On the buyers' side, premium fraud occurs when businesses reduce their workers' comp premiums by unscrupulous means. Some firms may not account for all employees on the payroll. Others may misrepresent employees' jobs--such as a construction company with an inordinate portion of clerical workers (low risk of injury) versus construction "on-site, hard-hat" workers (higher risk of injury).

Other companies may hide a history of injuries and risk by changing their name and reorganizing. One misrepresentation that has become increasingly prevalent is the misuse of workers designated as contract employees.

The potential for premium fraud is vast. While claimants and service providers can only victimize the system after a claim is made, there is a risk of premium fraud with every policy.

Key indicators of premium fraud include:

o Employers who operate businesses without proper licenses or registrations.

o Employers who pay workers in cash.

o Employers who pay for injured employees' medical bills rather than reporting the accident to the workers' comp carrier.

Another type of fraud occurs when medical providers seize upon workers' comp cases to make hefty profits. Doctors may bill for tests and procedures that never took place or prescribe extensive treatments for minor injuries.

Red flags for provider fraud include:

o A treatment regimen beyond the norm for a particular injury.

o A team of professionals with a repeated claim history.

o "Cookie-cutter" medical treatment and billing records.

o High incidence of prescribing a multitude of prescription drugs.

Underwriting, loss and treatment data tools can provide checks and balances to avoid lost premium and fraudulent claim payments. Fortunately, technology now allows carriers to run such queries in an automated fashion.

Insurers are using sophisticated software and databases to systematically spot employee, employer and provider fraud. Knowing what to look for and where to find it protects honest claimants, policyholders and caregivers from the negative impacts of fraud.

Reducing workers' comp fraud requires initiatives in a range of areas. One positive development is that state insurance departments are creating more stringent regulations and increasing resources for state fraud bureaus. In many instances, the increase in resources is funded by the insurance industry.

Major states are taking the lead.

In New York, Governor Eliot Spitzer signed a bill in March that will help combat fraud as part of a workers' comp overhaul. In California, Insurance Commissioner Steve Poizner recently formed a blue-ribbon Advisory Task Force on Insurance Fraud.

Changing public acceptance of insurance fraud is another important step. Nearly one out of four Americans says it's okay to defraud insurers, according to a 2003 survey by Accenture Ltd. The insurance industry still has a lot of work to do to change the public's tolerance of this type of crime.

Within the insurance industry, one of the most effective ways to combat workers' comp fraud is the application of antifraud technology. The arsenal of fraud-fighting tools includes an all-claims database, as well as link analysis, data visualization and claims scoring tools.

As legislators strengthen workers' comp laws, opportunities for fraud can be curtailed. These efforts should be bolstered by continuing efforts to alter the public's tolerance of insurance fraud.

For insurers, the key to discovering workers' comp fraud is data. By analyzing the claims and premium data insurers already collect, investigators can discover hidden fraud indicators and catch the individuals, businesses and providers who perpetrate scams.