Further study, he said, is necessary for long-term development of a statewide focused fraud initiative.

There have been other studies of health insurance and workers' comp systems by Florida and Texas, but "nothing as extensive a study as California is planning," commented Malcolm Sparrow, who was brought in as a consultant to help the Commission on Health and Safety and Workers' Compensation (CHSWC), which has drawn up the specifications for the study. "California, I believe, is a pioneer in this regard," she added.

Mr. Sparrow--a professor of public management practices at Harvard University's John F. Kennedy School of Government, who holds a doctorate in mathematics--has written a number of books on fraud, including "License to Steal: How Fraud Bleeds America's Health Care System."

Explaining California's need for such a high-powered research project, he noted that there are forms of fraud that are out of control, and to combat such problems there is a need to get the facts on the table. Otherwise, he said, targeting efforts can be "driven by parochial interests."

Mr. Sparrow said there are a lot of parties who have the ability to steal from the workers' comp system but added that injured worker "claimants in my view are not the big risk."

The real danger, he said, is from professional providers who can organize schemes that rake in vast amounts of money. "A few dishonest actors can do huge amounts of damage," he noted.

In some cases there are health care providers who run operations whose entire focus is to take advantage of a government system and "who have no other legitimate business," said Mr. Sparrow. The risk of fraud, he cautioned, is most dangerous when loopholes in the system present a professional or business opportunity.

The impetus for the California study began in April 2004, when the California Bureau of State Audits--as part of a 164- page study--concluded that the state's Fraud Assessment Commission and state insurance commissioner had spent an average of $30 million a year for five years to reduce fraud costs without any effective strategy in mind.

Under a 1991 law creating the fraud fighting program, insurers and self-insured companies have been assessed to fund its operations. The latest fiscal year will see the operation hand out $21.4 million to district attorneys and $16.1 million to the insurance department's fraud division.

"Neither the fraud commission nor the insurance commissioner has acted to ensure that the assessments employers pay are necessary or are put to the best use for reducing the overall cost that fraud adds to the workers' compensation system," the audit found.

It also found shortcomings in the process used to distribute fraud assessment funds to county district attorneys to maximize their fraud fighting effectiveness.

The audit cited a lack of information sharing to combat fraud between the state's Department of Industrial Relations and the insurance department's fraud division. It said the fraud division's special investigative unit had no program to ensure carriers complied with fraud reporting requirements.

In addition to the problems found by the audit bureau, another defect that concerns the fraud commission is the repackaging of drugs that is allowed under the state's Workers' Compensation Official Medical Fee Schedule, which was the subject of a report by the Rand Institute for Civil Justice and Health in May.

According to Mr. Zachry, there is a large legal loophole that permits repackaging of drugs into smaller units at higher prices. By way of example, he said a $100 bottle of 100 pills might be repackaged into 25 bottles of four pills each with a new average wholesale price of $250 a bottle.

Mr. Sparrow noted that what data there is about fraud generally concerns audits that have been conducted, money recovered from prosecutions and number of cases made, which he described as providing information about "standard law enforcement metrics rather than the underlying scope of the problem."

Christine Baker, executive director of the Commission on Health Safety and Workers' Compensation, said "you really can't measure 'fraud' because fraud is a legal term," but what the study proposes to do is measure the degree of potential fraud in the system.

The request for proposals developed by her commission at this writing had not been released but was expected to be given full funding.

Language in the RFP draft calls for a study of the extent of workers' comp medical overpayments and underpayments of all types in order to allocate spending to detect and evaluate suspected medical provider fraud.

It also seeks recommendations for detection and monitoring of abuse and fraud in the workers' comp system and the identification of "potential vulnerabilities and suspected perpetrators of fraud."

Besides identifying measurement systems, the RFP calls for baselines to measure medical overpayments and underpayments of all types, including suspected fraud, waste, abuse billing and processing errors.

It asks for benchmarks to monitor performance of fraud reduction programs and recommendations for "appropriate measures and tools for detecting suspected fraud."

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One potential loophole to be examined is the repackaging of drugs into smaller units at higher prices.

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"A few dishonest actors can do huge amounts of damage," warns one expert.