January 14, 2014
U.S. federal prosecutors in New York have arrested more than 100 retired city police officers, corrections officers, and fire fighters, alleging they had wrongly received federal disability benefits, according to an Associated Press report. Four men pleaded not guilty in a Manhattan court to grand larceny charges of helping retired police and fire department employees obtain disability benefits, with payouts as high as US $500,000. Prosecutors say the men coached benefit seekers to fake depression and other mental health problems — some claiming that their conditions stemmed from activities following the Sept. 11, 2001 terrorist attacks. Although attorneys for the accused say the officers all qualified for city disability payments, federal prosecutors say there is a greater standard for obtaining Social Security disability benefits.
This story provides an excellent opportunity for internal auditors to appreciate the role of strong controls in effective and efficient program delivery — and conversely what can happen when they are weakened. Fraud related to disability benefits has a material impact. By the end of 2011, there were 10.6 million U.S. citizens collecting Social Security Disability Insurance (SSDI) benefits, up from 7.2 million in 2002; about a 50 percent increase. The share of the U.S. population receiving SSDI benefits has risen rapidly over the past two decades, from 2.2 percent to 4.1 percent of adults age 25 to 64 in 2005. Wide-scale fraud also seems to be increasing, as represented not only by this story, but others such as the arrest of several Long Island Rail Road employees for stealing federal disability benefits.
One can speculate about the various reasons for this increase in fraudulent activity. Noteworthy for auditors, audits and studies conducted by and for the U.S. government point to two key factors contributing to successes by fraudsters and more generally to the significant increases in access to SSDI benefits: the loosening of controls within the disability screening process that took place in the mid-1980s and a related strengthening of and emphasis on appeal processes available to initially disqualified applicants.
Loosened controls. With regard to the first factor, the medical eligibility criteria for the Disability Insurance program and the evidentiary rules for continuing disability reviews have been changed significantly to focus on whether an applicant has an "ability to function in a work-like setting," placing significant weight on applicants' reported pain and discomfort, as compared with the previous emphasis on whether an applicant objectively met verifiable medical diagnostic criteria in relation to a listed impairment. These changes have had the effect of increasing the number and percentage of SSDI benefits provided to claimants with low-mortality disorders such as mental illness and back pain.
Easier appeals. Evidentiary rules for determining disability status have been made more favorable to claimants, and appeal rights access has been expanded greatly. Originally, the U.S. Social Security Administration placed the greatest weight on its own consultative medical examination. Now, evidence provided by the applicant's own health-care provider has "controlling" weight, provided this evidence is not at odds with other medical evidence. These changes give far more scope for applicants to be represented and to appeal. Not surprisingly, about 90 percent have a disability representative, either companies with trained specialists experienced in handling SSDI applications and appeals, or law firms that specialize in disability-related cases, both of whom can charge fees of 25 percent of the retroactive dollar amount awarded, not to exceed US $6,000. Although statistics on the rate of successful appeals of application denials are not readily available, it is not difficult to project that this has been rising. This is of course quite apart from what the fraud scheme revealed in our story shows: insiders receiving kickbacks for helping fraudulent applicants provide false or evasive information in support of their claims.
These lessons are not intended to be construed as taking any particular policy position on the merits of SSDI entitlement or appeals criteria; rather they should be seen as an opportunity for internal auditors to reflect on the influence of the design of program and management controls as they go about their audit planning and engagement work. At the same time, these lessons suggest potential measures for policy-makers to consider to counter such fraudulent activity — without the need to return to the strict eligibility criteria of the past — including:
- Voluntary disclosure programs for those ineligible to avoid prosecution.
- Whistleblower mechanisms.
- Increased reliance on medical practitioners to provide objective evidence — perhaps a greater positive potential with the arrival of the U.S. Affordable Care Act.
- Requiring disability benefits recipients to periodically re-establish their eligibility to receive benefits.
- Less emphasis/reliance on an expensive adversarial system of third-party representation and appeal of decisions.
- More resources for disability benefits fraud investigation units, as Kentucky has done.
- Greater, more effective communications to the public about the negative implications and costs of this kind of illegal activity.