The California Commission on

Health and Safety and Workers' Compensation

Workers' Compensation Anti-Fraud Activities

Report on the CHSWC Public Fact-Finding Hearing

CHSWC Members

James J. Hlawek, Chairman

Leonard McLeod

Gerald O'Hara

Tom Rankin

Kristen Schwenkmeyer

Robert B. Steinberg

Darrel "Shorty" Thacker

Gregory Vach

CHSWC Executive Officer

Christine Baker

State of California

Department of Industrial Relations

September 1997



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


Public fact-finding hearing

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

The purpose of the fact-finding hearing was to bring representatives from the California workers' compensation 1 community and other interested persons together

Draft Report Review and Comments

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

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

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

Final CHSWC Report

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

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

Report Availability

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

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

Next Steps

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

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

Findings and Recommendations

Current status of Workers' Compensation Fraud

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

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

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

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

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

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

Deterring Fraud

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

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

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

Detecting Fraud

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

Incentives/Barriers in Fighting Fraud

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

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

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

Roles in Fighting Fraud

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

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

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

Administration of the Fraud Assessment

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

Distribution of the Fraud Assessment

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

Measuring Effectiveness of Anti-Fraud Efforts

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

Future CHSWC Anti-Fraud Activities

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

Acknowledgments and Thanks

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

California Applicants' Attorneys Association

Laurence R. Lerner, President
Mark Gerlach, Consultant

California Chamber of Commerce

California Department of Insurance

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

California District Attorneys Association

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

California Fraud Assessment Commission

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

California Manufacturers Association

California Workers' Compensation Institute

Department of Industrial Relations

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


Los Angeles County - District Attorneys Office

Members of the Public

State Compensation Insurance Fund