California Department of Industrial Relations

Division of Workers' Compensation

2002 Audits of Workers' Compensation Insurers, Self-Insured Employers, and Third-Party Administrators

April 1, 2003

2002 Audit Results

This thirteenth annual workers' compensation audit report summarizes the accomplishments of the Audit Unit of the Division of Workers' Compensation for all audits commencing during calendar year 2002.

Assembly Bill 749, effective January 1, 2003 has resulted in major changes to California workers' compensation law and mandates significant changes to the audit program (see pg. 28) beginning 2003.

Scope

The Audit Unit of the Division of Workers' Compensation completed a total of 55 audits which began in 2002, an increase of six audits from the 49 audits conducted in 2001. Of these, 46 were randomly selected and the remaining 9 were non-random, or "targeted" audits. Non-random audits were selected either based upon results from prior audits or following investigations resulting from complaints received by the Division of Workers' Compensation. The total number of audit subjects included 25 insurance companies, 11 self-administered, self-insured employers, and 19 third-party administrators (TPAs).

At all audits except for two of the three "Civil Penalty Investigations" (See below), claim files were selected for audit on a random basis, with the number of medical-only, indemnity and denied cases being selected based on the numbers of claims in each of those populations for the audit subject. In addition, if any complaints were received regarding possible violations of the Labor Code or regulations of the Administrative Director, each claim file related to the complaint was audited. The number of files audited at an adjusting location typically ranges from 100 to approximately 300 files for some audits. The numbers of claims audited are based upon the total number of claims at the adjusting location and the number of complaints received by the Division of Workers' Compensation related to claims handling practices. Pursuant to Title 8, California Code of Regulations, Section 10106(c)(2), either a "short sample" or a "full sample" of indemnity claims is audited, depending on the claims administrator’s performance as measured in certain key areas after the short sample is audited.

In 2002, compliance officers audited 8,861 claim files, of which 3,638 were randomly selected claims in which indemnity benefits were paid or were expected to be paid, 2,699 were randomly selected medical-only claims, 1,992 were randomly selected claims in which the employer or insurer denied all liability, 363 were selected based on complaints received by the Division of Workers' Compensation, and 169 were designated as "additional" files. "Additional" files include:


Findings

As a result of audits conducted during the calendar year 2002, the Audit Unit issued 12,654 administrative penalty assessments to administrators totaling $2,004,890. There were 579 claims in which injured workers were owed unpaid compensation totaling $850,385.36, an average of $1,468.71 per file in which there was unpaid compensation. The unpaid compensation is broken down as follows: $389,894.05 in temporary disability indemnity and salary continuation in lieu of temporary disability (45.85% of the unpaid compensation), $311,591.03 in permanent disability indemnity (36.64% of the unpaid compensation), $44,329.83 in vocational rehabilitation maintenance allowance (5.21% of the unpaid compensation), $91,243.44 in 10% self-imposed increases for late indemnity payments (10.73% of the unpaid compensation), $0 in death benefits (0% of the unpaid compensation), and $13,327.01 in interest and penalty and/or unreimbursed medical expenses (1.57% of the unpaid compensation).

The average number of penalty citations per audit subject was 230, the average amount per penalty assessment was $158, and the average total in penalty assessments per audit was $36,452. Most assessments were found in the indemnity, complaint, and denied claims, and although very few penalty assessments were found in medical-only claims, the time involved in reviewing them was minimal.

Of those audits demonstrating poor performance in 2002 audits, 4 resulted in the assessment of more than $100,000 each in administrative penalties:

1.  99 Cents Only Stores in City of Commerce, CA.

This audit subject was a randomly selected audit.

In addition to the administrative penalties and following conclusion of the 99 Cents Only Stores appeal to the audit findings, the Audit Unit will be filing civil penalty charges and requesting the Administrative Director set a hearing for the 99 Cents Only Stores to show cause as to why the Administrative Director should not issue a civil penalty of up to $100,000 against it.

Under 2002 regulations, the Audit Unit will return for a non-random audit within three years.

2. Cambridge Integrated Services, Inc. / City of Los Angeles in Pasadena, CA.

This audit subject was targeted for audit. Claim files involving complaints resulted in the audit of several additional self-insured employer clients of this third party administrator.

In addition to the administrative penalties the audit resulted in two civil penalty assessments, one against Cambridge Integrated Services, Inc. and the other against City of Los Angeles pursuant to Labor Code Section 129.5(d).

The Audit Unit will return for a non-random audit within three years.

3.  Vons Companies, Inc. in Arcadia, CA.

This audit subject was randomly selected for audit.

Under 2002 regulations, the Audit Unit will return for a non-random audit within three years.

4. Zurich Services Corporation, Inc. in Woodland Hills, CA

This audit subject was randomly selected for audit.

Under 2002 regulations, the Audit Unit will return for a non-random audit within three years.
 

Performance Standards Affecting Audit Sample Size and Future Audit Selection

In November 1998, regulations were adopted to establish sampling methodology consisting of a two-tiered approach for the random selection of indemnity files. These regulations contain performance standards in key areas that establish a process whereby fewer files are reviewed at adjusting locations that are performing well in these areas, and greater numbers of files are reviewed at locations that are not performing well in these areas. The regulation changes also include final audit result criteria whereby the audit subject will be removed from the random audit selection pool for three years if the performance standards are met, or the audit subject will be scheduled for a return, non-random audit within one to three years if certain of the standards are not met. The following standards were established:

• Abbreviated Sample versus Full Sample of Indemnity Files and Removal from Random Selection Pool

If, after the completion of an abbreviated sample of indemnity claims, performance in those claims fails to meet standards in three key areas, the full sample of indemnity files besides the sample of denied and medical-only files will be audited. However, if performance exceeds the standards in all of these key areas, the audit will be cut short after review of the abbreviated sample of indemnity files and the sample of denied and medical-only files. Following completion of the audit (including the samples of denied and medical-only files), if performance exceeds the standards in all of these key areas, the audit subject will be removed from the random selection pool for three years. The criteria in the key areas are as follows:

1. The number of randomly selected audited files with violations involving the failure to pay indemnity exceeds 20% of the audited files in which indemnity is accrued and payable and the average amount of unpaid indemnity exceeds $200.00 per file in which indemnity is accrued and payable.

2. The number of randomly selected files with violations involving the late payments of indemnity exceeds 30% of the audited files in which those indemnity payments have been made.

3. The number of audited files with violations involving the failure to issue routine benefit notices exceeds 30% of the files in which there is a requirement to issue those notices.

• Performance Standards Requiring a Return, Non-Random Audit

If, following the completion of the audit, the audit subject fails to meet the unpaid indemnity standards (No. 1 above) or fails to meet both the late-paid indemnity and failure to issue benefit notice standards (Nos. 2 and 3 above), the Audit Unit will return for a non-random audit within one to three years based on poor audit results. High frequency of either late paid indemnity or failure to issue benefit notices alone does not merit a return, non-random audit.

In addition, the Audit Unit shall return for a repeat non-random audit of denied files within one to three years of the results of an audit becoming final if there is more than one unsupported denial and the number of unsupported denials exceeds 5% of the audited denied claims.

• 2002 Performance Results

In 2002, 52 of the 55 audits entailed line by line reviews of randomly selected claims (Pursuant to tables in Title 8, California Code of Regulations, Section 10107, the numbers of claims randomly selected are determined based upon the claims population of the audit subject). 41 of these 52 audits (78.8%) met or exceeded performance standards in key claims-handling areas following the review of either an abbreviated or expanded sample of indemnity, medical-only, and denied claim files; thereby performing well enough to avoid a return, non-random audit based on final audit results. Those audits are identified in Exhibit 1D.

On the basis of final audit results, the performance of 11 of the 52 audits (21.15%) warranted return, non-random audits within one to three years. Those audits are identified in Exhibit 1E.

Title 8, California Code of Regulations, Section 10111.1(e)(5), adopted in 1994, states, "No administrative penalties shall be assessed if the only violations found in an audit are violations which do not involve the denial of a claim without supporting documentation, or failure to pay or late payment of compensation, and the violations are found in 20% or less of the indemnity files audited." No audits met these standards in 2002.
 

Civil Penalty under Labor Code Section 129.5(d)

California Labor Code Section 129.5(d) states, in part:

"In addition to the penalty assessments permitted by subdivision (a), the administrative director may assess a civil penalty, not to exceed one hundred thousand dollars ($100,000), upon finding, after hearing, that an employer, insurer, or third-party administrator for an employer has knowingly committed and has performed with a frequency as to indicate a general business practice any of the following: (1) Induced employees to accept less than compensation due, or made it necessary for employees to resort to proceedings against the employer to secure compensation due.

(2) Refused to comply with known and legally indisputable compensation obligations.

(3) Discharged or administered compensation obligations in a dishonest manner.

(4) Discharged or administered compensation obligations in a manner as to cause injury the public or those dealing with the employer or insurer...."

Three of the 55 audits conducted in 2002 were conducted as part of civil penalty investigations based on information received which indicated the existence of claims practices for which the assessment of civil penalties under Labor Code Section 129.5(d) could be warranted. Two consisted of targeted samples of claims and the third of randomly selected indemnity claims.

As a result of investigations and audits conducted by the Civil Penalty Investigation Section of the Audit Unit, the Administrative Director assessed two separate civil penalties one against Cambridge Integrated Services, Inc. and the other against City of Los Angeles pursuant to Labor Code Section 129.5(d) in 2002.

Additionally, one civil penalty investigation and non-random audit from an earlier year, 2001 audits, Gates McDonald & Company remained unresolved.

The status of each of these matters is as follows:

1. Cambridge Integrated Services, Inc. and the City of Los Angeles in Pasadena, CA

This civil penalty investigation and audit was conducted based on the complaint of a lien collection service and other lien holders. The complaints allege Cambridge and the City of Los Angeles were failing to pay liens for medical bills and WCAB Awards, and if paid, issuing payment of liens for medical bills and WCAB Awards late. Also failing to pay the required interest and increase when liens for medical bills are paid late. Additionally, within the complaint documents are correspondence and checks, which appear to have been held for a considerable time beyond their creation dates before placing in the US mail as evidenced by metered stamps. This practice results in late issuance of time sensitive documents. Finally, allegations that Cambridge fails to properly include medical reports with bill review processes.

The investigation and audit consisted of the limited review of targeted complaint files and was directed towards the medical billing issues.

The third-party administrator and self-insured employer both agreed to pay separate $50,000 civil penalties.

Both cooperated with the division throughout the audit process as evidence of good faith and subsequently stipulated to implement changes in its claim handling practices. These included:

The Audit Unit also issued administrative penalties and required the parties’ pay all back due interest and increase in accordance with its findings. The Audit Unit will return for a follow-up non-random audit within 3 years. 2. Golden Eagle Insurance Corporation in San Diego, CA. This civil penalty investigation and audit was conducted based on information received from several vendors’ of durable medical equipment. The complainants alleged that Golden Eagle failed to pay medical bills, failed to pay liens for medical bills, paid medical bills late, paid liens for medical bills late, and failed to pay the required interest and increase when medical bills or liens for medical bills were paid late. Also contained within the complaint documents are allegations of Golden Eagles’ use of non-meritorious and frivolous objection to medical bills, inconsistent reasonableness of values, and forcing unnecessary litigation.

The investigation and audit consisted of the limited review of targeted complaint files and directed towards the medical billing issues.

There was no indication of a general business practice for which a civil penalty may be assessed under Labor Code Section 129.5(d), and the Audit Unit did not recommend that a civil penalty be assessed. Penalties were assessed only for individual violations involving medical bills.

3. State Compensation Insurance Fund in Glendale, CA. This civil penalty investigation and audit was conducted based on information received by the Audit Unit about State Compensation Insurance Fund claim handling practice(s). The complaint alleged delaying creation of new claims, failure to provide timely medical treatment authorization, failure to issue notices in a timely manner, and failure to provide compensation benefits in a timely manner. These allegations indicate the possible existence of claim handling procedures that could be assessable as a civil penalty under Labor Code 129.5(d).

The investigation and audit consisted of a limited review of a random sample of indemnity claims plus review of procedures involving the taking of new reports and data entry programs and review of the computer record data base.

There was no indication of a general business practice for which a civil penalty may be assessed under Labor Code Section 129.5(d), and the Audit Unit did not recommend that a civil penalty be assessed. Administrative penalties were assessed only for 59 individual violations totaling $8,080.

4. Gates, McDonald & Company in Concord, CA. This civil penalty investigation and audit of 2001 was conducted based on information received from the Office of Self-Insurance Plans indicating possible business practices involving late paid indemnity, failure to pay self-imposed increases pursuant to Labor Code Section 4650(d), and failure to issue required benefit notices pursuant to Title 8, California Code of Regulations, Sections 9812 and 9813. The investigation and audit consisted of a limited review of a targeted sample of claims of specific clients.

Penalties were assessed only for individual violations involving the failure to pay indemnity, late paid indemnity and the failure to pay self-imposed increases, and the failure to issue notices. The audit subject filed an appeal of the audit findings. The appeal was resolved in late 2002.

The Audit Unit has filed charges to a civil penalty and has requested the Administrative Director set a hearing for Gates McDonald to show cause why the Administrative Director should not assess a civil penalty. The matter is now pending a hearing date.
 

Unpaid Compensation Due To Employees

Of the 4,170 indemnity, complaint, and additional files audited (that is, all the audited files except for the audited denials and medical-only claims), the Audit Unit found 579 files (13.9% - down from 17.2% in 2001) in which the employee was due compensation, interest and/or penalties totaling $850,385.36. The average amount of unpaid compensation per file in which there was unpaid compensation was $1,468.71 — up from $1,064.39 in 2001. The administrator is required to pay these employees within 15 days after receipt of a notice advising the administrator of the amount due, unless a written request for a conference is filed within 7 days of receipt of the audit report.

When employees due unpaid compensation cannot be located, the unpaid compensation is payable by the administrator to the Workplace Health and Safety Revolving Fund. In these instances, application by an employee can be made to the Division of Workers' Compensation for payment of moneys deposited by administrators into this fund. In 2002, $2,750.95 was paid into this fund because the injured workers could not be located.
 

Informal Post-Audit Conferences

Informal post-audit conferences are offered to all administrators after audits are completed. Conferences help to clarify issues, resolve misunderstandings and assist in reducing the frequency and volume of conference appeals. The post-audit conference is the last opportunity for the administrator to respond to audit findings on an informal basis before issuance of the written audit report, Notices of Penalty Assessments and Notices of Compensation Due.

The conference may include:

• A discussion of the factual and legal bases for the proposed penalty assessments and/or notices of unpaid compensation. The claims administrator is given the opportunity to dispute proposed penalties informally and provide reasons for additional mitigation for the penalties proposed.

• A discussion of general findings of areas where there are deficiencies. The Audit report includes frequency tables so that frequency of violations can be addressed. These tables (Individual Exhibit 5 for each audit) in effect act as report cards, showing in key areas of consideration the number of files in which exposure for certain penalty assessments exists, the number of files in which penalties are proposed, and the resultant percentage of those files in which penalties are proposed.

• A discussion of claims where the claims administrator will be requested to take action and/or provide further information or documentation so that penalties may be properly assessed. Issuance of the final report following the post-audit conference may be postponed until the audit subject has had the chance to obtain additional documentation to clarify any disputed issues.

• A discussion of additional documentation to be obtained to comply with statutory and/or regulatory requirements. Necessary items for documentation of compliance are listed in addenda to the audit reports. These suspense items include requests for such documentation as earnings for the dates of the injury, wage statements needed to determine appropriate disability rates, and proof of provision of claim forms.
 

Final Audit Report

Following the post-audit conference, the Audit Unit issues the final report of audit findings along with the Notice of Penalty Assessments and Notices of Compensation Due. If any penalties are still in dispute, the audit subject then has 7 days from receipt of the final audit report to request an appeal, either by appeal conference or written decision only from the Administrative Director, and an additional 21 days from the date of request for appeal to submit arguments and supporting documentation. Any unappealed penalties must be paid within 15 days of receipt of the Notice of Penalty Assessments.

Appeals

In 2002, one audit was appealed and remains unresolved. However, the two unresolved appeals from an earlier year, 2001 audits, were resolved. The status of each of these appeals is as follows:

Types of Penalties Cited

The following are the eight most common types of violations and the number of times they have been cited in 2002 audits:

1. Failure to Timely Provide Proper and Accurate Benefit Notice

In 2002, the Audit Unit assessed 4,096 penalty citations totaling $468,140 (32.4% of the total of 12,654 penalties assessed and 23.3% of the total dollar amount of $2,004,890) which involved the provision of benefit notices, excluding the vocational rehabilitation notices listed in No. 5 below. The dollar amount of these assessments ranged from $25 to $100 each, except for notices of the procedure to evaluate permanent disability and denial notices for injuries occurring on or after 1/1/94, for which the penalties are assessed at up to $500. These violations are broken down as follows:

• Failure to Issue Benefit Notices

    1,672 penalty citations totaling $160,560 (13.2% of the total penalties and 8.0% of the total dollar amount) were issued for the failure to issue benefit notices. The penalty assessments ranged from $50 to $100 before mitigation for good faith, frequency, and history.

• Late Provision of Benefit Notices

    1,213 penalty citations totaling $70,885 (9.6% of the total penalties and 3.5% of the total dollar amount) were issued for late provision of benefit notices. The penalty assessments ranged from $50 to $100 before mitigation for good faith, frequency, and history.

• Materially Inaccurate or Incomplete Benefit Notices

    684 penalty citations totaling $24,425 (5.4% of the total penalties and 1.2% of the total dollar amount) were issued for materially inaccurate or incomplete benefit notices. The penalties were assessed at $25 before mitigation for good faith, frequency, and history.

• Failure to Timely Issue Notices for the Procedure to Evaluate Permanent Disability

    502 penalty citations totaling $205,770 (4.0% of the total penalties and 10.3% of the total dollar amount) were issued for late issuance and the failure to issue notices advising of the procedure to evaluate permanent disability. The penalties ranged from $100 to $500 before mitigation for good faith, frequency, and history.

• Violations Involving Denial Notices

    25 penalty citations totaling $6,500 (0.2% of the total penalties and 0.3% of the total dollar amount) were issued for late issuance, the failure to issue, and the issuance of materially misleading or inaccurate denial notices. The penalties ranged from $100 to $500 before mitigation for good faith, frequency, and history.


2. Failure to Pay or Object to Medical or Medical-Legal Bills within 60 Days of Receipt

    3,397 penalty citations totaling $248,960 (26.9% of the total penalties and 12.4% of the total dollar amount) were issued involving the failure to pay or object to medical or medical-legal bills within 60 days from the receipt of the bill and failure to pay interest and self-imposed increases for late paid bills. Penalty assessments ranged from $25 to $100 each before mitigation for good faith, frequency, and history. The penalties are broken down as follows:
 

Failure to Pay or Object to Medical Expenses within 60 Days of Receipt

    3,110 penalty citations totaling $227,045 (24.6% of the total penalties and 11.3% of the total dollar amount) were issued for the failure to pay or object to medical expenses within 60 days from the receipt of the bill and/or failure to pay interest and self-imposed increases for late paid bills. Penalty assessments ranged from $25 to $100 each depending on the amounts of the bills, before mitigation for good faith, frequency, and history, and from $25 to $50 for the failure to pay interest or penalties on late paid medical bills.

Failure to Pay or Object to Medical-Legal Bills within 60 Days of Receipt

    287 penalty citations totaling $21,915 (2.3% of the total penalties and 1.1% of the total dollar amount) were issued for the failure to pay or object to medical-legal bills within 60 days from the receipt of the bill. Penalty assessments ranged from $50 to $100 each before mitigation for good faith, frequency, and history, depending on whether the bill remained unpaid at the time of the audit and whether or not interest and penalty were paid.


3. Late Indemnity Payments

1,989 penalty citations totaling $289,075 (15.7% of the total penalties and 14.4% of the total dollar amount) were assessed for late indemnity payments. The penalties were assessed at up to $100 before mitigation for good faith, frequency, and history unless the payments were more than 30 days late, in which case the penalties were assessed at up to $1,000 depending on the amount of late paid indemnity. These violations are broken down as follows:
 

• Late Subsequent Indemnity Payments

    1,053 penalty citations totaling $131,505 (8.3% of the total penalties and 6.5% of the total dollar amount) were assessed for late subsequent indemnity payments, including any late death benefit payments, the failure to pay all indemnity due with a payment when paid with a later payment, late payments of self-imposed increases for any late indemnity payments, and late payments of WCAB Awards or Orders. The penalties ranged from $25 to $100 before mitigation for good faith, frequency, and history, depending on the degree of lateness, unless the payments were more than 30 days late, in which case the penalties were assessed at up to $1,000 depending on the amount of late paid indemnity.

• Late First Payments of Temporary Disability Indemnity

    712 penalty citations totaling $99,325 (5.6% of the total penalties and 5.0% of the total dollar amount) were assessed for late first payments of temporary disability indemnity. The penalties ranged from $25 to $100 before mitigation for good faith, frequency, and history, depending on the degree of lateness, unless the payments were more than 30 days late, in which case the penalties were assessed at up to $1,000 depending on the amount of late paid indemnity.

• Late First Payments of Permanent Disability Indemnity

    195 penalty citations totaling $52,275 (1.5% of the total penalties and 2.6% of the total dollar amount) were assessed for late first payments of permanent disability indemnity. The penalties ranged from $25 to $100 before mitigation for good faith, frequency, and history depending on the degree of lateness, unless the payments were more than 30 days late, in which case the penalties were assessed at up to $1,000 depending on the amount of late paid indemnity.

• Late First Payments of Vocational Rehabilitation Maintenance Allowance

    26 penalty citations totaling $5,750 (0.2% of the total penalties and 0.3% of the total dollar amount) were assessed for late first payments of vocational rehabilitation maintenance allowance. The penalties range from $25 to $100 before mitigation for good faith, frequency, and history depending on the degree of lateness, unless the payments were more than 30 days late, in which case penalties are assessed at up to $1,000 depending on the amount of late paid indemnity.

• Late Death Benefit Payments

Three penalty citations totaling $220 (0.1% of the total penalties and 0.01% total dollar amount) were assessed for late death benefit payments. Penalties in this category can range from $25 to $100 before mitigation for good faith, frequency, and history, depending on the degree of lateness, unless the payments were more than 30 days late, in which case penalties are assessed at up to $1,000 depending on the amount of late paid benefits.


4. Failure to Timely Comply with Vocational Rehabilitation Notice Requirements

977 penalty citations totaling $396,180 (7.7% of the total penalties and 19.8% of the total dollar amount) were issued for the failure to timely comply with specified vocational rehabilitation notice requirements. Penalty assessments ranged from $100 to $500 each before mitigation for good faith, frequency, and history. The penalties are broken down as follows:
 

Failure to Timely Comply with Vocational Rehabilitation Requirements following 90 Days of Aggregate Temporary Disability

    533 penalty citations totaling $220,560 (4.2% of the total penalties and 11.0% of the total dollar amount) were issued for the failure to timely assign a Qualified Rehabilitation Representative within 10 Days after 90 days of aggregate total disability for injuries occurring before 1/1/94, and for failure to issue a notice regarding vocational rehabilitation rights within 10 days after 90 days of aggregate total disability for injuries occurring on or after 1/1/94. Penalty assessments ranged from $100 to $500 each before mitigation for good faith, frequency, and history.

Failure to Timely Issue a Notice of Potential Eligibility for Vocational Rehabilitation

    379 penalty citations totaling $148,000 (3.0% of the total penalties and 7.4% of the total dollar amount) were issued for the failure to timely issue a Notice of Potential Eligibility for Vocational Rehabilitation within 10 days of knowledge of a physician's opinion of an employee's medical eligibility. Penalty assessments ranged from $100 to $500 each before mitigation for good faith, frequency, and history.

Failure to Timely Issue a Notice Denying Vocational Rehabilitation as Required

    65 penalty citations totaling $27,620 (0.5% of the total penalties and 1.4% of the total dollar amount) were issued for the failure to timely issue a denial notice for vocational rehabilitation services along with notice of the procedures for disputing the denial when required, or for termination of vocational rehabilitation services other than as described by Labor Code §4644.


5. Failure to Pay Accrued and Payable Indemnity in Undisputed Claims

    950 penalty citations totaling $276,010 (7.5% of the total penalties and 13.8% of the total dollar amount) were assessed for violations involving the failure to pay accrued and payable indemnity in undisputed claims. The penalty assessments ranged from $25 to $1,000 before mitigation for good faith, frequency, and history, depending on the unpaid amount, unless the failure to pay involved the complete failure to pay a WCAB Award or Order, in which case penalties are assessed at $5,000. These violations are broken down as follows:

• Failure to Pay Self-Imposed Increases for Late Paid Indemnity

    451 penalty citations totaling $36,590 (3.6% of the total penalties and 1.8% of the total dollar amount) were issued for the failure to pay self-imposed increases payable because of the late payment of temporary or permanent disability indemnity. The penalty assessments ranged from $25 to $100 before mitigation for good faith, frequency, and history, depending on the amount of the late paid indemnity for which the self-imposed increases were due.

• Failure to Pay Temporary Disability Indemnity or Salary Continuation in Lieu of Temporary Disability Indemnity

    307 penalty citations totaling $120,320 (2.4% of the total penalties and 6.0% of the total dollar amount) were issued for the failure to pay temporary disability indemnity or salary continuation in lieu of temporary disability indemnity, which was not awarded or ordered, paid by the WCAB. The penalty assessments ranged from $100 to $1,000 before mitigation for good faith, frequency, and history, depending on the unpaid amount.

• Failure to Pay Permanent Disability Indemnity

    108 penalty citations totaling $61,980 (0.9% of the total penalties and 3.1% of the total dollar amount) were issued for the failure to pay permanent disability indemnity that was not awarded or ordered paid by the WCAB. The penalty assessments ranged from $200 to $1,000 before mitigation for good faith, frequency, and history, depending on the unpaid amount.

• Failure to Pay All or Part of a WCAB Award or Order or Rehabilitation Unit Order

    33 penalty citations totaling $27,800 (0.3% of the total penalties and 1.4% of the total dollar amount) were issued for the failure to pay all or part of any indemnity awarded by the WCAB or Rehabilitation Unit.The penalty assessments ranged from $100 to $5,000 before mitigation for good faith, frequency, and history, depending on the unpaid amount.

• Failure to Pay Vocational Rehabilitation Maintenance Allowance

    26 penalty citations totaling $14,680 (0.2% of the total penalties and 0.7% of the total dollar amount) were issued for the failure to pay vocational rehabilitation maintenance allowance which was not awarded or ordered paid by the WCAB or Rehabilitation Unit. The penalty assessments ranged from $100 to $1,000 before mitigation for good faith, frequency, and history, depending on the unpaid amount.

• Failure to Pay Interest or Penalty on an Award orFailure to Pay Death Benefits

    25 penalty citations totaling $14,640 (0.2% of the total penalties and 0.8% of the total dollar amount) were issued for the failure to pay any Interest or Penalty on an Award. The penalty assessments ranged from $100 to $1,000 before mitigation for good faith, frequency, and history, depending on the unpaid amount.
 

6. Late Payment of WCAB Awards or Orders or Orders of the Rehabilitation Unit

    69 penalty citations totaling $114,930 (0.5% of the total penalties and 5.7% of the total dollar amount) were issued for late payments of WCAB Orders or Awards or Orders of the Rehabilitation Unit. The penalty assessments ranged up to $5,000 before mitigation for good faith, frequency, and history, depending on how late the payment.
 

7. Unsupported Denial of Liability for Claims and Failure to Investigate

    liability for claims and the failure to investigate to determine whether benefits were payable. Penalty assessments ranged up to $1,000 before mitigation for good faith, frequency, and history for the failure to investigate, and up to $5,000 before mitigation for good faith, frequency, and history for unsupported denials. The penalties are broken down as follows:

Failure to Investigate

    46 penalty citations totaling $24,420 (0.4% of the total penalties and 1.2% of the total dollar amount) were issued for the failure to investigate to determine whether benefits were payable in a claim. If the failure to investigate led to the denial of all liability for the claim, the penalty was assessed for the unsupported denial rather than the failure to investigate. Penalty assessments ranged up to $1,000 before mitigation for good faith, frequency, and history.

Unsupported Denial of Liability for Claims

20 penalty citations totaling $63,000 (0.1% of the total penalties and 3.1% of the total dollar amount) were issued for unsupported denials of liability for claims. Penalty assessments ranged up to $5,000 before mitigation for good faith, frequency, and history.


8. Other Violations

    1,110 penalty citations totaling $124,175 (8.8% of the total penalties and 6.2% of the total dollar amount) were issued for other violations, including the failure to document an employee's average weekly earnings when temporary disability is paid at less than the maximum rate, the failure to document that a claim form was provided to an injured worker, the failure to maintain various forms of documentation in a claim file such as copies of medical reports or WCAB orders or awards, the failure to pay or object to a vocational rehabilitation expense within 60 days of receipt of the bill, the filing of an inaccurate Annual Report of Inventory, and claim log violations. Penalty assessments generally range up to $100 before mitigation for good faith, frequency, and history. Claim log violations and violations involving the filing of an inaccurate Annual Report of Inventory (assessed as part of an audit) range up to $500.

Penalties for the Failure to File the Annual Report of Inventory

In addition to the 12,654 administrative penalty assessments totaling $2,004,890 that were assessed as a result of audits, an additional 37penalties totaling $18,520 were assessed not as the result of individual audits, but for the failure of claims administrators to timely file an Annual Report of Inventory of Claims with the Audit Unit, as required by Title 8, California Code of Regulations, Section 10104. These penalties are not otherwise included as part of the audit data within this report, but were assessed as follows:

 

Claims Administrator
Location
Amount Assessed
Amount Collected
Unpaid Balance
Assoc. of California Water Agency
Citrus Heights, CA
$1500
$1500
$0
City of Richmond
Richmond, CA
$3000
$3000
$0
Claimquest, Inc.
Walnut, CA
$280
$280
$0
Complere Claim Services
Aliso Viejo, CA
$500
$0
$500
Crawford & Company
Orange, CA
$280
$0
$280
Farmers Insurance Group
Van Nuys, CA
$400
$400
$0
Ford Motor Company
Richmond, CA
$400
$400
$0
Foster Farms
Turlock, CA
$500
$500
$0
Fullerton School District
Fullerton, CA
$100
$100
$0
Highlands Insurance Group
Tustin, CA
$400
$400
$0
Indiana Lumbermens Mutual Insurance
Indianapolis, IN
$400
$400
$0
InServices, Inc.
Rancho Cordova, CA
$400
$400
$0
Integrated Claims Admin.
Torrance, CA
$500
$0
$500
Interstate Brands
San Diego, CA
$280
$280
$0
Lance Camper Mfg. Corp.
Lancaster, CA
$400
$400
$0
Mitsui Sumitomo Insurance
Universal City, CA
$400
$400
$0
North Bay Schools Insurance Group
Suisun, CA
$280
$280
$0
Ohio Casualty Group
Hamilton, OH
$500
$500
$0
PTSC/MTA Risk Mgmt. Authority
Los Angeles, CA
$280
$280
$0
Ralphs Grocery Company
Los Angeles, CA
$400
$400
$0
Recon Administrative Service
Banning, CA
$1000
$0
$1000
Rexhall Industries, Inc.
Lancaster, CA
$1000
$1000
$0
Risk Management Service Group
Agoura Hills, CA
$500
$500
$0
Safeco Insurance Company
Santa Ana, CA
$400
$0
$400
Safeway, Inc.
Walnut Creek, CA
$400
$400
$0
San Diego Transit Corp.
San Diego, CA
$500
$0
$500
Sedgwick Claims Mgmt. Services
Orange, CA
$100
$100
$0
The Hartford Insurance Group
Sacramento, CA
$180
$180
$0

 

The Hartford Insurance Group
Dallas, TX
$180
$180
$0
The Stockman Group
Whittier, CA
$400
$400
$0
Topa Insurance Company
Los Angeles, CA
$280
$280
$0
Tristar Risk Management
Santa Ana, CA
$400
$400
$0
Universal Underwriters Insurance
Roseville, CA
$400
$400
$0
Universal Underwriters Insurance
Overland Park, KS
$500
$500
$0
Vanliner Insurance Company
St. Louis, MO
$400
$400
$0
Warner Brothers Studio Facility
Burbank, CA
$400
$400
$0
Yasuda Fire & Marine
Los Angeles, CA
$280
$280
$0
TOTALS
 

EXHIBITS

Exhibit 1A is a summary of the number of files audited by type, the numbers and amounts of penalties, amounts collected, balance due, and the number of appeals for Northern California and Southern California. Exhibit 1B lists the same data for each audit subject audited in or by Northern California staff. Exhibit 1C lists the same data for each audit subject audited in or by Southern California staff. Exhibit 1D lists the audit subjects whose performance did not merit return, non-random audits based on 2002 audit results. Exhibit 1E lists those audit subjects whose poor performance warrant return non-random audits within the next one to three years.

Exhibit 2A and 2B are summaries of the audit results for each audit by type of claims administrator and by method of selection for audit. There are separate listings for randomly selected and non-randomly selected audit subjects, and breakdowns showing the same data for insurers, self-insured employers, and third-party administrators as separate groupings.

Exhibit 3 separates the Schedule of Administrative Penalties in Title 8, California Code of Regulations, Sections 10111 and 10111.1 into various categories. There is a Key to Exhibit 3 describing the nature of each category and listing the ranges of penalty assessment amounts, and an Exhibit 3 showing statewide totals and amounts of penalties assessed in 2002 by category.

Exhibit 4 summarizes by type of indemnity the amounts of unpaid compensation found in the 579 audited claims for which Notices of Compensation Due were issued.

Perhaps the clearest way to measure the overall performance of California workers' compensation claims administrators is by the percentages of audited claim files with violations when compared to the claim files with the exposure for violations in key areas. Exhibits 5A through 5L show, in each of 21 key areas of consideration, the number of files in which the exposure for assessment exists, the number of files in which penalties were assessed, and the percentage of those files with exposure in which penalties were assessed. These 21 categories are as measured by the frequency mitigation standards in Title 8, California Code of Regulations, Sections 10111.1(d)(1) and (e)(3). The exhibits list the numbers and percentages for randomly selected files only, excluding penalties and exposure for penalties from any files audited as a result of complaints received by the Audit Unit or any files selected by any other method than randomly. They are broken down as follows:
 

• Exhibit 5A Statewide Frequency Summary for all audit subjects.
   
• Exhibit 5B Statewide Frequency Summary for all randomly selected audit subjects.
   
• Exhibit 5C Statewide Frequency Summary for all non-randomly selected audit subjects.
   
• Exhibit 5D Statewide Frequency Summary for all insurers, regardless of method of selection.
   
• Exhibit 5E Statewide Frequency Summary for all randomly selected insurers.
   
• Exhibit 5F Statewide Frequency Summary for all non-randomly selected insurers.
   
• Exhibit 5G Statewide Frequency Summary for all self-insured employers, regardless of method of selection.
   
• Exhibit 5H Statewide Frequency Summary for all randomly selected self-insured employers.
   
• Exhibit 5I Statewide Frequency Summary for all non-randomly selected self-insured employers.
   
• Exhibit 5J Statewide Frequency Summary for all third-party administrators, regardless of method of selection.
   
• Exhibit 5K Statewide Frequency Summary for all randomly selected third-party administrators.
   
• Exhibit 5L Statewide Frequency Summary for all non-randomly selected third-party administrators.

Following the statewide Exhibits 1A through 5L in the report are Individual Exhibits 3, 4, and 5 for each audit subject.
 

Trends in Claims Performance

In 2002, the Audit Unit conducted 55 audits and audited 8,861 claims, a slight increase from the 49 audits with 8,749 claims audited in 2001. There was a notable increase in administrative penalties assessed for specific violations in 2002:

Analysis of audit results of the two years seems to indicate that claims performance in certain key areas declined in 2002, at least as insofar as overall performance can be measured by audits conducted: The frequency rates of claims with penalties in these areas, in randomly selected claims, determine whether or not an audit subject "fails" an audit under current regulations. If an audit subject fails an audit, the Audit Unit returns for a repeat non-random audit within three years. In 2001, 36% of the audit subjects merited return, target audits based on poor audit performance in randomly selected claims. In 2002, 21% of the audit subjects merited return, target audits.

Following are some audit data from the past six years:

Numbers of Audits Conducted

Numbers of Claims Audited Numbers of Penalties Assessed Dollar Amounts of Penalties Assessed Unpaid Indemnity Average Unpaid Indemnity in Claim with Unpaid Indemnity Frequency of Violations

A comparison of the statewide frequency for all audit subjects (Exhibit 5A) with the statewide frequency in the five prior years' annual reports shows:

Unpaid Indemnity

Of the randomly selected audited claims in which indemnity was accrued and payable, the percentage with assessments for unpaid indemnity was:

Late First Payments of Temporary Disability

Of the randomly selected audited claims with temporary disability payments, the following percentages of those claims were assessed penalties for late first payments:

Late First Payments of Permanent Disability

Of the randomly selected audited claims with permanent disability payments, the following percentages of those claims were assessed penalties for late first payments:

Failure to Issue Routine Benefit Notices

Of the randomly selected claims with a requirement to issue routine benefit notices (e.g., first payment, final payment, delay in decision, change of disability rate), the following percentages were assessed penalties for at least one failure to issue a notice:

Failure to Timely Issue Notices advising of the Procedure to obtain Permanent Disability Evaluations (QME Notices)

Of the randomly selected claims with a requirement to a issue a notice advising the injured worker of the procedure to obtain an examination by a Qualified Medical Examiner to evaluate permanent disability, the following percentages of those claims were assessed penalties for failure to comply with requirements (both late notices and failure to issue notices):

90-Day Vocational Rehabilitation Notices

Of the randomly selected claims where there was an obligation to issue a notice of vocational rehabilitation rights after 90 days of temporary disability, the following percentages of those claims were assessed penalties for failure to comply with requirements (both late notices and failure to issue notices):

Notice of Medical Eligibility for Vocational Rehabilitation

Of the randomly selected claims where there was an obligation to issue a Notice of Potential Eligibility for vocational rehabilitation within 10 days of knowledge of a physician's opinion that the employee was medically eligible, the following percentages of those claims were assessed penalties for failure to comply with requirements (both late notices and failure to issue notices):

Failure to Timely Pay or Object to Bills for Medical Treatment

Of the randomly selected claims with a requirement to pay or object to bills for medical treatment within required time frames, the following percentages of claims were assessed penalties for at least one failure to timely pay or object:

Failure to Pay or Object to Medical-Legal Bills within 60 Days

Of the randomly selected claims with a requirement to pay or object to medical-legal bills within 60 days, the following percentages of claims were assessed penalties for at least one failure to pay or object within the 60 days:

Amendments to audit regulations in November 1998 included changes to penalty frequency mitigation criteria to provide an incentive to improve claims handling performance in the prompt issuance of routine benefit notices. Penalties are eliminated for violations involving the failure to issue routine benefit notices and/or late benefit notices if frequency of violations is 10% or less in randomly selected claims. In 12 of the 52 audits in 2002 (23.1%), penalties for late benefit notices and/or failure to issue benefit notices were reduced to zero because the percentages of claims with violations were 10% or less.

A comparison of the frequency summaries for randomly selected audit subjects (Exhibit 5B) and for non-randomly selected audit subjects (Exhibit 5C) shows that frequency of assessments is generally higher for the targeted audit subjects than for the randomly selected audit subjects. Even so, and even though some audit subjects demonstrate good performance, the overall frequency of violations is high for both randomly selected and targeted audit subjects as separate groups.
 


California Division of Workers’ Compensation Audit Program Description

Work progressed through 2002, extensive new audit regulations, effective 2003 are in place to implement Assembly Bill 749. Profile audit review audits (PAR audits) commenced, February 18, 2003. Employees of the Division have high expectations that the audit program’s effectiveness will be enhanced by the changes. The Audit Unit continues to work to ensure that injured workers receive their proper workers' compensation benefits and to act as a deterrent to poor claims handling.
 

2003 Audit Program Description

Assembly Bill 749, enacted into law in 2002 and effective in 2003, mandates major changes to the Division of Workers’ Compensation audit program. These changes include the following:


Selection of PAR Audit Subjects

Targeted Audit Subject Selection [8CCR§10106.1(c)]

Notices of Audit and Audit Commencement


Selection of Claims for Audit and Performance Standards

Random sample of indemnity files from logs of prior 3 years

Complaints involving unpaid indemnity

PAR Performance rating for the following factors:

 
  • Unpaid indemnity
  • For audits conducted in 2003, a PAR performance rating of higher than 2.09 will result in a full compliance audit of indemnity files. Expanded random sample of indemnity files from logs of prior 3 years

    Complaints involving unpaid and late paid indemnity

    Full Compliance Audit (FCA) Performance rating of randomly selected files for the following factors:

    For audits conducted in 2003, a FCA performance rating of higher than 2.81 will result in a full compliance audit of indemnity files. Random sample of denied claims in addition to the expanded random sample of indemnity files from logs of prior 3 years

    Complaints that indicate the possible existence of any claims handling violations

    Claims will be audited for all violations

    FCA findings will include Notice(s) of Compensation Due pursuant to 8CCR§10110, and Notice of Penalty Assessments of administrative penalties for all violations cited

    The Audit Unit will return for a target audit within 2 years

     
    Basic Audit Practices and Procedures


    How to Help the Audit Run Smoothly

    Note: The statewide charts referred to above can be found in the Adobe Acrobat (.pdf) version of the report. Click here to download (.pdf), 187k. The individual exhibits are contained in this file(.pdf, 313k)