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By Leslie Kim
White sand beaches
Flower scented breezes
Rampant insurance fraud…
Mike Anderson moved to Hawaii, lock, stock, barrel and wife Sue, two years ago. His mission? To set up a special investigation unit for Fireman’s Fund. A California transplant, he found the situation in Hawaii to be an instant replay of the Golden State’s late 1970’s dilemma.
“Hawaii is a haven for insurance opportunists, ” says Anderson. “Essentially, there is no Department of Insurance Fraud Division, no significant penalties for fraud perpetrators, no supportive legislation and no immunity statutes to protect insurance companies who would seek to exchange suspected fraud information with one another. What we do have,” he added, “is a threshold no-fault auto system that invites abuse, a workers’ compensation system rife with problems, an insurance commissioner who rated the fraud problem a zero on the one-to-ten scale and a phone book chock full of ads for attorneys and chiropractors.”
These ingredients present a recipe for abuse.
Oahu, the most densely populated of the state’s islands, is home to nearly a million people. There are 500,000 cars registered on the island – and more than 6,000 were stolen during 1994.
But the geographies of a 1,400 square mile island present a problem to the typical car thief. It’s not the same as stealing a Mercedes in Denver and transporting it to a populous eastern city for re-titling and sale. Where can you hide a stolen Mercedes on a relatively small island?
The Honolulu Police Department’s Auto Theft Unit provides some of the answers. Captain Louis Souza, Lieutenant Alan Anami, Detective Lui Pestana and Detective Leroy Fujishige comprise the Criminal Investigation Division and work on crimes involving anything that’s engine propelled: airplanes, boats, mopeds, automobiles. “Our stolen vehicle reports are 95 percent automobiles,” says Anami, “and of the 500 incidents per month, 85 percent are recovered.”
“We’re seeing a number of trends,” offers Fujishige, “with the most common scenario being the chop shop. Vehicle cost on the islands is a large factor in car theft. Because accessories cost so much – a set of rims carries a price tag of $2,000 if purchased in a retail store but costs only $500 if bought from -a fence – chopping cars for parts is a very lucrative crime. “
“Another scenario we see a lot,” Pestana adds, “is the paper car scam. These vehicles sometimes exist only on paper; other times
the auto might be a pre-existing wreck. Insurance companies pay off on them all the time. “
“Most commonly they’re purchased from private owners and registered with clear title to a new owner who then purchases full coverage. About a month later we see a report that the car was stolen – and 30 days after that the insurance company sends a check,” Pestana added.
Souza advised of another common scenario that involves cars stolen by druggies. “Hey, Dude, I’ll pass you a bag if you’ll steal me some wheels,” is often heard. This is because of the drug seizure laws in effect. “Stolen cars present a popular mode in which to transport drugs. They’re usually used for two to three days, ditched in a parking lot somewhere and replaced with yet another stolen vehicle,” explains Souza.
Auto theft on the islands is more of an individual crime than a, group crime in most cases. It’s just one more way to make ends meet for people who live in the highest costof-living location in the United States. When
the fairly simple scam works for one guy, he tells his best buddy. It works for the best buddy and he tells his brother. Then the brother teaches the cousin and the insurance company checks keep coming. But where does it stop?
The theft team members offer some insight and suggestions. “Most federal, state and local agencies have been hit with extensive budget cuts,” says Anami. “We do not have the manpower necessary to mount a full effort to stop these guys. We will, however, work in tandem with insurance investigators who are willing to do part of the necessary legwork. “
“Because auto theft is a low priority crime,” says Pestana, “the chances of doing actual prison time are slim. Prison space is very limited here in Hawaii. Cells are filled with murderers and rapists, not auto thieves. Now, before we can even sum up the case, the guy’s on the streets stealing another car.”
The auto theft team takes pride in the 1992 bust and successful RICO action involving Daniel Freeman, a 30-plus-year criminal responsible for millions of dollars of bogus insurance payments.
“There wasn’t anything this guy wasn’t into,” said Fujishige. “He was an insurance fraud mastermind. He was a paper car artist. Cars would be stolen three or four times each and in between he would transpose numbers on the VIN to stay ahead of the NICB. Most of the time he’d purchase a wrecked vehicle and keep the clear title. Then he’d supposedly sell it to another party who would register it in his own name and get full coverage. Freeman would walk the new owner through the whole process. He did this since the early 6U’s. his downfall came as a result of getting too many people involved and, eventually some of them rolled over. “
The RICO bust had the goods on 70 transactions, but only 31 of the most recent and best documented ones were prosecuted. “There were a lot of smiling faces the day Freeman was found guilty,” said Souza; “but his wasn’t one of them.”
Clem Kaonohi, the National Insurance Crime Bureau’s (NICB) Hawaii agent, plays a major role in the island’s anti-fraud efforts. Having joined NICB in 1984, his is a popular face throughout the fraud-fighting industry. “We need at least ten more of Clem” is a comment agreed upon by all.
Since 1984, the system has not changed, but the way in which information is obtained and exchanged today revolves around Clem.
Welton Chang, a member of the Allstate SIU team, says, “Because of the lack of a fraud immunity statute in Hawaii, we use Clem as a sort of conduit. As members of the NICE, we call him and let him know what we’ve got. If he thinks our case is strong enough for further action, he gets the word to the HPD and they subpoena our file. This protects us legally and serves to get the ball rolling.”
Kaonohi also works in tandem with HPD Arson Investigator Steve Whiting. Because of budget cuts, building fires are investigated on a priority basis and Whiting seldom has time left over to allow for vehicle arson investigations. This unfortunately translates to mean that most car fires, no matter how suspicious in circumstance, are being paid by the insurance companies. Only those companies with active SIU teams are defeating these claims.
“One of our biggest needs,” says Whiting, “is training. Firefighters are trained to put out fires but not to figure out how they might have started.”
What training there is, Whiting reports, goes to battalion chiefs and arson investigators and stops right there. “Too many of our front line firefighters could be standing ankle deep in gasoline and would not recognize arson. Training should be, at the least, provided to the captain of each fire company. He’s on site at every fire. ”
As with the police, investigative manpower, or lack thereof, plays a major role in fire investigations. A typical insurance fraud house fire can tie up nearly a month of Whiting’s time. If an insurance company wants to pursue prosecution, Whiting is more than willing to help. “We are here to assist an aggressive insurance company, but we are not here to do their job. We have a 100 percent conviction rate on those cases that reach the prosecutor’s office. But it takes a lot of work to compile enough evidence to get that case to the prosecutor. SIU personnel can be of tremendous assistance.”
Companies are becoming more aggressive, he thinks. “It’s a matter of numbers. More SIU bodies are needed, both for investigation and to assist in the education process.”
Education would appear to be a key. This is especially true due to the overall mind set present today in Hawaii. Because of the heavy involvement of the trade unions, the mentality is one of entitlement. So not only is specialized training necessary for police and fire personnel, but the public must be educated as well.
The message? The cost of fraud comes out of the pockets of the insurance buying public. Auto fraud is funded by auto premiums, homeowners fraud is funded by homeowners’ premiums, workers’ compensation fraud is funded by passing on the cost to the consumer via higher prices, etc.
If there is a central point in the fight against insurance fraud in Hawaii, it would fall upon the NICB. Dewey Kim, Deputy Attorney General and an active participant in the prosecution of Medicare/Medicaid fraud, says, “Right now, one safe way for Hawaiian insurers to share information is to report their suspicions to the NICB. “
Providers who rip off the private industry sector are probably ripping off the federal programs as well. “Everyone here knows about the same fraudulent guys. The problem is that there’s an economic disincentive
to do anything about it. For instance, wf prosecuted a doctor last January for charging for people that she did not treat. She pled guilty to Medicare and Medicaid fraud and i would be difficult for her to sue us because the case was solid and we have prosecutorial immunity. The problem is, when she doe! the same to the private people, the Blues, nc fault companies, etc., and any of that information gets out, there is no protection for these private companies to pursue the cases At that point she might sue them for defamation. It’s a big risk and companies may be; afraid.”
On the plus side, according to Kim, is th; the overall number of medical providers involved in fraudulent billing schemes is very small, perhaps one percent is responsible for billing 25 – 30 percent in certain categories. So, although the actual number of doctors is small, the amount of money involved is not.”
John Conte, the State Farm in-house legal advisor, agrees that the health care service providers constitute the largest abusers. “But the insurance system problems in Hawaii are multi-faceted,” he says “and a great deal of work must be done to get the situation under control.”
Conte suggests that one of the problems that should be addressed is the entire Hawaii no-fault system. State Farm is proposing revi-sions to the current laws that would lessen the levels of appeals. Right now there are administrative appeals, trial level appeals, lower and district courts appeals, arbitration programs and rights to appeal those awards. In short, the insurance industry is spending a tremendous amount of money and time in the cluttered, multi-layered appeals process.
State Farm has approached the Hawaii soft fraud (medical build up) problem by abject refusal to pay nuisance settlements and taking questionable cases, right through the jury trial process. “If we think a court ordered arbitration settlement is out of whack, ” says Conte, “we get a de novo review and request trial. In about 90 percent of the cases we get it and the jury will reduce the awards.”
The no-fault system needs major revision. Currently, there is a $10,000 medical threshold which must be passed before a claimant can seek tort liability damages. The result is massive over-treatment of alleged injuries.
Two years ago, realizing that “something had to be done,” the Peer Review Organization (PRO) was unveiled in Hawaii. It works like this: providers must submit a treatment plan to the no-fault or workers’ compensation provider at the inception of the claim. This plan must provide 1) a description of the diagnosis, 2) what treatment is suggested, 3)what the treatment will accomplish and 4) the cost of the suggested treatment. Upon receipt, the carrier has five days to either accept or challenge the plan. If they choose to challenge, they may add additional information, (i.e. low impact zero damage collision) and submit it for peer review. The cost to the carrier is $500 per case, but cases of massive over-treatment are usually kicked back as unreasonable and unnecessary and the company is entitled to then attempt to recover its money.
GEICO uses the PRO on approximately 25 percent of its cases, advises Tim Dayton, General Manager of the Hawaii office. “Our concern,” says Dayton, “is that our insured receives treatment that is reasonable and appropriate and is in line with the circumstances of the loss.” GEICO scrutinizes the needs early in the claims process. Files are extensively reviewed by employees hired for their medical backgrounds.
It is this hiring practice that may be partially responsible for GEICO’s success in a difficult market. In 1993, their pure loss ratio was 56.2 percent, which was lower than many of their competitors. Although part of this may be attributed to a different class of insured (predominately military personnel), Dayton is quick to point to the PRO process as one which puts more pressure on the applicant or PI attorney. “Attorneys absolutely hate peer reviews, “comments Dayton, “but something had to happen when State Farm and AIG, the two largest insurers in Hawaii, took respective rate increases of approximately 24 percent and 44 percent.”
Has peer review been an answer? A help, yes. An answer, no. “A number of major carriers have switched directions,” Dayton says. “They are the ones using the PRO process. They are trying to determine what they do owe and what they do not owe.
“There are certain carriers here in Hawaii, who – if they have the no-fault and we have the bodily injury exposure – we know that the threshold will be met. Nothing will be challenged. I know one major carrier that has never done a single peer review in the few years since the system has been in place.”
Some medical practitioners are getting more creative in order to reach the $10,000 threshold on minor impact accidents. Of course they include the usual chiropractic treatment, but big-buck add ons for psychological trauma therapy and pain management are becoming more common.
There is widespread agreement that the threshold itself presents a problem. Taking away the threshold would probably lower the amount of medical treatment sought by many no-fault claimants and perhaps lower the overall settlements.
“The current system encourages treatment to $10,000,” says Defense Attorney Bob Chong. “The Hawaii average tort settlement – over $35,700 per case – is the largest in the country.
“Hawaii has become a mecca for chiropractors. It is not uncommon for a chiropractor out of college less than two years to be making over $200,000 in a year. A good provider will tell a patient that there is nothing further to be gained by treating past a certain point. A provider who wants to make money will tell the same patient that if he does not come back for adjustments, his spine will again slip out of alignment. Actually, getting the patient into a muscle strengthening exercise program would make more long term sense.
Chong is heavily involved in workers’ compensation defense. “Hurricane Iniki had a tremendous impact,” he says. “There was a large influx of workers from the mainland; independents, carpenters, sub-contractors, etc. In the beginning, there was an abundance of work but as the available work hours began to dry up, the injuries started to
Under the current Hawaii workers’ compensation statutes, there is a monetary. incentive not to get well and return to work. In many instances, an employee collecting benefits is getting more money for staying home than he would get for returning to work. This is due, in part, to treating part-time workers the same as full-time workers.
The answer, according to Chong, must be via regulations or actual legislation. “It is essential to encourage the insurance carriers to go after abusive providers,” he says. “Currently, there is no incentive at all for the companies to do so. There are no real criminal penalties and in cases where actual money is recovered, it goes to the workers’ compensation fund, not to the defrauded insurer.”
What few claimant prosecutions have taken place have been in cases where welfare fraud was also evident. In situations where a claimant is collecting workers’ compensation benefits and not reporting the benefits to the welfare office (if they also receive welfare benefits), the Health and Human Services Department can – and does – prosecute criminally.
Provider prosecutions are rarer yet. Chong advises of one case where an island chiropractor had an office worker who had previously worked for the IRS and had many contacts in the enforcement field. When he fired her, she retaliated by advising the authorities of a specific case wherein the chiropractor had signed all necessary medical papers to allow a carpenter/patient to obtain full workers’ compensation and disability. What was in it for the chiropractor? Well, while the carpenter was collecting full benefits, he was working “under the table” for the very same chiropractor, doing work on both his house and his office. The insurance company got film and the claim was defeated.
The same chiropractor was treating another patient and billing for, among other things, massage therapy. Surveillance at the chiropractor’s personal residence clearly revealed that the “hands on” home visits went beyond the bomi laries of customary treatment. Inasmuch as this was a California workers’ compensation claim; prosecution of the claimant is underway. The chiropractor, however, is still out there.
Under the Hawaii workers’ compensation system, the Director of the Department of Labor is the decision maker but the actual prosecutor of a case would be the insured (or defrauded) party. Since there is no financial incentive to the injured party to go after the providers, insurance carriers are not doing anything beyond defeating individual cases. Can it be done? “Absolutely,” says Chong, “but it’s going to take a unique company to undertake such a venture.”
Clyde Mark is the director of risk management and insurance for the Outrigger Hotels, one of Oahu’s largest employers. He is responsible for 3,000 employees in 21 Waikiki hotels, as well as seven more locations on the outer islands. “When dealing with fraud control,” Mark says, “we look at two aspects that are not mutually exclusive – loss prevention and loss control.”
Mark uses a deterrent approach, one which seems to prevent abuses. “We call the physician/provider within a week of any injury to coordinate the return to work. We maintain continuous contact with the employee. The key with the employee, we believe, is recognition. We encourage him
to want to return to work as quickly as possible.”
Creativity may be another key to the Outrigger’s success in keeping work related injuries at a low level. The Great Malasada Challenge, an original idea of Mark’s, has been highly successful. A “malasada” is a deliciously sweet Portuguese donut – and high risk groups (ie: housekeeping, food and beverage, bell, etc.) that go without any lost time injuries for a month qualify for a special reward… coffee and all-you-can-eat malasadas, personally delivered by Mark. This kind of personal appreciation and recognition is Mark’s method of controlling abuse from within his organization.
Is Mark concerned with fraud? “There’s a misuse of the understanding between fraud and abuse. We have some abuse – we’ve seen it across the board by all the outsiders to the workers’ compensation system,” he said. “Physicians, chiropractors, physical therapists, attorneys … every professional group has their bad apples as well as their good apples. When we speak of fraud, we often are actually referring to provider abuse. Fraud means intent and it’s difficult to prove intent.”
Dave Robinson, a Honolulu plaintiff attorney, thinks the insurance industry is too quick to shout fraud in many instances. “Companies tend to adjust claims with a western mentality. They often do not take into consideration that the population of the islands is very mixed, both racially and ethnically. If an injured party seeks treatment with an alternative medicine provider, For instance acupuncture treatment, it sets off a red flag at the company level. That should not happen. Adjusters need to realize that healing may have a psychological/cultural
Aspect as well as a physiological aspect.
Robinson also reports that many clients seek his assistance only after they have given up trying to deal directly with the insurance companies. If the initial conversation with the carrier is positive, and the injured party is treated respectfully and politely advised of what (s)he is entitled to, many more claims would be settled without attorney intervention. “Abuse of the system is not a one-way street,” he said.
Not many fraud industry people are sympathetic to PI attorneys, though. Ed McArdle of Alamo Car Rental attributes an increase in both the number of fraudulent claims and in the amount of the settlements to inadequacies in the current no fault system and less than reputable medical/legal providers.
“In one case,” he says, “the people making claims advised that they were all Vietnamese fishermen. Yet none of them could name the ship they worked on, the captain of the ship, where it was berthed or what their duties were. There were six individuals in the vehicle at the time of the accident. At $20,000 each exposure under the present no fault system, let alone later tort damages, we were looking at a total of $120,000. Couple all that with a low-impact, minor-damage, single-vehicle accident, allegedly caused by a phantom vehicle. Of course we are going to question the intent of the providers in pursuing the claim.”
McArdle says that Alamo is now seeing a disproportionate number of Vietnamese claims. It is primarily individuals; however, the same provider names are commonly seen. “The current system guarantees the doctors $20,000 in income. It’s free money or the taking,” he says.
The Hawaii problem presents a critical challenge to car rental companies. They are extremely vulnerable to fraud due to the million dollar policy limits. Even though the ordinance requiring higher limits has now been repealed, the repeat was done in such a way that it can easily be added back on. The high limits are there for the asking, though, and with quirks in the law that allow for things like no impact phantom vehicle claims, the policy is ripe for abuse.
McArdle thinks the answer is a return to tort. “You will always have fraud. But states with thresholds are inviting unethical providers to take free advantage of the insurance companies’ money.”
“Fighting fraud is easier in a tort state. The doctors are on a lien. Companies can do things like inspect the clinics. In no fault states, there is no pressure on the doctor to allow an investigator into the clinic. Additionally, the doctor in a tort state is taking a risk along with the claimant. He won’t want to do as much lien treatment if there is a chance he won’t get paid. In Hawaii, the doctor is looking at a pot full of money, $20,000 per patient, and he has no risk,” says McArdle.
Walt McIntosh, a member of the AIG SIU team, sees an insurance system that’s in need of an overhaul. He also sees the value of an aggressive approach. “We have an inherent duty to protect the assets of our company. We also have a duty to see that our policyholders receive the benefits that they are entitled to under the law at a fair and affordable cost. Fraud in any form is counterproductive to this duly.”
What does the future hold for Hawaii? For now, the newly formed Honolulu chapter of the International Association of Special Investigation Units (IASIU) is out of the gate, off and running. Guys like Anderson and Chang are jumping on any chance they get to speak to business and professional groups. Guys like McIntosh, Conte and Dayton are working hard to help speed up the painfully slow legislative reform process. Guys like Chong and Robinson are knee-deep in the time-consuming process of litigation. Guys like Souza, Anami, Pestana, Fujishige and Whiting are using every tool at their disposal to move the more flagrant cases toward prosecution. Guys like Kim and McArdle (each in their own unique way) are striking terror into the hearts of abusive providers. And guys like Kaonohi are just working…and working…and working…and working.
© 1995 John Cooke Fraud Repor