Workers compensation fraud investigators face a lose-lose situation as the recession continues to bite: Fraud is increasing but, at the same time, investigators' budgets are being trimmed.

It's tough to nail down exact numbers, but anecdotal evidence suggests more fraud is being committed by struggling companies and workers, while state budget constraints restrict investigator and prosecutor funds, several sources say.

A six-year, nationwide trend of increased prosecution of all types of insurance fraud appears to be flattening out, if not declining, in 2009, said Dennis Jay, executive director of the Coalition Against Insurance Fraud, a Washington-based alliance of insurers, government agencies and consumer groups.

“The other thing we are seeing in many jurisdictions is prosecutors are under financial pressure, just like the rest of government, and are not taking as many cases as they were prior to the recession,” Mr. Jay said.

Not everyone agrees enforcement efforts have slowed.

But Mr. Jay's observations are based on discussions with insurers and fraud investigators, as well as the soon-to-be-released results of a brief poll of 37 state insurance fraud bureaus.

CAIF annually conducts a more in-depth survey of fraud bureaus, with 2009 results expected in February 2010. But it conducted an additional, condensed, poll this year for a more immediate gauge of the economy's affect on the bureaus.

CAIF found that nearly two-thirds of fraud bureaus had budget cuts this year and several reported unfilled staff positions amid hiring freezes.

“If you have fewer investigators, you have fewer cases that can be investigated and fewer cases that can be presented for prosecution,” Mr. Jay said.

Other sources also report that funding for insurance fraud investigation and prosecution appears under pressure.

“It's at a level that it wasn't at a year or two ago,” said a spokesman for insurer-funded National Insurance Crime Bureau in Des Plaines, Ill. His observation is based on conversations with NICB employees nationwide, the spokesman said.

At the same time, insurance fraud appears to be increasing, judging by case referrals to the bureaus and their open case loads, Mr. Jay said.

While prosecution of various forms of insurance fraud is affected by budget constraints, the prosecution of underreporting of workers comp premiums by unscrupulous employers, or their outright failure to purchase the mandated coverage, may take the biggest hit, depending on each state's priorities, Mr. Jay said.

Premium fraud investigations are time-consuming and expensive to pursue, requiring more forensics experts and paper chasing than other forms of insurance crime, Mr. Jay explained.

“You can do maybe five other insurance fraud cases while you do one premium fraud case,” Mr. Jay said. Meanwhile, “prosecutors are under financial stress and, if they have a whole lot of different crimes they need to prosecute, workers comp fraud may not be a priority for them.”

Depending on the jurisdiction, workers comp fraud, in general, takes a lower priority than other offenses, the NICB spokesman agreed.

“If there isn't an aggressive prosecution stance in an area for insurance fraud or white-collar crime, then the chances of seeing a workers comp case get prosecuted are that much less,” he said.

Steven Nachman, deputy superintendent for frauds and consumer services at the New York State Insurance Department, said he is seeing more workers comp premium fraud as the recession continues.

For example, more employers are misclassifying workers so it appears they perform safer tasks than they really undertake and keeping payroll off the books so it appears they have fewer workers.

The number of employers forging insurance certificates also is on the rise—a ruse used by unscrupulous employers so it appears they have workers comp coverage when they don't.

“In this economic environment, both businesses and individuals are more tempted to commit fraud,” Mr. Nachman said.

Despite budget constraints and unfilled vacant positions, however, his fraud investigations bureau has logged a comparable number of arrests this year as last year, Mr. Nachman said.

The New York Insurance Frauds Bureau received 23,054 reports of suspected fraud in 2008, up from 22,079 the prior year. Arrests in 2008 totaled 755, up from 708 in 2007, according to a state report.

“Our resources are taxed (and) there is a hiring freeze statewide,” Mr. Nachman elaborated. “That said, we have a sizable bureau where we are able to shift the deck chairs around and make sure workers comp fraud, which is one of our highest priorities, gets the appropriate level of attention.”

Several sources, including Robert Marlow, manager of the internal audit department at Sedgwick Claims Management Services Inc. in Memphis, Tenn., also say they have not seen the prosecution of workers comp fraud slow down.

But he has seen enforcement priorities shift from prosecuting workers comp cases to allow greater focus on Medicare fraud, Mr. Marlow said.

Investigations are growing more sophisticated, as is claims data mining, which is allowing more investigations to look across various types of fraud, he said. So more investigations into Medicare fraud, for example, also are pursuing workers comp cases against the same perpetrators.

Additionally, while most types of workers comp and other insurance fraud appears to be rising significantly, cases of claimants taking on jobs while they claim to be disabled, are not rising as rapidly, Mr. Jay said.

Fewer available jobs remove that temptation, he said.

While some sources say the number of prosecutions have not fallen, attempts to slash funding have stirred controversy in some states.

Earlier this year, for example, California Gov. Arnold Schwarzenegger's administration proposed cutting prison costs by downgrading several types of offenses, including insurance crime, from felonies to misdemeanors.

But the proposal drew ire. Critics complained that, among other consequences, the downgrading of crimes would discourage prosecutors from pursuing complex insurance cases such as those involving fraudulent billing by doctors.