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Announcer: A 15-month DATELINE Investigation.

Ms. CINDY ROBINSON: They turned my life into a shambles.

Announcer: We uncovered sealed court records.

Ms. LECRECA DUFFEY: They don't have the right to do this to people.

Announcer: Found thousands of documents.

JOHN LARSON reporting: Is there any way that that could be your signature?

Dr. JOSEPH VIGLOTTI: Highly unlikely.

Announcer: Tracked down insiders.

Unidentified Man: (In silhouette) We didn't know the person, so by not knowing the person, I guess we really didn't care.

Announcer: Broke computer codes.

LARSON: This wasn't an independent medical opinion. What was it?

Ms. SHELBY PATTERSON: It was a real fast way to close a file.

Announcer: To tell you what some in the insurance industry don't want you to know.

LARSON: Doctor, with all due respect, how do you know it represented your view if you never even looked at it?

Announcer: When thinking about insurance, if you have it, if you need it. A special investigation you can't afford to miss.

Ms. ROBINSON: I thought I had peace of mind with coverage. It wasn't there.

Announcer: John Larson and a DATELINE Investigation, The Paper Chase.

Announcer: From our studios in New York, here is Tom Brokaw.

TOM BROKAW: Good evening. Tonight, the results of a 15-month DATELINE Investigation. We uncovered thousands of documents, cracked computer codes, talked to dozens of sources and discovered a little-known practice that could leave you unprotected when you need help most.

If you drive a car, you've probably got insurance. You pay those premiums so if you're in an accident, your medical bills will be covered. But if you think you'll always be taken care of, think again. As we discovered, for some, one of the best known and biggest insurance companies in the world was not always a good neighbor. Here's John Larson with tonight's DATELINE Investigation.

JOHN LARSON reporting: (Voiceover) In June of 1993, Lecreca Duffey was driving through her neighborhood in Fairbanks, Alaska, when out of nowhere, a truck ignored a yield sign and broad-sided her car. (Neighborhood; yield sign)

Ms. LECRECA DUFFEY:

LARSON: (Voiceover) Lecreca was hurt and almost immediately began racking up expensive doctors' bills. She didn't have health insurance, but she did have auto insurance, which covered injuries caused by accidents. So she called her insurance agent, who promised to help.

(Fairbanks Memorial Hospital sign; Lecreca Duffey washing dishes)

Ms. DUFFEY: All my medical bills would be take care of. Don't worry about anything. And that's not what happened.

LARSON: If you're like a lot of people, you buy insurance, trusting it will pay off when you need it. And most of the time, that's exactly what happens. But what happens when it doesn't? What happens behind the scenes when an insurance company decides to challenge your claim? Tonight, we're going to tell you about part of the insurance business you've probably never heard of, so unknown that many of the highest ranking state insurance officials weren't even aware of it. A practice used by nearly every major insurance company in the nation, involving some people who may not have your best interests at heart.

Ms. DUFFEY: I don't understand people being that dishonest.

LARSON: (Voiceover) Our questions into what happened to Lecreca Duffey launched a 15-month DATELINE Investigation into her insurance company, State Farm, the largest in the nation. We interviewed more than 250 people, reviewed more than 70,000 pages of documents and examined two companies that State Farm did business with. What we found was a disturbing pattern in the way State Farm handled thousands of accident claims.

(Duffey looking through bills; State Farm Insurance sign; head shots of interviewees; documents; CMR and MCRS logos)

Ms. DUFFEY: If you're hungry, you eat.

LARSON: (Voiceover) Lecreca Duffey, a home day care operator, had faithfully paid her premiums for 15 years. But before State Farm paid her bills, it did what a lot of insurance companies do. It said it wanted the advice of another doctor, a second opinion to decide which bills to pay. After all, some injuries like Lecreca's, which involve pain in the joints and muscles, are easier to fake than most. The auto insurance industry estimates it loses $5.5 billion to phony claims every year. And Lecreca was taking an unusual amount of time to heal. Plus, her x-rays showed a degenerative condition in her joints. And she had had polio as a child. So State Farm shipped Lecreca's paperwork from Alaska to a doctor in San Diego.

(Duffey walking with small child; State Farm sign and building; Duffey in he home; logos for The Travelers, Geico, USAA, Nationwide and Allstate; Duffey in her yard; overhead map of United States)

Ms. DUFFEY: I had no idea who this person was.

LARSON: Didn't you go see him?

Ms. DUFFEY: No.

LARSON: Didn't he examine you?

Ms. DUFFEY: No.

LARSON: (Voiceover) But nine months after Lecreca's accident, State Farm got back this report signed by a doctor that surprisingly called her injuries minor. The doctor concluded that her difficulties were most likely not caused by the accident but by a pre-existing bone condition. Bottom line: State Farm took the doctor's recommendation that only a small fraction of Lecreca's bills were justified in relation to the accident and paid only $780 of Lecreca's bills.

(Duffey carrying a plate of food; documents)

LARSON: When you got that information, what was your reaction?

Ms. DUFFEY: Stunned.

LARSON: Lecreca may have been stunned, but medical reviews like the one she got are written all the time. State Farm says it uses them for claims that seem questionable, about one out of every 20. That's at least 35,000 claims a year. And what better way for State Farm to get an honest, independent opinion than from a doctor who doesn't work for State Farm? It's called a paper review because the patients are never actually examined, only their paperwork is, their medical files and accident reports. And doctors tell us you can learn a lot from paperwork, even find fraud. But consider what happened in Lecreca's case. The bills were $500, $1,000?

Ms. DUFFEY: Oh, they were thousands.

LARSON: Thousands of dollars?

Ms. DUFFEY: They were over 10,000, probably, by that time.

LARSON: Could you pay them?

Ms. DUFFEY: No.

LARSON: (Voiceover) Lecreca was instantly plunged into debt. Bill collectors began calling at all hours. And then the clinic where she was getting treatment, still unpaid, refused to continue treating her unless she paid cash.

(Duffey in her home; bills)

LARSON: Now surely you must have gone back to State Farm and said, you know, 'Please, please, please look at this again.'

Ms. DUFFEY: I was on the phone with them all the time.

LARSON: (voiceover) What frustrated Lecreca the most was that State Farm did not seem to be considering her own doctor's opinion, who had examined her in person and felt sure Lecreca's injuries were caused by the accident. It seemed to come down to one doctor's opinion vs. another's, at least that's what it looked like until we discovered who was really writing some of the doctors' reports sent to State Farm.

(Duffey in her home playing with a child; State Farm flag)

Mr. EDWIN NEWTON: I did over 30. I completed over 30 cases myself.

LARSON: (voiceover) We found this man, Edwin Newton, who told us he created medical opinions for the same San Diego company as the doctor who did Lecreca's paper review, Comprehensive Medical Review, or CMR. But Newton wasn't exactly a doctor.

(Edwin Newton working at a computer; Comprehensive Medical Review logo)

LARSON: What kind of training do you have?

Mr. NEWTON: I'm a writer.

LARSON: A writer? What was your college degree in?

Mr. NEWTON: News editing.

LARSON: Journalism.

Mr. NEWTON: Journalism.

LARSON: No medical training at all?

Mr. NEWTON: None.

LARSON: (Voiceover) Newton, who now works for a small newspaper, told us in the CMR Vancouver office where he worked, he, along with a paralegal, a former teacher and a nurse, created doctor's opinions deciding whether accident victims like Lecreca had received appropriate treatment.

(Newton working)

Mr. NEWTON: And, of course, with my great medical ability, I could really make the determination, now couldn't I?

LARSON: (Voiceover) Newton says CMR provided him with a computer containing stock paragraphs of medical opinions, opinions that were put into reports and sent to State Farm.

(Written information)

LARSON: These are preprogrammed bits of information...

Mr. NEWTON: Right.

LARSON: ...that you just slide in.

Mr. NEWTON: Right.

LARSON: Makes you sound like a doctor.

Mr. NEWTON: It sounds pretty impressive.

LARSON: (Voiceover) Newton worked at CMR for three months until he was let go shortly before the branch office closed. Remember, this is the same company whose doctors produced Lecreca's report, the report State Farm used to justify not paying her bills. Unable to afford more treatment, Lecreca says her pain became too much to handle.

(Newton working at a computer; CMR office; Duffey sitting in a lawn chair)

Ms. DUFFEY: So you start planning ways of killing yourself. You plan how you're going to do it.

LARSON: (Voiceover) Did State Farm know that people with no medical training were writing what were supposed to be doctors' reports? And what would the paper review company, CMR, say when we confronted its president?

(State Farm flag; CMR logo)

Mr. WILLIAM MARVIN: I've been hearing rumors of this for six months, so you may as well fire way.

(Announcements)

TOM BROKAW: Returning to our story, after Lecreca's accident, State Farm Insurance used a medical report called a paper review to justify denying payment of almost all her medical expenses. Most major insurance companies now use these reviews. They can help identify phony medical claims. That's a major problem in the industry. But is that all there is to it? Once again, John Larson.

LARSON: (Voiceover) The company that wrote Lecreca's medical report, CMR, is just one of about 200 paper review companies State Farm has used. Over the last 15 years, CMR has produced 27,000 reports about accident victims from all over the country, not only for State Farm but also for many of the nation's other leading insurance companies. So the question of who's really behind these reviews is vital.

(Duffey doing dishes; State Farm Insurance sign and building; documents highlighting city names; names of insurance companies Allstate, Geico, Nationwide and USAA; CMR building)

Mr. MARVIN: I think on one occasion, we even employed a journalist.

LARSON: (Voiceover) Bill Marvin is CMR's president. He told us that in the mid 90s, non-medical people often did research and wrote medical reports but that doctors always checked them to make sure the reports were accurate.

(William Marvin working in his office)

Mr. MARVIN: The reports, when they were issued, were the opinions of the doctors who... who signed them.

LARSON: (Voiceover) But were they? DATELINE found a number of confidential sources who told us otherwise.

(CMR logo)

Unidentified Man: (In silhouette) There was really not much of a review going on from the physician's point of view.

LARSON: (Voiceover) This CMR insider was so afraid of reprisals he would only speak if we disguised him. He told us he saw doctors at CMR sign stacks of reports while barely reviewing the records.

(CMR logo; stairs)

LARSON: How many reports would a doctor look at and sign in maybe an hour?

Man: (In silhouette) Anywhere between 30 to 50.

LARSON: Fifty reports in one hour?

Man: (In silhouette) In one hour.

LARSON: So it was more like an autograph session?

Man: (In silhouette) That's exactly what it was.

LARSON: (Voiceover) Sources told us some doctors did diligently review reports. Yet, this man and others told us frequently the reports were then changed without the doctors' knowledge and then sent on to insurance companies like State Farm.

(CMR building; State Farm Insurance sign and building)

Man: (In silhouette) Bill Marvin would feel free to go in and just make a change to the report. We witnessed it every day.

LARSON: Did you ever change reports after a doctor had signed them?

Mr. MARVIN: No, I don't believe so.

LARSON: Think about that. Never?

Mr. MARVIN: Not to my recollection.

LARSON: But what Marvin didn't know was that we had tracked down someone else who had boxes of documents nearly forgotten in a garage. Here's a case. In the boxes, we found rough drafts of medical reviews, reviews sent to Bill Marvin after doctors had already signed them. In this case, a Dr. Viglotti.

(Documents)

LARSON: Why would they send you a report that Viglotti has already reviewed and signed?

Mr. MARVIN: I don't know. If you know the answer, please, please enlighten me. I... I don't know.

LARSON: We did know the answer. This is the same case.

(Voiceover) Because we had a later draft of the same review. It showed Marvin had changed the doctor's report, more than 30 changes in his handwriting. Most were stylistic, but some made things better for State Farm and worse for the accident victim. For example, the doctor had written about the 'unlikelihood' of a back injury. Marvin had crossed that out and changed it to 'extremely unlikely.'

LARSON: Why would you be saying this after a doctor has already signed off on it? By the way, did you go to medical school?

Mr. MARVIN: No.

LARSON: (Voiceover) So we asked him again: why did he change the doctor's report?

(Marvin sitting in a chair)

Mr. MARVIN: Because I was probably the most experienced person in the company at that point in time in terms of looking at a... a... the wide assortment of the type of cases that would come in from the insurance companies.

LARSON: But Marvin, who at first had said he never changed doctors' reports, then said if he did, he would always run the changes by the doctor. But did he?

(Voiceover) DATELINE found the doctor and showed him the changes.

(Doctor getting out of an elevator)

LARSON: All these changes, are these your notes?

Dr. JOSEPH VIGLOTTI: No, they're not.

LARSON: (Voiceover) Dr. Joseph Viglotti, a well-respected, Harvard-educated doctor, worked for CMR in 1993 and 1994.

(Joseph Viglotti looking over documents)

LARSON: If that happened, that happened without your knowledge?

Dr. VIGLOTTI: Absolutely. I did not authorize it. When I finished a report and my signature was on it, that was it. No more changes were to be made.

LARSON: We showed this to Dr. Viglotti, and he said it's obvious to him that somebody's changing his medical opinion after he signed it. And he didn't like it.

Mr. MARVIN: I... I guess it depends on... on your perspective.

LARSON: Under what perspective would this be the right thing to do?

Mr. MARVIN: Well, show me in there what was changed medically, please.

LARSON: (Voiceover) So we showed him his changes again.

(Marvin being interviewed)

Mr. MARVIN: You know, the process was... was not entirely paint by the numbers. Maybe the president of the company shouldn't be involved in... in the report-writing process at all, which I am not anymore.

LARSON: Maybe the president of the company, who's not a doctor, should not be rewriting reports after the doctor has already signed them.

Mr. MARVIN: Or maybe the president of the company and the doctors needed to be spending a little bit more time together.

LARSON: (Voiceover) So why would Marvin change reports, reports insurance companies like State Farm were using to help analyze medical costs? The answer may lie in what was usually in the reports, what they said.

(Marvin; State Farm flag; files)

Mr. NEWTON: We were not in the process or business of healing. We were in the process of limiting.

LARSON: (Voiceover) Remember Edwin Newton, the journalist who wrote so-called 'doctors reports' for CMR? He told us the reports were not at all what State Farm was saying they were, fair and objective, but, in fact, were secretly biased, written to favor the insurance companies.

(Newton; reports)

Mr. NEWTON: We were never told exactly, 'Deny care. You're paid to deny car.' We were never told that. But the information we had to work with, to come up with a conclusion, was slanted in that way.

LARSON: (Voiceover) DATELINE obtained copies of the 160 stock computer paragraphs given to CMR case writers like Newton. And were surprised to discover almost every single paragraph cut or limited medical care.

(Excerpts from document)

LARSON: It's almost like you were... your job was to come up with the excuse.

Mr. NEWTON: The excuse. We were the excuse.

LARSON: (Voiceover) DATELINE also found documents that suggest CMR case writers were taught to downplay injuries, even going so far as to avoid the word. "Watch the word 'injury' because it's inflammatory." On another document: " Use 'discomfort' as a substitute for 'pain'" And here, an employee suggests leaving out medical information that could be helpful to the accident victim: "Her bones were possibly more brittle, and we don't want to point this out."

(Excerpts from documents.)

LARSON: "And we don't want to point this out." Should that be on here?

Mr. MARVIN: No.

LARSON: Would that be objective if anybody in your company was thinking like that?

Mr. MARVIN: As... as I indicated, John, I've never seen that note. I've never been asked about that note.

LARSON: Because the way this appears is, somebody had a bias here. Somebody said, 'Let's not point out a medical reality. Let's not mention that.' That's what it looks like.

Mr. MARVIN: That's what it looks like to me, too.

LARSON: (Voiceover) And there was more. DATELINE legally followed a trail of electronic footprints. We learned that CMR computer files had been erased, but we found backups. We collected 39 computer disks from a number of sources. Some were encrypted, electronically locked, so no one could read them. But DATELINE cracked the codes and opened the files. Altogether, we examined thousands of memos and documents, and something caught our attention.

(Documents; keyboard; files; password box; disk; documents)

LARSON: It was a reference to a sophisticated computer database. CMR claimed it could predict the likelihood of an injury in a specific accident by comparing it to thousands of other accidents. MCR called it 'CRASHData.' We were told it was used to recommend cutting care on up to 100 cases sent to State Farm. Sounds impressive, but there's just one problem. CRASHData never really existed.

Man: (In silhouette) It was a big joke down the hallways of CMR.

LARSON: A joke?

Man: (In silhouette) A joke. We laughed. We couldn't believe that people were buying a false piece of paper.

LARSON: (Voiceover) Marvin told us he wasn't sure if CRASHData had ever been cited in a CMR report.

(Marvin)

Mr. MARVIN: I don't know.

LARSON: (Voiceover) But it was. DATELINE found these CMR reports purchased by State Farm quoting CRASHData as a reason to deny coverage. In fact, DATELINE found this State Farm letter, sent to managers in the Northwest, promoting CMR's new review service. The letter trumpets CRASHData's fast turnaround time and low cost. It even included order forms. So we took what we had learned to State Farm, which was by far CMR's biggest customer, to see if it had any idea that the thousands of paper reviews it used to settle accident claims included reports written by some non-medical people, reports slanted against accident victims and some which included a bogus database.

(Excerpts from documents; State Farm building; documents)

Mr. JACK NORTH: The story you're telling is one that I'm not very happy with and is not State Farm and is not the way we do business.

LARSON: (Voiceover) Senior vice president Jack North told us State Farm, too, was shocked by CMR's behavior. This was the first time State Farm acknowledged publicly it knew there were problems at CMR.

(Jack North; CMR building)

Mr. NORTH: We've learned some things about CMR that disappoint us, and when we learned a... about that, we quit doing business with them.

LARSON: (Voiceover) So if what happened at CMR was just a case of one small paper review company deceiving the nation's largest insurance carrier, then our story would likely end here. But it doesn't. In a moment, you'll meet this man.

(CMR Building; State Farm flag; Ronald Gott)

(Announcements)

Announcer: Could you be a dangerous driver and not even know it? Log on to msnbc.com and take the national DATELINE driving test, then watch DATELINE Tuesday at 10, 9 Central to see how you scored. This is no game. This test could save your life. A brand new interactive experience. DATELINE Tuesday, 10, 9 Central.

Announcer: DATELINE NBC, winner of two 1999 Emmy Awards. The year's most honored news magazine, DATELINE NBC will be right back.

(Announcements)

TOM BROKAW: Now returning to our story. DATELINE's investigation has turned up disturbing practices by a company State Farm used for years to review and justify denying or reducing medical claims. But was the nation's largest insurance carrier just deceived by one small company? You're about to meet a former insider who says it went much further than that. Once again, John Larson.

LARSON: (Voiceover) In 1992, Cindy Robinson of Boise, Idaho was driving on a highway and suddenly her entire back wheel fell off. Her axle hit the pavement hard.

(Cindy Robinson on highway)

Ms. CINDY ROBINSON: It was like thunk, thunk, thunk down the road.

LARSON: So you're getting bounced around the road pretty good?

Ms. ROBINSON: Right.

LARSON: (Voiceover) Cindy was hurt, eventually requiring surgery for a herniated disc in her back. Her insurance company was State Farm. Now what you're about to hear may sound familiar because just like in Lecreca Duffey's case, State Farm got a paper review that called Cindy's injuries minor, blaming her medical problems on something else, work-related activities. And State Farm refused to pay most of her medical bills.

(Robinson at hospital; State Farm sign; Robinson; Duffey; excerpts from documents; State Farm building.)

LARSON: And the common slang they are basically saying to you, 'We don't believe you.'

Ms. ROBINSON: Right.

LARSON: 'We think you're lying to us.'

Ms. ROBINSON: Right.

LARSON: (Voiceover) But this time State Farm used a different paper review company. It sent Cindy's file from Boise, Idaho to Bethesda, Maryland to a company called Medical Claims Review Services, or MCRS. So we tracked down the company's founder and former medical director, Dr. Ronald Gotts. Right away we learned that, just like at CMR, doctors didn't write many of the reports it sent to State Farm and other insurance companies.

(State Farm building; graphic of map; Gotts; documents)

Dr. RONALD GOTTS: It was, you know, our report but someone else did the calligraphy.

LARSON: But Dr. Gotts assured us, just like the president of CMR had, that doctors always, always read and checked them all.

(Gotts)

Dr. GOTTS: The doctor looked at every one.

LARSON: You read all the reports.

Dr. GOTTS: That's right.

LARSON: (Voiceover) But listen to what happened next, when we told him a former MCRS doctor had told us just the opposite.

(Gotts)

LARSON: He said it was standard practice at MCRS for reports to go out without a doctor ever looking at them.

Dr. GOTTS: It was not standard practice.

LARSON: You're not actually saying it never happened.

Dr. GOTTS: It was certainly not standard practice. It may... I can't say that it, excuse me (coughs), never happened but it was certainly not standard practice.

LARSON: (Voiceover) We kept asking and Dr. Gotts eventually admitted that 10 to 15 percent of MCRS' reports, hundreds, were never looked at by doctors at all.

(Gotts; documents)

Dr. GOTTS: There... there's some small percent of our cases, probably...

LARSON: Ten to 15?

Dr. GOTTS: ... that went out, that would be my best guess. And it's a guess at this point. That went out under our medical director's signature that had been reviewed by the nurse.

LARSON: If that's the case then why didn't the nurses just sign them?

Dr. GOTTS: Well, because these represented a... a... a... the view of the corporate medical director. Because the nurses...

LARSON: Doctor... Doctor, with all due respect, how do you know it represented your view if you never even looked at it?

Dr. GOTTS: Because the nurses were very well trained. They were very well supervised. It was only on a very simple, straightforward issues that the nurses would carry out those reviews.

LARSON: But no matter how well trained the nurses were, they were not doctors. And their reviews were being used by State Farm as doctor's opinions to challenge, even over-rule, the opinions of accident victim's doctors. And they saved State Farm money. And here's another thing, paper reviews are supposed to offer independent, objective medical advice. So it stands to reason the reviews wouldn't always favor the insurance company. Surely, they sometimes favored the accident victims.

(Voiceover) Yet, DATELINE obtained copies of 79 MCRS reports done for State Farm. Although too small a number to draw any definitive conclusions, we were surprised to find every single medical review, 79 out of 79, favored State Farm, recommended cutting back or denying care to accident victims. Dr. Gotts told us that's because State Farm only sent him problematic cases. But we asked State Farm's Jack North.

(Documents; excerpts from documents; Gotts; North)

LARSON: What does that suggest to you when this independent medical review company sends back 79 cases and all 79 recommend cutting medical reimbursement? Doesn't that seem strange?

Mr. NORTH: Looking back, if we had been able to look broader at the time, we may have seen that trend earlier. And it's not a trend that I'm... that I'm happy about or supportive of.

LARSON: (Voiceover) And that might sound reasonable. After all, State Farm is a huge company handling about 33,000 accident claims every day in nearly 1,000 centers around the country. But we found someone near Los Angeles who told us from where she sat, the pattern of negative reviews was hard to miss.

(State Farm sign; employees; Shelby Patterson)

LARSON: What was your job at State Farm?

Ms. SHELBY PATTERSON: As a claim representative.

LARSON: (Voiceover) Shelby Patterson handled auto insurance claims for State Farm for three years. She says in her office, it was common knowledge paper review companies cut medical care.

(Patterson)

LARSON: Would you have been surprised if any of the paper reviews came back and said, 'We recommend paying everything?'

Ms. PATTERSON: Oh, I would have been shocked. And deep down inside, I never thought it was independent.

LARSON: So if this wasn't an effort to get an independent medical opinion, what was it?

Ms. PATTERSON: It was a real fast way to close a file.

LARSON: (Voiceover) In other words, cut off medical payments and hope the accident victim gives up. But Patterson was only one worker exposed to a small part of State Farm's operations. So we really didn't know if all this went any higher until we met this man.

(Patterson; State Farm's flag; Jim Mathis)

Mr. JIM MATHIS: It is a company-wide program, and it is decisively and deliberately orchestrated.

LARSON: (Voiceover) Jim Mathis is a former State Farm superintendent who had one of the bigger jobs at State Farm in Washington state. He told us State Farm management not only knew there was a pattern of negative opinions, but wanted it that way.

(Mathis; State Farm building)

Mr. MATHIS: There's only one motivation for using a paper review, and that's to increase profits by reducing costs.

LARSON: In fact, DATELINE found these internal State Farm memos from the early '90s showing that at least one part of State Farm kept track of how much it was saving using paper reviews. One State Farm supervisor even referred to paper reviews as medical cost reduction services. And Mathis says State Farm favored paper review companies that consistently recommended the deepest cuts.

(Excerpts from documents; Mathis at computer)

LARSON: So it's dollars and cents?

Mr. MATHIS: Yes.

LARSON: It wasn't whether or not they were honest or doing good work, it's how much money they were saving us?

Mr. MATHIS: That's correct.

LARSON: (Voiceover) Could this really be true? Take a look at this: a page from a State Farm manual sent to hundreds of employees. It says if adjusters want to deny a claim, they should hire a paper review company who will support your position. Remember, State Farm says all it wants are independent, objective medical opinions. So you may be as surprised as we were when Bill Marvin, whose company provided some of those opinions, told us he thought it was his job to save State Farm money.

(Manual; State Farm building; Marvin)

Mr. MARVIN: We were set up as... we advertised ourselves as a cost containment company.

Mr. MATHIS: We knew that it was a tool to reduce costs. And if we all... all of the management wanted to promote or move forward in our careers, we would use these tools.

LARSON: (Voiceover) Mathis says he resisted using paper reviews, especially CMR's because he didn't think they were fair. He says he shared his concerns with his supervisors. Concerns which should have gone up the ladder to this man, deputy regional vice president Ralph Householder, a top official at State Farm. Mathis says he hoped the well-respected State Farm veteran would set things right. But instead, rather than doing less business with CMR, Mathis says Householder pushed employees to do more business with CMR.

(Ralph Householder; photos of Householder; Mathis)

LARSON: You got in trouble because you were trying to be a good neighbor?

Mr. MATHIS: I believe so.

LARSON: And where did it get you?

Mr. MATHIS: Well, I was terminated from State Farm. Yes.

LARSON: Are you smiling because it's funny or because it's sad?

Mr. MATHIS: Because it's the only emotion I have left over the issue.

LARSON: (Voiceover) Mathis says he was fired because he wouldn't go along and, in 1997, file suit against State Farm, accusing it of conspiring with CMR to defraud its policyholders. State Farm disputes the charges and says Mathis was fired for misconduct and abuse of his position. A judge dismissed Mathis' suit, and he is appealing. But you may be interested in what happened to Mathis' supervisor, Ralph Householder. Well, he got a new job, senior vice president of CMR, a position DATELINE has learned he negotiated four months before State Farm says he left his job. We asked Householder to explain, but he declined. And if that sounds like an inappropriate relationship between companies that were supposed to be independent, it was even more surprising when we learned what some people inside State Farm were doing.

(Mathis; excerpts from court documents; photo of Householder; excerpt from document; CMR building; State Farm building; State Farm flag)

(Announcements)

TOM BROKAW: Returning to our story. Your insurance company is supposed to be there when you need it, but DATELINE has learned some State Farm employees secretly tried to cut back the medical expenses of accident victims. And remember Lecreca Duffey who had most of her medical claims denied after a paper review? State Farm tried to keep what happened in her case a secret. And now DATELINE may have uncovered why. Here, with the conclusion to our story, John Larson.

LARSON: (Voiceover) When State Farm refused to pay Lecreca Duffey's medical bills, her life quickly unraveled.

(Duffey opening mail)

Ms. DUFFEY: Hospital bill, final notice.

LARSON: (Voiceover) Her debt grew to $30,000. She was fighting with State Farm, fighting with bill collectors, fighting with her own medical clinic, which demanded to be paid.

(Duffey opening mail)

Ms. DUFFEY: The headaches get excruciating. There's times that it just... I just want to bang my head against the wall, they hurt so bad.

LARSON: (Voiceover) She lost most of her home day care business. She ran up credit card debt just to buy groceries. Remember, Lecreca's financial troubles began when State Farm refused to pay her medical bills based on a paper review of her records by CMR, a company whose processes at that time are now suspect.

(Duffey watering; State Farm building; document; CMR office)

LARSON: But is State Farm to blame for any of this? After all, CRM was supposedly an independent company. How independent was it? DATELINE has uncovered evidence that indicates State Farm did more than just possibly benefit from the negative reviews, evidence that some State Farm employees play an active role shaping the supposedly independent reviews.

(Voiceover) This is a CMR memo about a meeting with two State Farm employees. One is quoted as advising CMR to change its medical opinions, approve more emergency room visits, more x-rays for children. While that may sound good, the memo goes on to reveal what appears to be State Farm's motive, to give the insurance company more room for negotiation, room to get an accident victim to settle for less money.

LARSON: It looks like these two State Farm employees are telling CMR what to say, what to put in their medical reports.

Mr. NORTH: That's a document I had not seen before.

LARSON: (Voiceover) North says if anything like that was going on, it was not widespread. But DATELINE found out more about the two State Farm employees quoted. They weren't just any employees. They were, in fact, trainers responsible for teaching hundreds of State Farm claims representatives in the Northwest how to use paper reviews. One of the trainers is quoted as saying, "If you don't want to pay a claim, send it to CMR. They'll reduce the amount and provide a strong foundation for doing so."

(North; State Farm building; documents and quote)

Mr.NORTH: That's going too far. I can't support or approve that. And if that was going on, to my knowledge, I'd deal with it very decisively.

LARSON: (Voiceover) And there was something else about that memo that indicated CMR was willing to change its reports the way State Farm wanted. Next to each statement, someone had written, "concur." We recognized the handwriting as that of CMR president Bill Marvin.

(CMR building; documents)

LARSON: You said "concur." In other words, you agreed with this.

Mr. MARVIN: I agreed that we should be... we should be honest and objective and not so hard-nosed like some of the doctors wanted us to be in these cases.

LARSON: Excuse me, Bill. It appears as though you and State Farm are working together to come up with medical opinions that will help State Farm negotiate settlements.

Mr. MARVIN: If... if that's the way it appears, then I'm glad that we've evolved away from this type of... of scenario. The concept of what we were doing was evolving over time. And... and you go through, it's almost like going through a rite of passage.

LARSON: At any point in this journey that you describe, would it be proper for State Farm to tell you to start approving or disapproving more medical tests?

Mr. MARVIN: No. No.

LARSON: (Voiceover) But, according to this CMR source with some State Farm adjusters, it happened repeatedly.

(Source in shadow)

Unidentified Source: The claim adjuster would call us and say, 'You know, I do not approve of this. We need to adjust it. Change the dollar amount.' If they wanted some money taken away from these reports, we would take away from the reports.

LARSON: So they were helping author the reports.

Source: That's exactly what they were doing, yes.

LARSON: (Voiceover) State Farm says that behavior would have been unacceptable and it doesn't believe it ever happened. It insists these accusations grossly distort its overall record. Remember, for State Farm, a company whose very business is built on trust, such a charge is devastating.

(State Farm building; State Farm commercials)

LARSON: It appears as though employees of the biggest insurance company in the United States are secretly conspiring to cheat the very people who are trusting them.

Mr. NORTH: Well, your... your word is "appears," and... and I can't argue with what your perspective is. That just isn't the way we do business. I'm even bothered with the notion that... that you may be thinking or suggesting that it is.

LARSON: (Voiceover) State Farm insists paper reviews do not ultimately cut that many claims. It cites its own internal study of 65,000 accident claims in Arizona which showed only one of every five claims sent out for review resulted in a final reduction or denial of payment.

(State Farm building; documents and text)

TEXT:

65,352 claims
1 out of 5 claims reduced or denied

LARSON: (Voiceover) And remember the 79 MCRS cases in which all the paper reviews were negative? State Farm says it eventually paid most of those claims in full.

(Documents; office cubicles)

Mr. NORTH: If indeed we are paying less, it's because we owed less, not because we intentionally tried to... to shortcut any of our customers.

LARSON: (Voiceover) But take a look at this. DATELINE obtained documents showing that while, on the one hand, State Farm was telling employees to "pay every dollar we owe," it was also, until the mid 1990s. giving employees goals like this, trying to lower on average how much it paid its own policyholders, clearly stating paper reviews were a way to reach those goals.

(Documents and text)

TEXT:

We want to pay every dollar we owe
Goals and Objectives
Not to exceed $2375 per claim
Use of Peer review

LARSON: (Voiceover) State Farm says it was only trying to find a way to review its employees objectively.

(State Farm building)

LARSON: Getting to the bottom of how State Farm uses its paper reviews to influence settlements isn't easy because private insurance files are just that, private. And while you can understand insurance companies needing to protect the privacy of people involved, there's more to it than that. State Farm has aggressively blocked efforts to learn more about its paper review process. In more than two dozen cases, State Farm convinced courts to seal thousands of documents, making it impossible for the public to get an independent look, impossible until now.

(Voiceover) DATELINE searched computer court files in more than 100 courthouses in a dozen states, and we found some of those sealed documents accidentally left open for public view, documents including this one. An economist hired by someone suing State Farm analyzed nearly 100 claims State Farm sent to CMR.

(Courthouses; documents and text)

TEXT:

Consulting Economist
Number of files which contain a CMR recommendation: 98

LARSON: (Voiceover) This is the first public look at how paper reviews profit State Farm. He found the accident victims on average had about $7,400 in medical bills. CMR's paper review recommended slashing those claims. In the end, State Farm paid on average only $4,400, saving State Farm about $3,000 in medical bills every time it used a paper review. State Farm argues that the sample is not statistically valid.

(Documents and State Farm logo; medical bill figures)

Ms. CINDY ROBINSON: If State Farm were my neighbor, I'd sell my house and move.

LARSON: (Voiceover) As for Cindy Robinson, she filed suit against State Farm for bad faith. And after six years of battling with State Farm's lawyers, Cindy had her day in court. The jury awarded Cindy nearly $10 million in damages. State Farm asked for a new trial, but the judge said no and issued this scathing opinion. He called the paper review company, MCRS, a "complete bogus operation," which prepared "cookie cutter reports." And he said State Farm knew the paper reviews "were not objective, but slanted to favor the denial or reduction of claims." State Farm is appealing. MCRS went out of business in 1995, one year after Cindy filed her lawsuit. But Dr. GOTTS insists MCRS was unfairly portrayed at the trial and that its medical reports were good.

(Robinson at desk; empty jury box; State Farm sign; documents; Dr. Gotts getting in vehicle)

Dr. GOTTS: And, in fact, were above standards in the industry by far.

LARSON: So you're saying other medical review companies probably looked at even less?

Dr. GOTTS: Oh, they don't even have doctors. Many of them have either all nurses or clerical people who do reviews.

LARSON: (Voiceover) Is that possible? We contacted insurance officials in every state and learned something astounding. Only four states have either banned or specifically regulate these kinds of paper reviews to ensure doctors are really writing them. In fact, 13 states told us that until DATELINE called, they had no idea insurance companies were even using paper reviews in medical accident claims. In Alaska, a year and a half after Lecreca's accident, State Farm had her examined by two doctors and offered to pay more for her medical bills. But Lecreca filed suit against State Farm and the paper review company, CMR. And when her lawyer tried to interview the doctor who supposedly wrote Lecreca's paper review, State Farm went to court and blocked all efforts to question him. So we went looking for the doctor ourselves, and guess what? It was Dr. Viglotti, the same doctor whose reports had apparently been altered at CMR. He was surprised when we told him about Lecreca's case.

(Map of US; Duffey watering; CMR building; State Farm flag; Dr. Viglotti)

LARSON: State Farm essentially went to court to keep you from being interviewed on this. They actually filed a protective motion.

Dr. VIGLOTTI: I didn't know that.

LARSON: (Voiceover) So we showed him a copy of Lecreca's report. Right away, he noticed something off about the signature.

(Viglotti looking at document; signature)

Dr. VIGLOTTI: Well, you know what? It looks like, just, there's something about the way that the upstroke of... of after the "j" comes that doesn't look right. And then there's a little kind of circle underneath it that just doesn't look right to me.

LARSON: Is there any way that could be your signature?

Dr. VIGLOTTI: Highly unlikely.

LARSON: (Voiceover) And after reading it, Dr. Viglotti felt sure he had neither written nor approved it.

(Dr. Viglotti)

Dr. VIGLOTTI: I don't think I've seen this report before.

LARSON: (Voiceover) This so-called "independent medical review," which devastated Lecreca, which State Farm not only used to deny her claim but also blocked all questions about, apparently was forged.

(Report; Duffey; signature)

Mr. MARVIN: This is... is the only incidence, to my un... to my knowledge, where... where something like this has happened. And as... as captain of the ship, as...

LARSON: So, we just, out of 27,000 cases, we just happened to be holding the one?

Mr. MARVIN: I think that that is probably... that is probably right on the mark.

LARSON: (Voiceover) Last year, Lecreca settled her lawsuit with State Farm for an undisclosed amount of money, never learning what we had about her report.

(Duffey reading)

LARSON: Have you gone back to any of your policyholders and said, 'Hey, there was a company involved in this process that we think may not have gone right. You should be warned'?

Mr.NORTH: We're in the process of looking at those files and trying to identify them, but we have not...

LARSON: It's been 2... it's been 2 1/2 years.

Mr. NORTH: I understand, and... and we've been in the process. But... but we have not been going back to policyholders to suggest something that may not be the case.

LARSON: (Voiceover) State Farm insists it can find no evidence that anyone was definitely harmed by a paper review. And because it is owned by its policyholders, it's in their best interests to keep insurance costs down.

(State Farm building)

Mr. NEWTON: I regret being involved in a situation where we affected people's lives like that, that negatively. It bothers me to n... to this day.

Source: We didn't know the person. So by not knowing the person, I guess we really didn't care.

LARSON: (Voiceover) State Farm suggests instead that what happened at CMR and MCRS is not the rule, but an exception, an unfair, ugly snapshot. But if what happens here is just that, a snapshot, remember this picture includes thousands of people who trusted State Farm.

(State Farm building; CMR and MCRS logos; Duffey and Robinson; highway; State Farm sign)

Ms. ROBINSON: They turned my life into a shambles. I thought I had peace of mind with coverage. It wasn't there.

Ms. DUFFEY: They don't have the right to do this to people. It destroys their lives and they have no right to do that. They are not gods.

BROKAW: State Farm and two other major insurance companies are facing lawsuits over the way they use paper reviews. And DATELINE has learned that Florida's attorney general is also investigating the use of paper reviews. State Farm tells us it has reviewed the credentials of all the paper review companies it uses. Since our interviews, State Farm says it has now gone back and examined almost 4,900 claims that had been reviewed by CMR and decided to pay about 500 of them in full.

TOM BROKAW: That's DATELINE for this Friday. A reminder. We're off on Sunday, so we'll see you again for DATELINE Monday at 8, 7 Central. I'm Tom Brokaw. For all of us at NBC News, goodnight.

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