Risky Business

by Stephen Schneider, principal at ScanFiles, Inc. and DocuCents

Are you a Target for LC 139.32 investigation?


The subjects I pick to write about often come down to RISK. When things change in this industry, it often takes years for people to fully integrate those changes and make the necessary ADJUSTMENTS to manage them. If participants in this industry can’t assimilate the changes into their business goals and platform, they won’t be successful. Those participants that are early adopters of integrating the changes are usually the most successful. I happen to enjoy the process of reading all the changes and trying to predict the outcome. Often, this includes putting some thought towards the genesis of the changes – who caused the change, and what agenda the changes embody. The late-2012 legislation known as SB 863 introduced a lot of changes. Most of the posts here at ScanFiles.com have been my observations and concerns about what those changes mean to the PROVIDERS and attorneys that represent injured workers – including the regulations interpreting SB 863 that have trickled out of the various DIR Units since the bill was enacted.

Today’s post is about the recent trend of provider ARRESTS for fraud: kickbacks, illegal referrals, and billing for unnecessary services. Some of the biggest provider names in the industry has shown up in the news lately. Could you be next?


There should be no question in anybody’s mind at this point that SB 863 specifically targeted the offices that treat and provide various other services to injured workers: physicians, chiropractors, interpreters, copy services, and other service providers that have historically filed LIENS under Labor Code Section 4903 have been under a serious (and successful) attack. The Lien Filing Fee (LFF), Lien Activation Fee (LAF) and markedly reduced Lien Filing Statute Of Limitations (LFSOL) all fit together to make it procedurally more difficult and expensive to provide services to injured workers and their attorneys than ever before. A new Fee Schedule for copy services has made sharp reductions in revenue for these types of providers, and weakened them. Similar fee schedule changes are affecting other types of applicant-side providers. These and other changes have shocked the system and caused cash flow issues for applicant-side providers of all types.

If you do some research on the Net (CCWC, CHSWC, DIR), you will find the same names of powerful folks that helped manage SB 863 through the legislature are also driving the anti-fraud efforts, and the obvious agenda is to put FRICTION on as many applicant-side providers in the system as possible. Take away their accounts receivable, put procedural friction and expense on their collection processes, and make it increasingly illegal to market their customers and business associates.

Providers that put themselves in the crosshairs of Insurance Code 1871.4, Penal Codes 549-550, and the SB 863-created Labor Code 139.32 are taking substantial RISKS in today’s anti-provider environment. Take steps now to review your marketing and business processes so that you DON’T become the next casualty in the system. Consider these recent news stories:

Drobot Says He Paid Nearly $23M to Alleged Co-Conspirators – Aug 2015

Frontline Medical Owners Charged in $150M Fraud Scheme – Sept 2015

SCIF Accuses 15 Additional Providers Of Conspiring With Drobots – Sept 2015

Drug supplier pleads guilty to paying illegal kickbacks to doctors – Dec 2015

Nine Arrested in $24.6 Interpreter Billing Scheme – Dec 2015

If you are an applicant-side provider in this system and haven’t carefully read each of the Fraud code sections mentioned in this Post and considered them in relation to how your business operates, you are literally playing a game of Russian Roulette every time you send an employer/carrier an invoice. If you are an applicant law office and are getting incentivized for referring injured workers or ordering services from your various vendors, you are playing the same dangerous game. If you are wondering what types of SERVICES fall into the category of “TARGET” by the Powers That Be, then look no further than Labor Code 139.32(a)(3) and review The List (of “Services”). These are the service providers targeted by the powerful people behind SB 863 and who need to stay squeaky clean while the post-SB 863 “shakeout” continues.


My personal opinion after studying this code section for countless hours over the last three years, is that it’s illegal (misdemeanor) for an attorney or provider of “Services” to accept or provide anything of value between each other if they refer injured workers to each other, or use each other’s services. These same provisions can be used against claims adjusters and their vendors, but that is a story for a different day.

If you are an applicant law office and you are accepting injured worker referrals, cash, gift cards, vacations, cars, free ancillary services or occasional gifts of any kind from a provider of services that you refer to (or place orders directly with), you are violating this code section and risking your State Bar status, your freedom, and your life savings. It’s completely unnecessary to take incentives from providers, and doing so hurts the reputation of the entire system. There is no scenario where this is worth the risk.

If you are a provider and trading cash, gift cards, free services, subsidizing licenses or fees, or trading anything of value for referrals or direct orders for your services, you are setting yourself up for elimination from the system through Labor Code 139.32. Many (including me at one time) thought that only the Interested Parties (attorneys and doctors) were at risk under this code section, but subsection (e) clearly states that as soon as you present an invoice to the employer/carrier for your services on a case controlled by that Interested Party whom you have incentivized, you have violated LC 139.32 and are subject to all the penalties in subsection (g), including jail and major financial penalties.

I’m not trying to concern anybody over lunches or drinks, or the occasional Starbucks cards… or even free charts or the usual and customary small-value gifts that help all businesses build relationships with their customers. I can’t imagine anybody getting arrested over such benign gifts as part of standard business marketing. I’ve listed some examples of what I think you should all be concerned about following the next section (see “Examples Of Illegal Incentives Under LC 139.32”). First though, let’s go over the details of Labor Code 139.32.


The real problem with Labor Code Section 139.32 is that it’s so damn complicated and confusing to read and understand. I’ve broken each subsection down below, and tried to provide some context. However, be warned that I am not an attorney, and you should not rely upon my interpretation. Consult your attorney before making any decisions about this code section:

(a) contains all the Definitions needed to understand the section as a whole. Each subsection is listed below:

(a)(1) defines “Financial Interest“, and talks about how financial incentives might be passed between a provider of “services” and an Interested Party, such as a law office. The definition includes discounts and subsidies, including direct and indirect payments for orders or referrals. It’s so broad as to be construed to be just about anything and everything you could think of to incentivize direct ordering or referrals from a law office. Again, you can review my list of common examples of what I would consider illegal incentives in the next section, below.

(a)(2) defines “Interested Parties“. These are entities that have an interest in (and manage) the workers compensation case. This is the applicant and employer themselves, the claims examiners, treating doctors, and lawyers managing the claim. The providers of the “services” barred from incentivizing these Interested Parties are not usually Interested Parties themselves. In other words, vendors like Copy Services, Interpreters transportation companies, etc. are not Interested Parties.

(a)(3) defines the “Services” targeted by the code section. The items listed here have to do with the services likely to be billed to the employer/carrier by such a provider in response to an order or referral by an Interested Party. Pay attention to the fact that this list is not all-inclusive… it’s defined as “including” those items listed, but could include any type of product or service referred or ordered by an Interested Party.

(b) simply states that “Interested Parties” are required to disclose any “Financial Interest” they have with any provider of one of the “services” in (a)(3). It is assumed this would only apply to the types of Financial Interests that have been excluded as violations by subsection (h), since nobody would disclose a Financial Interest that caused a violation.

(c) makes it a violation for Interested Parties to REFER OR USE providers for medical and/or medical-legal services, any of which will be billed under Division 4 of the Labor Code, if there is a “Financial Interest” between the Interested Party and the Provider of the services. This includes treatment providers, pharmacies, Labs, x-ray and similar providers, copy services, interpreters, transportation companies, etc. – each of the providers that perform service under (a)(3). Claims examiners and network service providers are excluded from these types of referrals being a violation, but it certainly applies to law offices referring an injured worker to a particular provider, or ordering services directly from a particular provider, and getting incentivized for doing so. [Note that the Provider is ALSO committing a violation, as defined in subsection (e).]

(d)(1) catches schemes that involve third parties to provide the referrals or incentives to the “Interested Party”. This could include a provider of any of the listed “Services” subsidizing or paying the fees of a Third Party that normally would be paid by the Interested Party. It would also include referring injured workers to an Interested Party (like a law office) and then having that Interested Party refer or place orders with a particular service provider(s) on all such referred cases.

(d)(2) is a “catch all” paragraph making it illegal for an Interested Party to give or receive any sort of INCENTIVE for referring a person (usually the injured worker) to a particular service provider.  While this subsection uses the phrase “refer a person”, it could easily be construed to include using the services of a particular provider, such as a copy service, or interpreter.

(e) makes it a violation when a provider of any services defined in (a)(3) presents an invoice for payment to any employer, carrier, AND there is a “Financial Interest” with the Interested Party that provided the referral or order for services. For example, if a copy service was incentivizing a law office to ensure they received orders from that law office, it would be a crime for that copy service to send invoices to the employer/carrier for services on the cases originating from that law office. [Note the requirement of a statement for all copy companies that “no violation of LC 139.32 with respect to the services” must be included on every copy service invoice under CCR 9981(b)(2).]

(f) makes it a crime for the employer, carrier, TPA or “third party payer” to KNOWINGLY pay an invoice that was presented in violation as defined in (e).

(g) defines the penalties for violating LC 139.32. Any violation is a crime, and subjects the officers and managers of any Interested Party guilty of a crime. Violating the section requires that any licensing authority must be notified, such as the state bar association, and that licensing authority shall take appropriate disciplinary action. People prosecuted for violations of LC 139.32 are subject to a fifteen thousand dollar penalty FOR EACH OFFENSE. In other words, if referrals or orders for services occurred on 100 cases, the penalties could add up to $1,500,000. Several more penalties are include in various subsections of (g).

(h) defines some EXCLUSIONS to the “financial interest” between an interested party and a provider of services.


The bottom line is that if a provider listed under (a)(3) is incentivizing the law firm or other Interested Party in any way, and that provider receives referrals or direct orders from that law firm, it’s very likely a crime for both parties. If you are participating in “Give To Get“, you are in the Crosshairs of this powerful code section and should be looking over your shoulder right now.

Here are a few examples of things that you should assume violate LC 139.32:

  • A provider supplying FREE or unreasonably discounted services to an Interested Party to ensure referrals or orders for services are given to that provider
  • A provider paying the licensing fees and/or maintenance fees for software being used by an Interested Party to ensure the referrals or orders for services are given to that provider
  • A provider installing equipment or paying for equipment used by an Interested Party, such as computers, printers or copy machines, which ensures referrals or orders for services are given to that provider
  • A provider paying for temp or contract workers that perform work for an Interested Party to ensure referrals or orders for services
  • A provider giving valuable services to an Interested Party without billing for it

If it sounds like a provider pretty much can’t do ANY favors or provide anything to their Interested Party customers… you’re right. Again, I think if you consider this in context with all of the other changes in SB 863, including the extremely draconian Lien Activation Fee Deadline, it should be clear to you that this Administration wants most of the lien providers – especially the high-volume ones – out of the system, and will do whatever it takes to make that happen.


What we’ve discussed above for LC 139.32 involves kickbacks for referrals or orders for services. Providers also must make sure never to send an invoice or collect a receivable from an employer or carrier on a workers compensation claim that was (a) not actually ordered by the listed ordering party, (b) the services listed on the invoice or statement were not actually performed or delivered as stated, and (c) the same services were not billed for more than one time.

The Interpreters that were arrested and made the Work Comp Central news this month (see link to story, above) are accused of  billing for services that were not actually provided or needed. At least, that’s what the news story indicates.

It’s easy for a high-volume provider to get caught up in the disputes and friction with the payers and inadvertently step on a Penal Code Landmine. For example, consider these subsections of Penal Code 550:

(a)(1) Knowingly present or cause to be presented any false or fraudulent claim for the payment of a loss or injury, including payment of a loss or injury under a contract of insurance.

(a)(2) Knowingly present multiple claims for the same loss or injury, including presentation of multiple claims to more than one insurer, with an intent to defraud.

(a)(6) Knowingly make or cause to be made any false or fraudulent claim for payment of a health care benefit.

(a)(7) Knowingly submit a claim for a health care benefit that was not used by, or on behalf of, the claimant.

(a)(8) Knowingly present multiple claims for payment of the same health care benefit with an intent to defraud.

Those are some paragraphs that jumped out at me, but providers should carefully read this entire section and make sure their businesses never cross over any of the lines defined therein.

Next, let’s look at Insurance Code 1871.4, which makes it unlawful to do any of the following:

(a)(1) Make or cause to be made a knowingly false or fraudulent material statement or material representation for the purpose of obtaining or denying any compensation, as defined in Section 3207 of the Labor Code.

(a)(2) Present or cause to be presented a knowingly false or fraudulent written or oral material statement in support of, or in opposition to, a claim for compensation for the purpose of obtaining or denying any compensation, as defined in Section 3207 of the Labor Code.

Violations of this section earn a minimum of one year in jail. This is scary stuff!


Here are some things you must not do as a provider:

  • Bill for the same service more than one time
  • Bill for services that were not actually requested or ordered
  • List services on an Invoice or support documentation that was never provided
  • Make a false declaration in support of payment or as part of the collection proceedings
  • Present a bill for services that includes a credit for previous over-charges, without also showing that overcharge on the statement

Again, I am not an attorney and you should not rely on any advice from me. Read these sections yourself and decide how it applies, and consult your attorney before making any changes in  your business.


I wonder how many of you readers are aware of the fact that the carriers and self-insureds are required by law to pool money that is set aside every year to help ferret out and arrest people committing work comp fraud. In the fiscal year 2013-2014 alone, $49 MILLION was collected from carriers and self-insureds to be provided to local District Attorneys willing to track down and prosecute people committing work comp fraud. See this link for more more information on this: http://www.insurance.ca.gov/0300-fraud/0100-fraud-division-overview/10-anti-fraud-prog/Workers-Comp.cfm

Carriers and self-insureds are required by law to setup in-house Special Investigation Units, whose job and focus is to investigate possible acts of fraud and help build cases against possible perpetrators. The SIUs then turn over their collected information to the local district attorneys. The DA’s offices can qualify for some of the that “pool” money I mentioned above that is set aside each year to combat insurance fraud.  If you are an applicant-side provider in the system, you should check out this Powerpoint slideshow on the DIR’s public website to see how all this works. It is an industry all on it’s own.

My point here is there are people dedicated to targeting you should you fail to carefully play according to the Rulebook. There are also MILLIONS in “reward money” that local DA offices can qualify for if they successfully prosecute the people who cross the established lines.

Have I concerned you yet? I sure hope so….


I know, I know… my blogs are often apocalyptic. My goal isn’t to scare anybody out of the system or slow them down, or hurt anybody. My goal in these blogs is to HELP people navigate the law – and the CHANGES in the law – so they can be SUCCESSFUL. Nobody can be successful in this industry if they don’t know what they can and cannot do… what to expect from all the changes to the system… and most of all, they can’t be successful if they go “against the grain” of the laws they are supposed to live by.

If you make your living in the California workers compensation system and want to be successful, immerse yourself in the codes, regulations, and published cases. They tell you what to do, what not to do, and what to expect. Despite what anybody tries to tell you, California workers compensation is extremely procedural and complicated to participate in. Sure, you can bumble along by your wits for a while, but sooner or later you are going to paint yourself into a corner. I would hate to see that happen to anybody, on either side of the proverbial fence.

Pay attention and follow the Rulebook and there is room for everybody to be successful and get what they want out of the system.

Good luck out there!

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About the Author

Stephen Schneider, principal at ScanFiles, Inc. and DocuCents

Stephen rode the wave of microcomputers in the early 1980's when he founded a software development company, creating Legal Assistant, an MS-DOS based law office management program. He also released a complete software management system for SAK Photocopy Service in 1983. He then founded Med-Legal in 1986 with his father, Warren. Stephen continued to write software to help law offices during his 26 years at Med-Legal, including NetLaw on MS-DOS, QuickLaw on Windows in 1993, WorkComp Toolbox, ML Rating software, Auto Impairment Rating (AIR), getMedLegal.com tools, and more. Stephen pushed Med-Legal off microfilm and on to scanners in the early 1990s - a first in the copy service industry, and then delivered searchable PDFs on CD with every order.

In 2005 Stephen pioneered the delivery of excerpts/reviews built into every set of records produced by Med-Legal, and even obtained several patents on the technology. Med-Legal pioneered the automation of the EAMS system in 2009 and was the first to be certified as a Third Party e-Filer. Stephen has been an expert witness in the area of copy service collection and deposition law, and served on the Board and as the Legislative Chair for the California Workers Compensation Services Association (CWCSA), where he worked closely with the DIR and the Berkeley Research Group in development of the copy service fee schedule. Stephen authored the Lien Collection and Discovery chapters of the Med-Legal Quick Reference book, as well as co-authoring the Med-Legal PD Chart, WC Tables book and WC Phonebook.

The Schneiders sold Med-Legal in 2012 and no longer have any interest in Med-Legal or any other copy service. Stephen is now focussing on automated document delivery at DocuCents.com, where he again co-authored a patent on the technology. Stephen is also owner and CEO of ScanFiles, Inc., focussing on document scanning, daily mail scanning, and "data scraping" for EDI with the most popular case management programs.