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Chapter 4.5. Division of Workers' Compensation
Subchapter 1.5. Injuries on or After January 1, 1990
Article 1. Audit, General Definitions

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§10106.1. Routine and Targeted Audit Subject Selection; Complaint Tracking; Appeal of Targeted Audit Selection


For audits conducted on or after January 1, 2003:

(a) The Division of Workers' Compensation shall maintain and update annually a list of known adjusting locations of California workers' compensation claims. The list will be based on information provided to the Division in Annual Reports of Inventory submitted pursuant to California Code of Regulations, title 8, section 10104, data submitted to the Division's Workers' Compensation Information System pursuant to Labor Code section 138.6, and any other sources of information available. The list shall include all known adjusting locations, located in or out of California, of insurers, self-administered self-insured employers, and third-party administrators that administer California workers' compensation claims.

(b) The Audit Unit shall select each adjusting location from the list of adjusting locations for routine profile audit review pursuant to Labor Code section 129(b)(1) at least once every five years. Audit subjects may be selected in any order, and routine audits may be scheduled by the Audit Unit in a manner to best minimize travel expenses and utilize audit personnel efficiently.

  (1) For routine audit subject selection pursuant to Labor Code section 129(b)(1), if the adjusting location includes claims of more than one insurance underwriting company, self-insured employer, or third-party administrator at the location and all claims at that location share the same local management, the location will be considered as one audit subject.  


  (2) Eligibility under this subsection for removal from the pool for routine audit subject selection shall not bar the targeted selection of the audit subject pursuant to subdivisions (c)(2), (c)(3), (c)(4) of this section, Labor Code section 129(b)(3), or for investigation and/or audit pursuant to California Code of Regulations, title 8, section 10106.5.  


(c) Pursuant to Labor Code section 129(b), the Audit Unit may conduct a targeted profile audit review or full compliance audit of targeted audit subjects. An audit subject shall be selected for a targeted audit based on the following target audit criteria:

  (1) Prior audit results pursuant to Labor Code section 129(b)(2) shall be used independently as factual information to support selection of a claims administrator for a return, targeted audit as follows:  


  (A) When a final audit report is issued, the report will include a final performance rating. The final performance rating will be calculated in the same manner as the performance audit review performance rating as set forth in California Code of Regulations, title 8, section 10107.1(c)(3), except that the rating shall be determined based on audit findings from all claim files randomly selected pursuant to section 10107(c)(1), (d)(1), and (e)(1), and selected additional claim files.  


  (B) If the audit subject's performance rating calculated pursuant to section 10107.1(c)(3) or (d)(3) fails to meet or exceed the worst 10% of performance ratings for all audits conducted in the three calendar years before the year preceding the year in which the current audit was commenced, the Audit Unit will return for a targeted audit of the audit subject within two years of the date the audit findings become final.  


  (C) In the final audit report, the Audit Unit shall notify the audit subject that a return, targeted audit will be conducted based upon its performance rating.  


  (D) Any appeal of the audit subject's selection for a targeted audit based upon the audit findings must be made in the same manner as an appeal of the Notice of Penalty Assessment as set forth in California Code of Regulations, title 8, section 10115.1, and must be made within seven days of receipt of the audit findings upon which the selection for targeted audit is based.  


  (2) Audit subjects may be selected for targeted audit based on final decisions or findings of the WCAB issued pursuant to Labor Code section 5814 as follows:  


  (A) The Division of Workers' Compensation will regularly submit to the Audit Unit copies of WCAB decisions, findings, and/or awards issued pursuant to Labor Code section 5814, and reports of WCAB cases involving section 5814 violations.  


  (B) The Audit Unit will establish a list of claims administrators identified for potential targeted audit based on the documentation provided pursuant to subdivision (c)(2)(A). For each adjusting location, the total number of decisions, findings, and/or awards issued pursuant to Labor Code section 5814 shall be compared to the total number of claims reported at that claims adjusting location for the last year for that potential audit subject, as indicated on the Annual Report of Inventory or the Self Insurer's Annual Report, or as indicated in the data reported by the claims administrator to the Division of Workers' Compensation as part of the Workers' Compensation Information System pursuant to Labor Code section 138.6. The Audit Unit may obtain data runs or claim logs from the claims administrator to verify the accuracy of the claims reported.  


  (C) The Audit Unit may select for target audit the highest-ranking subjects, based on the ratios of decisions, findings, and/or awards issued pursuant to Labor Code section 5814 compared to the number of claims reported at the adjusting location, from the list. The Audit Unit may consider the results and recency of prior audits at the adjusting location, the resources of the Audit Unit, and the need to conduct routine audits in scheduling targeted audits. The Audit Unit is not required to audit every claims administrator on the list, nor is it required to audit in the order in which claims administrators appear on the list.  


  (3) The Audit Unit may also target audit subjects based on credible complaints and/or information received by the Division of Workers' Compensation that indicate possible claims handling violations, except that the Audit Unit will not target audit subjects based only on anonymous complaints unless the complaint(s) is supported by credible documentation. Complaints received by the Division of Workers' Compensation may be kept confidential if confidentiality is requested by the complaining party. In order to establish priorities for audits pursuant to this subsection, the Audit Unit shall review and compile complaints and information that indicate claims administrator adjusting locations are failing to meet their obligations under Divisions 1 or 4 of the Labor Code or regulations of the Administrative Director. The Audit Unit may contact a claims administrator and request information necessary to determine the validity of a complaint. Complaints and information alleging improper claims handling shall be tracked and compiled into a list of claims administrators identified for potential target audits in two manners:  


  (A) On the basis of overall gravity and frequency of potential violations as measured by assigned points:  


  1. Complaints or information indicating possible violations of the kind which, if found on audit, would be subject to the assessment of administrative penalties or issuance of notices of compensation due shall be weighted on the basis of apparent severity of the alleged violation. One point shall be assigned for each $100.00 in penalties assessable under the corresponding violations in California Code of Regulations, title 8, sections 10111 through 10111.2 of these regulations.  


  2. The Audit Unit may select for target audit the highest-ranking subjects, based on points assigned compared to the number of claims reported at the adjusting location. The Audit Unit may consider the results and recency of prior audits at the adjusting location, the resources of the Audit Unit, and the need to conduct routine audits in scheduling targeted audits. The Audit Unit is not required to audit every claims administrator on the list, nor is it required to audit in the order in which claims administrators appear on the list.  


  (B) On the basis of credible complaints or information indicating claims handling for which a civil penalty may be assessed pursuant to Labor Code section 129.5(e).  


  The Audit Unit may select for target audit the highest-ranking subjects based on the ratios of complaints or information regarding specific claims practices compared to the number of claims. In considering the potential for specific poor claims practices, the Audit Unit may consider the results and recency of prior audits at the adjusting location, the resources of the Audit Unit, and the need to conduct routine audits in scheduling targeted audits. The Audit Unit is not required to audit every claims administrator on the list, nor is it required to audit in the order in which claims administrators appear on the list.  


  (4) The Audit Unit may also select targeted audit subjects based on data from the Workers' Compensation Information System which indicates the claims administrator is failing to meet its obligations, including, but not limited to, high percentages of possible violations compared to other claims administrators. Possible violations include high percentages of apparent late first and/or subsequent indemnity payments, either overall or by class of indemnity, and/or high ratios of denied claims to indemnity claims.  


  (5) The Audit Unit may also target an audit subject for any of the following:  


  (A) Failure to produce a claim for the Audit Unit within 30 days of receipt of a written request in a profile audit review conducted pursuant to Labor Code section 129(b).  


  (B) Failure to pay or appeal pursuant to California Code of Regulations, title 8, section 10115.1 any Notice of Compensation Due issued by the Audit Unit.  


  (C) Failure to comply with the Workers' Compensation Information System (WCIS) requirements and timelines set forth in Labor Code section 138.6 or California Code of Regulations, title 8,, sections 9700 et seq.  


  (D) The assessment of or a stipulation to a civil penalty pursuant to Labor Code section 129.5(e).  


(d) For targeted audits conducted in accordance with the target audit criteria set forth in subdivision (c) of this section:

  (1) The Audit Unit shall send the audit subject selected for targeted audit a Notice of Audit in accordance with section 10107.1(a).  


  (2) For target audits, the Audit Unit may randomly select claims pursuant to section 10107.1 of these regulations and/or target claims on the basis that the Audit Unit has received information alleging the existence of an improper claim handling practice, and for the purpose of determining whether that practice occurred in those files. Companion claim files or additional claim files as defined by these regulations may be included for audit with the selected files.  


  (3) For all types of target audits and/or for targeted claims in any audit, the Audit Unit is not required to audit an entire claim file, but may audit only those parts of the claim file that pertain to the complaint or to a specific type of possible violation(s).  


  (4) The Notice of Audit for a targeted audit selected pursuant to subdivisions (c)(2) through (c)(5) of this section may be appealed as follows:  


  (A) Within 7 days after receiving a Notice of Audit the claims administrator may appeal its selection for audit by filing with the Administrative Director and serving on the Audit Unit a request for an appeals conference or a request for a written decision without a conference.  


  (B) Within 21 days after the request for a written decision or an appeals conference is filed, the appellant shall file with the Administrative Director and serve the Audit Unit with a written statement setting forth the legal and factual basis of the appeal, and including documentation or other evidence which supports the appellant's position.  


  (C) If a request for an appeals conference or a request for a written decision without conference or if the written statement and documentation are not timely filed and served under California Code of Regulations, title 8, section 10115.1(g)(1) and (g)(2), the claims administrator shall be deemed to have waived any issue concerning its selection for audit. The claims administrator will be precluded from raising the issue at any subsequent appeals of Notices of Penalty Assessment or Notices of Compensation Due.  


  (D) Service and filing are timely if the documents are placed in the United States mail, first class postage prepaid, or personally delivered between the hours of 8:00 a.m. and 5:00 p.m., within the periods specified in section 10115.1(g). The original and all copies of any filing shall attach proof of service as provided in California Code of Regulations, title 8, section 10975.  


  (E) The appeal process shall be governed by California Code of Regulations, title 8, section 10115.2.  



     Note: Authority cited: Sections 59, 129, 129.5, 133, 138.6, 138.7 and 5307.3, Labor Code. Reference: Sections 7, 53, 111, 124, 129, 129.5, 138.6 and 138.7, Labor Code; and Sections 11180, 11181 and 11182, Government Code.  


 HISTORY 
   
1. New section filed 12-30-2002; operative 1-1-2003 pursuant to  GovernmentCode section 11343.4 (Register 2003, No. 1).

2. Change without regulatory effect redesignating and amending formersubsections (c)(8)(i)-(v) to subsections (c)(8)(A)-(E) filed 5-1-2003 pursuant to section 100, title 1, California Code of Regulations (Register 2003, No. 18).

3. Amendment of section and Note filed 4-20-2009; operative 5-20-2009 (Register 2009, No. 17).

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