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The Claim Game

Disability Fraud

December 2011

wheelchair-money.jpg"You're never going to figure it out, honey," Marie Baran confidently told an FBI special agent.

Following a Sept. 20, 2008, front-page article ("A Disability Epidemic Among A Railroad's Retirees") in The New York Times, federal investigators began asking pointed questions about $250 million in potentially unwarranted benefit payments made to Long Island Railroad (LIRR) retirees for the disabilities they claimed to have. The investigation is ongoing. If the payments continue, they ultimately will exceed $1 billion.

Baran had reason to be sure of herself. As a former manager of the Westbury, N.Y., Railroad Retirement Board (RRB) office, she knew the disability system inside and out because she had overseen the processing of LIRR claims until she retired in 2006. After she left the RRB, Baran opened a consultancy that advised LIRR workers on how to apply for disability benefits.

Times reporters had focused on the LIRR disability program after they learned that its claims and benefit awards far outstripped those of other railroads. Between 1998 and 2008, two independent physicians had certified the disability claims of 956 LIRR employees who each had retired with at least 20 years of service.

Those who received benefits had said they no longer were physically able to do their jobs, and their physicians agreed. But Times reporters and others had observed the claimants participating in activities — golf, tennis, bicycling and aerobics — at least as strenuous as their workplace functions.

Then, in 2009, a Government Accountability Office performance audit found that LIRR workers applied for RRB occupational disability benefits at a rate 12 times higher than workers from other commuter railroads.


Baran might have underestimated investigators’ abilities to unravel the complexities of RRB and LIRR benefit systems. Guilty or not, she and others have been under intense scrutiny during the ongoing investigation.

The probe gathered momentum when a new lead investigator — transferred from the FBI — arrived at the RRB Office of the Inspector General in October 2010. RRB-OIG Special Agent Adam M. Suits had been a senior claims adjuster and fraud investigator for a private insurer, so he knew exactly how to "figure it out."

Suits searched claimant medical records for details of suspects’ actions that corroborated their self-incriminating statements recorded during surveillance. In 2008, non-suspects who worked in the medical offices in which the allegedly bogus examinations took place agreed to wear hidden recording devices to capture evidence when they discussed LIRR disability cases with the doctors and others suspected of committing fraud.

New York, where all those participating in the taped conversations were located, is one of 38 states and the District of Columbia in which it is legal to record a conversation when only one of those in the discussion — in person or on the phone — is aware of the recording.

On Sept. 26, 2008, a non-suspect colleague of Peter Ajemian, one of the two suspected doctors, asked him to comment on the issues in the Times article. During their recorded conversation, Ajemian said that “before they come to my office, [his LIRR patients] already had that expectation” that “they’re gonna end up with a [claim] narrative suggesting disability.” Ajemian said he relied on the patients’ descriptions of their conditions.

"I take what they tell me … to be the truth. And I can't question their integrity," Ajemian said, adding that the proportion of occasions in which he recommended disability “could have been one hundred percent."

In 2010, Suits discovered medical records in Ajemian's office that indicated that claimants each had paid Ajemian $800 or more in cash so he would certify that their disability onset dates coincided with their retirement dates. Thus, claimants’ instructions — not their medical conditions — governed Ajemian's disability determinations.

Suits also found LIRR disability certifications in Ajemian's office that Ajemian had prepared and backdated after his partners had fired him from their practice because of the growing evidence of his alleged scheme.

By October 2011, Suits had amassed evidence sufficient to file a criminal complaint in the U.S. Southern District of New York. He charged Baran and 10 others — the two physicians and eight LIRR retirees — with conspiracy to commit health care fraud and mail fraud. They face up to 20 years in prison.


To further understand this case, we must understand the evolution of employee benefits in the U.S.

In 1874, a railroad established the first industrial pension plan in North America. By the 1930s, there were more such plans in this industry than any other. But administration and funding of these plans was sometimes inadequate. So in 1934 Congress established the RRB to better meet the social welfare needs of the railroads’ workforce — then the nation's biggest. Since then the RRB has funded and administered retirement, unemployment and disability benefits that predate and resemble those of the Social Security Administration (SSA). Taxes collected from railroads and their employees fund most of the RRB’s programs and benefits.

There are limits to the similarities between SSA and RRB. In fiscal year 2010, SSA outlays exceeded $700 billion — 20 percent of all mandatory federal expenditures, the largest share of any program. RRB benefit payments for the same period were $11 billion.

Visibility being proportionate to size, government watchdogs might scrutinize RRB less than the SSA. If the RRB — and, consequently, the LIRR — had been more attentive to detecting and preventing fraud in the railroad benefit programs perhaps it would have more closely examined disability trends and launched a full investigation years earlier than it did.

But, in the absence of such oversight, leaders of both organizations professed ignorance of what had become obvious to outside observers. The Times, before publishing its findings in 2008, presented them to RRB Chairman Michael S. Schwartz, who said, "I've not seen that until you just showed it to me." LIRR President Helena E. Williams, who had been in her post only a year, told The Times that the data were "alarming" and asked the RRB-OIG to investigate.

Since 2008, both organizations have worked to improve their fraud detection and prevention training and resources. [Beginning in 2008, the LIRR increased ethics training for its employees, established a compliance unit to review the propriety of all RRB correspondence related to disability applications by LIRR employees, encouraged employees to use its hotline to report suspected disability fraud and asked Congress to pass legislation that would re-assess the statutory and regulatory framework underlying the RRB disability program. See "LIRR President Outlines Actions to Curb Abuse of U.S. Railroad Disability System." Also since 2008, the RRB has been following a five-point plan it set up then to enhance oversight of LIRR claims. Under the plan, the RRB’s own doctors examine claimants, claimants undergo disability re-evaluations, the RRB closely oversees its Westbury office with biweekly phone calls and quarterly visits, the RRB analyzes LIRR claims separately for red flags and the RRB collects data on how many LIRR managers (non-laborers) apply for disability. See "Implementation Plan for Long Island Employees."] 

But employees who have seen their managers either ignore or fail to actively detect and prevent fraud may not perceive and emulate a strong anti-fraud tone at the top for a long time.

CFEs can lead their clients and employers toward proactive mitigation of such risks with the ACFE’s Fraud Prevention Check-Up, which outlines effective anti-fraud controls and explains how to implement them.


According to the criminal complaint, the scheme also involved large-scale fraud outside of the public sector. The two independent doctors discussed above received more than $2 million from private insurers for unnecessary medical treatments and fees for preparing fraudulent medical documentation of the LIRR employees' claimed disabilities.

Each day more than 7,000 working-age Americans experience disabling injuries or illnesses, according to the Council for Disability Awareness, a nonprofit organization. Many of those harmed are not employees. In response, private insurers offer groups and individuals a variety of health-related policies. Some cover the cost of medical care, while others replace income when a claimant becomes disabled. To control the cost of serving numerous lines of business, insurers often engage outside specialists for help in assessing, for example, the information claimants supply as documentation of their pre-disability income.

Suzanne Tarchala, CPA, is a partner of international forensic accounting firm Matson, Driscoll & Damico, and heads its Detroit, Mich., office. Her clients include numerous insurers who offer disability income replacement policies. Tarchala specializes in evaluating the financial and operating records of individual claimants to quantify their income losses due to disability. Her findings provide the insurers with reliable data they can use to accurately calculate the amount of benefits due to an income replacement policyholder.

Most of the claims she investigates are from small business owners or professionals, although some are from employees who choose to buy policies independent of whatever coverage — if any — their employer offers. Virtually all of them buy "own occupation" coverage, which, like that provided by the RRB, covers you if disability prevents you from doing your own job but not other types of work.


"To evaluate such claims, you really have to understand exactly what the claimant does each day at work," Tarchala said. "A claimant typically pays higher premiums for ‘own occupation’ coverage than he would for 'any occupation,' which would not pay benefits unless the claimant is so disabled he can’t perform any job. So, after years of paying premiums, one might feel entitled to benefits when he or she gets injured in any way. But that might not be what the income replacement disability policy covers."

For example, if the disability is due to a physical injury, a claimant might say that most of what he does each day is physical. But the investigator has to find out whether that is true. In some cases, Tarchala said, the claimant manages the business but does little, if any, manual labor. So if the disability does not interfere with the claimant’s ability to work in his normal occupation, he is not considered disabled under the policy terms.

"Interviews can be adversarial," Tarchala said. "For the claimant, the disability and loss of income are very personal. For some CPAs or anyone who hasn't participated in such interviews in the past, transitioning to it requires you to develop new skills and sensibilities. I let the claimant know I'm trying to understand his situation. When I pose a question, I make sure the claimant’s response provides the information I've requested. And I ask myself how it compares with everything else I know about the case. If it doesn't make sense, I ask more questions. Sometimes my client will say, 'Just give me a list of things to ask the claimant.' The problem is that they don't know the follow-up questions. So whenever possible I interview the claimant myself."


Tarchala's expertise is in forensic accounting, which enables her to accurately assess a claimant's income before and after the onset of a disability that entitles him to coverage. The risk she helps protect her clients against is that a claimant will report pre-disability income higher than he actually was making and report post-disability income lower than he actually receives. Such fraud increases the insurable gap between pre- and post-disability income.

"There are many ways to provide false data," Tarchala said, "and the best way to expose them is to obtain reliable documentation for all the claimant’s income and expenses. I rely heavily on income tax records. On occasion, a claimant will say he made more than the amount on his income tax return. But he can't have his cake and eat it. I won't disregard the income reported to the government and allow the claimant to benefit from a higher pre-disability income interrupted by his disability."

Tarchala examines the following documents and ratios to obtain a full and accurate picture of a claimant’s income and any expenses that could influence it.


  • Income statements 
  • Monthly charges, collections, adjustments or other production records 
  • Billing records 
  • Bank statements 
  • Detailed general ledger 
  • Pay stubs 
  • Payroll earnings registers 
  • Business and personal income tax returns, including all schedules and attachments 
  • W-2 Wage and Tax Statements 
  • Schedule K-1 for Ownership Interests 

  • Pension and/or profit sharing plan annual participant statements 
  • Employment contracts 
  • Shareholder/partnership agreements 
  • Business/operating agreements 
  • Buy/sell documents 
  • Lease agreements 

[Source: Suzanne Tarchala, CPA]



  • Gross margin ratio = (Net revenue – Cost of goods sold) ÷ Net sales   


Without sufficient and stable gross margin, a company cannot pay its operating and administrative overhead costs. Significant fluctuations in gross margin can result from price cuts or from rising product costs not passed on to customers. 
  • Profit margin ratio = Net income ÷ Net sales 
Measures how much of every revenue dollar a company counts as earnings. Declines in a company’s profit margin ratio suggest management is having difficulty controlling costs. 
  • Sales growth index (Sales trend) = Current year sales ÷ Prior year sales 
Measures the annual increase or decrease in sales. A declining sales trend — whether due to loss of a key customer, increased competition or another economic factor — signals a deterioration in the company’s financial health. 
[Source: Suzanne Tarchala, CPA]

"I evaluate income and expenses as a percent of revenue," she said. "One particular item to consider is rent expense. I look at fluctuations, particularly when there’s an increase in rent after the claim is filed. I want to see if income is suddenly being shifted into rent payments rather than wages. But it’s not just the numbers; you have to understand what’s behind them. So in those cases, I sometimes recommend that my client engage a real estate expert to develop a current reasonable market rent. 

"If the claimant is paying rent that is above the market rate, we might treat the excess as additional income if the claimant is in effect paying the rent to himself. That's true when a claimant has a 100 percent ownership interest in an S corporation that pays rent to another entity he's also an owner in, or when the claimant personally owns the real estate. So it's in his power to manipulate the rent he's paying himself. Some claimants will use that situation to artificially lower their current income in order to increase the insurance payment they receive for being disabled."


"In this field, you have to be comfortable doing financial analysis, researching fluctuations in income and expenses, and getting to the bottom of whatever is driving those changes," Tarchala said. "As soon as I began my career, I moved right into forensics. I love this work."

Robert Tie is a New York business writer. 

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