The history of fraud in the California medical system meant to help injured workers goes back decades. And there are strong signs that the latest wave of criminal prosecutions might not mark the final chapter.

The 102-year-old system is built on a simple bargain. Workers give up the right to sue for injuries sustained on the job. In exchange, about 15 million people covered by workers’ compensation insurance in California expect access to free and readily available medical care.

State officials focused on delivering care to workers neglected to build safeguards into the system, according to Dale Banda, a former head of enforcement for the California Department of Insurance.

“You’re dealing with a program that was designed from the beginning not to incorporate fraud as a component,” he said.

It took nearly 80 years for lawmakers to establish the California Department of Insurance’s Fraud Assessment Commission, which collects money from workers’ compensation insurers and distributes it to prosecutors who press the cases.

That was 1991. By then, the system had developed a culture of corruption.

The fraud was so blatant in 1993 that James Little, then president of a workers’ compensation insurance firm, worked with a colleague to pitch the story to television outlets.

“Primetime Live” wound up capturing footage of “cappers,” people paid to recruit patients. They trolled unemployment lines trying to lure laid-off workers to clinics. Journalists put hidden cameras in a fake workers’ comp clinic and recorded jockeying for kickbacks in exchange for patient referrals.

In 1993, “Primetime Live” recorded “cappers,” people paid to recruit patients for workers’ compensation clinics. The practice is illegal. Credit: Primetime Live Credit: Primetime Live

The sham clinic’s leader, using the pseudonym Paul Morgan, confessed on camera that he wanted to help clean up the system – having participated in a half-billion dollars’ worth of fraud.

He recalled that when he was in business, recruiters brought his clinic so many uninjured workers that “we would be surprised and really didn’t know what to do with a person who came through with a legitimate injury.”

Little recalls the era: “It was way out of control.”

And it seemed to get even worse. The system costs more than doubled from $9.5 billion in 1995 to $25 billion in 2002.

In 2004, a state audit found across-the-board shortcomings in state officials’ efforts to measure and investigate workers’ compensation fraud.

That was when the new governor, Arnold Schwarzenegger, aimed his star power squarely at the problem of soaring workers’ compensation costs. He swept through Costco warehouse stores from Burbank to Sacramento with TV cameras trailing him, warning that the problem could force companies out of state.

Schwarzenegger brokered a reform deal with lawmakers that brought down costs, but it is difficult to tell whether it had an impact on fraud as well. State government leaders responsible for workers’ compensation long have struggled to measure the medical fraud problem.

The state’s Department of Insurance commissioned a 2008 study, which concluded that the state’s employers were footing the bill for up to $1.3 billion a year in erroneous payments. The report dealt with errors instead of fraud, it said, because identifying fraud would mean proving criminal intentions.

The overall “error rate” was about twice the current rate in Medicare and Medicaid.

Malcolm Sparrow, a Harvard University management professor, created the method that California officials used to reach the conclusions. He said in an interview that government officials must be willing to measure fraud to control it – and then make key changes. The next step, he said, is to conduct a follow-up study to see whether the errors are falling off.

“It takes a high degree of political courage to do a measurement program rigorously,” Sparrow said. “You have to be prepared to deal with the huge embarrassment” of failure.

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California officials never followed up using the same measurement, leaving no way to determine whether they have succeeded at reducing errors. Instead, the Department of Industrial Relations commissioned a study, unveiled last year, that used different methods to examine medical spending in workers’ compensation.

That study still found problems. Even though workers were not getting hurt worse or more often on the job, medical costs had climbed $1.6 billion from 2007 to 2012.

Barbara Wynn, a researcher with the Rand Corp., led that second study. Her preliminary findings suggest one significant cost driver was the overuse of MRI studies, particularly in Southern California. The MRIs, she said, often were done too early in the course of medical treatment to be clearly medically necessary.

Wynn’s discovery raises the specter that some of those MRIs might have been part of a scam to drum up business.

Indictments unsealed in January show that two firms specializing in MRIs were part of kickback schemes meant to guarantee a steady stream of patients. Since 2007, those MRI firms have billed insurers more than $260 million for services and filed more than 50,000 demands for payment, according to a Reveal analysis of state data.

Charges in that kickback case – dubbed “Operation Backlash” – mostly cover the years since 2012, when lawmakers passed another reform package. The new law added layers of medical review over doctors’ requests for treatment. It also took aim at middlemen who collect money on behalf of medical providers.

Recent cases in an FBI-led sting suggest that despite the legal changes, fraud continues to flourish. A San Diego prosecutor who handled one part of that case said it is merely a “small constellation in a universe of workers’ comp fraud.”

“This happens all over California,” said Pedro Bernal, the San Diego County deputy district attorney. “This is how it’s done.”

Christina Jewett

Christina Jewett is a reporter for Reveal, covering labor and workplace issues with a focus on the workers' compensation system. With reporting partner Will Evans and CNN, she exposed widespread fraud and failed government oversight of California’s network of addiction treatment centers for the poor. The stories led to the defunding of more than 200 rehab clinics and changes in state law. The Emmy-nominated series won the 2013 broadcast award from Investigative Reporters and Editors. Jewett – as part of California Watch, a project of The Center for Investigative Reporting – won the 2011 George Polk Award for medical reporting with Lance Williams and Stephen K. Doig. The series exposed outsized rates of rare but lucrative medical conditions at a rapidly growing hospital chain and spurred a federal investigation. She was also a Livingston Award finalist in 2010. Previously, Jewett worked at ProPublica and The Sacramento Bee, where a story she broke about contracting malfeasance led to arrests and convictions. She and a colleague also chronicled jail abuse and medical mistreatment, spurring countywide policy reforms. Those stories were honored with awards from the John Jay College of Criminal Justice and the National Council on Crime and Delinquency. Jewett is based in Sacramento, California.