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A little-noticed paragraph in the federal welfare reform law passed last year could save million of dollars in fraudulent workers compensation claims, suggests an insurance consultant.

The passage in question relates to a part of the federal welfare reform law designed to track down "deadbeat dads," those people who fail to pay their child support obligations. To facilitate finding these people and tapping their assets, the law requires each state to compile a list of all new employees hired. The list is used to compare newly hired employees with support orders so that money can be deducted from their wages.

But the law also states that "state agencies operating employment security and workers compensation programs shall have access" to the directory of newly hired employees.

By cross-checking the list of people receiving workers compensation benefits with the list of new hires, those who are working while claiming to be unable to do so can be discovered.

Finding these people and terminating their workers comp benefits could save $59 million a year in New York alone, according to Frederick Buse, managing director of Schwartz Heslin Group Inc., an insurance consulting firm in Troy, N.Y., and former unemployment insurance director of New York.

He arrived at that figure by using the percent of fraudulent unemployment insurance cases in New York over the past five years, 1.67%, and multiplying that by the amount paid in the state for workers comp benefits, $3.5 billion a year.

"But the initial years' impact would be an order of magnitude higher than that," he said, because the fraud detected the first few years would include fraud that occurred in previous years.

Not everyone envisions savings to the extent Mr. Buse does.

One drawback of the law, according to a spokeswoman for ITT Hartford Group Inc., is that insurers and self-insured companies don't have direct access to the data. And in states where the state agency is not yet actively involved in compiling the information, the federal law does not say what an insurer or employer can do to obtain the data.

David Farmer, senior vp with the Alliance of American Insurers in Washington, said the savings won't be so great initially, but the law will be of some help. "The overall impact will be small on workers comp fraud," he said.

Under the law, each state must pass its own implementing legislation that as of Oct. 1 would require employers to provide the name, address and Social Security number of every employee hired, within 20 days of their start dates. Previously, the only information available to workers comp agencies in every state were quarterly reports of people receiving wages. Some states, however, already have established their own directory of new hires that has been made available to the workers comp agency.

In Maryland, a state law that passed in 1996, prior to the federal law, requires employers to report all people hired after July 1. Susan Bass, head of policy and planning for the Maryland Office of Unemployment Insurance in Baltimore, said the laws will be a tremendous help in reducing unemployment insurance fraud. Her department plans to cross-match data on the directory of new hires with those receiving unemployment benefits and investigate those people who appear on both lists.

Less activity is taking place to prevent workers comp fraud.

The chairman of the Maryland Workers Compensation Commission, Charles Krysiak, said he is not familiar with either the Maryland or federal law. He said it's the responsibility of the insurance company making the workers comp payment to investigate any possible fraud.

"It's not within our purview," he said.

In Minnesota, which also started a state program as of July 1, the workers comp agency plans to utilize the new directory but doesn't expect it to have a significant impact.

The new law "is an effective tool," but it won't significantly reduce fraud in Minnesota, said Jim Feckey, director of the Investigative Services Unit for the Minnesota Department of Labor and Industry in St. Paul.

Since 1994, the workers comp agency has had access to the state's list of people receiving wages. This has had "a definite effect" on the agency's ability to track down fraud, he said, adding that he doesn't expect the new registry to add to their investigative resources. "It's too early to say, but I don't see how the new hire reporting requirement will change anything," he said.

The new law does offer a timing advantage, he said. Now they will receive notice of the hiring within 20 days, whereas under the old system it was done every three months.

The administrator for Wisconsin's workers compensation division, Gregory Krohm, said he was unaware of the new law. He added that he doesn't think it will help much in reducing fraud in Wisconsin, because 75% of that state's fraud is comprised of people claiming out-of-work injuries occurred on the job or of people collecting benefits as they continue some type of self-employment.

Compliance by employers may be a problem under the new law, Minnesota's Mr. Feckey suggested. Under the system in place since 1994, employers had to report every employee or face criminal penalties. The federal law says states may impose a maximum of a $25 penalty on an employer who fails to report a new hire. This penalty can increase to $500 if the failure to report is a conspiracy between the employer and employee.

Another problem with the information is that "just knowing the guy is working does not mean there is fraud," Mr. Krohm noted, because people prohibited from certain types of work because of an injury still can work at less physically demanding jobs.

However, Mr. Buse, the insurance consultant, countered that knowing someone is working does cut down on fraud because workers comp benefits are reduced when the worker starts earning a salary again. "This might adjust" his projected $59 million savings for New York "downward by a little, but not by much," he said.

Some states are viewing the law optimistically.

In Ohio, the Bureau of Workers' Compensation is establishing a system to retrieve data from the soon to be created directory, a spokesman for the bureau said. Since 1993, the bureau has had access to other state-gathered information to prevent deceased or imprisoned people or their relatives from collecting workers comp, but the new directory "will add another tool to our belt in trying to stop people from stealing from the system," the spokesman said.

The AAI's Mr. Farmer said the issue has received relatively little attention in the insurance community. His organization has only begun to look at the issue within the last month. "It slipped by us," he said. "This was one we didn't focus on at the time" it became law.