Civil actions seek to take down heads of complex fraud rings

By Michael Flaherty
September 11, 2012
SIUs must root out underlying schemes instead of quickly settling litigation

JIFA_logoAbstract: Large and complex no-fault fraud rings collectively attempt to steal hundreds of millions of dollars in false injury claims from false medical diagnoses and the resulting unnecessary treatment and testing. Truly effective civil fraud litigation has a more ambitious goal than merely cutting off payments to the hub provider. It seeks to eviscerate the ring by undermining the head of the enterprise — the doctors, lawyers and others who run the operation. After an insurance company files a lawsuit, a division soon forms between key ringleaders and low-level ring members who can’t withstand protracted civil litigation. Ex-clinic workers who feel abandoned by their former employers during litigation are often willing to provide testimony describing their experiences in exchange for being dismissed from a lawsuit. Another civil-litigation strategy option is the use of a Declaratory Judgment Action when an insurance carrier is certain that the alleged facts do not support a payment and the carrier is looking for the court to affirm their decision. A request for a Declaratory Judgment can also seek to recover money unjustly paid out. Insurance carriers that quickly settle their complex fraud litigation are only doomed to investigate the same rings over and over again. But SIUs that dig deeper and use civil litigation to root out the leadership core of auto-fraud rings will emerge the superior force in the fight against fraud.


Effective pursuit of large and complex fraud rings should go beyond simply dealing with suspicious claims or individual ring members one at a time, as they’re identified. The best approach is an integrated big-picture strategy that methodically takes down the ringleaders who mastermind the enterprise.

Civil litigation is a potent courtroom option for insurance companies. It is especially well-positioned to help break up highly insulated staged-crash rings and medical mills. That has been Allstate’s experience in New York, which has some of the nation’s largest concentrations of these criminal enterprises.

This same strategy underlies the deployment of civil suits and related civil actions to combat such fraud rings. New York, for example, has large concentrations of organized no-fault medical mills. Since 2003, Allstate has filed 41 fraud lawsuits in New York State, seeking more than $227 million in damages.[1]

About one out of every five no-fault claims closed in New York City appeared to have some element of fraud, and as many as one in three appears to be inflated, according to a 2011 study by the Insurance Research Council.[2]

Case referrals to the New York fraud bureau involving suspected no-fault fraud have accounted for more than 50 percent of all fraud referrals since 2007.[3] The fraud bureau received nearly 12,000 reports of suspected fraud in 2011.

“With all the technological advancements made in detecting and investigating insurance fraud in the last decade, perhaps less attention has been given toward dismantling the corrupt enterprises that perpetrate the frauds.” In Florida, no-fault fraud cost consumers and insurers an estimated $658 million in 2011, according to the Insurance Information Institute.[4] The typical two-car family in Florida paid a “fraud tax” of nearly $100 a year in higher auto premiums due to fraud.[5]

Looking at the larger national trend, insurance fraud is widely recognized as a national problem that adversely affects the insurance-buying public and insurance industry. The Coalition Against Insurance Fraud estimates that, very conservatively, about $80 billion is lost in the United States due to insurance fraud each year. Insurance fraud accounts for about 10 percent of the property-casualty insurance industry’s incurred losses and loss adjustment expenses, according to the Insurance Information Institute. Making matters worse is the challenge of the current economic times, which creates an additional financial motive for many who otherwise might not consider submitting a fraudulent claim.

While insurance companies continue to rely on detecting fraud with traditional investigative methods work that requires specialized training, industry experience and an understanding of red flags, there have been recent advancements in technology and data analytics that are changing the traditional approach to fighting fraud. Insurance carriers are utilizing this new technology to mine their data, which is then analyzed and visualized to expose patterns of fraud.

Tech detecting fraud
Examples include predictive modeling, at the front end or throughout the lifecycle of a claim; data analytics where information from multiple sources is pulled together by technology tools and easily displayed to the investigator; internet database searches that provide background information at the desk level; and link analysis software that evaluates and visualizes the questionable relationships (connections) among organizations, people, vehicles, accidents, addresses, phone numbers and multiple other fields. All this technology enables sourcing the data into information in a timely and relevant way for the investigator.

With all the technological advancements made in detecting and investigating insurance fraud in the last decade, perhaps less attention has been given toward dismantling the corrupt enterprises that perpetrate the frauds. Once an insurance carrier has completed an investigation and obtained evidence of fraud, the next steps are to deny the claims and defend against any resulting lawsuits.

However, with respect to complex medical insurance fraud the more sophisticated Special Investigative Units (SIU) in the country are using their civil litigation against auto-accident medical mills to go beyond the age-old insurance industry goals of 1) preventing further payments to a fraudulent medical provider and 2) quickly obtaining pennies-on-the-dollar restitution. That old litigation philosophy has led to fraudulent medical mills learning that insurance-industry fraud lawsuits are usually only a temporary nuisance to be endured, and often can act as a training tool to improve the overall scheme in the next, better iteration of the enterprise.

Rather, new highly-effective SIU fraud litigation is specifically intended and designed to expose the entirety of an organized ring’s activity and to obtain detailed and comprehensive investigative intelligence about how the entire scheme works. It is only by taking the time to go beneath the surface of fraud and to understand the complex financial relationships necessary to maintain these organized schemes that the full magnitude of the fraud can be comprehended, exposed and dismantled. Managing the massive amount of information, intelligence and documents generated by sophisticated investigations is an ongoing challenge but is crucial if insurance companies are going to identify and defeat modern complex auto-accident fraud schemes.

Crooked med industry created
JIFAstory1This new litigation philosophy is based on a realistic understanding of the extent and sophistication of the fraud that our industry is facing in 2012: An often-willing patient base is seeking to profit from exaggerated or fabricated personal-injury claims. In turn, a very specific and efficient medical industry has been constructed to provide false diagnoses for injuries that do not exist and guide patients along an automatic path of care including chiropractic, durable medical equipment (DME), acupuncture, physical therapy, MRI, neurodiagnostic testing, pain management injections, orthopedics and even invasive spinal procedures.

Compliant patients are deliberately recruited to participate in this well-built conveyor belt of fraudulent medical care constructed for the sole purpose of documenting serious permanent injuries. The false medical diagnoses and subsequent billings are then used by fully aware and unscrupulous attorneys to support the third-party, bodily-injury, pain-and-suffering claims presented to insurance carriers on behalf of their clients. More and more often, bodily-injury lawyers are recruiting and paying for clients, selling them to clinics, and then directing the full extent of their clients’ medical care.

Only by coming to grips with this new reality can the general premise behind high-end fraudulent auto-accident-mill schemes be understood and addressed: that the primary-care facility at the hub of the investigation has illicitly purchased the vast number of its patients from runners for a fee; that the medical diagnoses provided to patients by those primary-care facilities are false; that the subsequent treatment billed and/or provided is unnecessary, routine and essentially predetermined before the patient ever comes into the clinic; and that the primary care facility later refers all of its patients out for further diagnoses, treatment and testing not because of any real medical need but rather, 1) in exchange for a financial kickback, 2) to overcome any medical management attempted by the insurance carrier, and 3) to bolster the personal-injury claim and keep the patient’s lawyer happy enough to refer more clients.

Therefore, truly effective civil fraud litigation must have a more ambitious goal than merely cutting off payments to the hub provider. High-end investigations operate with the understanding that medical-mill rings involve illegal relationships where massive amounts of kickback money are exchanged for patient referrals. Because the vast majority of the money going into these schemes is in the form of checks and drafts from insurance companies, one of the biggest challenges facing a fraudulent enterprise is avoiding detection while converting those insurance funds into the enormous amount of kickback money necessary to keep the enterprise operating.

The exchange of direct checks among ring participants is now rare and has been replaced by sophisticated schemes involving transportation fees, billing and collection agreements, check-cashing facilities, money laundering, cash injected from other enterprises, advertising, marketing and a continual variety of other techniques. Auto-accident medical-mill schemes are so lucrative they have attracted traditional organized crime elements that bring with them the complex financial techniques learned during years of narcotics and other illicit enterprises.

Insurers with a long-range view understand the huge rewards that come from undertaking the time, expense and investigative challenges required to expose kickbacks paid by DME companies, MRI facilities, neurologists, pain-management providers and ambulatory surgical centers. For example, when an investigation proves that an MRI facility has paid a kickback to the hub primary-care provider in exchange for patient referrals, that same investigation naturally uncovers kickbacks paid to every other primary-care provider in that MRI’s network. One good piece of fraud litigation therefore can lead to several other valuable new investigations that are not in their infancy but rather are already quite well-developed.

Sophisticated auto-accident medical-mill schemes involve a huge number of individuals. After a lawsuit is filed, it is not long before a division forms between those key ringleaders who have the money to pay for highly competent counsel, and those low-level participants who cannot afford to withstand protracted litigation against an insurance carrier. It is the individuals who worked within medical mills as salaried employees who often approach an insurance carrier shortly after a lawsuit is filed to explore settlement options.

When a carrier’s litigation strategy designates that information from ring participants is as valuable as restitution, then real progress can be made at the intelligence level. Ex-clinic workers who feel abandoned by their former employers during litigation are often willing to provide testimony describing their experiences in exchange for being dismissed from a lawsuit. It is important to note that former clinic employees who are medical professionals are always unwilling to make admissions that could impact the future of their licenses.

Regardless, the value of first-hand information from those who worked in a fraud scheme cannot be underestimated, and it is a significant mistake to ever overlook an opportunity to speak with a ring participant. Remember, due to the high number of participants involved in complex schemes, paper and/or computer records have to be maintained just to keep track of all the kickback money owed to ring members — and that is a weakness in medical-mill fraud.

Declaring declaratory judgements
On the other hand, compartmentalization of employee tasks within fraudulent rings is a common tactic to help avoid detection, and therefore it often takes speaking to multiple persons within an organization before the full extent of the fraud can be fully comprehended and exposed.

Another civil-litigation strategy option is the use of a Declaratory Judgment Action when an insurance carrier is certain that the alleged facts do not support a payment and the carrier is looking for the court to affirm their decision. A request for a Declaratory Judgment can go one step farther by also seeking to recover insurance money unjustly paid out.

This exact strategy was used in a case referred to Allstate’s SIU involving a 53-year-old insured male whose medical records called into question whether he was truly injured as the driver in an auto accident as he alleged. The records were received sometime after the claim was reported and payments had been made. The 53-year-old insured had sought medical attention for a shoulder injury two days after the date of the motor-vehicle accident.

At the time, he was being treated by several medical providers and one set of medical records received by Allstate revealed that his injury actually occurred at his place of employment, a racetrack.

A call was made to the third-party driver to obtain details of the accident, including information about all the occupants in the insured vehicle at the time of the accident. The third-party driver detailed another inconsistency with the claim: He said he was rear-ended by a young male who was approximately 20 years old, and that this young male was the only occupant in the insured vehicle. In the investigative process a request for an Examination Under Oath (EUO) was made for the 53-year-old insured, the insured’s 20-year-old son, and the third-party driver.

The third-party driver again confirmed that the 20-year-old was the driver and only occupant of the insured vehicle. He recalled that the insured’s son was on his way to school when the loss occurred and he had telephoned his mother from the scene of the accident. However, the third-party driver further testified that sometime after the accident the 53-year-old insured telephoned him and appeared at his residence, asking him to corroborate the insured’s false details of the loss.

The EUO of both the insured and the insured’s son was taken. During their EUO, the insured alleged he was in the car at the time of the loss, asleep in the backseat while his son was driving and that he was awakened when the accident occurred.

Based on the evidence gathered during the investigative stages and the amount of money paid to medical providers for the treatment, a decision was made to bring forth a Declaratory Judgment against the insured and the medical providers. The Declaratory Judgment was two-fold: to affirm Allstate’s denial and stop additional payout of money based on the fraud committed, and to enable restitution of the money already paid. The Declaratory Judgment stated that the 53-year-old insured was neither the driver nor an occupant of the vehicle, and that the treatment received was not related to the motor-vehicle accident and therefore Allstate was not responsible for payment of the claim.

To resolve the litigation against them, the medical providers involved reimbursed Allstate for all the monies they had received and they also released Allstate from any and all further claims. Opposing counsel for the insured was provided with the evidence that was gathered surrounding the insured after reviewing the evidence, and counsel entered negotiations to resolve the case. The outcome resulted in full restitution of the loss paid.

Every piece of complex litigation undertaken by a Special Investigative Unit requires the development of new techniques and tools to uncover and track the unique characteristics of each particular fraudulent scheme. However, at the end of each investigation the SIU team has become a more intelligent and increasingly efficient fraud-fighting organization that is better situated to take on larger and more complex investigations.

Insurance carriers that quickly settle their complex fraud litigation are only doomed to investigate the same rings over and over again. And in each subsequent investigation the ring participants will be stronger and faster but the SIU’s effectiveness will remain unchanged. SIUs that dig deeper and use civil litigation to root out the underlying scheme and the leadership core of fraud rings will emerge the superior force in the fight against fraud.

By vigorously combating fraud, and especially sophisticated rings, insurers can better reduce the upward pressure on auto premiums for their policyholders.

About the author: Michael Flaherty is an Allstate SIU Analyst.


endNOTES
[1]Allstate Insurance Company Files $29.9 Million Insurance Fraud Case. May 11, 2012. http://www.prnewswire.com/ news-releases/allstate-insurance-company-files-299-million- insurance-fraud-case-151111355.html
[2] More than 20 percent of New York City area auto injury claims appear to be fraudulent, says new study of no-fault insurance. Insurance Research Council, January 5, 2011. Malvern, PA. http://www.insurance-research.org/sites/default/files/downloads/IRCNewYorkPIP_010511.pdf
[3] 2011 first annual report of the superintendent to the gover- nor and legislature. New York State Department of FinancialServices. New York, NY. http://www.dfs.ny.gov/reportpub/ dfs_annualrpt_2011.pdf
[4] Overview of No-Fault Auto Insurance Fraud in Florida. http://www.insuringflorida.org/articles/overview-of-no- fault-auto-insurance-fraud-in-florida.html
[5] Florida Drivers Pay A “Fraud Tax” That Is Rising And Contributes To Higher Premiums For Honest Drivers. Insurance Information Institute. Tampa, FL. January 26, 2011. http://www.insuringflorida.org/press_releases/ florida-drivers-pay-a-fraud-tax-that-is-rising-and-contributes-to- higher-premiums-for-honest-drivers.html


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