reported that the value of annual underreported payroll during this period ranged from $31 billion to $106 billion, translating to a loss to insurers — in JUST California — of an amount estimated at $6 billion. How would this translate nationally? Estimating high if California businesses pay 10% of national WC premiums, that would translate to $60 billion per annum on just this form of fraud.
The report states that the fraud affects everyone because insurers base rates on all losses suffered by a classification code, whether the employers reported that payroll or not. This tends to artificially inflate the rates, hurting the honest employers the most. It is estimated that rates for highest risk classifications could be cut by 50% (and perhaps significantly more) if all payroll was reported.
As is the case with all frauds, the bad guys are attempting to divert investigators attention by changing their game plans. In some instances of injuries with smaller medical outlays, dishonest employers are paying benefits out of their own pockets in order to avoid detection. Another report received by the California commission concerns a form of fraud occurring in the construction industry. It states that the split rate codes do not accurately reflect exposure because employers are not providing honest information. In construction occupations, rates for high-risk workers are lower than rates for low-wage workers because risk is associated more with hours of exposure than pay rates, and because high-wage workers are thought to be more experienced and better trained in safety procedures.
In another census comparison, it was found that high wage workers were over-reported by an estimated 20%, even though the industry-wide reporting reflected that 1/3 of all employees were not being reported to the insurers when they computed the premiums. The numbers suggest that employers are reporting low-wage workers as high-wage workers to insurers to lower their rates. The result is increased premium rates for honest employers who report their wages fully and pay their workers well.
So many scammers. So few jail sentences.
And the beat goes on.
© Copyright 2007 The John Cooke Fraud Report