Summer 2024

Triple Threat: Healthcare Fraud, Waste and Abuse in Workers' Comp

Fast Focus

The range of medical products and services needed for injured worker recovery is broad and the opportunities for fraud, waste, and abuse in workers’ comp healthcare are many. AI may prove to be a valuable detection tool, but we already have some highly effective solutions for combatting FWA in workers’ comp healthcare.

Fraud, waste, and abuse (FWA) is an unfortunate fact of life for workers’ compensation payers who must contend with a variety of issues that drive up costs, compromise care for injured workers, and undermine the workers’ compensation system.

Workers’ compensation insurance fraud costs are estimated to be $34 billion per year, with $25 billion attributed to employer fraud and $9 billion attributed to worker fraud.1   Employer fraud usually involves efforts to lower premiums, often by misclassifying or under-reporting employees. Worker fraud is when an employee misrepresents the facts of an injury in some way, such as exaggerating symptoms to prolong paid time off,  making a claim for an injury that occurred outside of work, or faking an illness or injury altogether.

The third, and possibly most expensive, type of fraud that impacts workers’ compensation payers is healthcare/provider fraud.

Workers’ comp payers must provide all necessary medical care for injured workers, which makes them  highly susceptible to healthcare system fraud, which is estimated to total $100 - $300 billion per year across public and private payers.2  And fraud is just one part of the FWA triangle that drives up healthcare and workers’ compensation costs across the country.

Healthcare System Fraud, Waste and Abuse

Of the $4.5 trillion in annual U.S. healthcare spending,3 approximately 25 percent is considered wasteful,4 and three to 10 percent is estimated to be fraudulent.It’s a huge problem that affects all healthcare payers and administrators, including those in workers’ compensation.

In California:


Average loss for cases involving worker fraud


Average loss for cases involving large medical provider fraud rings

=$10 million

Fraud, waste, and abuse are often lumped together, but they are three distinct issues, although closely related and with some overlap.  

FWA Defined


Intentional deceit to receive unearned payment from a healthcare payer


Unnecessary use of medical services and/or resources, usually due to carelessness or negligence


Failure to follow standard protocols or best practices leading to additional and unnecessary treatments and/or expenses.

Fraud is generally considered a crime and abuse can be a crime depending on circumstances, such as frequency and level of abuse, as well as intent.

Healthcare provider fraud and abuse come in many forms and can range from a small number of incidents by a single entity to widespread endeavors by groups or organizations. Medicare and Medicaid are prime targets for large-scale fraud, but private healthcare payers – both group health and workers’ comp — also experience regular fraud and abuse.

Types of Healthcare Fraud, Waste, and Abuse

The sheer size and complexity of the American healthcare system creates a lot of opportunities for unethical, negligent, greedy, and careless behaviors. Common types of FWA that occur in both group health and workers’ comp include the following.

Service Fraud

Intentional overcharging for services
Submitting inflated or false claims
Billing for medical services and treatments not rendered
Billing for medical supplies never provided to the injured worker
Duplicate claims

Billing Code Fraud

DRG Creep: manipulating diagnostic and procedural codes to increase reimbursement amounts
Unbundling: billing individual service codes versus group service codes
Up-coding of services: billing for a higher level of service than provided
Billing for mutually exclusive procedures
Using miscellaneous or other broad-based codes to obscure product/service selection or price

Kickbacks and Referral Schemes

Healthcare providers (can include medical practices, laboratories, pharmacies, physical therapists, home health and others) pay or receive monetary incentives in exchange for:
Prescribing and/or fulfilling/dispensing specified drugs or medical equipment/supplies
Colluding with patients and claims professionals to falsify records
Other service providers, such as attorneys, can also be involved in kickback schemes

Service Abuse

Unnecessary or harmful treatments, procedures, or tests administered or recommended purely for monetary gain
Excess number of services or extending duration of treatments past their usefulness in patient recovery
Experimental/investigational products or services with no proven efficacy


Administrative Waste
Inefficiencies in managing claims, clinical documentation, coding, and prior authorizations
Clinical waste
Care delivery failure means not delivering the right treatment, either by omission or error and not adhering to best practice or evidence-based medicine
Care coordination failure occurs when patients fall through the cracks along the continuum of care and do not receive necessary treatment as a result
Operational waste
Inconsistent pricing and/or the misuse of materials, such as prescribing an expensive drug or product when an equally good and less expensive one is available
Unnecessarily discarding effective products in favor of new ones that offer little or no benefit

FWA in Workers’ Comp Healthcare

Generally speaking, all forms of healthcare FWA are relevant to workers’ compensation care. As a group, injured workers receive a wide variety of medical services and claims must be filed with and approved by insurers for payment. However, there are some nuances to combatting FWA in workers’ comp.

Because workers’ compensation benefits and the regulations that guide them are determined by state lawmakers, the benefits afforded to injured workers are often more generous, as compared to group health, and insurers sometimes have less leeway in limiting costs and services. In addition, the state-by-state system creates 50+ separate departments/bureaus of workers’ compensation, and hundreds of insurers and TPAs who authorize and pay claims from thousands of healthcare service providers. This makes it harder to detect suspicious activity because bad actors can distribute schemes across a wide network of stakeholders.

Workers’ compensation is a fraudster’s paradise!6

Other factors, such as the size and composition of a state’s workforce, the type of injuries that are compensable, and the state’s medical oversight regulations and resources, may make some states more vulnerable to fraud and abuse. For example, a $200 million fraud scheme in California was perpetrated there because of three combined factors: generous benefits; a large population of migrant workers who had limited English language skills and even less knowledge of workers’ comp; a large and cumbersome system with limited oversight capabilities. 7

Another example of how the idiosyncrasies of states’ workers’ comp systems can result in more fraud, waste, and abuse is a Florida statute that has entitled injured workers to “free full and absolute choice in the selection of the pharmacy or pharmacist dispensing and filling prescriptions for medications required,” which has led to physicians dispensing/selling medications directly to patients or through third-party mail order services, both of which result in unnecessarily high pharmacy costs and potential harm to patients.8

Expanding compensability for mental health conditions might also lead to new cases of FWA, given that about 20 percent of healthcare fraud is attributed to mental health services9 and it has become increasingly common for these services to be provided via telehealth.

During the COVID-19 pandemic, telehealth visits became a necessity, and many payers adjusted their policies to allow more liberal use of telehealth services. In addition, workers’ compensation laws were amended in many states to accommodate telehealth visits for injured workers. While not used at the same levels they were during the pandemic, telehealth visits have remained popular for many medical services. Unfortunately, they have also become fertile ground for fraud schemes. Specialized telehealth organizations in particular recruit and pay providers with kickbacks for prescribing unnecessary products and services, such as durable medical equipment and lab tests, as well as prescribing unnecessary medications. 10 Telehealth services are most commonly used for mental and behavioral health services, follow-up office visits, and in rural communities. 11  Both telehealth companies and traditional medical practices offer these services to workers’ compensation payers who should beware of other common types of fraud, such as upcoding and duplicate billing.

While each state has its own variables, they also share commonalities that create widespread opportunities for fraud, waste and abuse. Most notably, workplace injuries frequently involve the treatment of pain, which led to excessive rates of opioid abuse over the last two decades. At the height of the crisis 55% of injured workers were prescribed opioids12 and approximately 30% of those were still filling prescriptions after 90 days.13   Worse still, opioid abuse was found to account for 61% of drug-related deaths among workers with lost-time injuries.14   Fortunately, opioid prescriptions have decreased dramatically in workers’ comp. But abuse and addiction risk with opioids remains high and there are other concerning drugs and prescribing practices that warrant vigilance in workers’ comp medical management.

The types of injuries common in workers’ comp also often require a large variety of medical services, including diagnostics, physical therapy, durable medical equipment, and more. Ancillary services such as these can be challenging to manage and are ripe for several types of FWA, including upcoding,  overutilization, kickback schemes, and more. One case in California involved $310,000 of fraudulently billed translation services. 15   Much larger dollar amounts were involved in a physical therapy fraud scheme in Texas where $80 million of inflated and fraudulent physical therapy and durable medical equipment were charged to the Department of Labor’s Bureau of Workers’ Compensation.16

Impact on Injured Workers

Workers' compensation fraud, waste and abuse costs billions of dollars every year and causes financial stress for individual payers and the system as a whole. It also hurts injured workers. Some of the lost money could potentially have been used to provide more or better benefits. Worst of all, medical fraud, waste, and abuse can compromise care and directly harm injured worker patients.

For example, the previously cited $200 million fraud case in California involved hundreds of workers who were subjected to unnecessary and sometimes painful treatments, including unneeded medical devices inserted into their spines.7  More broadly, a study sponsored by Johns Hopkins School of Bloomberg Public Health found that patients seen by medical providers who were later banned due to FWA were 11 to 30 percent more likely to require emergency hospitalization and were 14 to 17 percent more likely to die than patients treated by providers in good standing.17

Patients seen by medical providers who were later banned due to FWA were 14-17 %  more likely to die than patients treated by providers in good standing.

In addition to compromising care and risking injured worker health and recovery, incidents of FWA have a damaging effect on the injured worker experience and can undermine confidence in the workers’ compensation system and its ability to provide quality care.

Combating Healthcare FWA

The methods of committing FWA in healthcare are myriad. The number and diversity of potential perpetrators is even larger. One line of defense that is often effective against FWA is expert knowledge and experience. Claims staff and clinical case managers often spot an anomaly – or a suspicious pattern – that indicates inappropriate or suspicious activity.  Over time, different types of FWA become known and healthcare payers and benefits managers employ a variety of methods to combat them.  But the large scale and constantly evolving variations of FWA incidents in healthcare can only consistently be detected through data.

Traditional Data Detection

A standard FWA identification method used today is rule-based detection. Rule-based detection involves developing rules to mine claims data and identify known FWA behaviors, such as upcoding, duplicate bills, inappropriate utilization and more.19   Rules can be written to identify patterns of FWA at various levels, such as provider, patient, or transaction. Rules-based FWA detection is commonly used and has been successful. Indeed, many insurance carriers, TPAs, PBMs, and other industry stakeholders are currently reducing costs and improving health outcomes using rule-based data detection. But this method may become insufficient as fraud schemes and waste/abuse patterns change.  

AI Enters the Picture

The global healthcare fraud detection technology market was valued at $1.1 billion in 2021 and is estimated to reach $3.6 billion by 2031.20 This projected growth is mainly due to advances in artificial intelligence (AI) and its ability to learn and adapt as conditions change.

Even uncomplicated rules-based detection systems involve thousands of algorithms that must be rewritten to accommodate changes as simple as updating NCCI codes.21   In contrast, some AI models, including machine learning and natural language processing, can update themselves through continuous learning and adaptation to observed changes. AI can enable the automation of applied analytics to swiftly identify signs of both known and potentially new types of FWA. AI’s ability to accurately detect signs of FWA at higher volumes and in a fraction of the time could lead to significant cost savings and better health outcomes for injured workers.

However, adopting these models is not without risk and complications.

AI Obstacles

AI-driven models vary, but many share the ability to detect patterns and anomalies over vast datasets and hundreds of thousands of variables that humans are not equipped to analyze. To do this effectively, AI models rely on a store of relevant and clean data. Claims data, which generally contains all of the medical transaction records, is the most essential and commonly used data set for FWA detection.19 However, claims data contains personal health information (PHI), which is  protected by federal privacy regulations and cannot be legally shared without patient consent. This can make it difficult for healthcare organizations to use some commercially available generative AI models, such as ChatGPT, due to security risks.

Two  ways around this problem are for organizations that store PHI data to use large language learning models that do not expose it and/or to utilize generative AI models internally and train them to access relevant new information while keeping PHI secure. Using these advanced technologies to keep up with evolving fraud schemes requires a high degree of technical expertise, which will take time and money to build across the industry. More time may also be needed for stakeholders to have confidence in AI models and to develop the necessary multi-disciplined cooperation needed to build successful applications.

As promising as AI appears to be as a tool to reduce FWA in workers’ comp healthcare, it is not likely to be the sole tool. Workers’ comp organizations can already employ a multi-pronged approach to  effectively combat FWA using a combination of evolving data-driven tools combined with human  expertise.

Current Solutions for FWA in Workers’ Comp Healthcare

A combination of technologies and human oversight will always be needed to effectively combat FWA now and in the future, including:


Strategic planning and ongoing data & trends analysis to identify and address potential FWA across all types of medical services and products, including pharmaceuticals, DME, physical medicine, diagnostics and even non-medical services, such as translation and home/vehicle modification.


A stringent qualification and credentialing process for network providers and service vendors to ensure they are in good standing and the right fit for specific injured worker populations, combined with leveraging performance and benchmarking data to help identify top-performing providers within networks.


Prospective adjudication of all medical services and products to allow denial of inappropriate treatments.


Rules-driven enforcement of strategies to circumvent common practices that result in FWA, such as auto shipments and ambiguous billing codes.


Data-driven risk identification triggers paired with outreach and intervention strategies for providers, prescribers, and patients to educate and encourage appropriate, cost-effective therapies.


Programmatic alerts that identify and educate claims professionals at the point of authorization about inappropriate, high-cost treatments, based on expert clinical and trends analysis.


Automated and human-aided reviews and audits to identify and reconcile inaccurate coding and billing that drives up costs.


Secure interoperability between systems to facilitate communication and the exchange of information between payers, providers, and injured worker patients.

Healthesystems’ proprietary ancillary benefits management program was created to address unmanaged FWA in medical products and services commonly used for injured worker care.

Delivering medical care to help injured workers recover and return to work is a critical component of the workers’ compensation mission and accounts for approximately half of its total costs.22

Awareness of evolving FWA and how to effectively detect and prevent it are crucial to containing costs and ensuring the best possible care injured workers.


  1. Coalition Against Insurance Fraud. The Impact of Insurance Fraud on the Economy 2022. CSU Global. 2022.
  2. National Healthcare Anti-Fraud Association. The Challenge of Healthcare Fraud. February, 2024.
  3. Centers for Medicare and Medicaid Services. National health expenditure data. December 13, 2023. .
  4. Shrank, William H. et al. Waste in the US Health Care System: Estimated Costs and Potential for Savings. Journal of the American Medical Association. October 7, 2019.
  5. Ceniceros, Roberto. Why Physician Fraud Rings are a Major Workers’ Comp Issue and What You Can Do About Them. Risk & Insurance. September 28, 2018.
  6. Healthesystems. 2024 Workers’ Compensation Industry Insights Survey (post-survey interview).
  7. Chu, Valerie, et al. Participants in $200 Million Workers’ Comp Fraud Scheme Sentenced to Prison and More Than $2 Million in Financial Penalties Department of Justice, United States Attorney’s Office, Southern District of California. February 22, 2019. Southern District of California | Participants in $200 Million Workers’ Comp Scheme Sentenced to Prison and More Than $2 Million in Financial Penalties | United States Department of Justice
  8. Rabb, William. Doctors, Insurers Clash on Florida’s Workers’ Comp Physician Dispensing Rules. Insurance Journal. January 17, 2023.
  9. Jacobs, Andira. Mental Health Fraud Exacts High Human and Financial Costs. American Journal of Managed Care. March 11, 2016.
  10. Department of Health and Human Services. Office of the Inspector General. Special Fraud Alert: OIG Alerts Practitioners To Exercise Caution When Entering Into Arrangements With Purported Telemedicine Companies. July 20, 2022.
  11. Rakshit, Shameek, et. al. Private insurance payments for telehealth and in-person claims during the pandemic. September, 26, 2023. Health System Tacker, Perterson-Kaiser Family Foundation.,%20among%20privately%20insured,%202021
  12. The National Institute for Occupational Safey and Health. Data on Opioids in the Workplace. Cener for Disease Control and Prevention. February 24, 2023.,claims%20with%20prescriptions%20included%20opioids
  13. O’Hara, Nathan, et. al. Factors Associated With Persistent Opioid Use Among Injured Workers’ Compensation Claimants. Journal of the American Medical Association Network. October 26, 2018.
  14. Shaw, William S. et. al. Work Environment Factors and Prevention of Opioid Related Deaths. American Journal of Public Health. August, 2020.
  15. California Department of Insurance. Newport Beach attorney affected for $310,000 insurance fraud scheme. December 4, 2020.
  16. United States Attorney’s Office, Southern District of Texas. Operators of physical therapy chain charged in fraud scheme. United States Department of Justice. August 24, 2023.,provided%20to%20injured%20federal%20employees.
  17. Nicholas, Lauren H. et. al. Association Between Treatment by Fraud and Abuse Perpetrators and Health Outcomes Among Medicare Beneficiaries. Journal of the American Medical Association. October 28, 2019.
  18. WCInsights. Most Common Workers’ Comp Provider Fraud Schemes. March, 2024. Most Common Workers' Comp Provider Fraud Schemes - Workers' Comp Insights (
  19. Kumaraswamy, Nishamathi, et al. Health Fraud Data Mining Methods: A Look Back and Look Ahead. Perspectives in Health Information Management. January 1, 2022.
  20. Allied Market Research. Healthcare Fraud Detection Market Update 2023. October 18, 2023.
  21. Marquez, Juandiego. AI in Healthcare: The Value and Importance of Explainability. Shift. August 8, 2023.
  22. Arnautovic, Nedzad, et. al. Medical Cost Trends: Then and Now. National Council on Compensation Insurance. November 2, 2017.



Since 2010, the semi-annual RxInformer clinical journal has been a trusted source of timely information and guidance for workers’ comp payers on how best to manage the care of injured worker claimants and plan for the challenges that lay ahead. The publication is an important part of Healthesystems’ proactive approach to advocating for quality care of injured workers while managing the costs associated with treatment.