Lawmakers Told Ending Controversial Arrangement for Fraud Cases Will Be Costly

State insurance regulators would need a big infusion of cash to handle injured worker fraud investigations if the Texas Legislature puts an end to the controversial funding deal between Travis County and the largest provider of workers’ compensation insurance, officials said Wednesday.

The Texas House Committee on Insurance is studying a potential replacement of the agreement that has allowed Texas Mutual Insurance Company to pay the Travis County district attorney’s office to prosecute its fraud cases. The legislative study, ordered by House Speaker Joe Straus, R-San Antonio, comes in the wake of a series of reports by The Texas Tribune and the Austin American-Statesman, R-San Antonio, comes in the wake of  that raised questions about the relationship between government prosecutors and Texas Mutual.

Responding to a flood of criticism about the unusual deal late last year, state and local officials in Austin announced a dramatic restructuring of Travis County’s workers’ compensation fraud unit and implemented new safeguards against potential abuse and conflicts of interest. But Texas Mutual still pays for the unit and officials said a permanent replacement would require state legislation.

Testifying before the committee at the Capitol Wednesday, state regulators said a fix would also require financial help from state lawmakers, who convene in regular session early next year. Already, the Texas Department of Insurance’s Division of Workers’ Compensation doesn’t have enough resources to investigate all of the fraud referrals it gets from other workers’ compensation insurers, they said.

Division head Ryan Brannan pointed out that it only had five allocated investigators pursuing workers’ compensation fraud cases. By contrast, he said Texas Mutual had over 20 investigators and support staff looking into fraud perpetrated against the company.

“If there’s an option secured by the Legislature and the contract is allowed to expire then the Texas Department of Insurance would be unable to handle the additional caseload of fraud referrals from Texas Mutual,” Brannan said. “We do not currently have the resources to take on 40 percent of the marketplace.”

Texas Mutual, which is required under law to act as the workers’ compensation insurer of last resort, has authorized payments to the Travis County district attorney’s office of more than $4.7 million to have its fraud cases prosecuted since 2001, the Tribune and Statesman found. Under the deal, private investigators working for Texas Mutual reported their cases directly to those prosecutors.

Beginning in January, a retooled contract has required Texas Mutual to route its referrals to the Texas Department of Insurance, which then refers cases to prosecutors as appropriate. That’s more in line with what other insurance companies do now. 

Travis County is also free now to use the unit to pursue fraud cases referred by other companies. State Sen. Kirk Watson, D-Austin, helped spearhead the contract changes after state and local officials expressed concerns about the potential for a conflict of interest between a privately held company and government prosecutors.

“We’re going to put an independent eye on whatever’s referred to us,” Insurance Commissioner David Mattax said. “The distinction here is that prosecutors in Travis County are being paid by Texas Mutual. So that’s sort of the issue, is what’s going to happen when that contract goes away.”

The current contract is set to expire on Sept. 1, 2017, which is usually when new laws passed by the Texas Legislature take effect. Lawmakers are just beginning to discuss what an overhaul to the state’s insurance fraud-fighting apparatus would look like.

Texas Mutual Senior Vice-President Terry Frakes told the committee that he was satisfied with the current arrangement but would gladly accept a restructuring of the deal as long as the Legislature continues to make the investigation and prosecution of workers’ compensation fraud a priority.

“I think (insurance regulators) have some concerns about their current ability in terms of both appropriations and (full time employees) to do the job,” Frakes said. “If it’s the will of the Legislature to change the arrangement, I hope that the necessary funding accompanies that change.”

Disclosure: Texas Mutual Insurance was a corporate sponsor of The Texas Tribune. Terry Frakes is a donor to The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.