Prosecutors, Insurer Change Controversial Funding Deal

Responding to a flood of criticism about its unusual financial arrangement with a large insurance company, the Travis County District Attorney’s Office is dramatically restructuring its workers’ compensation fraud unit and implementing new safeguards against potential abuse and conflicts of interest.

The changes come in the wake of a series of reports by The Texas Tribune and the Austin American-Statesman that raised questions about the cozy relationship between government prosecutors and Texas Mutual Insurance Company, the state’s largest provider of workers’ compensation policies. 

After a six-month joint investigation, the reports revealed in September that Texas Mutual, in an exclusive funding deal, had authorized payments to the district attorney’s office of more than $4.7 million since 2001 to have its fraud cases prosecuted by the public prosecutors. Under the deal, private fraud investigators working for Texas Mutual reported their cases directly to those prosecutors.

“I think that we should always be striving to assure there’s confidence in the way the justice system works, and I had questions that the way this was set up created appearances that would degrade confidence,” said state Sen. Kirk Watson, D-Austin, who announced the changes Friday. “And so I tried to address those within the limitations we have.”

Travis County District Attorney Rosemary Lehmberg said after signing the agreement Friday that it would install important new oversight of prosecutors in the unit that Texas Mutual has funded for more than a decade.

“I’m pleased with it,” she said. “Even though this has always been a lawful contract, I understand there were perceptions of it, and this will provide a lot more transparency, obviously, and put another set of eyes on the cases.”

Lehmberg added that she is appreciative of Watson and Travis County Judge Sarah Eckhardt and their staffs for “working on solutions.”

Watson spearheaded the changes as a temporary fix to issues the Tribune and Statesman reports raised with the unique funding arrangement, which the Texas Legislature authorized by statute in the early 1990s in response to a crisis in the state’s workers’ compensation system. A permanent fix, however, will have to wait until lawmakers meet again at the state Capitol in early 2017.

Critics of the financial arrangement — including an Odessa man jailed on workers’ compensation fraud charges the DA’s office ultimately dropped — say it’s a massive conflict of interest for a privately held company to finance government prosecutions.

Under the terms of a new contract, which will take effect on Jan. 1 and expire no later than September 2017, Texas Mutual will keep reimbursing the government prosecutors for their expenses, but the company will lose its exclusive deal to have its cases pursued by the fraud unit. Any workers’ compensation insurance provider with a fraud complaint in Travis County can have its case referred to the unit starting next year, officials said.

Going forward, “it’s not just Texas Mutual paying for Texas Mutual,” Watson said. “What happens now is everybody is on even footing. Everybody gets a bite at the apple.”  

Asked why the company would agree to fund prosecutions beyond its own referrals, Texas Mutual General Counsel Mary Nichols said the company believes workers’ compensation fraud has a “negative effect and corrosive effect” on the entire industry and is willing to cover the cost of prosecutions even if its own competitors benefit. 

“Our concerns are keeping the workers’ compensation system clean,” she said. “It’s a carefully balanced system, and fraud unbalances it.”

In addition, Texas Mutual’s team of investigators will no longer send the company’s fraud cases directly to the district attorney’s office. Instead, it will route them to the Texas Department of Insurance (TDI), which will then refer cases to prosecutors as appropriate. That’s in line with what other insurance companies do now. 

Watson said he thought it was crucial to remove Texas Mutual’s direct referral process in order to protect against potential conflicts of interest. It ensures a separate government agency will vet fraud cases and refer them for prosecution, he said.

“TDI will serve as the conduit between the payor and the payee so that you take out the question of whether or not there is a direct payment for prosecution,” Watson said. While company investigators will continue to work with prosecutors once a case is accepted, the complaint submission process will start at the state insurance department, he said. 

The contract also will move away from a yearlong commitment and move to a month-to-month agreement that can be terminated by either party with 20 days’ notice, officials said. It expires on Sept. 1, 2017, which is usually when new laws passed by the Texas Legislature take effect. 

The statute that specifically authorizes the payments from Texas Mutual was passed at a time when the company, created by the Legislature amid a market meltdown, was subject to robust state control. Over the years, the state removed key oversight and control of the insurer and turned it into a privately held mutual insurance company. But under current law, Texas Mutual still has to act as the so-called “insurer of last resort” in the now-healthy workers’ compensation market — and the company retained its authority to pay government prosecutors to pursue its fraud cases. 

Both Watson and Lehmberg expressed hope that state lawmakers will devise a permanent solution during the 2017 legislative session so that combatting insurance fraud would remain a priority after the Travis County deal expires. 

“This creates a real opportunity, and I’ve heard enough concern about the way we do it in Texas, even outside of Travis County, that it’s clearly worthy of asking questions during the interim and seeing if there aren’t better practices,” Watson said. 

Rep. John Frullo, R-Lubbock, is already pondering changes to the system as part of an interim study by the House Insurance Committee he chairs. House Speaker Joe Straus, R-San Antonio, ordered the committee to “review current statutory provisions regarding the prosecution of workers' compensation insurance fraud (and) examine ways to maintain or enhance fraud prosecution.”

Like Watson, Frullo said the contract modifications announced Friday represented a “good opening” to a more permanent fix in 2017.

“There’s a situation right now that is drawing concern,” he said. “I think at that point it’s a prime opportunity for the Legislature to make changes in that area. Now whether or not it gets changed, who knows? There’s a million ways to kill a bill.”