Category: Daily News

The California Department of Insurance announced its decision in a major insurance case pitting a small business against a Berkshire Hathaway owned workers’ compensation insurer that it said used a complex insurance scheme to circumvent regulatory review of its rates and policy terms to the disadvantage of small and medium sized businesses.

California Insurance Company, a Berkshire Hathaway company, filed one set of rates and insurance policies with the Department of Insurance, which it then sold to Shasta Linen, a small family owned business, and then followed that by having another Berkshire Hathaway company sell Shasta Linen a second insurance policy with different rates and terms that had never been submitted to the department for review as the law requires. California Insurance Company is the seventh largest workers’ compensation insurer in California by premium volume.

The lure for small businesses like Shasta Linen was seemingly attractive lower workers’ compensation premiums, but that attractiveness evaporated when the small business owner realized they were on the hook to pay the cost of workers’ compensation claims which eclipsed its original premium savings.

“This is a case of if it sounds too good to be true, it probably is,” said Insurance Commissioner Dave Jones. “The evidence showed that California Insurance Company filed one set of rates and policies, sold it to a California business, and then had one of its affiliates sell the same business an insurance policy with another set of rates and terms which had not been filed with the department.”

The scheme – Shasta Linen originally purchased a guaranteed cost workers’ compensation policy from California Insurance Company. Guaranteed cost insurance policies have rates based on the average historical losses of the insured business, modified by their own experience with worker injuries as compared to other businesses hiring workers’ of the same type. When a business buys a guaranteed cost policy it knows what its rates will be for the duration of the policy.

The insurance company later had one of its affiliates – another Berkshire Hathaway entity – sell Shasta Linen a second insurance policy called EquityComp, which is not a traditional guaranteed cost workers’ compensation insurance policy. This second insurance policy was a retroactive non-linear insurance policy, which adjusted the rates paid based on current loses and provided no experience modification of rates based on the employers’ claims experience.

Under the EquityComp insurance program, the risk of claims was essentially shifted back to the small business, which would end up paying additional premiums and fees in the policy term if it suffered from increasing claims. The second insurance policy was written by another Berkshire Hathaway company – Applied Underwriters Captive Risk Assurance (“AUCRA”), which is in the same corporate holding group as California Insurance Company and shares the same board of directors and executives.

This new EquityComp insurance program essentially left Shasta Linen self-insured, and also locked it into potentially making various ongoing payments to the insurance company for seven years, well beyond the three-year period of the policy, as well as the one-year period for the typical guaranteed cost policy.

The commissioner’s decision found that in the three years before it introduced EquityComp, California Insurance Company’s profits were $47 million and in the four years since introducing EquityComp the company’s profits were $220 million. The net loss ratio of California Insurance Company has fallen from 77.7 percent to between 19 and 30 percent, since it started offering EquityComp, compared to an industry annual average net loss ratio of over 80 percent.

The EquityComp insurance policy not only changed the rates to be paid by Shasta Linen, it also added new, expensive cancellation and non-renewal penalties. For example, under the guaranteed cost policy a business paying $300,000 in premium that cancels its policy after 100 days is liable for $114,000, while that same business cancelling under the EquityComp policy would be liable for more than $1.1 million. Under the original guaranteed cost policy there was no non-renewal penalty, but when Shasta Linen did not renew the EquityComp policy it was sent a bill for nearly $250,000.

In addition the new EquityComp insurance policy had an additional term that sought to deprive Shasta Linen of its right to appeal to the insurance commissioner and to have its dispute decided under California law — instead, the unfiled EquityComp insurance policy required all disputes to be governed by Nebraska law through arbitration in the British Virgin Islands.

When confronted with demands for higher payments under the EquityComp insurance policy, Shasta Linen brought the case before the insurance commissioner. The commissioner found that California Insurance Company and AUCRA failed to file the EquityComp insurance policy or its rates with the Department of Insurance, contrary to California law.

Commissioner Jones’ decision also found that California Insurance Company, in applying for a patent for EquityComp, stated that its objective was to circumvent regulatory oversight. Jones concluded that the EquityComp insurance scheme was illegal and void as a matter of law, because it was not filed with the Department of Insurance for review. The Commissioner’s order relieved Shasta Linen of having to make the additional payments under the EquityComp insurance policy and ordered California Insurance Company to repay any amounts paid by Shasta Linen in excess of the premium under the guaranteed cost policy.

“California employers should be able to trust that their insurance companies are doing business by the book and not exploiting them in the name of profit,” Jones continued. “Unfiled rates and unfiled major policy terms are void as a matter of law.”

During the hearing process, the department became aware that other state departments of insurance have also taken action to prohibit the sale of EquityComp and similar insurance programs.

As a result of this decision, Commissioner Jones has also directed the Department of Insurance to determine whether other unfiled insurance policies and rates are being sold by other Berkshire Hathaway companies and other workers’ compensation insurers. The outcome of that evaluation will determine what action the commissioner takes next, ranging from market conduct examinations, financial examination, and enforcement actions with potential penalties.

The Department of Health and Human Services Office of the Inspector General (“OIG”) and the Department of Justice (“DOJ”) released the FY 2015 Health Care Fraud and Abuse Control Program Annual Report. The Annual Report details the enforcement actions and the monetary gains from efforts by the OIG and DOJ to fight fraud and abuse throughout the prior fiscal year..

The Annual Report estimated that settlements and judgments resulted in approximately $2.4 billion returned to both the government and private parties in 2015. The Annual Report estimated that from 2013 to 2015, the return on investment for the Program has been $6.10 for every $1.00 expended (down from the previous calculation of $7.70 for every $1.00). Further, the DOJ convicted 613 defendants, and the OIG brought 800 criminal actions against individuals and entities involved in health care fraud and abuse-related crimes. The OIG also excluded 4,112 individuals from participation in federal health care programs in 2015. In Medicare, medical professionals may be banned from seeking money to see patients if they’ve been convicted of defrauding a health care program or fraud-related offenses.

But those banned providers have no problem starting a second career in California’s workers’ compensation system. Recent criticism argues that no such facility vetting occurs on a regular basis for workers’ compensation medical treatment. For example, Medicare banned Dr. Thomas Heric in 2006 after he pleaded guilty to charges related to writing reports based on diagnostic tests that turned out to be fraudulent. Heric then found a new line of work in the workers’ compensation medical system. His job was to review data on injured workers’ sleep patterns and issue reports needed to bill insurers. Five years later, prosecutors accused Heric of fraud again. That case is pending in Orange County Superior Court. Heric’s attorney, Robert Moest, said Heric stands by the reports and is fighting the charges.

There have been numerous successful criminal and civil health care fraud investigations in 2015 by the OIG and DOJ. These included: an $800 million settlement in which a company allegedly paid kickbacks to physicians through selling interests in exchange for referrals; a $54 million settlement by drug companies for knowingly underpaying rebates owed under the Medicaid Drug Rebate Program; a 156-month imprisonment and $1.2 million restitution payment for an individual medical supply company owner for submitting false claims to Medicare for hundreds of medical devices; a $47 million settlement by a laboratory for paying physicians kickbacks for patient referrals and billing for medically unnecessary testing; and the largest national health care fraud takedown in history charging 243 individuals, including 46 medical professionals, for alleged participation in Medicare fraud schemes for approximately $712 million in false billings.

The OIG’s audit and evaluation process found some key emerging issues in the Annual Report, including: Medicaid Home Health services; terminated Medicaid providers; access to Medicaid managed care services; payments to delinquent providers; non-emergency medical transportation services; issues in Medicare Part D; and the skilled nursing facility payment system. CMS reported that the national Medicaid improper payment rate for 2015 was 9.8 percent or $29.1 billion (an increase from the 2014 rate of 6.7 percent or $17.5 billion). Also in 2015, CMS awarded a contract for a pilot program to estimate the possible fraud in the Medicare program, specifically in the Home Health benefit. This pilot program includes a review team of health care clinicians, analysts, policy experts and fraud investigators that will review possible fraud and determine whether law enforcement should be involved.

Health care payers should be aware of the concentrations of the Annual Report, as many of these areas will likely remain a focus in 2016. In 2015, the DOJ Civil Division Fraud Section focused on hospitals and physicians. This trend is one that payers should watch for in the future. The DOJ stated in the Annual Report it was concerned with hospitals and physicians treating patients on an inpatient basis when they could have been treated as outpatients. The DOJ also stated that a key area of concern was in violations of the Stark Law for physicians with ownership interest in health care entities. Further, the DOJ civil division recently has been litigating more cases that would have normally been settled in the past. This trend may continue in upcoming years.

Many of the recent settlements from providers have been in regards to excessive physician compensation. Several large settlements have resulted from findings of physician compensation that was in excess of fair market value, not commercially reasonable and based on the volume or value of referrals. Further, the DOJ has emphasized a recent focus on individual accountability and corporate responsibility. It is likely these trends will continue as well.

The State Compensation Insurance Fund is seeking to cut its workers’ compensation rates, per a recent filing with the California Department of Insurance.

The rate filing also includes an overall 9.5 percent rate reduction due to improvements in State Fund’s claims costs and goes into effect next year.

“An important part of State Fund’s purpose is to provide fair pricing. We have filed a new pricing structure with the California Department of Insurance (CDI) that will further enhance our pricing accuracy and rate stability for our policyholders,” said Gina Simons, communications director for State Fund.

State Fund said in a communication sent out to insurance brokers that it is evolving its pricing structure by introducing additional pricing ranges and risk characteristics “that will further enhance pricing accuracy and make our rates more stable year over year.”

Although the rate action will have an overall effect of a decrease, individual policyholders may see their rates increase or decrease depending on their individual loss experience, Simons said.

“Once the filing is accepted by CDI, we anticipate it to be effective Sept. 1, 2016,” Simons added.

Last week the SCIF also released its 2015 Annual Report which is now available online. The report profiles financial performance in 2015 highlighted by an increase of $271 million in net income, which is 14 percent more than in 2014. Other important highlights include – 138,000 policies were written in 2015 – net premiums earned were $1.6 billion – policyholders’ surplus grew by $164 million since Dec. 31, 2014, and net investment income was $731 million.

“2015 was a pivotal year for State Fund’s transformation into the agile and efficient workers’ compensation carrier we will become,” stated Vernon Steiner, State Fund President and CEO. “Under the oversight of our Board of Directors, we began this transformation with the goals of strengthening our culture and improving our business processes and technology.”

Despite this favorable financial achievement, State Fund’s Board of Directors did not declare a dividend on new or renewal policies that incepted during the 2015 calendar year. Instead, during 2015, State Fund designated an additional $750 million dollars as restricted surplus to cover future expenses for pension and other healthcare benefits. It also continues to carry reserves for losses, anticipated future claims, and expenses that are prudent and adequate for our operations.

This proposed rate reduction is atypical good news for the California workers’ compensation marketplace. California employers generally tolerate unrelenting premium increases. At least for now, other states are facing the bad news.

For example, Florida businesses could soon be paying almost 20 percent more for workers’ compensation coverage. In response to a recent decision from the Florida Supreme Court, the National Council on Compensation Insurance (NCCI) filed a 17.1 percent rate increase with the Florida Office of Insurance Regulation (OIR) for all new, renewal and additional policies in effect on a “pro-rata” basis. It’s the first rate filing from NCCI, which files on behalf of 260 Florida workers’ comp insurers, since the Florida Supreme Court struck a devastating blow to the state’s workers’ compensation system.

The U.S. Supreme Court on Thursday imposed some limits on the kind of fraud claims that can be brought against federal contractors in a case involving a suit against one of America’s largest hospital operators over a woman’s death at one of its facilities. More than a dozen major healthcare organizations and associations have jumped into the Supreme Court case over the validity of a legal theory now used to bring many fraud lawsuits against them.

But the 8-0 ruling was not the broad victory for business sought by the company, Universal Health Services, and other healthcare providers are fearful of suits under the U.S. False Claims Act, which lets individuals make claims that the federal government has been defrauded.

The case focuses on situations in which whistle-blowers allege providers have submitted false claims to government programs by failing to follow certain regulations. That legal theory is known as “implied certification” and has been accepted by some federal appeals courts and rejected by others. The justices threw out a 2015 appeals court ruling that had allowed the parents of Yarushka Rivera to sue Universal Health Services under the False Claims Act, but sent the case back to a lower court, meaning the suit could potentially still proceed.

Rivera suffered a fatal seizure in 2009 at age 19 a mental health facility owned by the company in Lawrence, Massachusetts. The lawsuit said the facility provided “gravely inadequate treatment” and used “unsupervised and unqualified personnel.” Rivera’s parents, Julio Escobar and Carmen Correa, accused the company of defrauding the government because it was getting federal Medicaid funding to provide treatment to low-income people and did not comply with personnel regulations at the Lawrence facility.

The ruling represented a partial victory for the business community because it rejected the lower court’s expansive view of a company’s liability under the False Claims Act. Roy Englert, King of Prussia, Pennsylvania-based Universal Health Services’ lawyer, said he was pleased the justices threw out the appeals court ruling and set a “new rigorous standard” for determining if the claims can move forward.

The ruling “accepts the basic notion that fraudsters can’t provide shoddy services to the government and expect payment without incurring significant liability,” said David Frederick, the lawyer for Rivera’s family.

Businesses had hoped the justices would put more limits, or disallow completely, lawsuits based on a federal contractor’s failure to meet certain legal or regulatory requirements not specifically outlined in a government contract. The court instead said such lawsuits can be filed as long as they are relevant to the government’s decision to make the payment to the company.

Justice Clarence Thomas, writing for the court, said the parents “may well have adequately pleaded a violation” of the fraud law, but added that the False Claims Act “is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations.”

The Obama administration had backed the parents.

The DWC will enforce lien claimants’ use of a Uniform Assigned Name (UAN) beginning June 25, 2016. This is a uniform naming convention which ensures that parties are properly associated to cases in EAMS . The UAN is currently used by attorneys, claims administrators and lien claimants.

Effective June 25, 2016, lien claimants must use their UAN when filing a Notice and Request for Allowance of Lien and Application for Adjudication or their attempt to do so will result in failure. This requirement applies to all filing methods (OCR, EForm, and JET). It is advised that all lien claimants check the UAN Lien Claimants search page to verify their exact UAN name that must be used when filing documents.

Lien claimants who do not have a UAN should email the Central Registration Unit at CRU@dir.ca.gov. Please include an attachment with your business letterhead in the email request . The new assigned name or information will be posted within 10 business days of receipt of the request.

This new mandate is likely to become an additional tool in the claim administrator’s health care fraud prevention process. The true identity of fraudulent medical providers is often hidden behind fictitious business names, medical management companies who file liens in their name, as well as collection companies who do the same. In many instances the true identity of the perpetrator at the top of the pyramid scheme is not clearly visible. Forcing liens to be identified by a single unique number is a step forward since this would at least provide an investigatory thread that can be followed to the culprit’s doorstep.

The Center for Investigative Reporting current investigatory effort exposes fraud in California’s workers’ compensation system. An analysis of more than a million court cases details how workers have been swept into medical billing mills, prescribed unregulated medications and advised to undergo sometimes unneeded or high-risk surgery by doctors who were raking in bribes. The CIR report has now birthed follow up articles in many California leading publications.

The Sacramento Bee in a series of related articles points out that a review of thousands of criminal court records by The Center for Investigative Reporting shows a system in which pay-to-play schemes trump patient care, particularly in unregulated treatments rejected by insurers and “disputed in obscure courts throughout the state.” Prosecutors are pursuing charges against more than 80 medical professionals who have handled more than 100,000 injured-worker cases, most of them originating in Southern California. They allege that the cases account for $1 billion in fraud.

And the Sacramento Bee story suggests that “nobody cares about policing health care for injured workers.” Thousands of unregulated medical providers can spurn legislated checks and balances on medical care in the only-in-California network of 24 workers’ compensation courts. Anyone can demand money – a process known as filing a medical lien – for unregulated medical treatments that include the use of questionable devices, pain creams, shockwave therapies and DNA tests. And in an overburdened system that favors settlements over trials, they often succeed”.

The DWC had this response. “We know there’s a problem,” said Christine Baker, director of the state Department of Industrial Relations, which administers workers’ compensation. Baker’s agency worked with lawmakers on a 2012 law that was meant to limit the filing of medical liens. It established a $150 fee required to demand payment in workers’ compensation courts. It also gave insurers new powers to deny money to providers that aren’t approved to treat injured workers.

Yet claims for unapproved care still are cropping up, Baker said. And the number of liens filed last year is even higher than it was when one of Baker’s advisers initially concluded that the system “rewards bad behavior.” Baker said her department has begun reviewing the medical providers who currently file the largest number of liens. The result: “We do note that many are (criminally) indicted.”

Perhaps the DWC mandate that lien claimants must soon use a UAN is the aftermath of these stunning developments. It would seem at least that the DWC and claim administrators will soon be able to better track the identity of who it is that is asking to get paid.