No-Fault Insurance Fraud in N.Y. State
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More cars are insured in New York—8.6 million—than in any state except California. For this reason, problems in the state’s $8.2 billion private passenger auto insurance market get the prompt attention of the nearly 100 auto insurers doing business here. Recently, a problem emerged like no other in the history of auto insurance in New York State.
Investigations by insurers and law enforcement agencies show that organized crime rings along with a small number of unscrupulous medical providers and attorneys are manipulating the personal injury protection (PIP) part of the New York state no-fault auto insurance plan at the expense of the state’s policyholders. These elements are actually imposing a tax on every honest driver in New York State. Sadly and ironically, the current New York system is enabling this explosion of abuse.
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Scope of the PIP Problem in New York State
Medical no-fault (PIP) claim costs are rising faster in New York—by far—than anywhere else in the country and they are accelerating. Last year claims costs in the state rose by almost one-third (32.1%,) more than twice the 15.0% increase in second-place Florida (see Figure 1). In 1999, claims costs in New York rose by 11.1% while in 1998 the increase was just 4.5%. The sudden surge in claims costs is the result of greater frequency of claims as well as extraordinarily large increases in the average cost per claim. Both phenomena are almost entirely fraud-driven. Medical no-fault claim frequency in New York is 30% above the median no-fault state while New York’s average cost per claim is more than double the no-fault median.(1)
The astonishing rise in frequency and cost of medical no-fault claims cannot be explained by any economic factors such as increases in medical inflation. Medical professionals under the no-fault law in New York State are paid according to a fee schedule which fixes the price for medical goods and services. According to the U.S. Bureau of Labor Statistics, the cost of providing medical services rose 4.1% last year. However, the average PIP claim in New York State jumped 19% over the first nine months of 2000 and 63.5% over the period 1995 to the end of the third quarter 2000, according to insurance industry figures from the National Association of Independent Insurers. This compares with a 33% increase in average PIP claims over the same time period for other states. In addition, the average bodily injury liability claim in New York, as of the third quarter 2000, is 64% higher than the average for other states, which, even taking into consideration the higher cost of medical treatment in New York, is a substantial difference. (Bodily injury liability claims are filed when the policyholder injures someone else and that person's claim reaches the threshold to file a lawsuit.)
Evidence of major fraud in New York’s no-fault auto insurance system is irrefutable. As illustrated in Figure 2, the number of auto no-fault fraud reports received by the New York Insurance Fraud Bureau (IFB) has nearly tripled in recent years, from 4,393 in 1995 to 12,372 last year.(2) No-fault fraud reports now account for 55% of all reported insurance frauds, up from just 22% in 1995 (Figure 3). The National Insurance Crime Bureau reports that last year, 90% of its fraud referrals in New York involved auto insurance fraud. The rapid increase in no-fault fraud reports masks what otherwise would be a significant overall decline in reported insurance fraud in New York. Excluding no-fault auto, the number of fraud reports actually plunged by 38% between 1995 and 2000!
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Economic Implications
The economic implications for New York drivers are painfully obvious. Because rates have not kept pace with costs, auto insurers on average are paying out almost twice as much as in PIP claims as they collect in premiums. For every $100 insurers took in during the first nine months of 2000, they paid out more than $177 in claims. Not surprisingly, auto insurers are forced to withdraw from the market and/or raise prices.
Sharply higher costs and the withdrawal of capacity from the market are leading to higher auto insurance premiums and forcing more drivers to seek coverage through New York’s Automobile Insurance Plan (the NYAIP is the state’s market of last resort for high-risk drivers), where the cost of automobile insurance is significantly higher. Already the number of applications to the plan is surging (see Figure 4). In 2000, the plan received 227,131 applications, an increase of 62% over the 140,288 applications received in 1999. Through the first nine weeks of 2001, applications to the plan were up 277% over the same period last year. It is estimated that the NYAIP will receive at least 500,000 applications this year, a 125% increase over 2000.
No-fault fraud is leading directly to higher auto insurance costs in New York State, particularly in the most fraud-ravaged parts of New York City. As of March 1, 2001, a clean adult driver in Brooklyn insured through the NYAIP carrying just the mandatory liability coverage of 25/50/10 and basic no-fault coverage will pay $3,100. The no-fault portion of the coverage alone accounts for $1,681 or 54% of the total premium. Adding collision or comprehensive coverage will cost an additional $4,000. Increasing limits of liability to 100/300 adds another $700 to the premium. A 24-year old male in Brooklyn, for example, would pay $5,831 just for mandatory coverage. If the driver has tickets or accidents or is an inexperienced driver, the above premium could be as much as 200% higher. In many cases, the annual cost of insurance could well exceed the value of the car itself.
It is estimated that no-fault fraud will cost insurance companies doing business in New York State and their policyholders one billion dollars this year alone. Insurers have already spent millions of dollars to battle medical no-fault fraud in New York through investigations and prosecutions of those who perpetrate fraud, but the problem remains overwhelming. Only serious reforms, along with the continued efforts of insurers and law enforcement agencies can stop this. Failure to address this problem swiftly will force honest policyholders to subsidize fraudulent and abusive criminal activities and will reinforce the notion that New York’s no-fault system is an open checkbook for criminals.
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New York’s No-Fault System: What it Is and What it’s Intended to Do
New York’s no-fault auto insurance laws became effective on February 1, 1974. Today, 23 states, the District of Columbia and Puerto Rico have some form of auto no-fault statute in force. No-fault auto insurance systems were developed to keep auto insurance costs low by keeping small claims out of the courts. Each insurance company compensates its own policyholders for the cost of minor injuries regardless of who was at fault in the accident. These so-called “first-party” benefits, which are a mandatory coverage, vary from state to state. In New York, a policyholder is eligible to receive compensation for medical fees, lost wages, funeral costs and other out-of-pocket expenses without having to prove the fault of the other driver. This type of coverage is referred to as “Personal Injury Protection” (PIP) coverage. New York’s no-fault law also restricts the injured party’s right to sue for non-economic damages such as pain and suffering unless the severity of their injuries satisfies certain “verbal thresholds” (permanent significant disfigurement, for example) or when the total cost of a claim exceeds $50,000. If a claim exceeds the $50,000 threshold or the verbal threshold is satisfied, the injured party may sue for damages as a bodily injury claim. There is an incentive for claimants and their attorneys to “build-up” a claim in order to establish a basis for a potentially much more lucrative filing of a bodily injury suit.
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The Nature of Fraud in New York Medical No-Fault Coverage
Fraud in New York’s medical no-fault system is a billion dollar business. The sheer magnitude of the problem in dollar terms and the fact that claims costs are accelerating far more rapidly than in any other state suggests a deliberate, well-organized and sophisticated effort to defraud auto insurers. It is well known from insurer and law enforcement investigations that organized criminal elements have conspired with “medical mills” for the express purpose of defrauding the no-fault system. Casual or opportunistic fraud and ordinary claims inflation are not the drivers of such dramatic change.
The Anatomy of a Fraud
The more common crimes associated with auto insurance are staged accidents, stolen identities, fraudulent police reports, and “jump-ins.” These fraudulent activities are aimed at creating an accident scenario from which costly and fraudulently contrived medical claim payments can be forced from auto insurers.
Typically, owners and managers of medical clinics pay “runners” or recruiters to arrange minor auto accidents and send individuals supposedly injured in the accidents to the clinics for treatment. The runners recruit drivers to cause the accident and passengers to ride in the cars. Being a runner is a lucrative business, with each “referral” earning the runner a fee ranging from $800 to $1,300—paid by the attorney or medical mill. Usually, two to four passengers are recruited to maximize the profit per accident. Insurers have also reported that the same vehicle is sometimes used in several staged accidents. One insurer reported receiving 21 PIP claims from a single vehicle involved in three separate accidents within a short period of time. Another insurer received eight PIP claims from the same insured on three different vehicles within a span of just four months. The individual was receiving treatment for all eight incidents simultaneously. When investigated, none of the cars involved in the alleged accidents could be found, none of the “injured” parties would talk. The policyholder was found to have a long criminal record.
Although staged accidents are intended to cause no real injuries to the defendant driver or passengers, the accidents are reported to police so that a record can be created to support the fraudulent insurance claims. Some claimants, despite the absence of any apparent injuries, insist on being transported to a hospital by ambulance in order to establish the “legitimacy” of their claims. Runners then direct them to clinics for bogus medical treatment, often driving the “passengers” there themselves. The clinics then submit claims under the insurance policy of the runner or another ring member who had insured the car.
Medical bills often reach $10,000 to $20,000 per passenger and can go as high as $50,000 per passenger under the New York no-fault law. A single staged accident with multiple claimants generally results in billings for hundreds or even thousands of treatments.
The details of a typical claim are displayed in Case Study 1. The four claimants alleging injury from this accident had a combined total of 482 treatments within approximately four months of the date of loss (date of accident). Billings to the claimant’s auto insurer totaled $41,902. The nature and frequency of treatments strongly suggest the fraudulent nature of this claim. Collectively, the four people alleging injury in this particular “accident” received 149 chiropractic/orthopedic treatments, 139 physical therapy sessions (including massage therapy), 133 acupuncture treatments, 28 “diagnostic” procedures (such as MRIs) and numerous other medical services including treatments for purported neurological, psychological and dental problems. Claimants also received transportation to and from visits to clinics on numerous occasions (a permitted benefit under the New York’s PIP laws), including one day where no treatments were rendered. New York’s PIP laws also permit claimants to receive a wide range of medical supplies. Claimants in this case received supplies ranging from massage devices to “tens units” (an electrical device used to relax muscles) with at least one claimant receiving a whirlpool. Also shown in Case Study 1 is a calendar documenting the types and dates of treatments for one of the claimants for just one month. Receiving medical treatments was nearly a full-time occupation for this particular claimant.
Medical services sought by such fraud rings are not only unnecessary, but many services are never actually provided at all. Passengers typically make false claims of multiple injuries to maximize their claims and, in addition, file lawsuits against companies alleging bodily injuries. Settlements of these lawsuits range from $3,500 to $22,000 per passenger.
Owners and managers of unscrupulous medical clinics give kickback payments to runners and also produce fraudulent bills to insurers in which the unauthorized signature of doctors has been cut out from other documents and pasted on fake medical bills.
Lastly, provisions of the no-fault law itself are contributing to the medical fraud problem. The law currently can be manipulated to effect excessive medical utilization, expensive testing, along with other palliatives to build up a pain and suffering claim to meet the definition of serious injury. Medical treatment authorized under the present law includes aromatherapy, biofeedback, massage, acupuncture, thermography and psychotherapy sessions for post-traumatic stress. Overutilization of these non-primary treatments allows claimants to build up medical expenses in order to satisfy the no-fault verbal definition for lawsuit eligibility. This was the same problem being experienced in New Jersey before new no-fault medical protocols were introduced there in 1998.
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The Many Faces of Medical Fraud
Flaws in New York’s no-fault laws have permitted perpetrators of fraud to get away with a surprisingly wide array of abuses. Virtually all insurers have indicated significant fraud and abuse in the following areas:
Provider Billing:
Billing practices associated with “medical mills” are a major source of fraud in New York’s medical no-fault system. Many insurers have seen numerous cases where the provider has billed for services not rendered on behalf of the insured. Insurers have used their Special Investigation Units (SIUs) to interview policyholders who have verified that they did not receive any of the treatment billed on their behalf. In addition, insurers have required that some policyholders submit to examinations under oath which revealed facts that ultimately led to denial of payment for medical bills. Insurers have also inspected numerous medical facilities, even demanding actual sign-in sheets to verify visits by insureds. In several instances, insurers have found that certain medical facilities do not even exist and the provider was just running a medical billing mill.
Durable Medical Suppliers:
Insurers have seen numerous occasions where policyholders have complained that they did not receive all of the durable medical supplies that the insurer was billed for. Some insurers have mentioned that the same piece of equipment has been billed for on multiple occasions or resold to another person and that the price charged is far in excess of the device’s actual value. One insurer, for example, recently investigated a case in which it was billed for supplies allegedly provided to three separate claimants. Each of the three bills and supporting justification were identical, except the name was changed, suggesting that the provider probably did not provide the devices as billed. Many insurers feel that fraud committed by providers of durable medical devices is significant. SIU units have also investigated numerous claims where the provider “padded” the bill with additional items that the insured didn’t receive although they received certain items.
Transportation “Provider” Bills:
Despite the clear and obvious conflict of interest, some of the attorneys and doctors in New York actually own a share of the transportation companies involved in transporting claimants to their “clinics.” Insurers have been able to prove that the insured “did not” receive any transportation to the doctor’s office, although significant billing was received. Transportation costs to and from a medical clinic can easily build up into the thousands of dollars. SIUs have been successful in determining that in many instances the insured was unaware of this billing practice and did not receive this service.
Lost Wages:
In some cases, unemployed insureds attempt to file for loss wage benefits under the No-Fault provisions to supplement their payout. Some have forged documents, increasing their hourly rate, number of hours or days worked to enhance the benefits they receive.
Household Help:
The No-Fault coverage allows for the injured insured to be compensated for household help required because of their injury. Some insureds have claimed to have a household helper when upon verification one never existed at all. Some of the insureds that have actually had household help have attempted to inflate the actual days or hours that the help have worked.
Exotic Medical Treatments:
Most insurers are receiving bills for excessive use of services and procedures that are often of questionable medical value. Insurers routinely are billed for:
- Aromatherapy
- Biofeedback
- Acupuncture
- Psychotherapy
- Massages
- Whirlpool Sessions
- Electrical Stimulation
- Thermography
Treatment Frequency:
Treatments such as those listed above as well as others are often administered with such extraordinary frequency that a strong suspicion of fraud is aroused. Chiropractic and physical therapy sessions, for example, often account for one-third of all treatments rendered, acupuncture another third. In contrast, treatment protocols designed for workers compensation and managed care programs utilize a narrower range of modalities as well as effective controls on the frequency of treatments while at the same time achieving maximal medical recovery.
Other Types of Fraud:
Identity Fraud
Claimants in PIP fraud cases are generally paid to feign accidents and injuries. In order to protect their own identities, identities of other individuals are often stolen and medical claims are made on those stolen identities. This practice also permits the same individual to receive “treatments” under many different assumed (stolen) identities.
Bounced Checks
Many policyholders planning to commit fraud obtain insurance using checks that they know will bounce. Many states, though not New York, have laws that allow insurers to deny coverage if an insurance policy is obtained using a check that is returned because of insufficient funds.
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Legal Abuse
Lawsuits
New York’s legal system is also suffering from abuse at the hands of a relatively small number of law firms who represent New York’s PIP medical mills. Attorneys at these firms try to force payment from insurers before the insurer has had an adequate opportunity to review a suspected fraudulent claim by filing and threatening to file bad faith law suits against them. Most insurers are reporting that the number of suits filed against them increased by 100% to 200% last year. One insurer reporting a 164% surge in suits indicated that 74% of those suits were generated by just three law firms.
Attorneys flood the courts with lawsuits by exploiting the fact that claimants (more often the medical mill in cases suspected of PIP fraud) have 180 days or nearly six months to submit proof of expenses to insurers. The insurer, on the other hand, has just 30 days to determine whether to pay or deny such claims. Because suspicious cases often involve multiple claimants receiving hundreds of treatments from numerous providers for up to six months before bills are submitted to insurers, the documentation associated with a single claim could be a foot or more thick. Thorough reviews of suspicious claims are time consuming. If the insurer misses the 30-day deadline, attorneys automatically initiate a legal action against the insurer and file a complaint with the New York Insurance Department.
It is important to note that the proportion of PIP claims with attorney involvement in New York State is above the national average while New York City is far above the national average. According to the Insurance Research Council, 30% of PIP claimants nationally are represented by attorneys compared to as many as 57% in New York City.(3) The data are for 1997 and are the most recent available. It’s likely that more current information on attorney involvement would indicate an even greater disparity.
Inequities in the Arbitration Process
Arbitration is a dispute resolution option that provides parties with a forum and a mechanism to settle their differences without resorting to the courts. The advantages of arbitration include speedier resolution of disputes, lower costs and less uncertainty relative to a court proceeding jury trial. Under New York’s no-fault laws, however, the process is anything but equitable.
First, for a claim to be heard by an arbitrator the insurer must pay a fee of $345 while the claimant (usually an attorney representing the medical provider) pays a fee of just $40. If the claimant wins even $1 in a dispute, the insurer must pay the claimant’s arbitration fee. If the insurer wins, the insurer must still pay its own expenses and is not reimbursed for the $400 arbitration fee.
This lopsided and obviously inequitable system has led to a flood of arbitrations against insurers. In 1989, the New York Insurance Department received 9,000 requests for no-fault arbitration and quickly conciliated about 6,500 of these disputes. About 1,000 disputes that year went to court. Last year, over 73,000 no-fault disputes were submitted for arbitration with a similar number going to court. Virtually none of these requests for arbitration come from claimants. In fact, over 98% these disputes originate with medical providers. One major auto insurer in the state reported a 243% increase in arbitrations in 2000 over 1999.
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Solutions to the Problem
A number of legislative and regulatory reforms have been suggested to address the problematic trends discussed here without affecting benefits to truly injured parties or slowing payments to honest policyholders, medical providers or attorneys.
One measure involves shortening the time for both accident victims and medical professionals to file claims, as other states have done, to give more opportunity to investigate suspicious bills.
Under current law, claimants have 90 days to submit a claim and 180 days to submit proof of medical, wage loss, or other expenses. One new rule, aimed at curbing fraudulent injury claims, would reduce the claim filing period to 30 days and proof of work loss to 45 days. Health care providers would be required to submit written proof of loss within 45 days, down from 180 days. Extensions would be allowed if the claimant could establish "clear and reasonable justification" for failing to meet the deadline. The Insurance Department says that the reduced notification time would allow insurers to look sooner at the treatment plan, thus providing fewer opportunities for unnecessary diagnostic tests and treatments.
Other significant changes being proposed include:
- A “Runner Bill” making the act of being a middleman between a claimant and a medical provider or attorney a Class E felony. Passage of such a bill permits prosecution of a key party to no-fault fraud.
- A bill to allocate $10 million of the $12 million balance in the state’s Auto Theft and Fraud Bureau Account (but not authorized by the Legislature to be spent) to the Auto Theft and Fraud Prevention Board dedicated solely to the investigation and prosecution of no-fault fraud. Use of the money in this way is logical because the funds are contributed by all of the state’s policyholders who will benefit directly from the elimination of this type of fraud. Police departments and district attorneys want to be more involved in the fight against no-fault fraud but are constrained by tight budgets and the particularly high costs of prosecuting such cases.
- A requirement that a no-fault insurer receive notice within five days of treatment from a medical provider for an assignment of benefits to be valid. This bill will provide the carrier with prompt notice of who is treating a claimant so that cost containment efforts can be immediately deployed and the fraud mitigated or eliminated. (This requirement was part of the 1998 reform in New Jersey).
- A bill to clarify that a no-fault insurer can take more than 30 days to pay or deny a claim when the carrier suspects fraud (and has reported the claim to the Insurance Frauds Bureau) or the carrier is questioning the causality of injuries in the accident. (This bill would remedy the Court of Appeals in the Presbyterian Hospital v. Maryland Casualty case, which appears to force 30-day decisions even in cases of suspected fraud).
- A bill requiring that arbitration be the sole remedy for the resolution of no-fault disputes for medical provider assignees. Presently, when attorneys know they will lose a case in arbitration they go to court since trial judges and referees are generally less knowledgeable about no-fault regulations and case law. Over 98% of disputes involve medical assignees and the arbitration system is very fair, with full-time paid arbitrators selected and reviewed by a panel consisting of both trial lawyers and insurers. The arbitration process also allows applicants to appeal to a master arbitrator and file for a trial when the award exceeds $5,000.
- Revision of Insurance Department Regulation 68 regarding arbitration so that each party pays one-half the cost of arbitration. Also, any party that prevails in the whole shall have its half of the arbitration costs paid by the loser.
- A bill granting insurers the authority to void (cancel from the date of policy inception) a policy that the insurer suspects was taken out with the intent of committing fraud. Innocent claimants will be able to obtain benefits from the Motor Vehicle Accident Indemnification Corporation.
- A bill stating that an insurer receiving payment of a deposit premium with a bad check would not provide coverage under the policy. Such a provision is currently law in 37 states. In most cases, perpetrators of staged accidents pay their deposit with a bad check in order to keep their investment to a minimum.
- A bill to establish pre-certification requirements for certain medical procedures, reduce unnecessary medical procedures, develop medical treatment protocols and/or establish alternatives to the current workers’compensation fee schedules. If enacted, insurers would be able to better challenge questionable and unnecessary medical treatments. Insurers are also seeking clarification that the rules and procedures associated with the workers’ compensation fee schedule (and not just the fee schedule itself) also apply to no-fault auto.
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Why Can’t Insurers and Law Enforcement Agencies Fix the Problem?
A natural question to ask is why can’t the state’s insurers and law enforcement agencies fix the problem on their own? Insurers could simply deny claims they suspected of fraud and law enforcement could arrest and prosecute suspecting perpetrators of fraud.
It’s not that simple for several reasons. Challenging cases suspected of no-fault fraud is a lengthy, expensive and uncertain process. As mentioned earlier, New York state law permits medical providers to build up a claim for up to 180 days before proof of expenses must be submitted to insurers. Insurers, faced with a mountain of medical expenses from a myriad of medical providers must decide within 30 days whether to accept or deny the claim. Claims suspected of fraud are not exempted from this 30-day rule (the so-called Presbyterian Hospital decision). If an insurer denies a claim based on the suspicion of fraud a lawsuit will most likely be generated by the attorney representing the medical mill.
Investigations into fraudulent activity are very expensive. The following “simple” case of fraud is illustrative of the problems insurers face (see Case Study 2). A major insurer recently received a first notice of claim involving a single claimant from an attorney nearly three months after the purported date of loss. The insurer subsequently received expense billings from medical providers totaling $17,188 for the single claimant. Suspicious of fraud, the insurer decided to investigate the claim. Initially, the claimant’s attorney refused to produce the accident vehicle for inspection. When the vehicle was finally surrendered from inspection, there was no visible damage. Independent medical examinations (IMEs) were ordered for the claimant as was an examination under oath (EUO). The IMEs came back negative and the claimant no-showed for a total of three EUOs. These developments led the insurer to deny the vast majority of billed charges. The insurer’s cost associated with the investigation of this case so far amounts to $3,626—which includes the costs of the IMEs, travel expenses, police report, plate check, EUO transcriber, legal, clerical and underwriting support, postage, etc. Costs, however, will continue to mount. The claimant has filed a lawsuit and the claimant’s attorney threatens to do the same. The insurer could face between 12 and 40 arbitration actions/suits over the next six years.
A recent suit by a group of insurers against a pair of medical fraud ring leaders shows just how expensive taking a case all the way to court can be.(4) In January 2000 a group of insurers joined forces to file a civil suit for relief under the federal Racketeer Influence and Corrupt Organization (RICO) Act against a group of organized perpetrators of fraud. Collectively, these insurers paid $2.6 million in fraudulent claims and were successful in recovering $1.2 million of that amount. Thirteen months after the coalition of insurers filed their RICO, their expenses in support of that action so far total approximately $500,000 in legal, investigative and administrative time. Costs will likely mount as several of the defendants refuse to settle with their cases appearing to be headed for trial.
Aggressive efforts by insurers and law enforcement are vital, but clearly cannot do the job alone in a system open to abuse. Dishonest operators have found ways to exploit some weaknesses in what was once a model no-fault system. These can be repaired. New York drivers do not have to support criminals.
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(1) Cost and frequency statistics and calculations are based on ISO Fast Track data for the four quarters ending 2000:3.
(2) The 2000 Report to the Governor and the Legislature of the State of New York on the Operations of the Insurance Frauds Prevention Act, New York Insurance Frauds Bureau, January 15, 2001.
(3) Injuries in Auto Accidents, Insurance Research Council, June 1999.
(4) Allstate Insurance Company et al, Plaintiffs v. TMR Medibill, Inc., et al, Defendants.
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