SACRAMENTO, Calif. -- The third party administration industry is rife with fraudulent schemes, such as sending all medical treatment to utilization review to generate fees, using "phantom adjusters" to meet contracted workload standards and buying durable medical equipment for inflated prices from affiliated companies, the president of a large TPA told the Fraud Assessment Commission on Tuesday.
The problem is especially pronounced in California, where TPAs are reeling from recent reforms that slashed spending on claims and claims management, said Tom Veale, president of Tristar Risk Management in Los Angeles.
"Some people are feeling desperate," Veale said. "Since the reforms they have got to come up with some way of making money. Our industry is shrinking 6% to 8% a year."
Veale, who was asked to speak by Fraud Assessment Commission Chairman Bill Zachry, said he has intimate knowledge of TPA overbilling schemes because about two dozen times a year his firm takes over claims-administration contracts previously held by other companies. He said Tristar conducts an internal audit once it takes possession of those files and often finds that its new client was being scammed.
Veale said Tristar has uncovered both "hard fraud" and "soft fraud." As an example of hard fraud, he said Tristar auditors discovered that one claims administrator was paying exorbitant prices for durable medical equipment: $6,000 for a wheelchair, for example, and $8,000 for a hearing aide. He said an investigation revealed that the companies supplying the equipment -- through a series of corporations -- were owned by the company that was adjusting the claims.
TPAs also create "phantom claimants" and authorize unnecessary services, such as interpreters and transportation services. In one instance, Veale said Tristar surveyed claimants who supposedly had received transportation services authorized by a TPA and found that only 10% of them had actually received the service.
In another case, Veale said a claims supervisor for a small TPA was dating a partner in a workers' compensation law firm. He began referring all of his client's claims to the woman's law firm, billing the employer $950 per file for "legal review." The law firm was paid a total of $1 million before the scheme fell apart, he said.
"The supervisor and the attorney had a fight," Veale said. "They didn't know who to turn in, so they turned in each other."
What Veale called soft fraud also takes money out of the system. He said he knows of one firm that sends all medical treatment requests through utilization review, no matter how insignificant, and bills a client $95 for each review done.
Exposing another common ruse, Veale said some TPAs sign contracts promising to assign no more than, say, 175 files to each of their claims adjusters, but create phantom claims adjusters to meet that target. He said the real adjusters are actually handling 300 claims files apiece.
Veale said employers are being ripped off not only by their own claims administrators, but by organized criminals who hoodwink harried adjusters into paying phony medical bills. He said California had largely gotten organized crime out of the workers' compensation system during the 1990s, but in 2005 Tristar saw a sharp increase in the number of fraudulent bills being sent in by crime syndicates.
Veale said typically the schemers are able to produce realistic looking medical bills that can easily fool busy adjusters. Often, the criminals will rent small offices or mail boxes in a medical clinic in order to disguise themselves as legitimate businesses. He said the fraudsters will sometimes pay a low-level clerk for a legitimate clinic to provide a list of patient names in order to concoct phony bills for services never given.
Embezzlers are also having a heyday, Veale said. They often steal from one company after another because claims administrators don't report their crimes to police or even give them a negative reference. In one instance, Veale said two sisters were able to steal $2 million from a series of employers because no one turned them into police, and supervisors were afraid to give a negative reference.
Veale made his presentation as the Fraud Assessment Commission is deciding on how to best spend $750,000 that the state budgeted to continue a study begun this year. The goal of the ongoing study is to estimate the amount of fraud and abuse within California's workers' compensation system.
No decision was reached Tuesday, but fraud commissioners said Veale's account of industry misdeeds makes them wonder about the impact on the system.
"I'm concerned about the injured worker not receiving benefits," said fraud commissioner Jiles Smith. Chairman Zachry echoed that concern.
Lance Wong, a deputy district attorney who supervises Los Angeles County's workers' compensation fraud unit, said the schemes described by Veale are not particularly surprising. In fact, he said his office is currently prosecuting a TPA that was referring claimants to a vocational rehabilitation company that it owned.
Wong said sophisticated criminals have learned that fraud can bring in more cash than violent crime or narcotics and carries less risk because sentences are relatively light.
"It's a crime of opportunity," he said. "It's one that's very lucrative."
