By Steven Greenhouse
New York Times
January 25, 2007

http://www.nytimes.com/2007/01/25/nyregion/25labor.html

To view the study referred to in the article below, click here http://www.fiscalpolicy.org/publications2007/FPI_WorkersCompShortfall_WithAddendum.pdf

A new study estimates that employers cheat New York State’s workers’ compensation system by not paying $500 million to $1 billion a year in required insurance premiums, forcing other employers to pay higher premiums.

The study by the Fiscal Policy Institute, a liberal research group, found that these illegal underpayments represent 15 percent to 20 percent of all the workers’ comp premiums that are supposed to be paid each year statewide.

Some companies pay no premiums while others underpay by underreporting the size of their work force to qualify for lower premiums, the study said.

Government, business and labor leaders say the noncompliance hurts the state’s business climate by forcing law-abiding companies to pay higher workers’ comp premiums when many corporations are already complaining that their premiums are too high.

"We were surprised to find this magnitude of noncompliance," said James Parrott, the chief economist for the Fiscal Policy Institute. "This noncompliance has helped cause at least two things: very low benefits for injured workers in New York, which are among the lowest in the country, and second, despite these low benefits, workers’ comp premiums that are considered very high."

Mr. Parrott said inadequate data made it hard to pinpoint the exact amount of cheating.

The report asserts that if more companies paid their full premiums, the extra money would enable the state to cut workers’ comp premiums over all and increase benefits for injured workers. The report maintains that a lack of enforcement has emboldened employers to cheat.

"Not being honest on payroll has become almost an accepted practice in New York State," said Art Wilcox, a workers’ comp expert with the New York State A.F.L.-C.I.O. "It hurts the competitiveness of a business that does the right thing. It hurts the competitiveness of an insurance broker who refuses to play games with payroll. And it certainly hurts any insurance carrier who won’t bend the rules because they’re competing against people who will."

Michael Moran, a spokesman for the American Insurance Association, said he found it difficult to believe the level of noncompliance found by the study. "It is very important for insurance companies to be paid correctly for all the people they cover," he said. "They work at it very hard. They try to audit to make sure that things are right."

The Fiscal Policy Institute based its calculations on financial numbers filed with state agencies. It bolsters the finding of a report last year by the state’s association of insurance agents, which estimated, based on inside knowledge of industry practices, that up to 20 percent of New York’s employers did not pay all their required premiums.

"New York’s honest businesses who are playing by the rules have had to subsidize those who don’t even cover their employees or those who seriously underpay for the coverage they do have," said David Dickson, president of the association, Professional Insurance Agents of New York State. "It approaches plain fraud."

Gov. Eliot Spitzer has pledged to make major changes in the workers’ comp system, hoping to hold down premiums and increase benefits. The maximum benefit an injured worker can now obtain is $400 a week.

"Although we do not know the magnitude of the underreporting of workers’ comp obligations, we recognize that it is a serious problem," said Christine Anderson, a spokeswoman for the governor.

Insurance experts say that a company with, say, 100 employees might tell its insurer that it has only 70 workers and then pay premiums for only 70.

But if any of the company’s 100 employees are injured on the job, they would be likely to qualify for worker’s comp benefits — either medical coverage and weekly benefits in lieu of wages — when they are out of work. This means that the amount collected in premiums might fall short of the amount spent on benefits. As a result of such a shortfall statewide, insurers often pressure New York officials to increase premiums for all employers in an effort to balance total premiums paid in with total benefits paid out.

"The lack of aggressive enforcement forces everybody in the process to bend the rules," said Mr. Wilcox of the A.F.L.-C.I.O. "If insurance company A enforces the law but all the rest don’t, then the client will end up with insurance company B or C or D."

In finding underpayments, the Fiscal Policy Institute first looked at the total amount of employee payroll — $389 billion — that the state’s employers reported for 2003 to the Labor Department and Tax Department when they paid their unemployment insurance taxes. Then the institute examined the total payroll reported to the state agencies and the industry association that handle payroll data for employers paying workers’ comp insurance. The total payroll reported for workers’ comp came to just $311 billion (after the policy institute made some adjustments to account for excluded job categories.)

"Manufacturers are paying significant amount of workers’ comp, and they obviously pay more than they need to because it looks like a large percentage of companies aren’t paying into the system," said Randall Wolken, president of the Manufacturers Association of Central New York. "If we’re inadvertently increasing some companies’ costs, we inadvertently drive some companies out of the state."

Last July, the state’s insurance superintendent, Howard Mills, denied a request by insurers to increase workers’ comp premiums, saying, "The insurers’ efforts to fight fraud — both claimant and employer fraud — can be said to be anemic at best."

At the time, Mr. Mills, who stepped down last month, said that without a greater commitment by insurers to fight fraud, it would be hard to justify any overall increase in premiums.

One common practice, insurance experts say, is for companies, often taxi or trucking companies, to say that their drivers are independent contractors (who are not required to be part of the workers’ comp system) when by many definitions they are actual employees.

As part of the campaign against fraud, Manhattan District Attorney Robert M. Morgenthau and the State Insurance Fund, a state agency that provides workers’ comp coverage to 194,000 employers, arrested Anthony Spychalsky last month and charged his company, NY Ceiling & Drywall, with underpaying premiums by at least $207,000. Mr. Spychalsky pleaded guilty on Jan. 8 to insurance fraud.

Many industry experts say the State Insurance Fund, which focuses on providing coverage to small business, is more aggressive in pursuing premium fraud than private insurance carriers.

Robert Lawson, the insurance fund’s spokesman, said that in 2006, the fund’s 200 auditors did 88,398 field audits. All the audits yielded an additional $89 million in revenues, coming to $493,000 per auditor, Mr. Lawson said.

Mr. Dickson, the head of the insurance agents’ group, said, "The level of audits that are conducted by the commercial carriers and the frequency of the audits, I don’t see that at the same standard as the State Insurance Fund’s efforts."

Kenneth Adams, president of the Business Council of New York State, said, "Whatever can be put in place to limit and reduce fraud by employers or injured workers, that will produce benefits throughout the system."

Copyright 2007 The New York Times Company

To view the study referred to in the article above, click here
http://www.fiscalpolicy.org/publications2007/FPI_WorkersCompShortfall_WithAddendum.pdf