Report on the CHSWC Public Fact-Finding Hearing

Workers'Compensation Anti-Fraud Activities
CHSWC Members

James J. Hlawek, Chairman

Leonard McLeod

Gerald O'Hara

Tom Rankin

Kristen Schwenkmeyer

Robert B. Steinberg

Darrel "Shorty" Thacker

Gregory Vach

CHSWC Executive Officer

Christine Baker

State of California

Department of Industrial Relations

September 1997



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


Public fact-finding hearing

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 1 community and other interested persons together

  • To discuss California's workers' compensation anti-fraud activities, and

  • To determine if legislative or administrative changes may be needed to improve workers' compensation fraud detection and prosecution.

Draft Report 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.

Comments from those agencies regarding the draft findings and recommendations were incorporated into this final report.

Final CHSWC Report

The Commission has adopted those findings and recommendations supported by the Department of Insurance and the Fraud Assessment Commission. They are contained in the report section entitled "Findings and Recommendations" annotated with applicable comments from those agencies.

The report section entitled "Acknowledgments and Thanks" lists those people and organizations that submitted oral and/or written testimony for the fact-finding hearing. The Commission appreciates their interest and involvement in a project dealing with a significant aspect of the California workers' compensation program.

Report Availability

This report may be reproduced as needed, as long as appropriate attribution is given to the Commission on Health and Safety and Workers' Compensation.

This report is also available on the Internet. The address locates the website of the California Department of Industrial Relations. The Commission on Health and Safety and Workers' Compensation may be accessed under either "Workers' Compensation" or "Occupational Safety and Health" on DIR's home page.

Next Steps

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.

The Commission may subsequently issue a supplemental report with additional findings and recommendations.

Findings and Recommendations

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.

  • CHSWC commends the anti-fraud efforts undertaken by the members of the workers' compensation community and public agencies. Since fraudulent activities continue, CHSWC recommends that anti-fraud efforts 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.

  • CHSWC recommends that anti-fraud efforts be directed at all types of fraud, including employers who willfully fail to secure workers' compensation coverage, large medical-mill cases and small injured worker cases.

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.

  • CHSWC recommends legislative language so that failure to secure workers' compensation insurance is subject to actions under Fraud Assessment grant activities.

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.

  • CHSWC recommends that particular focus be made on bringing employers "into the system" and insuring workers' compensation, payroll, tax, and other requirements are met.

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.

  • CHSWC recommends that a review of the effect of free choice of physician and the presumption of correctness of the treating physician's evaluation be carried out and changes recommended if warranted.

    CHSWC concurs with the Department of Insurance suggestion that representatives from the California Medical Board, Board of Chiropractic Examiners and the Industrial Medical Council be asked to participate in this review.

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

  • CHSWC recommends that the community keep up its efforts against fraud in the workers' compensation system and warns it to guard against complacency.

Deterring Fraud

The first step in deterring fraud is to insure that everyone in the workers' compensation community knows the requirements they must meet and responsibilities they have.

  • CHSWC recommends that measures be taken to insure that employers know of requirements for workers' compensation coverage. Inform and publicize employer requirements for insurance - at points where permits, employer ID numbers etc. are issued.

    CHSWC concurs with the Department of Insurance suggestion that representatives from the Employment Development Department be asked to participate.

  • CHSWC recommends that measures be continued to inform injured workers of their rights and responsibilities, and of the penalties for fraudulent activities. Such advisories should be included in informational material about workers' compensation designed for distribution to injured workers.

    The Department of Insurance has advised that it has fraud-fighting posters and other materials available on request to employers, and to DIR and CHSWC for distribution.

  • CHSWC recommends increasing public awareness of

      - requirements for workers' compensation coverage

      - prohibitions and penalties against fraud

      - how fraud hurts everyone

  • CHSWC recommends that various methods for disseminating this information be considered, including public service announcements on radio and television, press releases, through the academic sector, job training programs and employer and employee organizations. The Department of Insurance suggests the possibility of joint Public Service Announcements.

There is widespread recognition that publicizing anti-fraud activities is effective as a deterrent.

  • CHSWC recommends that the community get the message out that "Fraud by Anyone is Fraud against Everyone".

  • CHSWC recommends increasing public awareness of enforcement activities, arrests, convictions, and savings to all when fraud perpetrators are caught.

  • CHSWC recommends that the Fraud Assessment Commission consider issuing regular press releases, commending the efforts and results of anti-fraud activities and, where appropriate, demonstrating the savings.

  • CHSWC recommends that the Fraud Assessment Commission consider giving"commendations" or "awards" or other recognition for various activities, such as to those fighting for fairness in particular industries.

Significant penalties will help in deterring fraud. However, penalties for fraud vary - employees engaging in fraudulent activities are subject to heavier penalties (prison and fines) than illegally uninsured employers (misdemeanor).

  • CHSWC recommends that the penalty structure be examined and modified as needed so that it is balanced, flexible with respect to prosecution, and sufficiently severe to act as a deterrent.

  • CHSWC recommends implementation of authorizing language in the law so that employers who intentionally illegally fail to secure workers' compensation coverage be prosecuted under "wobbler" (felony or misdemeanor) option. The Department of Insurance advises that it supports efforts to increase penalties against illegally uninsured employers.

Detecting Fraud

As anti-fraud efforts increase and some segments of the community such as medical-legal providers feel the pressure, those who engage in fraud will find other ways. For example, the community has noted an increase in suspected medical treatment fraud.

  • CHSWC recommends that the insurance community consider industry-wide training in fraud detection and techniques for investigation.

    The Department of Insurance advises that by law, insurance companies are required to maintain "Special Investigation Units" (SIU). The Fraud Division of DOI is currently developing new outreach and training strategies to increase fraud detection and reporting by these SIUs.

  • CHSWC recommends that the community establish a feedback loop whereby frontline persons are advised of new types of fraud, what to look out for, and advising that efforts are being made to detect and combat it. This could take the form of "Fraud Bulletins" issued by the Fraud Assessment Commission, with input from the Department of Insurance, district attorneys, employer and employee groups, and the public.

  • CHSWC recommends that the Department of Insurance consider establishing an 800 phone number Hot Line by which suspected fraudulent activities and techniques could be reported.

  • The DOI Fraud Division advises that it will work with the Insurance Commissioner's office to possibly expand the use of its existing 800-number to include reporting fraud.

Incentives/Barriers in Fighting Fraud

There are some inherent barriers in the legislation, rules, regulations, and administration of the workers' compensation program that hinder anti-fraud activities. For example, recent court decisions have reasserted that the WCAB has jurisdiction over workers' compensation matters and have thus precluded insurers from suing fraudulent providers in Civil Court.

  • CHSWC recommends that systemic barriers to fighting fraud be reduced or eliminated.

  • CHSWC recommends reviewing other states' anti-fraud laws and activities for possible application in California.

  • CHSWC recommends increased detection of and sanctions imposed against fraud perpetrators.

It was noted that the Industrial Medical Council of the Department of Industrial Relations is taking steps to combat fraud in the medical-legal sector of the workers' compensation system. However, the Industrial Medical Council is the only medical licensing body with investigators who do not have peace officer status, the lack of which impedes investigations.

  • CHSWC supports IMC's goal to obtain Peace Officer status for its Senior Special Investigator. Such status would enable the investigator to have access to criminal records and police files and would give the investigator legal authority to be an affiant for, issue and execute search warrants, detain suspects for questioning, and seize and secure evidence.

Incentives would enhance and encourage workers' compensation anti-fraud activities.

  • CHSWC recommends that incentives to fight workers' compensation fraud be continued and enhanced.

  • CHSWC recommends that the Fraud Assessment Commission consider establishing awards or recognition to those who have effectively fought fraud.

Roles in Fighting Fraud

The Department of Insurance has experienced difficulties in the past with respect to its workers' compensation anti-fraud activities. Recent audits have led to recommendations for improvement. The Department of Insurance is reorganizing to deal with past problems and is requesting time to accomplish this endeavor.

  • CHSWC commends the Department of Insurance for requesting audits of its operations and taking measures to implement improvements.

  • CHSWC supports the efforts of the Department of Insurance to implement constructive changes pursuant to audit findings and recommends that Department of Insurance submit periodic status reports to the FAC (if such reports are not already a requirement of the audit).

  • The Department of Insurance advises that reports are already prepared regularly for the Fraud Assessment Commission and special reports are made available on the request of the FAC.

  • CHSWC recommends that, after Department of Insurance has had the opportunity to make changes, the Department of Insurance make an oral presentation to the Fraud Assessment Commission and to CHSWC.

  • The Department of Insurance advises that since commencing its reorganization, Fraud Division personnel have already made personal visits with each of the Fraud Assessment Commission members. The DOI further advises that the FAC will be kept informed of all significant developments in the workers' compensation fraud program during regular meetings in the upcoming months.

The role of the Uninsured Employers Fund Unit in the DIR Division of Workers' Compensation is perceived by some as demonstrating conflict of interest between paying injured worker claims and defending the assets of the state.

  • CHSWC recommends that an internal review be conducted regarding the policies and purposes of the DWC Claims Unit and the administration of the Uninsured Employers Fund.

Unclear roles in the fight against fraud have led to multiple investigations of the same case or in cases that don't receive attention. The use and effectiveness of current coordination among agencies depends very much on the specific people involved - much is informal.

  • CHSWC recommends that investigative roles and referrals be formalized among the insurers' SIUs, the Department of Insurance and the county district attorneys to eliminate unnecessary duplications of investigative work.

  • The Department of Insurance advises that this process has been ongoing since the inception of the workers' compensation fraud program. "Joint Investigation/Prosecution Plans" are now required as part of the district attorney applications for funding. DOI believes that this requirement, along with increased communication and training with the district attorneys and the insurance industry, will eliminate many of the problems. DOI also notes that the "dual reporting" to district attorneys and the DOI Fraud Division remains an issue which causes some confusion.

  • CHSWC recommends that actions be taken to increase coordination among agencies to maximize the effective use of scarce resources.

  • The Department of Insurance advises that it is already developing strategies as part of its reorganization to form closer working relationships with parties, both governmental and private sector, in order to maximize its resources.

Administration of the Fraud Assessment

The community noted that the Fraud Assessment Commission sets the assessment rate but they seem to be constrained in what else they can do. Under the current statutes, the Fraud Assessment Commission has limited ability to control where the Fraud Assessment goes, who gets it and if is being expended correctly. The Fraud Assessment Commission does not currently seem to have the staff or the authority to effectively demand accountability. The Department of Insurance may be in a perceived conflict of interest role with respect to the handling of Fraud Assessment monies.

  • CHSWC recommends, if such are not already in place, that the Fraud Assessment Commission consider establishing standardized methods, procedures, forms, and justifications to request grant monies from fraud assessment and to evaluate the use of grant monies.

  • The Department of Insurance advises that this process is under discussion and open for review. A component in the DOI Fraud Division's reorganization project is the creation of several new functions that will directly track and report on all fraud program activities.

Distribution of the Fraud Assessment

The distribution of the current fraud assessment is set by law; 50% must be distributed to the Department of Insurance and the other 50% to local district attorneys.

  • CHSWC recommends a legislative change so that the distribution of the fraud assessment can be flexible.

  • The Department of Insurance advises that it supported Assembly Bill 1004 which has been passed by the Legislature and sent to the Governor for signature. AB 1004 would give flexibility to the FAC to fund the DOI Fraud Division and district attorneys.

  • CHSWC recommends that the feasibility be explored to enable smaller counties to join together in submitting grant applications to the Fraud Assessment Commission.

Measuring Effectiveness of Anti-Fraud Efforts

Currently, the Department of Insurance and the county District Attorneys are required to report the numbers of fraud cases, referrals, arrests, prosecutions, and convictions. The economic impact of such cases is not included in those reporting requirements, yet one case may save literally millions of dollars.

  • CHSWC recommends that the Fraud Assessment Commission work with the community to determine what measures of effectiveness would be best to use. CHSWC urges them to work toward achieving consensus and/or understanding of what is needed and what is possible in what timeframes.

  • CHSWC recommends that the Fraud Assessment Commission review the current statistical measures and consider adding economic measures of value of the case and the savings to all affected, including the public. The Department of Insurance suggests that the DOI Fraud Division and the district attorneys be closely consulted to determine what "meaningful" measures are needed and/or realistic to assess.

  • CHSWC recommends that Fraud Assessment Commission consider specific reporting requirements for all entities involved in workers' compensation anti-fraud activities, such as:

    District Attorneys

    Department of Insurance Fraud Division

    Department of Insurance Accounting Section- Tracking Payments and Restitutions

    Fraud Assessment Commission

    Division of Workers' Compensation

Future CHSWC Anti-Fraud Activities

The Commission on Health and Safety and Workers' Compensation is taking additional steps in the fight against fraudulent activities in the California workers' compensation system.

  • CHSWC project on Illegally Uninsured Employers was recently completed. The Issue Paper contains recommendations for legislative changes and possible future pilot projects.

  • CHSWC will actively seek sponsors for legislative changes.

  • CHSWC Commissioners will present oral and written testimony before legislative committees in hearings for proposed legislation and will recruit other members of the community to do the same. The Department of Insurance requests that CHSWC staff meet with the FAC, the DOI Fraud Division and the district attorneys in advance of any proposals for new legislation so that current fraud programs and strategies are not adversely impacted.

  • CHSWC encourages the formation of and will consider participating (if requested) in industry self-help/self-improvement efforts to deal with uninsured employers and benefit honest employers. The industry may wish to make a larger scope effort to deal with employers who do not comply with many and various requirements.

Acknowledgments and Thanks

The Commission on Health and Safety and Workers' Compensation gratefully acknowledges and thanks the following participants in the CHSWC Fact-Finding Hearing on Workers' Compensation Anti-Fraud Activities.

California Applicants' Attorneys Association

Laurence R. Lerner, President
Mark Gerlach, Consultant

California Chamber of Commerce

    Julianne Broyles, Director of Insurance and Employee Relations

California Department of Insurance

David Knowles, Deputy Commissioner, Department of Insurance
N. K. Newman, Deputy Commissioner, Fraud Branch, Department of Insurance

California District Attorneys Association

Michael R. Capizzi, CDAA President and District Attorney, Orange County
Alice Sprague, Deputy District Attorney, Alameda County

California Fraud Assessment Commission

Joseph E. Markey, Fraud Assessment Commission Chairman, and
President, California Self-Insurers Association

California Manufacturers Association

    Julianne Broyles, on behalf of CMA Policy Director Willie Washington

California Workers' Compensation Institute

    Edward C. Woodward, President
    John Benson, Vice President of Claims, Zenith Insurance

Department of Industrial Relations

Jerry Simpson, Deputy Director, Department of Industrial Relations
Larry Hoffart, Chief, DIR Division of Administration
D. Allan MacKenzie, M.D., Executive Medical Director, Industrial Medical Council
Suzanne Marria, Esq., Investigations Unit, Industrial MedicalCouncil


    David R. Beck, Director of Risk Management, Poway Unified School District
    John DeLaurentis, President, Merry Maids, El Cajon, CA
    Ed Ehlers, Executive Director, Associated California Loggers
    George Lively, Independent Building Contractor
    Esther Santiago, Consultant, representing "one of the major school districts in Southern California, self insured for workers' compensation"

Los Angeles County - District Attorneys Office

    David H. Guthman, Head Deputy, Workers' Compensation Fraud Division

Members of the Public

    Uros Jelicic, Injured Worker

State Compensation Insurance Fund

    Geri Madden, Government Relations Officer
    Donna Gallagher, Manager, Fraud Investigation Program