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2005 Audits of Workers' Compensation Insurers, Self-Insured Employers, and Third-Party Administrators

April 2006

Pursuant to Labor Code section 129(e), the administrative director of the Division of Workers' Compensation (DWC) submits this 16th annual workers' compensation report summarizing the results of audits conducted by the DWC Audit Unit.

2005 audit results

Profile audit review (PAR) standard - 1.76445 / full compliance audit (FCA) standard - 2.47631

The DWC Audit Unit completed a total of 46 audits which began in 2005. Of these, 42 were routinely selected PAR audits, 3 were target PAR/FCA audits and the remaining one audit was a target based on a return agreement in a previous stipulation of civil penalty in year 2000. Target audits for 2005 were selected based upon either results from prior audits of calendar year 2002 and 2003 or return audits by stipulated agreement to a prior civil penalty. The total number of audit subjects included 12 insurance companies, nine self-administered, self-insured employers, 20 third-party administrators (TPA), four insurance company / third-party administrator combined claims adjusting locations, and one self-insured employer / third-party administrator combined claims adjusting location.

At all audits, claim files were selected for audit on a random basis, with the number of indemnity and denied cases being selected based on the numbers of claims in each of those populations for the audit subject. Medical-only claims were selected for audit in the one 2005 target audit that was the return by stipulated agreement to a prior civil penalty. In addition, if any complaints were received regarding possible violations of the Labor Code or regulations of the administrative director, each respective claim file related to a complaint may have been part of the audit pursuant to Title 8 CCR 10107.1(c)(2), (d)(2), and (e)(2).

The number of claims audited is based upon the total number of claims at the adjusting location and the number of complaints received by the DWC related to claims handling practices. Pursuant to Title 8, California Code of Regulations, Section 10107.1(c) and (d), either a "PAR sample" of up to 59 or a "FCA sample" of up to 138 of indemnity claims is audited, depending on the claims administrator's performance as measured in certain key areas after the PAR sample is audited. Pursuant to Title 8, California Code of Regulations, Section 10107.1(e), a "sample" of up to 67 denied claims may be audited, depending on the claims administrator's performance as measured in certain key areas after the review of the indemnity claims in the "FCA stage 1 sample" are audited.

In 2005, compliance officers audited 3,168 claim files, of which 2,896 were randomly selected claims in which some form of indemnity benefits were paid. Two audits included 129 randomly selected claims in which the employer or insurer denied all liability. Targeted claims audited included 113 based on complaints received by the DWC. Thirty claims were designated as "additional" files. "Additional" files include:

  • Claims chosen based on criteria relevant to a target audit but for which no specific complaints had been received.
  • Claims audited in excess of the number of claims in the random sample that were audited because the files selected were incorrectly designated on the log.

Violations of administrative director's regulations

As a result of audits conducted during the calendar year 2005, the Audit Unit issued 6,312 administrative penalties assessable to claims administrators totaling $1,948,278. However, the Audit Unit waived $696,125 of the assessable penalties pursuant to Labor Code section 129.5(c) and regulatory authority. These waivers occurred within 35 of the audits that met or exceeded the PAR performance standard, eight audits that met or exceeded the FCA-1 performance standard and two audits that failed the FCA-2 standard. The total penalties subject to collection from claims administrators were $1,252,153.

Unpaid compensation due To employees

There were 480 randomly selected claims and 18 claims selected by target in which injured workers were owed unpaid compensation totaling $623,346.08, an average of $1,251.70 per file in which there was unpaid compensation. The unpaid compensation is broken down as follows:

  • $215,072.70 in temporary disability indemnity and salary continuation in lieu of temporary disability (34.5% of the unpaid compensation)
  • $255,082.66 in permanent disability indemnity (40.9% of the unpaid compensation)
  • $75,585.96 in vocational rehabilitation maintenance allowance (12.1% of the unpaid compensation)
  • $72,460.56 in 10% self-imposed increases for late indemnity payments (11.6% of the unpaid compensation)
  • $0 in death benefits (0% of the unpaid compensation)
  • $5,144.20 in interest and penalty and/or un-reimbursed medical expenses (0.8% of the unpaid compensation).

The claims administrator is required to pay these employees within 15 days after receipt of a notice advising the claims administrator of the amount due, unless a written request for a conference is filed within seven days of receipt of the audit report.

When employees due unpaid compensation cannot be located, the unpaid compensation is payable by the claims administrator to the Workers' Compensation Administration Revolving Fund. In these instances, application by an employee can be made to the DWC for payment of moneys deposited by claims administrators into this fund. In 2005, $659.94 was paid into this fund because the injured workers could not be located.

Frequency of violations

A statewide frequency of the five key areas under review for violations used in determining the PAR and FCA performance standards was calculated after combining the individual audit findings (Individual Exhibits 1A, 1B, and 1C). The frequency noted in each area is actually the ratio of files in which there is an assessment for a specific type of violation to the total number of randomly selected files in which the possibility of that type of violation exists. Statewide exhibits 1A through 1C provide a breakdown of performance for audit subjects in 2005.

Unpaid indemnity
Of the randomly selected audited claims in which indemnity was accrued and payable, the percentage for assessable penalties for unpaid indemnity is:

  • 2005 - 35 audits passing the PAR standard: 12.83%
  • 2005 - eight audits passing the FCA standard: 19.20%
  • 2005 - two audits failing all standards: 32.60%

Late first payment of temporary disability or first salary continuation notice when salary continuation is paid in lieu of temporary disability
Of the randomly selected audited claims with temporary disability payments or first notice of salary continuation, the following percentage for assessable penalties for late paid first payment of temporary disability or late first notice of salary continuation is:

  • 2005 - 35 audits passing the PAR standard: 26.31%
  • 2005 - eight audits passing the FCA standard: 32.36%
  • 2005 - two audits failing all standards: 46.99%

Late first payment of permanent disability, vocational rehabilitation maintenance allowance, and death benefits
Of the randomly selected audited claims with permanent disability, vocational rehabilitation maintenance allowance, and death benefits payments, the following percentage for assessable penalties for late paid first payment of permanent disability, vocational rehabilitation maintenance allowance, and death benefits is:

  • 2005 - 35 audits passing the PAR standard: 15.83%
  • 2005 - eight audits passing the FCA standard: 23.88%
  • 2005 - two audits failing all standards: 26.15%

Late subsequent indemnity payments
Of the randomly selected audited claims with subsequent indemnity payments, the following percentage for assessable penalties for late subsequent indemnity payments is:

  • 2005 - 35 audits passing the PAR standard: 21.82%
  • 2005 - eight audits passing the FCA standard: 35.84%
  • 2005 - two audits failing all standards: 27.42%

Failure or late provision of AME/QME notices and notices of potential eligibility for vocational rehabilitation
Of the randomly selected audited claims with requirement to issue the AME/QME notice and/or the notice of potential eligibility for vocational rehabilitation, the following percentage for assessable penalties for failure or late issuance is:

  • 2005 - 35 audits passing the PAR standard: 29.53%
  • 2005 - eight audits passing the FCA standard: 32.31%
  • 2005 - two audits failing all standards: 51.83%

Performance ratings of audit subjects

Of the 45 PAR/FCA audits conducted in 2005:

  • 35 audit subjects (77.8%) met or exceeded the PAR 2005 performance standard thereby having all penalty citations waived in accordance with Labor Code section 129.5(c) and Title 8, California Code of Regulations section 10107.1(c)(3)(B). These audit subjects were ordered to pay all unpaid compensation due found within the audit.
  • Ten audit subjects (22.2%) failed to meet or exceed the PAR standard with the audit expanding into the FCA-1 pursuant to Labor Code section 129.5(c) and Title 8, California Code of Regulations section 10107.1(d). Eight of these audit subjects (17.8%) then met or exceeded the FCA-1 2005 standard. For these 8 audits, the Audit Unit issued notices of compensation due and assessed administrative penalties for late and unpaid indemnity in accordance with Labor Code section 129.5(c) and Title 8, California Code of Regulations section 10107.1(d)(3)(B).
  • Two of the 45 audit subjects (4.4%) that failed the PAR also failed the FCA-1 and the FCA-2 performance standards thereby demonstrating poor performance and these claims administrators will be subject to a return target audit within two years. These audits expanded into the FCA-2 pursuant to Labor Code section 129.5(c) and Title 8, California Code of Regulations section 10107.1(e) and the audit subjects were assessed all penalty citations in accordance with Labor Code section 129.5(c) and Title 8, California Code of Regulations section 10107.1(e).

The "DWC Administrative Director's 2005 Audit Results Ranking Report" is part of this annual report and the complete list of the performance standard scores for the 45 audit subjects can be reviewed in order, from the best to worst performer.

PAR and FCA standards comparison

A look at the PAR and FCA performance standards combining all individual audit findings within the group that met or exceeded the PAR standard with the group that failed the PAR, but met or exceeded the FCA standard and the group that failed both standards. (Individual exhibits 860 1A, 1B, and 1C) beginning with calendar year 2005 shows:

PAR standard (1.76445)

  • 2005 average score of the 35 audit subjects passing PAR: 1.07818
  • 2005 average score of the 10 audit subjects failing PAR: 2.67201

FCA-1 standard (2.47631)

  • 2005 average score of the eight audit subjects passing FCA stage-1: 1.91784
  • 2005 average score of the two audit subjects failing FCA stage-1: 4.63995

FCA-2 standard (2.47631)

  • 2005 average score of the 2 audit subjects failing FCA stage-2: 3.88163

Appeals

In 2005 there were no appeals to the PAR/FCA findings.

Civil penalty issues

Civil penalty under pre-2003 Labor Code section 129.5(d)

For 1990 through 2002 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...."

As a result of investigations and audits conducted by the Audit Unit under Labor Code section 129.5(d), the administrative director assessed five separate civil penalties between calendar years 2000 and 2003. The claims administrators were National RV, Inc., Crawford & Company, Cambridge Integrated Services, Inc., City of Los Angeles, and 99 Cents Only Stores, Inc.

The status of the return target audits to the previous stipulation of agreement to a civil penalty on the above administrators is as follows:

National RV, Inc
This target audit is a return audit to the previous agreement of stipulation to a civil penalty. The audit commenced and was finalized in 2005. National RV, Inc was found to have met the requirements of the remedial actions that were part of the stipulated agreement.

Crawford & Company
The target audit that is the return audit to the previous agreement of stipulation to a civil penalty commenced in 2005. The audit continues to progress in 2006. The findings and resolution will publish in the April 2007 annual report for the 2006 audit results.

Cambridge Integrated Services, Inc.
The target audit that is the return audit to the previous agreement of stipulation to a civil penalty was to commence in 2005. However, due to other considerations the Audit Unit had to delay the audit by agreement until 2006.

City of Los Angeles
The return target audit for this administrator is scheduled to commence in 2006.

99 Cents Only Stores, Inc.
The return target audit for this administrator is scheduled to commence in 2006.

The status of the return target audits of other claims administrators because of failure of a previous audit thereby possibly making those adjusting locations subject to a civil penalty under Labor Code section 129.5(d) is as follows:

Gulf Insurance Company
As noted in last year's annual report, Gulf Insurance failed a random audit in 1999. A return target audit conducted under the amended Labor Code section 129 and closed in 2004, also resulted in failure. Gulf Insurance is scheduled for a return target audit to commence in 2006. At the conclusion of the 2006 audit, the findings of the three audits will be reviewed to determine whether civil penalty charges will be filed with the administrative director pursuant to Labor Code section 129.5(e) and Title 8 California Code of Regulations section 10114(c).

Kaiser Permanente Medical Care Program
Kaiser Foundation Hospitals failed a random audit in 2001. A subsequent target audit for Kaiser, conducted under the amended Labor Code section 129 and closed in 2004, also resulted in failure. Kaiser is scheduled for a return target audit to commence in 2006. At the conclusion of the 2006 audit, the findings of the three audits will be reviewed to determine whether civil penalty charges will be filed with the administrative director pursuant to Labor Code section 129.5(e) and Title 8 California Code of Regulations section 10114(c).

Civil penalty under 2003 Labor Code section 129.5(e)

Under AB 749, effective January 1, 2003, California Labor Code section 129.5(e) was modified and 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 or has performed with sufficient frequency so 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....

Any employer, insurer, or third party administrator that fails to meet the full compliance audit performance standards in two consecutive full compliance audits shall be rebuttably presumed to have engaged in a general business practice of discharging and administering its compensation obligations in a manner causing injury to those dealing with it."

Other than as noted above, no civil penalty investigations and target audits specific to this amended Labor Code occurred in 2005.

Other violations and penalties

In addition to the penalty assessments totaling $1,252,153 that were assessed as a result of audits, an additional two penalties totaling $75,945 were assessed: one based on the failure of the claims administrator either to timely file an appeal or timely pay administrative penalty assessments; and the other for the failure of the claims administrator to either timely file an appeal or timely pay a notice of compensation due an injured worker. These penalty assessments are not included as part of the audit data within this report, but are summarized below.

Title 8, California Code of Regulations section 10111.5.1 reads in pertinent part:

"(a) Within 7 days after receiving a Notice of Penalty Assessment issued under Labor Code Section 129.5(a) and (c), the claims administrator may appeal all or a portion of the penalty assessments in the Notice by filing with the Administrative Director and serving the Audit Unit with a request for an appeals conference or a request for a written decision without a conference.
(b) If a request for a written decision or request for appeals conference is not timely filed and served, the Notice of Penalty Assessment will become final 7 days after the claims administrator received it, and must be paid in accordance with Labor Code Section129.5(c) within 15 days of receipt."

Title 8, California Code of Regulations Section 10111.2(a)(12) reads in pertinent part:

"Notwithstanding Labor Code Section 129.5(c)(2) and whether or not the audit subject has met or exceeded performance standards calculated pursuant to Section 10107.1(d)(3), additional penalties will be assessed for late payment or failure of the audit subject to pay any administrative penalties assessed pursuant to this Section that are not timely appealed pursuant to Section 10115.1. Penalties will be assessed as follows:
An additional penalty of 50% of the amount of each late paid penalty will be assessed for each penalty paid more than 30 but not more than 60 days from receipt of the Notice of Penalty Assessments;"

Based on these regulations, the audit subject, following receipt of the final audit report that includes the Notice of penalty assessments must either appeal or pay the assessment.

One of the 45 audit subjects failed to either appeal or make the required payment of an administrative penalty assessment timely:

  • Santa Ana Unified School Districtdid not file an appeal to the notice of penalty assessments. The notice of penalty assessments was received by the administrator on May 17, 2005. Assessments were paid on Aug. 26, 2005, more than 60 days after the receipt of the notice. Additional penalties of $75,645 were assessed and paid for late compliance.

One of the 45 audit subjects failed to either appeal or make the required payment of the notice of compensation due to an injured worker timely:

Title 8, California Code of Regulations section 10111.2(a)(11) reads in pertinent part:

"11) Notwithstanding Labor Code Section 129.5(c)(1) and whether or not the audit subject has met or exceeded performance standards calculated pursuant to Section 10107.1(c)(3), penalties will be assessed for failure to pay, or late or partial payment of, a Notice of Compensation Due issued as a result of an audit. Penalties will be assessed as follows:

A penalty in the same amount as the total of the penalties applicable under subsections (a)(1) through (a)(4) and (a)(10) will be assessed for any compensation paid more than 15 but not more than 30 days after receipt of the Notice of Compensation Due;

A penalty in the amount of 200% of the total of the penalties applicable under subsections (a)(1) through (a)(4) and (a)(10) will be assessed for any compensation paid more than 30 but not more than 60 days late;

A penalty in the amount of 300% of the total of the penalties applicable under subsections (a)(1) through (a)(4) and (a)(10) will be assessed for any compensation not paid within 60 days.

  • Keenan & Associates did not file an appeal to the notice of compensation due. The final audit report and notices of compensation due were received by the claims administrator on Oct. 3, 2005. One of the notices of compensation due was not fully paid until Jan. 12, 2006, more than 60 days after receipt of the notice. Additional penalties of $300 have been assessed for late compliance.

The annual report of inventory

In addition to the penalty assessments totaling $1,252,153 that were assessed as a result of audits, and the penalty assessments above, an additional 33 penalties totaling $13,580 were assessed in 2005 based on the failure of claims administrators either to timely file or having filed an inaccurate annual report of inventory of claims with the DWC Audit Unit, as required by Title 8, California Code of Regulations section 10104. The penalty assessments are pursuant to Title 8, California Code of Regulations, sections 10111.1(b)(11) and 10111.2(b)(25). These penalties are not included as part of the audit data within this report, but were assessed and mitigated as follows:

Failure to timely file a report

Claims Administrator
Location

Amount assessed
$$
Amount collected
$$
Unpaid balance
$$
Federated Insurance Kansas City, MO
500
100
0
Gulf Insurance Company Irving TX
500
500
0
JT2 Integrated Resources San Ramon
500
500
0
JT2 Integrated Resources Oakland
500
500
0
JT2 Integrated Resources Modesto
500
100
0
Rexhall Industries, Inc. Lancaster
500
500
0
CNA Insurance Brea
500
500
0
CNA Insurance San Francisco
500
500
0
Ward North America -LP Santa Clara
500
500
0
Ward North America -LP Sacramento
500
100
0
Ward North America -LP Riverside
500
100
0
Ward North America -LP Concord
500
100
0
Pinnacle Risk Management Services Roseville
500
500
0
Fontana U S D Fontana
500
400
0
City of Simi Valley Simi Valley
500
100
0
California Fair Services Sacramento
500
400
0
Prudential Insurance (Liberty Mutual) Roseville
500
500
0
Fresno U S D Fresno
500
500
0
City of Pasadena Pasadena
500
400
0
Cannon Cochran Mgmt Services, Inc. Concord
500
400
0
Los Angeles M T A Los Angeles
500
500
0
Marriott International, Inc. Santa Ana
500
500
0
Macy's West, Inc. Pasadena
500
500
0
Vanliner Insurance Company St. Louis, MO
500
500
0
Employers Direct Insurance Company Agoura Hills
500
400
0
North Bay Schools Insurance Auth Fairfield
500
500
0
Monterey County Schools W/C Salinas
500
400
0
Clougherty Packing Company Los Angeles
500
500
0
Chevron Corporation San Ramon
500
400
0
Republic Western Insurance Company Phoenix, AZ
500
500
0
Ross & Castillo Fresno
500
500
0
Alternative Services Concepts, L.L.C. Citrus Heights
500
500
0
Century Nation Insurance Company North Hollywood
400
280
0
TOTALS:
$16,400
$13,580
$0

Failure to file an accurate report

No assessments were issued in 2005 for an inaccurate annual report of inventory.

DWC Profile Audit Performance standards and Full Compliance Audit Standards for 2006

The PAR and FCA performance standards have been updated pursuant to Labor Code section 129(b) and Title 8, California Code of Regulations, section 10107.1(c), (d), and (e). This is accomplished by taking the 2004 audit results and using data for the five major keys subject to the profile audit review program. The results are then combined with the 2003 and 2002 performance rating scores to develop the 2006 PAR FCA standards. The PAR standard for 2006 is 1.83856 and the FCA standard is 2.51920.PAR audits for 2006 commenced early 2006 using the new standards. The Audit Unit continues to work to ensure that injured workers receive their workers' compensation benefits and to act as a deterrent to poor claims handling.

Description of statewide analyses

Ranking report is the "DWC Administrative Director's 2005 Audit Ranking Report" issued in accordance with Labor Code section 129(e). The report ranks all insurers, self-insured employers, and third-party administrators audited during 2005 according to their performance measured by the profile audit review and full compliance audit performance standards.

Statewide summary of files audited is a synopsis of all 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. Statewide summaries of the same data are provided for Northern California and Southern California.

A statewide summary is provided for analysis of the audit results for routinely selected and targeted audit subjects. Finally, there is a statewide summary analyzing the same data for insurers, self-insured employers, and third-party administrators as separate groupings.

Statewide exhibit 1 is a summary of the statewide final performance for the 45 audits conducted in 2005. It includes the expanded number of indemnity files and denied claim files with subsequent acceptance and requirements to pay indemnity audited for each of the five major areas of key violations and the number of those files wherein one or more of the key violations were found.

Statewide exhibit 1A is a summary of the individual 1A exhibits used in determining the PAR performance standard factor for each audit subject. It includes the number of indemnity files audited for each of the five major areas of key violations and the number of those files wherein one or more of the key violations were found.

Statewide exhibit 1B is a summary of the individual 1A exhibits used in determining the FCA-1 performance standard factor for each audit subject. It includes the number of indemnity files audited for each of the five major areas of key violations and the number of those files wherein one or more of the key violations were found.

Statewide exhibit 1C is a summary of the individual exhibits used in determining the FCA-2 performance standard factor for each audit subject. It includes the expanded number of indemnity files and denied claim files with subsequent acceptance and requirements to pay indemnity audited for each of the five major areas of key violations and the number of those files wherein one or more of the key violations were found.

Statewide exhibit 2 summarizes by type of indemnity the amounts of unpaid compensation found in the 504 audited claims for which notices of compensation due were issued.

Statewide exhibit 3provides a synopsis of penalties cited pursuant to the schedule of administrative penalties in Title 8, California Code of Regulations section 10111.2. The key to exhibit 3 describes each penalty.

Description of individual audit exhibits

Individual exhibit 1A is the worksheet to calculate the audit findings to a score that determines the PAR performance standard factor for this audit subject. It includes the number of indemnity files audited for each of the five major areas of key violations and the number of those files wherein one or more of the key violations were found.

Individual exhibit 1B is the worksheet to calculate the audit findings to a score that determines the FCA-1 performance standard factor for this audit subject. It includes the expanded number of indemnity files audited for each of the five major areas of key violations and the number of those files wherein one or more of the key violations were found.

Individual exhibit 1C is the worksheet to calculate the audit findings to a score that determines the FCA-2 performance standard factor for this audit subject. It includes the number of indemnity files and denied claim files with subsequent acceptance and requirements to pay indemnity audited for each of the five major areas of key violations and the number of those files wherein one or more of the key violations were found.

Individual exhibit 2 summarizes by type of indemnity the amounts of unpaid compensation found in the audited claims in this individual audit for which notices of compensation due were issued.

Individual exhibit 3 separates the schedule of administrative penalties in Title 8, California Code of Regulations section 10111.2 into various categories showing totals and amounts of assessable administrative penalties for this individual audit finding. There is a key to individual exhibit 3 describing the nature of each category.


Statewide audit exhibits version

Individual audit exhibits by audit subject version

Audit report 2005 in acrobat format version


November 2006