Section III

Workers' Compensation Issues

Claims Adjudication

Case Openings

The following chart shows a significant decrease in litigation of workers' compensation claims, as measured by the numbers of opening documents received by the Division of Workers' Compensation in 1996.

This decrease in total opening documents resulted from decreases in every type of opening document -- applications for adjudication of claim, original stipulations and original compromise and releases.

The decrease from 1995 to 1996 is in marked contrast to the trend observed from 1991 to 1995, when the total opening documents received by DWC nearly doubled.

Note that the Opening Documents chart does not include preapplications -- liens and other documents -- as opening documents to preclude doublecounting.


The following table and chart shows certain categories of decisions issued by the Division of Workers' Compensation.

The category of "decision on merit" refers to a decision made by a workers' compensation judge on the merits of a disputed case. The decision "Finding and Award" means that the injured worker is to receive benefit(s) that were disputed, while "Finding and Order" usually indicates that no additional benefit is to be awarded.

The category of "settlement" refers to an approval by a workers' compensation judge on a settlement previously agreed-to by the parties to the case.

The category "order" refers to decisions made by a workers' compensation judge about certain matters relating to the case. Only two major types of the many types of orders are shown. Therefore, please note that minor decisions issued by DWC are not shown.

Type of Decision 1990 19911992 1993 19941995 1996
Decision on Merit:
Finding & Award







Decision on Merit:
Finding & Order







Compromise & Release










7,542 18,448 26,316 33,641
Attorney Fee

19,575 21,318 29,637 29,870 30,047

Vocational Rehabilitation

The 1993 workers' compensation reform legislation made major changes affecting the level and delivery of the vocational rehabilitation benefit. The most significant changes are as follows:

Vocational Rehabilitation Reform Provisions

- the medical condition worsens
- the plan is disrupted beyond the employee's control
- the employer does not provide timely service
- the combined cost of all plans cannot exceed the $16,000 cap unless the permanent disability rating is 25% or more.

- Employee must have the ability to do the job.
- Total income must be within 15% of the employee's pre-injury wage.
- The job must be within a reasonable commute.
- The job must last at least 12 months.

The Commission endeavors to measure the impact of the reform changes on vocational rehabilitation program. In order to do so, it is necessary to set up a model to get baseline information that will provide comparative data in future years regarding the number of workers undergoing vocational rehabilitation, the duration and cost of rehabilitation programs and services and the results produced by these programs and services.

The Vocational Rehabilitation Reform Study

The Commission contracted with the UC Berkeley Survey Research Center (SRC) to conduct the Vocational Rehabilitation Reform Study. The study, initiated in July 1995, is ongoing and a final report is expected in 1998. The Commission published an interim report in August 1997 containing findings to-date.

The primary objective of the study is to help the Commission in evaluating the impact of the reform legislation on the vocational rehabilitation system. Questions to be answered include: Did the reforms reduce the cost of the rehabilitation benefit for employers? How have changes affected outcomes for injured workers?

The Commission and project team are assisted in this effort by the Vocational Rehabilitation Project Advisory Committee, comprised of interested members of the workers' compensation community.

The study is establishing baseline data for continued monitoring of rehabilitation services and will measure changes in the workloads for DWC rehabilitation consultants, caseloads in the DWC Rehabilitation Unit's dispute resolution process, and caseloads in the WCAB system. The study also includes a review of Vocational Rehabilitation literature.

Vocational Rehabilitation Study - Preliminary Findings

Preliminary information in the July 1997 interim report addresses the question of whether the reforms saved employers money, but the study data is still a little premature to assess the impact on injured workers.

These interim findings are based largely on data available from the DWC Rehabiliation Unit files, the WCAB-Rehabilitation on-line system, and the American Business Index data base. Consequently they focus on changes in costs. This only tells half the story concerning the impact of reforms. Important questions about the outcomes of injured workers remain to developed and analyzed.

This preliminary data shows significant changes in vocational rehabilitation costs from the pre-reform period (1992 and 1993) to the post-reform period (1994 and after).

Total Costs

Preliminary estimates show that the total direct accident year 1 cost of the vocational rehabilitation benefit will decline by $274 million (49%) between 1993 and 1994. Current estimates are that the 1993 claim cost will eventually be $563 million, while for 1994 total cost will be $289 million. Total costs for 1992 are estimated to be $663 million (57% higher than 1994).

Estimated #
of VR Claims
Total Cost
Cost savings
year to year
% change
year to year
$663 million
$563 million
$100 million
$289 million
$274 million

Source of Savings

Between 1993 and 1994, approximately 70% of the decline in total cost is a result of a reduction in costs for all types of claims (modified or alternate work (M/A), plans, and declines). About 26% of the improvement is due to a change in the mix of case types, with a shift away from plans towards M/A offers and declinations. Less than 4% of the improvement is due to a decline in the frequency of claims. Savings in costs between 1992 and 1993 are the result of a decline in the estimated number of claims.

Average Cost per Claim

The decline in average cost per rehabilitation claim due to reform is dramatic. Prior to reform, claims were averaging just over $13,000 in total costs. In 1994, the mean total cost per claim had dropped to about $7,200 - representing an average savings of 45% over pre-reform years.

QRR cost per claim

Post-reform, Qualified Rehabilitation Representative (QRR) costs -- composed of evaluation, plan development, and monitoring and placement -- dropped substantially. Average QRR charges were in the $4,000 range for 1992 and 1993. In 1994, such fees were on average just $1,800.

Approximately four-fifths (79%) of this decline is due to moderation of charges by QRRs and imposition of caps on QRR costs. About one-fifth (21%) is due to the shifting of case types away from plans to M/A or declination. QRR costs were the component of VR costs most affected by the reforms.

$0 Claims

1994 claims have shown a substantial increase in the portion of vocational rehabilitation claims with no reported costs. In 1992 and 1993 approximately 5% of claims had no reported costs. In 1994 this jumped to almost 23%.

Interaction of Workers' Compensation and State Disability Insurance

Two important issues have been raised concerning costs imposed on the State Disability Insurance system (SDI) by occupational injuries and illnesses.

Under the current regulations and statutes, Qualified Rehabilitation Representatives (QRR) are writing vocational rehabilitation plans that use funds from SDI to supplement or replace the Vocational Rehabilitation Maintenance Allowance (VMRA). This situation has arisen since the 1993 reform imposed a cap of $16,000 on the total VR benefit, which under the previous statute had no limit.

The State Disability Insurance system provides a safety net for injured workers, paying benefits on an interim bases when payment in the compensation system is delayed or AOE/COE is in dispute. SDI recovers from the insurer or the worker, often through a lien filed with the WCAB. With approximately 60,000 lien filings a year, substantial funds are tied up in disputed cases. Significant time and money are expended pursuing recoveries. The Employment Development Department (EDD), which handles SDI, often settles for a fraction of the total lien. This results in a substantial but unknown cost on the worker supported SDI system.

Each of these situations suggests that substantial resources are being shifted between the SDI system and the workers' compensation system. This may result in higher taxes on -- or lower benefits to -- workers who are taxed to support the SDI system.

The Commission is developing an Issue Paper on cost shifting between the State Disability Insurance system (SDI) and the workers' compensation system, expected at the end of 1997.

Industrial Disability Retirement Issue

The Commission was made aware that disability definitions and methods of determining disability differ among the various compensation systems, including

An injury can result in payments from more than one system as the claim matures. Since definitions and determination methods differ, benefits can be delayed and costly additional evaluations required. Also, if benefits are substantially delayed, the injured worker may be forced back to inappropriate employment that could result in additional injury.

While competing demands lead to legitimate delays, complaints are common that the interaction of the various systems has become subject to excessive delays and inefficient levels of additional medical evaluations. As an example, the California Correctional Peace Officers' Association (CCPOA) has been particularly frustrated over delays in PERS disability retirement determinations.

The Commission is developing an issue paper regarding the interaction among industrial disability retirement determinations in various systems, expected to be issued in late 1997.

The Permanent Disability Rating Schedule

Enacted by the 1993 reform legislation, Labor Code Section 4660 directs the administrative director of the Division of Workers' Compensation to revise the schedule for the determination of permanent disabilities. A discussion of this requirement is contained in the "Agency and Program Operations" section of this report.

Incomplete Physician Reports

Incomplete physician reports have been cited as a major factor leading to inconsistency in permanent disability ratings. Many of DWC's disability evaluators state that their largest problem with the current system is the poor quality of medical reports that they have to rate.

Despite the incomplete nature of these reports, it is reported that the Disability Evaluation Unit (DEU) is rating the reports, sending them out and is having them returned for re-rating. This churning results in delays and additional costs to all parties in the system.

The Commission has also encouraged the Industrial Medical Council to develop training programs for physicians regarding improving the quality of physician reports for the rating of permanent disabilities.

CHSWC Physician Report Study

The Commission has contracted with UC Berkeley Survey Research Center to determine the nature and magnitude of the physician report problem, ascertain who is producing incomplete reports and why, and develop quantitative analysis, provide recommendations for improving the quality of the reports, and calculate the cost benefit obtained from the system.

The evaluation is being done on a random sample of reports drawn from the Disability Evaluation Unit. The sample is drawn in conjunction with the Industrial Medical Council, who determines the status of the reporting doctor -- QME or treating physician -- and participates in the evaluation of the reports done by QMEs. The costs of reports are estimated separately using data drawn from one or more bill review companies or carriers.

The study is expected to be completed by the end of 1997.

Permanent Disability Benefit and Program

The Commission realizes that the rating of permanent disability is one of the most difficult tasks of the workers' compensation system. The difficulty lies in the very process of estimating the degree of a worker's impairment and the amount of economic loss caused by such impairment. This process more often than not leads to disputes and litigation.

The manner in which California rates and compensates injured workers for total and partial permanent disability has enormous impact on the adequacy of their benefits, their ability to return to gainful employment, the smooth operation of DWC's adjudication system and the cost of the workers' compensation system to employers.

The Commission is also aware that the latest revision of the Permanent Disability Rating Schedule is not a long term solution for either promptness of rating or equity in permanent disability monies paid.

The Commission decided to explore the feasibility of conducting a study that would look at California's permanent disability benefit levels, the rating methods and the cost of providing those benefits in comparison to similar systems in other states. It is clear that this issue is very complex and should be addressed carefully and systematically.

CHSWC Permanent Disability Fact-Finding Hearing

In January 1996, the Commission held a public fact-finding hearing in Los Angeles to bring representatives from the California workers' compensation community together to identify problems and propose solutions to challenges noted in the California permanent disability benefit structure and program.

Summarized below are key points from oral and written testimony by employee and employer representatives, insurers, attorneys, vocational rehabilitation and health care providers, public officials and program administrators:

CHSWC Permanent Disability Study

Pursuant to the strong support and encouragement received from throughout the workers' compensation community to continue its investigation of the permanent disability system in California, the Commission issued a Request for Proposal for a study by an independent research organization.

The Commission voted to contract with RAND Corporation, which achieved the highest score in the State's competitive Request for Proposals process.

The study is evaluating how workers' compensation permanent disability benefits are currently determined and delivered in the California workers' compensation system. It examines the extent to which the current system meets the goals and objectives set forth in the constitutional mandate and whether the system can be improved to better meet those goals.

The Industrial Medical Council joined with the Commission in this effort and is contributing towards the cost of the study. The IMC is interested in the nature of impairment and evaluation, particularly the relationship between vocational rehabilitation and permanent disability rating.

As with all Commission projects and studies, a Permanent Disability Study Advisory Committee composed of interested members of the workers' compensation community, was formed to assist RAND and the Commission in this endeavor. The meetings have been well attended and well received. The latest meeting of the Advisory Committee was held in July 1997.

RAND will produce a report of preliminary findings from this study of workers' compensation permanent disability in September 1997.

CHSWC Public Forum on the Permanent Disability Study Findings

The Commission will host a public forum on the RAND report of preliminary findings on workers' compensation permanent disability in November 1997.

This public forum will provide the opportunity for experts, members of the community, and the public to discuss the report and share observations and opinions. The RAND report and the reaction to its findings will support Commission recommendations for legislative and/or administrative changes to the permanent disability program.

This public forum entitled "Summit on California Workers' Compensation Permanent Disability" is scheduled to take place on Friday, November 21, 1997 at the South San Francisco Conference Center near the San Francisco Airport. Further information about the PD Summit is available by contacting the Commission.

Commission/Community Recommendations on Permanent Disability

The Commission plans to create blue-ribbon advisory committees to assist in the development of feasible recommendations and workable plans to improve the permanent disability system.

These policy and technical committees, comprised of experts and community members, will work together to determine the feasibility of and further detail the recommendations of the CHSWC-sponsored study of permanent disability conducted by RAND.

The goal is to develop a consensus report, including recommendations, action plans and proposed legislation based on the preliminary findings of the RAND study and input from the community.

Medical Issues

Fee Schedules

The Official Medical Fee Schedule in use in 1993 was criticized as outdated because it did not cover many common procedures and did not apply to pharmaceutical or hospital charges. The reform legislation directed the Division of Workers' Compensation to update the fee schedule to address these concerns.

California Labor Code Section 5307.1(a)(1) states:

"The administrative director, after public hearings, shall adopt and revise, no less frequently than biennially, an official medical fee schedule which shall establish reasonable maximum fees for medical services provided pursuant to this division. No later than January 1, 1995, the administrative director shall have revised the schedule. By no later than January 1, 1995, the schedule shall include services for health care facilities licensed pursuant to Section 1250 of the Health and Safety Code, and drugs and pharmacy services. The fee schedule for health care facilities shall take into consideration cost and service differentials for various types of facilities."

Official Medical Fee ScheduleOfficial Medical Fee Schedule

The Official Medical Fee Schedule (OMFS), adopted and revised through the public hearing process by the DWC administrative director, is used for billing medical treatment under workers' compensation. Pursuant to Labor Code Section 5307.1, the fee schedule is to be reviewed and revised every 2 years.

During 1996 and into 1997, DWC reports that a fee schedule advisory group was convened through the Industrial Medical Council, in cooperation with the Division of Workers' Compensation. In July 1996, the IMC contracted with Medicode to compare the current OMFS with other payment schedules. Medicode submitted its analysis in late 1996 amidst questions of the methodology, and discussion continued in the advisory group.

IMC reports that the Official Medical Fee Schedule Advisory Committee conducted a page by page review of the Official Medical Fee Schedule. Among the topics covered in committee deliberations were: 1) to use the 1997 CPT to update the OMFS; 2) numerous clarifications to the fee schedule groundrule language; 3) allow for reimbursement for copies of medical documentation; 4) allow for reimbursement for the treating physician's permanent and stationary report; 5) provide for written confirmation of verbal authorizations for treatment; and 6) whether to increase the conversion factors for payment for medical services.

DWC reports that it expects to hold hearings in the fall of 1997 on changes recommended by the advisory group and other changes proposed by the Division, in order to have a new fee schedule available in 1998.

Medical-Legal Fee Schedule

To address the costs of medical legal reports, Labor Code Section 5307.6 was enacted mandating that the DWC administrative director adopt and revise a medical-legal fee schedule at the same time that the Official Medical Fee Schedule is adopted and revised pursuant to Labor Code Section 5307.1.

The current medical-legal fee schedule -- CCR §9795 -- went into effect on August 3, 1993, and applies to all medical-legal evaluations, not just the initial evaluation.

In June 1996, the Industrial Medical Council began holding meetings with an industry advisory committee that will assist the IMC in its efforts to update the medical-legal fee schedule. The IMC is required by the Labor Code to recommend to the Administrative Director reasonable levels of fees for physicians who treat and evaluate industrial injury in the California workers compensation system. In response to this mandate, the IMC hosted an advisory committee, the Medical/Legal Fee Schedule Task Force, comprised of representatives of major workers compensation insurers, employers, bill review companies and provider groups from throughout California.

The Medical/Legal Fee Schedule Task Force studied the potential for developing an entirely new basis for assessing the complexity of and for compensating for medical/legal evaluations and formulated clarifying amendments to the existing Medical/Legal Fee Schedule regulations. It was the conclusion of the committee that the proposal for a new medical/legal complexity scale should be studied and tested for another year prior to being considered for adoption. The topics reviewed by the Task Force included: 1) providing for a missed appointment fee; 2) clarifying and adding complexity factors for ML 103's and ML 104's; 3) clarifying the language of modifiers; and 4) whether to increase the conversion factors or the RV for each ML level.

The IMC reviewed the recommendations of the two task forces and forwarded to the Administrative Director its endorsement of the proposed modifications.

Hospital Fee Schedule

The reform legislation requires that the Division of Workers' Compensation issue a Hospital Fee Schedule by January 1, 1995. The enabling legislation specified that DWC should consider cost and service differentials for various types of facilities.

The Division held public hearings in December 1995 on the proposed schedule. During the hearings and the subsequent comment period, the Division received constructive feedback on alternatives and suggested modifications to the schedule.

New regulations to establish an inpatient hospital fee schedule were promulgated in December 1996 and were scheduled to take effect April 1, 1997 for all hospital admissions involving workers' compensation cases in California. Outpatient services provided by hospitals were previously covered by DWC's Official Medical Fee Schedule.

The fee schedule as set forth in Title 8, California Code of Regulations Sections 9790.1 and 9792.1 applies to inpatient services where the date of admission is on or after April 1, 1997. The new schedule provides that maximum payments to hospitals for specific diagnoses are calculated by applying a constant "composite" factor assigned to each hospital and derived from the federal Medicare program, along with a weight based on the injury diagnosis.

However, on March 31, 1997 the Community Care Network, Inc. obtained a temporary restraining order preventing the administrative director from "computing, administering, or implementing the 'Instructions for Payment of Inpatient Hospital Bills" pending a hearing on April 9, 1997. At the hearing on April 9, 1997 the Superior Court Judge extended the temporary restraining order.

On May 9, 1997, the Superior Court denied Community Care Network's request for a preliminary injunction. In a subsequent hearing on May 16, 1997, the judge upheld his earlier hearing but granted CCN a 45 day "stay" in order for them to appeal the ruling. An appeal has been filed, and further action on implementation of the inpatient fee schedule remains on hold.

Utilization Review Regulations

Legislative changes in 1993 required the DWC Administrative Director to "adopt model utilization protocols in order to provide utilization review standards" [Labor Code Section 139(e)(8)]. Pursuant to that statutory mandate, utilization review standards -- CCR §9792.6 -- were adopted as regulations effective July 20, 1995.

In response to the regulations, insurers and self-insured employers choosing to implement medical utilization review as part of the medical delivery process were required to advise the DWC administrative director when their programs were operational. According to the division, insurers and self-insured employers must "maintain, and make available to the administrative director on request, a written summary..." of their program. Any entity's utilization review program not in compliance with the regulations by July 1, 1996 may be subject to action on the part of the Administrative Director. Plans themselves need not be submitted to the Division, but a summary of the program must be made available to DWC upon request.

Since the regulations were promulgated, approximately 100 claims administrators have filed notice of use of utilization review with the Division.

DWC reports that implementation of the utilization review regulations has raised issues, including how to allow for telephone authorization of medical treatment, while assuring that authorized treatment is paid for; and how to reduce the paperwork required in current requirement that every written request for authorization be responded to in writing.

Treatment Guidelines

During 1996 and 1997, the Industrial Medical Council (IMC) completed the project of adopting guidelines to be used by treating physicians in the California workers' compensation system. Seven new treatment guidelines for the treatment of common industrial injuries were adopted, after extensive public hearing and input.

In 1994, when the mandate in Labor Code § 139(e)(8) to adopt treatment guidelines became law, the IMC identified eleven common industrial injury conditions to be addressed by the guidelines. These injuries included: occupational asthma, contact dermatitis, low back problems, injuries to the neck, knee, shoulder, elbow and four conditions related to the hand and wrist (Carpal Tunnel Syndrome, De Quervain's Tenosynovitis, Hand & Wrist Tendonitis/Tenosynovitis, Chronic Wrist Pain). The IMC subsequently added post traumatic stress disorder as another condition warranting a treatment guideline. Each guideline was reviewed and adopted by the IMC after a statewide public comment and hearing process.

The treatment guidelines became effective as regulation in Title 8 of the California Code of Regulations, as follows:

Treatment Guideline Topic Effective Date

§ 70Low Back ProblemsJuly 3, 1997
§ 71Neck ProblemsAugust 18, 1997
§ 72 Occupational Asthma October 18, 1995
§ 73 Contact DermatitisOctober 18, 1995
§ 74 Post-Traumatic Stress Disorder February 23, 1997
§ 75 Shoulder Problems August 15, 1997
§ 76 Knee Problems June 13, 1997
§ 76.5 Elbow Problems August 15, 1997
§ 77 Problems of the Hand and Wrist August 16, 1997

During 1997 and 1998, the IMC will devise and initiate a "Continuous Quality Improvement" (CQI) review of the guidelines, in order to update the guideline text. The CQI process will begin with the earliest guidelines, treatment of asthma and contact dermatitis. The IMC expects to review and update each treatment guideline at least every 18 months.

Evaluation Guidelines

Forensic physicians in the California workers' compensation system are required to perform medical/legal evaluations in conformity with the guidelines for doing such evaluations adopted by the Industrial Medical Council. In prior years, the IMC adopted into regulation guidelines for evaluating psychiatric disability, immunologic disability, neuromusculoskeletal disability, as well as cardiac and pulmonary disabilities.

During 1997, the IMC initiated the "CQI" process to update and revise two existing evaluation guidelines: § 44 Method of Evaluation of Pulmonary Disability and § 45 Method of Evaluation of Cardiac Disability. Public hearings on each guideline were held in southern and northern California in late June 1997. At the close of the fiscal year, the IMC was reviewing the comments received for possible amendments to the proposed guideline text. The updated guidelines should become regulation by the fall of 1997.

24-Hour Care Pilot Project

Labor Code Section 4612, adopted in 1992 and amended in 1993, established three year pilot programs of 24 hour health care in California. These programs were set up to test the administrative efficiencies, cost control potential, and service capabilities of having a single system provide health care for occupational and nonoccupational injuries and illnesses.

Under traditional workers' compensation law, workers often have different sources of medical care, depending on whether an injury occurred at work or was not work-related. Typically, workers choose their own physician for care provided under their nonoccupational health plan (if they have health coverage). When injured on the job, employers typically determine the primary care provider.

Under the pilot programs, workers have a single network of providers for both on- and off-the-job health problems. Employees signing up for the program agree to receive all medical care for on and off the job injuries from an "exclusive provider" of health care for up to one year, in contrast to the 30 day period of medical control that employers have under traditional programs. Employees have a choice as to whether to enroll or maintain their traditional system.

Four individual pilot program designs were approved after the application period in 1994. Since their approval, one of the four has dropped its participation, and another has experienced low enrollments. The vast majority of participating employers and employees are under two related projects, emanating from the northern and southern regional offices of the state's largest health maintenance organization.

Implemented in 1994 with the participation of five employers in San Diego County, the program now includes over 65 employers in four counties. Enrollments in pilot programs have grown steadily and currently stand at nearly 8,000 employees in participating firms.

A comprehensive evaluation, largely funded by external foundation grants, is now underway to test a series of questions. The evaluation is being conducted by a consortium of the UCLA School of Public Health, the Rand Institute, and UC-Berkeley's Survey Research Center. The bulk of the financing comes from the Workers' Compensation Health Initiative of the Robert Wood Johnson Foundation, with other funding from the Rand Institute and from assessments on participating employers. The survey instruments and study methodology are likely to be put to use in evaluating other statesí experience in 24 hour health care programs.

In March 1997, the Division of Workers' Compensation issued the "Interim Report to the Legislature: 24 Hour Pilot Programs under Labor Code Section 4612", which provides further information. A final report to the Legislature is due at the end of 1998, one year after the close of the pilot programs.

In early 1997, Senate Bill 410 (Johnston) was proposed to extend the 24 hour coverage pilot programs from 36 to 60 months. SB 410 failed in committee.

The Health Care Organization Program

Legislation enacted as part of the workers' compensation reform effort of 1993 was intended to expand the use of managed care in workers' compensation, as a means of reducing medical costs and facilitating better management of workers' compensation cases.

The Health Care Organization or HCO program, which came into effect following passage of the 1993 reform legislation, expanded the use of managed care techniques in the workers' compensation system by allowing employers and insurers to contract with certified health care organizations to provide medical treatment for industrially injured workers.

HCOs are medical care systems that offer managed care services for work-related injuries and illnesses. Ideally, HCOs should offer quality medical care with occupational medicine expertise; lower medical costs for employers through the use of managed care techniques such as provider networks, utilization management and case management; and coordination of medical treatment with workplace health and safety measures and return-to-work services.

A certified HCO would:

Employers that contract with HCOs may control the medical care of injured employees for longer than the current 30-day period after date of injury, as follows:

At least one of the HCOs must offer a fee-for-service option. Employees may still predesignate any physician as their primary treating physician and thereby avoid having any period of employer control over medical care for work-related injuries.

Certified HCOs

As of August 1997, DWC reported that there were ten entities certified as Health Care Organizations:

HCO Organization
Year Certified
FHP Life Insurance Co.
MetraComp Select
Greaney Medical Group
Eisenhower Medical Center
Priority CompNet
Health Plan of the Redwoods
MetraComp Choice
US CompCare
Kaiser Foundation Health Plan,
Northern California
Medex HealthCare Inc.

Legislative Developments

Efforts have been made to streamline the regulatory process by locating HCO certification and monitoring in a single agency, the Division of Workers' Compensation.

Senate Bill 1063 (Peace), eliminating the role of the Department of Corporations in the HCO certification process, was passed by the Legislature and signed into law by the governor in August 1997.

Medical-Legal Evaluations

Reform legislation changes to medical-legal evaluations were intended to reduce both the cost and the frequency of litigation, which drive up the price of workers' compensation insurance to employers and lead to long delays in case resolution and the delivery of benefits to injured workers.

CHSWC Medical-Legal Study

In 1995, the Commission, with the interest and support of the workers' compensation community, contracted with the University of California at Berkeley Survey Research Center for a study of medical-legal evaluations.

The study analysis was based upon the Workers' Compensation Insurance Rating Bureau's (WCIRB) Permanent Disability Claim Survey, a set of data created by the WCIRB at the request of the Legislature to evaluate the 1989 reforms. Since that time, the WCIRB has continued to collect these data on an annual basis. The WCIRB data summarizes accident claim activity, including such measures as the degree of impairment, the type and cost of specialty exams, whether the case was settled and, if so, the method of settlement employed.

The analysis covered samples of 1989 through 1994 accident year claims from insured employers. Data from self-insured employers and public agencies are not reported to the WCIRB and are therefore not included in the study. The first study report and findings were published in July 1996.

The Commission elected to extend the Medical-Legal study for another year and a second report, incorporating findings for the 1995 accident year, was published in July 1997.


Total Cost of Medical-Legal Exams

The study determined that the cost of medical-legal examinations on partial permanent disability (PPD) claims has declined significantly since its peak during the 1991 accident year.

For the insured community, the total cost of medical-legal exams performed on PPD claims by 40 months after the accident year 2 , has dropped 85 percent from a high of $394.5 million for the 1991 accident year to an estimated $58.8 million for the 1995 accident year.

Sources of Savings

Total costs are calculated by multiplying the number of PPD claims by the average number of exams per claim and then by the average cost per exam. The study determined that the decline in total medical-legal exam costs is due to a reduction in each of these components which make up the total cost.

Number of PPD Claims

The number of PPD claims decreased from about 137,000 in 1989 to an estimated 85,000 in 1995. This decrease was driven by a decline the number of reported injuries. Also, a substantial portion of the decline in PPD claim frequency may be the result of a steep drop in the number of claims with a psychiatric component, efforts to reduce fraudulent claims and restrictions on post-termination claims.

Number of PPD Claims

(Thousands, 30 Months after policy inception)
Change from previous year
1994 (est.)
1995 (est.)

Average Cost of Medical-Legal Exams

The average cost per medical-legal exam has dropped 48 percent from a high of $987 for 1990 accident year claims to an estimated $518 for 1995 accident year claims.

The study team determined that the decrease is the result of three important changes:

Average Cost of Medical-Legal Exams
(By Accident Year, at 40 months)

YearAverage Cost
1989 $965
1990 $987
1991 $959
1992 $875
1993 $659
1994 (est.) $531
1995 (est.) $518

Number of Exams per Claim

The average number of medical-legal exams per claim has dropped more than half from 2.3 in accident year 1990 to an estimated 1.1 in accident year 1995.

This substantial decline is attributed in part to reforms implemented to reduce the "dueling docs" syndrome in the past which contributed to complications and delays in claim resolution. Before the reforms, applicant and/or defense attorneys could attempt to bolster a claim by obtaining multiple reports by forensic doctors. Changes include establishing treating physician reports as presumed correct except with a preponderance of evidence, limiting the number of exams allowed per specialty in litigated cases, coverage of all issues in a single "comprehensive" evaluation, and an aggressive effort to reduce psychiatric exams.

Psychiatric Exams

Much of the improvement in the average number and average cost of medical legal exams per claim is a result of reductions in the number and cost of psychiatric claims.

As shown in the following chart, the total cost of psychiatric medical-legal exams dropped from a high of $93.8 million for the 1991 accident year to an estimated $5.8 million for the 1995 accident year. This represents a savings of $88 million, or 94 percent, in the cost of psychiatric-related medical-legal exams. This reduction accounts for 26% of the overall reduction in all medical-legal costs between the 1991 and 1995 accident years.

Improvement on Represented Claims

When these data are further disaggregated, it is clear that the decline in the number of exams is being driven primarily by the improvement on the represented claims. The following chart shows the data disaggregated by represented/unrepresented and major/minor injuries.

Regardless of whether the injury is major or minor, the represented cases in this period have had more exams than the unrepresented. This gap is, however, narrowing. While the frequency of exams on unrepresented claims has changed little, the change on represented cases has been substantial.


"Major" means a claim with a permanent disability rating of 25% or more.
"Minor" means a claim with a permanent disability rating of less than 25%.

Time to Case Resolution

There has been no significant improvement in the rate at which cases close. The study team determined there are no significant differences in the time taken to case resolution in the 1990s. After controlling for injury severity, the number and type of specialty exams, and presence of employee legal representation, there is no statistically significant improvement in time to case resolution between 1990 and 1993, despite the variety of reforms which have been enacted during that time. Indeed, the only statistical difference between any particular accident years that was found is that cases following 1989 appear to be resolved more slowly than cases arising during the 1989 accident year.


The 1996 report by the Commission evaluating the reforms to the medical-legal process found dramatic improvements since 1989 in the cost and frequency of medical-legal reports. Much of that analysis required projections for the 1993 and 1994 accident years. The current report, using more recent data, confirms those savings and the accuracy of the projections.

These more recent data also suggest that the substantial savings, especially for the 1993 and 1994 accident years, continue into the 1995 accident year. The 1996 report found that substantial savings resulted from changes in the Medical-Legal Fee Schedule and the decline in psychiatric exams and claims. These trends continue to be demonstrated in the 1997 report's findings.

In addition, data for the 1994 and 1995 accident years suggests an additional source of major cost savings, the reintroduction of the role of the treating physician. This legislative change is likely responsible for a substantial portion of the decline in the average cost and frequency of medical-legal reports on claims occurring after January 1, 1994. However, these data for 1994 and 1995 injuries come from special panels that are smaller than the full panels drawn for 1989-1993. The survey conducted during the current year, with a full panel of 3500 claims for 1994 injuries, will be important in analyzing this trend.

Finally, analysis of the time required to resolve PD claims continues to demonstrate the resistance of the system to more rapid claim resolution. The full 1994 panel, available late in 1997, will be critical to determining if the 1993 reforms have finally been able to achieve the goal of speeding up the claim resolution process.

Next Steps

The Commission has contracted with UC Berkeley Survey Research Center to continue this analysis for another year. An additional study report is expected in July 1998.

Alternative Benefit Delivery Systems

The Commission is monitoring one of the provisions of the 1993 workers' compensation reform package known informally as the "carve-out", since certain employees and employers are carved out from the traditional workers' compensation system. For the first time, authorized parties may agree through collective bargaining to alternative methods for resolving workers' compensation disputes.

The "carve-out" program was modeled on a similar experiment in Massachusetts, where Bechtel and the Pioneer Valley Building and Construction Trades Council had a collective bargaining agreement governing a single construction project.

California Labor Code section 3201.5, established by the 1993 Senate Bill 983 (Leroy Greene), allows unions and employers in the construction industry to create what is close to an alternative workers' compensation system. Through collective bargaining, the parties may agree on an exclusive list of medical providers and evaluators, on return-to-work and vocational rehabilitation programs, and an"alternative dispute resolution system" to replace most DWC and WCAB procedures.

The statute gives the parties great leeway to establish the kind of system they want -- but there are two important limits: (1) the agreement may not diminish compensation to injured workers, and (2) the final step of the "alternative dispute resolution system" must be appeal to the Workers' Compensation Appeals Board.

At first limited to the construction industry, in 1994 Senate Bill 853 (Greene) expanded the range of eligible employers to include businesses in rock, sand, gravel, cement and asphalt operations; heavy duty mechanics; surveying; and construction inspection.

Under the original provisions of the construction carve-out, the administrative director was to look at the proposed agreements, see if they complied with the law, and issue comments, but the division did not have approval/disapproval authority. The 1994 revision gave the DWC administrative director the power of approval and allowed the division to insure that the parties were eligible to participate. The parties must also submit a copy of the agreement, although they do not need the DWC administrative director's approval of the agreement itself.

Pursuant to the requirements in Labor Code Section 3201.5(i), the DWC must report to the Legislature by June 30, 1996 and annually thereafter on the number of employers and employees covered by carve-out agreements, as well as other data about claims costs and vocational rehabilitation.

The Division of Workers' Compensation reports that as of March 25, 1997, nine carve-out agreements have been reached.

For the 1995 calendar year, DWC reports that 242 employers were participating in the carve-out program. By the end of 1996, DWC reports that preliminary statistics show that this had grown to 277 employers under 9 general programs.

DWC also indicated that growth in the amount of experience under the program was more dramatic. In 1995, the program covered approximately 6.9 million workhours and $157.6 million in payroll. Preliminary results show that during 1996, the program covered over 11.6 million workhours, with $272 million in payroll.

Carve Out /Alternative Workers' Compensation Programs Study

The Commission is carrying out an evaluation of collectively bargained workers' compensation programs in the California construction industry, also known as "carve-outs".

Originally proposed by The Center to Protect Worker' Rights in Washington DC, the study is being independently conducted and funded by the Commission.

This independent, outside study is taking an important first step for the long term evaluation of the effectiveness of alternative workers' compensation programs. This identification and establishment of baseline measurements could form the foundation for a nationwide study of such programs.

The first phase of this study is to describe the carve-out programs that have been established and to determine the acceptability of these programs through interviews with unions and employers, program administrators, workers who have incurred claims, employers who are covered by the programs and service delivery providers engaged by the programs. This first phase is scheduled to be completed in December 1997.

As with all Commission projects, an advisory group has been formed to assist in this endeavor. The Center to Protect Workers' Rights is serving as an ex-officio member, and interested members from the California workers' compensation community are serving on that committee.


Reform Anti-Fraud Provisions

The reform legislation included provisions to deal with suspected fraud in workers' compensation claims. Besides stiffening penalties, obliging specified parties to report suspected fraud to the Department of Insurance (DOI) and mandating adherence to medical-legal/medical billing and reporting requirements, the legislation created an employer assessment to fund anti-fraud activities.

The legislation also established the Fraud Assessment Commission (FAC). The FAC is funded by an assessment on California employers. The FAC was charged with determining the actual assessment amount after considering advice and recommendations from both the Insurance Commissioner and DOI's Fraud Division.

The initial fraud assessment amount was $3 million. The assessment was increased to $10 million for fiscal year 1992-93 and then raised to $25 million for fiscal year 1993-94 and thereafter. The Fraud Assessment Commission authorized the Department of Insurance to distribute a total of $28 million for fiscal year 1996-97. The additional $3 million was derived from collected fines and civil penalties levied because of violations, restitutions and interest rather than from increased employer assessment.

After incidental expenses, the Insurance Commissioner with the advice and consent of the Fraud Division and the Fraud Assessment Commission distributes half of the funds to applying California district attorneys' offices.

The fraud prosecutions funded by this new program, as well as a renewed determination on the part of workers' compensation insurers to fight fraud, have driven many of the most egregious practitioners out of business and have helped reduce the number of workers' compensation claims.

Recognizing that insurer Special Investigative Units (SIU) are the first line of defense in fighting workers' compensation fraud, the Legislature in 1991 adopted statutes requiring all insurers to maintain a SIU. The Fraud Division is responsible for overseeing the SIUs. The Fraud Division established a performance audit process to determine whether they are in compliance with the code and regulatory requirements to combat fraud.

CHSWC Public Hearing/Open Forum on Workers' Compensation Anti-Fraud Activities

As partial fulfillment of its responsibilities to evaluate the impact of the worker' compensation reform legislation, the Commission on Health and Safety and Workers' Compensation decided to examine California's workers' compensation anti-fraud activities.

To assist in this examination, CHSWC conducted a public fact-finding hearing on workers' compensation anti-fraud activities on Thursday, February 20, 1997 at the Junipero Serra State Building in Los Angeles.

The purpose of the fact-finding hearing was to bring representatives from the California workers' compensation community and other interested persons together

Review and Comments

From the oral and written testimony at the fact-finding hearing, CHSWC developed draft findings and recommendations for legislative and/or administrative changes to improve anti-fraud activities.

Since specific responsibilities for dealing with workers' compensation fraud are assigned to the Fraud Assessment Commission and the Department of Insurance, the draft findings and recommendations were shared with those agencies for review and comment.

The Commission has adopted those findings and recommendations supported by the Department of Insurance and the Fraud Assessment Commission.

The Commission will host an "Anti-Fraud Roundtable" for the community and the public to discuss those draft findings and recommendations not supported in their current form by the DOI and the FAC.

Findings and Recommendations

The Commission has the following findings and recommendations on the current status of workers' compensation fraud:

Fraud in the California workers' compensation system has decreased since the implementation of the reform legislation. Fraud claims are down and some blatant medical mills have been put out of business. However, the workers' compensation community recognizes that fraudulent activities continue.

Fraud is subject to being perpetrated by those in every aspect of the workers' compensation system - employees, employers, and benefit providers. Fraud by anyone in the workers' compensation system impacts everyone in the workers' compensation system.

There is widespread recognition that uninsured employers as such are engaging in fraudulent activities, but there are differing opinions as to whether activities against such employer fraud are covered in the Fraud Assessment grants. Employers who fail to secure workers' compensation insurance hurt not only their employees, but also hurt honest employers through unfair competition.

The community recognizes that employers who fail to secure workers' compensation coverage may well be failing to meet other requirements. This situation is part of a larger problem of employers who operate totally outside the law and are therefore invisible to the system. Particular industries, such as construction and house cleaning, are hard hit.

It has been reported that recent changes in workers' compensation laws have given the designated treating physician unprecedented levels of authority and autonomy in controlling the type and duration of medical treatment, and the result is an open invitation to unscrupulous medical providers bent on committing fraud.

The community realizes that any long term reduction in criminal activity in area of fraud requires a long term commitment.

The Commission also adopted findings and recommendations regarding deterring fraud, detecting fraud, incentives/barriers in fighting fraud, roles in fighting fraud, administration of the fraud assessment, distribution of the fraud assessment, and measuring effectiveness of anti-fraud efforts.

CHSWC Anti-Fraud Roundtable

As noted above, the Commission will host an "Anti-Fraud Roundtable" for the community and the public to discuss those draft findings and recommendations from the CHSWC Fact-Finding Hearing not supported in their current form by the Department of Insurance (DOI) and the Fraud Assessment Commission (FAC).

Tracking Illegally Uninsured Employers

The Commission recognizes that employers who are insured for workers' compensation are placed at a competitive disadvantage with respect to illegally uninsured employers. Especially in industries with high premium rates, the illegally uninsured employer is able to underbid the insured employer.

Insured employers are again disadvantaged when taxes are raised to cover costs shifted to government services to assist the injured workers of employers who are illegally uninsured. In addition, regulations have made it increasingly more difficult for injured workers to obtain benefits from the state-supported Uninsured Employers Fund.

Several states, including Wisconsin and Colorado, have been using proactive programs to identify uninsured employers using computerized lists of employers and their workers' compensation policies. These have proved very successful at bringing uncovered employers into compliance.

CHSWC Issue Paper on Illegally Uninsured Employers

The Commission has developed an issue paper on its project to identify and bring into compliance various employers who are illegally uninsured for workers' compensation. By reducing the number of illegally uninsured employers, this project aims to provide proper workers' compensation coverage for workers, to reduce the cost to the Uninsured Employers Fund and the state's General Fund, and to level the economic playing field for insured employers.

As with all Commission projects, the Commission staff, in cooperation with the University of California, convened an advisory committee composed of interested persons from the workers' compensation community.

The following are two of the major findings in the uninsured employers issue paper:

To address these and other findings, the issue paper includes the following recommendations:

The Commission recommended other possible legislative actions, including proposals

Executive Summary: Findings and Recommendations

Section I The Commission on Health and Safety and Workers' Compensation

Section II Reform Legislation Impact on the Workers' Compensation Community

Section III Workers' Compensation Issues

Section IV Health and Safety Issues

Section V Program and Agency Operations

Section VI Commission's Future Activities