Archive for November, 2006

Cover-All’s Cover Up: Big Time Premium Fraud in California

Wednesday, November 8th, 2006

Cover-All, Inc, bills itself as the nation’s largest full service flooring installation and refinishing contractor. They have over 1,500 employees in 30 states. Here’s how they describe themselves: We’re the people who install floors for Home Depot in 17 states. The Home Depot utilizes Cover-All’s residential installation services for all trades exclusively in over 300 stores across the country. Our customers, like Carpet One, JPS Surface Solutions, the Home Depot and so many others understand the value of partnering with Cover-All. They realize the relationship can provide an opportunity to grow their business beyond the barriers of their previously limited labor capabilities.
Here’s how Deputy District Attorney Michael Gara describes them: they’re crooks. Three of the company’s owners have been indicted for felony fraud and conspiracy. The charges each bring a maximum sentence of five years in jail. The owners are currently under $100,000 bail.
The indictment claims that Cover-All Inc. underreported their payroll to the State Compensation Insurance Fund by nearly $32 million between September 2001 and April 2006, saving the company $10.98 million in premiums. That’s a lot of payroll and a lot of premium. If you do the math, here’s what you find:
: On average, they avoided comp premiums on over a hundred employees per year for five years
: They avoided about $2m per year in premiums
The scheme was uncovered when insurance fund auditors noticed the company’s reported payroll under its workers’ compensation insurance policy differed from what the company was reporting to the state’s Employment Development Department, which collects payroll taxes and administers unemployment benefits.
[Sidebar note: With millions in annual comp premium, Cover-All must have been audited each year. Did they have two sets of books, one for workers comp and one for unemployment insurance? How did they manage to get away with the fraud for five full years?]
Why take the chance?
Why would a reputable and growing company take this kind of risk? Keep in mind that this alleged fraud occurred during the period when California had the highest rates (by far) for workers comp insurance in the nation. Based on the above numbers, and assuming that the premium calculation involved the two basic class codes for carpet and tile installers (Scopes classes #5478 & 5348), we estimate the manual rate for installers in California at about $30 per $100 of payroll. That is three to four times higher than the rates you typically find in other states. Is it far fetched to imagine the frustration of Cover-All’s owners, paying so much more for workers’ comp in California than they were paying in all the other states where they operated? Did they, as a result, hatch a simplistic plan to under-report the payroll, thereby achieving a level of premium relief unavailable to other employers in the state?
If you review the Cover-All website, you see a number of good things. They appear to hire installers as employees (as opposed to calling them “independent contractors”). They have a robust benefit package, including health and dental, 401K and other goodies. They have forged a partnership with one of the country’s largest home improvement retailers. They appear to be well on their way to achieving their goal of becoming the nation’s largest flooring service.
So why risk it all in a rather primitive scheme to avoid insurance premiums? We may never know the answer. But I suspect that the sheer outrage of the cost of comp in California drove them over the edge. It’s ironic that the indictment comes at a time when California has finally achieved meaningful reform of their comp system. Insurance rates have come down dramatically and are likely to continue to do so. Unfortunately for Cover-All, the owners’s view of the emerging good times may soon be obscurred by some inconveniently placed iron bars.

Workers comp costs and benefits – Current state rankings

Monday, November 6th, 2006

Here’s a question for you: If you were to ask any employer in America how his or her workers’ compensation costs compare to similar employers in other states, what do you think the answer would be? Well, I’ve been doing that with employers I meet for a long time, and I have yet to meet one who thinks his or her costs are lower than those of employers in other states.
Moreover, if you expand the question to inquire about employee benefits, most employers will venture that indemnity benefits paid in other states are most likely lower than what’s doled out in theirs.
It’s the old, “The grass is always greener” thing. But is it really, and how would you know? And here’s one last question: Suppose those employers really wanted to know the comparative cost and benefit data for their state and decided to ask a room full of insurance professionals about it. What do you think the insurance professionals would say?
For many years, we at Lynch Ryan have tracked research reports from three highly credible organizations that produce state rankings of workers’ compensation costs and benefits, one a private actuarial firm, another an Oregonian governmental entity and the third a non-profit, Washington, DC, foundation.
Actuarial & Technical Solutions, Inc, an actuarial consulting firm located in Ronkonkoma, NY, has been publishing state cost and benefit data annually since 1992. Its 2006 report, Workers’ Compensation State Rankings – Manufacturing Industry Costs and Statutory Benefit Provisions, has been released within the last month.
The Oregon Department of Consumer & Business Services publishes comparative cost data every two even-numbered years. Oregon’s 2006 Workers’ Compensation Premium Rate Ranking Summary Report was released this past Friday, 4 November 2006 (the complete report won’t be published for another two to three months).
And the National Foundation for Unemployment Compensation and Workers’ Compensation (UWC), headquartered in Washington, DC, has, since 1984, published annual, and class specific, comparative state data in a report titled, Fiscal Data for State Workers’ Compensation Systems. In this report. you’ll find annual data and total indemnity and medical benefit payments over the last 12 years.
The UWC has also published a Research Bulletin called, State Workers’ Compensation Legislation and Related Changes Adopted in 2005. Perusing that somewhat eye-glazing, 77 page report offers up such tidbits as Maryland’s House Bill 461, which “Applies workers’ compensation occupational disease presumptions to Montgomery County correctional officers who suffer from heart disease or hypertension (my italics) resulting in partial or total disability or death,” effective 1 October 2005. Wow!
The Oregon reports are free; Actuarial & Technical Solutions charges $105 for a single report, and the UWC reports costs $25 for those who are not members of the Foundation ($20 for those who are).
The first thing you need to know about the three comparative cost reports is that, while they use different methodologies, they all pretty much arrive at the same place. For the most part their rankings are in general agreement. One state may be ranked #5 in one report and #7 in another. Personally, that’s close enough for me.
All three reports contain some rankings that appear predictable, but there are surprises and paradoxes, too. For example, notwithstanding changes to its law, most workers’ compensation professionals would expect California to be at or near the top of the cost rankings, and they’d be right. But who knew that my home state, Massachusetts, which so many of my conservative friends continue to call Taxachusetts, would rank way down at the bottom, either 43rd or 47th, depending on whose report you read? That’s a surprise, and here’s a paradox: Despite ranking as the least costly of the major industrial states in which to buy workers’ compensation, Massachusetts provides higher benefits than any other state except Nevada, which ranks in the middle of the pack in terms of cost.
We have found the data mined from these reports, as well as others, invaluable as we consult to employers and insurers around America. Searching out and understanding this research, and doing our own, as well, allows us to put costs and benefits in perspective and is very helpful in designing reasonable and achievable cost reduction targets for our clients.
I urge the workers’ compensation professionals among our readers to get and read the reports. It’s time well spent. If you’d rather not do that, but have some questions about them, you can email us at communicationsATworkerscompinsiderDOTcom (insert the @ and “.” where indicated – we avoid spelling it out to foil the spam bots). Or, if you’d prefer, call anyone at Lynch Ryan (my direct line is 781-431-0458, Ext 1). We’d love to hear from you.
By the way, if you do get in touch, let us know what you think of the Insider and if there’s anything you‘d like to see us do to make it even better.

Gun Boats on the Kennebec? Comp Medical Costs Sinking Bath Iron Works

Friday, November 3rd, 2006

Bath Iron Works (BIW) builds ships. The first was The Cottage City, a passenger steamer completed in 1890. Over the past two decades, their work has been limited to building destroyers for the US Navy. We read in the Kennebec Journal that the builder of destroyers is being clobbered by the high cost of medical care for injured workers. There’s supposed to be a fee schedule capping the cost of medical services in Maine, but the workers comp board has never been able to reach agreement on the rates. So BIW is suing the workers’comp board to implement the fee schedule. Imagine: a major employer suing government to implement regulations! What brought about this irony-laced situation?
Deadlocked Board
Maine was supposed to implement a fee schedule for all medical services fourteen years ago. Ten years ago the board approved a list of fees for doctor visits, but after that they got stuck. They have been unable to come up with set fees for such key items as operating rooms, hospital beds or other hospital services and equipment. That kind of tells you that doctors were unable to lobby against the rate setters, but hospitals – with their collective clout – succeeded very nicely.
In the absence of a fee schedule, self-insured BIW has to pay the “usual and customary fees” for all hospital services. We all know what that means: you have to pay the fees that have become highly unusual and no longer customary. Large insurers might be able to negotiate their own rates. But BIW is on its own in the workers comp system. They have no friends in high places and no leverage for negotiating the fees.
Gunboats on the Kennebec?
BIW’s lawsuit provides an example of a worker who was injured and needed surgery at a cost of nearly $6,500. BIW asked the workers’ comp board to allow the company to examine the hospital’s records and present evidence that the fee was higher than average. (Given that almost no one pays “usual and customary” rates, the fees were probably inflated.) But the hearing officer denied the request for records and refused to hear the company’s arguments.
He ordered BIW to pay the bill, saying that since the board had never adopted a fee schedule, the question of whether the bill was reasonable was irrelevant. (Given the apparent arrogance of the hearing officer, we can imagine that BIW had fantasies of sending one of their boats up the Kennebec River to offer him an opinion of their own. Alas, the Kennebec is so shallow, it might float logs and canoes, but certainly not a destroyer.)
Breaking the Logjam
Paul Dionne is the executive director of the workers’ comp board. He notes that the comprehensive fee schedule for hospitals and surgical centers has never come up for a vote. The board has been deadlocked on the issue for over a decade. Up until 2004, the board consisted of four members nominated by labor groups and four by management groups. They could not reach agreement on the fee schedule. Finally, frustration with the deadlock resulted in legislative action. The board has now been reconstituted into three labor representatives, three management representatives and Dionne himself, who chairs the panel and has a vote. We get the impression that Dionne has a mandate to build a fee schedule for Maine.
A group representing doctors, hospitals and other health care providers was asked last year to come up with their own fee schedule, but that panel reported earlier this year that it couldn’t reach a consensus. Well, duh. That’s like asking people how big a pay cut they would like this year. Fee schedules are not likely to emerge through a democratic process, especially when you limit the discussion to stake holders.
The Massachusetts Example
Maine does not have far to look for a fee schedule that radically reduced the costs of workers comp. The Bay State has one of the lowest fee schedules in the nation, with the fees tied to Medicare rates. You won’t find a single hospital that’s happy with these rates (indeed, they are too low), but the fact is that in Massachusetts the medical portion of total workers comp costs is around 36% (compared to nearly 60% in many other states).
In practice, the scheduled fees in Massachusetts don’t always prevail. Insurers often have to negotiate higher than fee schedule rates for specialty services. But overall, the fee schedule has driven down the cost of comp for the state’s employers.
The bottom line is fairly simple: if you want to reduce the cost of workers comp, someone has to pay. Injured employees pay through reduced benefits. Fee schedules make health providers pay. In the absence of a fee schedule, Maine is a relatively high cost state (ranked 13th overall in 2004). By contrast, Massachusetts is ranked 45th.
BIW’s lawsuit is likely to provide the kick in the pants that Maine needs to get this particular administrative chore accomplished. Until they do, BIW will continue to pay a premium for medical services: highly unusual, not exactly customary and very expensive, indeed.

News Roundup: HWR, Ohio, Iraq, scaffolding, and Spanish on the job

Thursday, November 2nd, 2006

New Health Wonk ReviewHealth Wonk Review – hot off the press, over at Jason Shafrin’s Healthcare Economist. His introduction states:

When economists analyze any industry, their first step is to look at the incentives facing the producers and the consumers. Next, an economist will examine the manner in which the government is regulating the industry and then the investigator will estimate whether or not the government activity is economically efficient. In this week’s Health Wonk Review we will focus on each of the 3 entities – producers, consumers and the government.

More from Ohio – Joe Paduda at Managed Care Matters keeps us updated on the latest doings in the Ohio scandal watch. This is a many-headed Hydra – there’s a new headline spawned every day. Today’s news question from The Columbus Dispatch: whether political influence played a role when premium rates for certain employers were lowered without proper justification.
Iraqi contractors – We’ve talked about independent contractors in Iraq a few times, and the issue of workers comp coverage – although its been hard to get information on this topic. Now, we learn that things seem to be getting too dangerous for the the independent contractors. Kroll, a Manhattan security company owned by Marsh & McLennan, has withdrawn its bodyguards from Iraq after it lost four workers. According to AP reports, Marsh & McLennan’s third quarter financial report stated, “results for the security group reflected the orderly exit from high-risk international assignments that had limited profitability and no longer fit Kroll’s business strategy.” Yesterday also included a report from the San Francisco Chronicle that Bechtel is pulling its contractors out of Iraq after seeing “52 of its people have been killed and much of its work sabotaged as Iraq dissolved into insurgency and sectarian violence.” The article paints a bleak picture.
Multilingual safety – Peter Rousmaniere at Working Immigrants discusses how Spanish language barriers increase hazards on construction sites, noting that mandating “English only” workplaces is not a solution since courts have only upheld this practice is business necessity can be demonstrated.

According to the U.S. Bureau of Labor Statistics, total workplace fatal injuries in 2005 fell 1.2%. But the number of fatal injuries among Hispanic workers rose 2% last year to 917, Mr. Carter noted. And in 2004, while the overall number of workplace fatal injuries was up 2%, fatal workplace injuries among Hispanic workers rose 11%.

Scaffolding – We read about a coalition of NY businesses are suing to get the state’s scaffolding law overturned just after seeing Jordan Barab’s item about another scaffolding death yesterday in NY. If today tracks to the average, two workers will die from falls today.