The Scheme: Oh, lord I want to be in that number – the power game (Chapter 5 qui tam)

trav’ling’ in the footsteps of those who’ve gone before
…we’ll all be reunited on a new and sunlit shore
Katrina, the hurricane, was a trumpet, not a saint.
When the trumpet sounds its call
the powerful go marching in.

On the 29th of August 2005, a display of sheer raw power, unlike any seen before, made landfall on the coasts of Mississippi and Louisiana.

The motivation for this display, a hurricane named Katina, made landfall the same day. Damage from her power was inflicted hit and run.

There seems to be no end to the damage inflicted by the raw power of the other.

The scheme, a needle hidden in a haystack of needles, was waiting for Katrina when the storm roared ashore trav’ling’ in the footsteps of those who’ve gone before playing the power game with every step.

Only one person in Mississippi received the warning letter detailing what had taken place elsewhere –  the one with the power to prevent as many problems as possible from popping up and resolve those that do, the State’s Insurance Commissioner.

Maryland Insurance Commissioner Alfred Redmer, Jr. sent letters to 13 state insurance commissioners from Ohio to Texas. He urged them to join with him to remedy serious issues found within the FEMA’s National Flood Insurance Program (NFIP) it’s contractors and business partners.

In the letter to his colleagues, Commissioner Redmer said he shared Congresswoman Jo Ann Davis’ concerns included in her letter to President Bush.  The Congresswoman’s letter listed a number of serious NFIP issues, many of which the Commissioner elaborated upon.

Dale’s counterpart in Louisiana at the time, Louisiana Insurance Commissioner Robert Wooley, also received the March 2005 letter from Redmer. Wooley joined Adams & Reese almost a year later and Dale followed, joining the firm in January 2007.  Redmer’s letter to Dale is here, Wooley’s here and and the Congresswoman’s letter to President Bush, combined with enclosures into a single document is here.

I was troubled and appalled at the contents of several related attached documents. As a result, there have now been five Congressional requests for the Department of Justice to investigate the NFIP’s private contractors and insurance company partners, however, no investigation has yet been launched.

Members of Congress may find a different approach if Eric Holder becomes Attorney General.  Holder’s position on the investigation of fraud in federal health care programs, stated in his memorandum of June 3, 1998, indicates allegations of false claims will be fairly and quickly considered.

Is the pervasiveness or magnitude of the false claims sufficient to support an inference that they resulted from deliberate ignorance or intentional or reckless conduct rather than mere mistakes?

When the trumpet sounds its call, raw power can blow off five Congressional requests to DOJ. Katrina could only blow off the homes of two members from Mississippi – no wonder the Congresswoman from Maryland was troubled.

The law does not pretend to punish everything that is dishonest.
That would seriously interfere with business.Clarence Darrow

Anyone familiar with Katrina litigation in Mississippi and Louisiana who reads the complaint filed in Maryland following Hurricane Isabel will see the Rigsby and Branch qui tam claims, Katrina RICO and cases such as Schafer v State Farm are not about “mistakes” when viewed in context.

Instead, they are about power. Power never concedes – President-elect Obama all but made this phrase in a memorable Fredrick Douglass statement into a mantra during the campaign.

Yet, in graphic depiction of the relationship between FEMA and the insurance industry, the only thing missing from the illustration of FEMA is a white flag atop the building.  However, none is needed to show where power is held – not in the graphic or in the policies and practices of the of the NFIP either.

The unusual but usual way of doing business concedes both power and the public interest to the industry. It is this usual way NFIP business is handled that provided the haystack of needles for hiding the scheme. Tyler Cohen, although writing about a different agency, puts it succinctly.

Excessive use of private contractors erodes checks and balances, and it substitutes market transactions, controlled by the executive branch, for traditional political mechanisms of accountability.

Times Picayune reporter Rebecca Mowbray provided the details of the story

Most of the flood program is actually run by a private contractor, Computer Sciences Corp., which has 170 employees working on the National Flood Insurance Program to the government’s 40 employees.

The California company manufactures a popular automobile claims-processing software used by Allstate, called Colussus, but maintains a wall between its private sector and public sector businesses.

Computer Sciences is the flood program’s data bank, auditor and liaison with the insurance industry. It tracks policies, claims, damage, reconciles the financial accounts, tracks financial information for the private companies working with the flood program, looks for errors, does claims reinspections when problems arise and trains insurance agents and adjusters.

The story behind her story was the release of her September 2007 story was the release GAO report, FEMA’s Management and Oversight of Payments for Insurance Company Services Should Be Improved,a nd related hearing.

About 68 FEMA employees, assisted by about 170 contractor employees manage and oversee the NFIP and the National Flood Insurance Fund into which premiums are deposited and claims and expenses paid. Their management responsibilities include establishing and updating NFIP regulations, analyzing data to actuarially determine flood insurance rates, and offering training to insurance agents and adjusters. In addition, FEMA and its program contractor are responsible for monitoring and overseeing the quality of the performance of the WYO insurance companies to assure that the NFIP is administered properly.

In terms of manpower alone, the much larger number of contractor employee’s is a power game of sorts. Returning to Mowbray’s story, however, indicates there was a different power game in play around the Expedited Claims Handling Process.

Immediately following Hurricane Katrina the National Flood Insurance Program, under pressure from the insurance industry, took radical steps to streamline its claims handling process and more quickly get payouts into the hands of policyholders…

FEMA set the stage for how it would allow Katrina flood claims to be handled at a Sept. 7, 2005, meeting at the Atlanta Airport Marriott of some 300 insurance company representatives, insurance agents and Gulf Coast insurance commissioners. Maurstad assured the crowd, jittery about the mammoth task of administering what would eventually become 162,065 flood claims, that he had already had conference calls with the largest insurance companies in the flooded areas and was working on emergency procedures to streamline claims-handling…

[Maurstad said,] “We’re working with all the companies, the trade associations, as closely as we can. We’re trying to do what we can to expedite the claims handling process.”

“I think we’ll have it up and rolling pretty soon,” he told participants in the meeting, which had been convened by then-Louisiana Insurance Commissioner Robert Wooley.

Just two weeks later, on Sept. 21, as Hurricane Rita was readying its punch to Texas and Louisiana, Maurstad’s expedited flood procedures were unfurled. Those procedures removed claim documentation requirements and adjuster training requirements and allowed companies to pay a flood policy’s limits if the house was gone or sat in standing water for an extended period of time in areas of serious flooding.

The expedited flood procedures approved by the flood program after consultation with insurers also allowed companies to settle flood claims without a site visit if satellite and aerial images showed that the home disappeared in the storm in areas that suffered storm surge or if the home sat in flood waters for an extended period of time and the damage likely exceeded the policy limits.

In addition, FEMA waived the line-by-line adjusting that was of concern to participants in the Wooley meeting after the storm. Rather than require room-by-room, item-by-item calculation of insured losses, FEMA allowed flood adjusters with two large but unnamed insurance companies to calculate damages by measuring the square footage of each room and characterizing the building materials as high, medium, or low grade, according to the GAO report. (emphasis added)

Lord how I want to be in that number
When the saints of power go marching in

These two large insurance companies that used the square foot method likely made money off of the special flood adjustment procedures. While FEMA scaled back the fee that private companies earned for adjusting claims if satellite photos and house measurements on file made it likely that the home was a total loss, FEMA paid the same fees to companies for the easier square-foot adjustments that it did for the detailed line-by-line adjustments.

FEMA also didn’t keep track of how many homes were adjusted using the square foot method, according to the GAO report.

At the same time, FEMA loosened the adjuster training requirements to get more adjusters into disaster-stricken areas.  Documentation requirements were dropped on claims. So were adjuster training requirements. And new procedures allowing adjusters to rely on satellite photos in determining a property’s flood damage were rolled out. (emphasis added)

Maurstad provided Congress a glowing report of the results.

These streamlining methods substantially reduced our normal adjustment times from what the NFIP would normally see under such extreme circumstances. Furthermore, these processes provided mechanisms for rapidly resolving claims within 60 days of the event. The NFIP estimates that over 17,200 claims have been handled through our expedited claims process.

However, the GAO report replaced the glow with an assessment of glaring error.

“FEMA did not adopt our October 2005 recommendation that it select the claims to be reinspected from a random sample of the universe of all closed claims,” the report states. “The results of FEMA’s NFIP quality reinspection program for Hurricanes Katrina and Rita cannot be projected to a larger universe than the claims adjustments sampled. As a result, FEMA is unable to determine the overall accuracy of claims settled for these flood events — an action that is necessary to meet GAO’s internal control standard.”

Lord, how I [don’t] want to be in that number
When the sun begins to shine [on the scheme]

According to Mowbray’s story, FEMA claimed a lack of time to adopt a random sample model.  The GAO report, in turn, according to Mowbray’s story, said… proper auditing is especially important because hurricanes Katrina and Rita involved more claims and higher payouts than ever before, as well as, new procedures that must be tested for accuracy. [emphasis added]
The quoted text from the GAO report in the paragraph above provides contains three absolutely dumbfounding reminders to an agency with the responsibility for lawfully operating the multi-billion dollar NFIP: (1) new procedures must be tested for accuracy, (2) a proper audit must conducted, and (3) an improper audit is not acceptable.

The trumpet sounds its call…

The report tapped into the well of controversy surrounding FEMA’s use private contractors following Katrina and the larger controversy about the use private contractor for other public services.

The war…exposed the administration’s “incompetence,” while the aftermath of Katrina revealed its corruption and cronyism.

The insurance industry, on the other hand, saw the GAO report as yet another indication of government’s inability to run any insurance program.  However, none are in a better position to know the government does not operate the National Flood Insurance Program.  Government houses and funds the Program; but NFIP is run by the Insurance industry.

Although there are contractors associated with most, if not all, of aspects of NFIP operation,  the Program’s contract with CSC has put the California-based business in the center of more that just the claims handling following Katrina reported Mowbray.

CSC’s contract has included serving as the liaison between NFIP and the insurance industry.  In the context of that role, CSC has attracted interest because it provides the Program with most, if not all, of those it also provides private insurance and reinsurance businesses.

Our proven systems and services are used by 80% of the top 50 U.S. life and annuity carriers, representing 75% of total industry premium.

CSC’s knock-your-socks-off use of cutting-edge technology – and what some see as its conflicting roles – involves the company in the controversy over NFIP claims handling following Katrina- and a power game that requires players to plug in literally as well as figuratively – and some or all into the scheme as well.

Although CSC is not the only company developing applications, every step in the key flood insurance claims handling process has associated software products.

Devoting time to a web search will provide verification of the industry’s capacity to electronically manage the claims handling process – including the various new procedures in the Expedited Claim Handling Process.  .

The search will also lead to information on the benefits of even one of the many elements in the process.

• In 1999, the use of square-foot and unit-cost estimating systems left 73% of properties in the United States undervalued by an average of 35%.

• Today, ITV has improved substantially. MSB’s ITV Quality Index for 2007 indicates an estimated 66% of properties are undervalued by 18%.

In addition to the electronic capacity to manage the claim process from the time a claim is reported until it is paid, data are being collected and, beyond that, there are software applications for every process from the purchasing a policy to the payment of a claim or litigation.

Believe it or not, there is even an application and related service to track any media related to a claim in litigation. Insurance companies rigorously adhere to the collection of massive amounts of data, and harvest specific points for reference and a measurement review.

There are even software applications with popular measurement programs such as Six Sigma metric system built into the application .

Historically, Design for Six Sigma (DFSS) was created in part because Six Sigma organizations found that they could not optimize products past three or four Sigma without, fundamentally, redesigning the product. This means that ‘Six Sigma’ levels of performance have to be ‘built-in’ or ‘by design’…

DFSS in Software Engineering, acts as a glue to blend the classical modeling techniques of software engineering such as OOD ERD with statistical, predictive models and simulation techniques. The methodology provides Software Engineers with practical tools for measuring and predicting the quality attributes of the software product and also enables them to include software in system reliability models. It Introduces techniques and measurements from different stages of the life cycle: Requirements, Design, Implementation, Verification and Validation.

AIG and Prudential are two of the insurers applying….Six Sigma to their insurance software development arenas. Hartford is another.

The Hartford P&C Co. built a single consumer view for both its new business and its renewable policies, including a customer application that gives it instantaneous information about its customers.

The Hartford owes these efficiencies to its adoption of serviceoriented architecture (SOA) and business intelligence (BI) tools, whose advantages are manifold, including providing real-time service.

Some insurers are exploring SOA-enabled BI tools, and others are trumpeting them as revolutionary. To some, BI alone is critical… Bob Goldberg, vice president of information technology of Colorado Farm Bureau Insurance Co…argues that organizations, his included, have been using SOA for years without actually calling it that. “If you have a good object-oriented framework…able to do a variety of different tasks?” he asks, then adds that his firm has been doing this.

Pat Saporito, insurance solutions director…for Business Objects Inc… recognizes that vendors sense theseduction in saying their BI solutions are SOA-enabled…there is a legitimate movement afoot among insurers to adopt such solutions, one akin to when companies went from client-server to Web-enabled applications.

Allstate has also been able to simplify its operations and enable easier integration, so different vendors can plug-and-play into its architecture.

FEMA claimed a lack of time prohibited the implementation of a random sample review of flood claims filed following hurricanes Katrina and Rita. The GAO concluded the failure to use random sample methodogy left the NFIP unable to verify the accuracy of flood damage claims paid following the two storms

Power games..

We are trav’ling in the footsteps
Of [players] who’ve gone before
And we’ll all be reunited [with our money],
On a new and sunlit [off] shore.

Oh, when the saints [of power] go marching in…

Introduction: The Scheme: you lived the movie

Chapter 1: The Scheme: the best place to hide a needle

Chapter 2:The Scheme: first there were just word games

Chapter 3:The Scheme: fingerlickin chickinpickin meat city mind games

Chapter 4: The Scheme: what’s the first case on the docket

Next, the monopoly game…