Regulators Seek to Reduce Unemployment Insurance Fraud

By Mark Scott, J.D., CFE


Federal and state regulators are ratcheting up efforts to reduce fraud and waste in the unemployment insurance system.


As jobless claims soar amid a weak economy, improper payments of unemployment benefits due to fraud and error are reaching record levels. According to the Department of the Treasury, improper payments of unemployment benefits cost taxpayers more than $17 billion last year.


According to the U.S. Office of Management and Budget's Partnership Fund for Program Integrity Innovation, "improper payments occur when funds go to the wrong recipient, the recipient receives the incorrect amount of funds (including overpayments and underpayments), documentation is not available to support a payment, or the recipient uses funds in an improper manner."


The Department of Labor released figures showing that in the 12 months ending in March 2011, the rate of improperly paid unemployment benefits was 11.59 percent, an increase of one percent from the same period a year earlier. The overpayment rate was 9.6 percent in fiscal 2009 and 9.25 percent in 2008.


Officials have placed partial blame on rising unemployment, which compelled state officials to use fraud, waste, and abuse personnel to help deal with the overwhelming increase in claims. "State staff and the information technology systems used to process claims have been severely stressed in managing the overwhelming workload," Gay Gilbert, the Administrator of the U.S. Department of Labor's Office of Unemployment Insurance, said at a House Appropriations Committee meeting. "As a result, many states transferred program integrity staff to process claims during much of the recession," he said.


What is more, Gilbert noted that many claimants are willing to commit unemployment insurance fraud during these tough economic times. "Some claimants, when confronted with discrepancies in their claims, tell state staff they are simply desperate and willing to risk committing fraud to get money to feed their families," he said. Unemployment insurance fraud occurs when a claimant knowingly conceals or misrepresents any eligibility information to obtain unemployment benefits.


The Department of Labor, however, claims that the primary reason for the high rate of improper payments is that some individuals continue to claim benefits after returning to work. Another leading cause is that many employers fail to provide government officials with timely and accurate information necessary to determine the workers' eligibility. Additionally, some workers receive benefits even when they fail to comply with state work search requirements.


Accordingly, federal and state lawmakers are employing new strategies to reduce fraud and waste in the unemployment insurance system:


States can use the National Directory of New Hires, a database that contains personal and employment data on newly hired individuals, to improve detection of claimants who continue to obtain benefits after returning to work. States can identify overpayments by crosschecking unemployment benefit claims against the National Directory's data. All states must use the directory by the year's end.
A number of states have been working together to stop improper payments. They created a web-based information data exchange system through which they can exchange unemployment insurance information with each other and employers or third-party administrators. Currently, Georgia, Utah, New Jersey, Colorado, and Ohio participate in the system. The system will make it easier for employers to communicate with the states.
Rhode Island has four investigators to pursue individuals who are defrauding the system, and the state has hired a collection agency to recover improper payments, the Associated Press reported.
Recently, Congress placed greater focus on combating improper payments in the unemployment insurance program by passing the Improper Payments Elimination and Recovery Act of 2010. The Act contains two provisions regarding unemployment insurance: First, it requires that employers report the first day of earnings for new hires to the National Directory of New Hires. This will help states identify claimants who continue to claim benefits after returning to work in a different state. Second, the law allows states to recover unemployment compensation debts from income tax refunds.
The Treasury Department established a public website that reports improper payment information for all "high priority" federal agency programs, including unemployment insurance programs.
The U.S. Office of Management and Budget established Partner4Solutions.gov to provide an opportunity for the public to recommend strategies for making federally funded assistance programs, such as the unemployment insurance program, more efficient.
The Department of Labor has proposed several strategies to address the several root causes of improper payments, including a requirement that states impose a penalty of at least 15 percent on fraudulent overpayments.

Time will tell if these strategies are successful. Still, the unemployment insurance system needs new solutions and technological tools, such as the state information data exchange system, to confront its fraud and waste problem.


Losing more than $17 billion to fraud and waste each year is unacceptable, said Senator Tom Carper, in prepared testimony for a hearing on preventing improper payments. "These dollars must be targeted to those in need and not lost through mismanagement and error. We must address the high level of improper payments (within) the unemployment insurance program now," he said.



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