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To learn what ails New York's no-fault auto insurance system, just take a look at a civil lawsuit filed last week against Fordham Medical Pain Treatment and several other defendants.

Allstate, Progressive and Encompass insurance companies banded together to sue Fordham, alleging it was illegally incorporated as a medical facility to serve as the center of a lucrative and massive auto insurance fraud ring in New York. Fordham and its associate facilities allegedly bilked more than $12 million from the insurers by billing them for make-believe medical treatments.

It would be easy to look at this as an isolated case. Unfortunately, it's only the tip of the iceberg in New York State.

Organized fraud rings routinely concoct and execute sophisticated schemes -- like the classic fraud pattern alleged against Fordham. Less overt fraud also exists, taking the form of padded bills or billing for unnecessary treatments or those never provided.

The premium-paying consumer pays these costs. It's what Gov. George E. Pataki correctly refers to as the "fraud tax."

Auto insurance fraud often includes the incorporation of sham "medical" clinics that hire "runners" to stage accidents and send the "injured" actors to the clinics for bogus treatment. To maximize profits for the perpetrators, the clinics fraudulently bill insurance companies for treating these claimants with expensive testing and other palliatives. Favored treatments include biofeedback, massage, acupuncture and thermography.

Insurance investigators have also found that many of these clinics don't actually exist at all, or that patients never received the treatments listed in their insurance claims. The clinics involved in these organized frauds are merely billing machines, designed for the single illicit purpose of cheating insurers.

So why is this happening in New York? The crackdown on no-fault fraud in New Jersey has encouraged perpetrators to move their operations to more fraud-fertile areas like New York.

In addition, some doctors are willing to facilitate fraud. This has spawned a cottage industry, evidenced by seminars for non-doctors on how to set up "medical billing mills" by leasing the name and professional credentials of medical doctors.

Unlike the health insurance system, New York's no-fault auto insurance laws and regulations have not been updated to address the need to aggressively and rigorously tackle fraud. The result is that no-fault claim costs in New York increased by almost a third last year alone.

Why can't insurers and law enforcement fix the fraud problem? First, it is not easy to identify fraud or abuse under the current system. Claimants have six months to submit bills, but insurers have only 30 days to either pay or deny them, making it difficult to detect the fraud and abuse that perpetrators try so hard to disguise.

Likewise there are no simple guidelines in the law as to the appropriate billing for soft tissue injuries and treatments, leaving the door open for dishonest graduates of Creative Billing 101, and ruling out a quick review as bills roll in the door.

Fortunately, lawmakers can help fix the no-fault system with a few simple but important steps:

Establish flexible treatment guidelines for common injuries that identify appropriate types of medical treatment.

Require arbitration as the initial remedy for resolving no-fault disputes.

Require early notice to insurers about treatment to ensure that legitimately injured people get prompt payment and fraudsters don't have time to pile up phony bills.

Allow insurers additional time to review claims to combat fraud.

Establish and impose serious penalties for no-fault fraud perpetrators, and throw them out of the auto insurance system.

These solutions are not complicated. The Senate and Assembly have introduced bills that would accomplish some of these goals, and the governor is proposing a direct and effective set of solutions. Our lawmakers can make the needed changes to our auto insurance system and rid New York drivers of the hidden and onerous fraud tax.

STEVE IHM is regional counsel for Allstate Insurance Co.

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