1. Commission on Health & Safety & Workers' Comp

CHSWC Study of the Division of Workers' Compensation Audit Function

The 1989 California workers' compensation reform legislation established an audit function within the Division of Workers' Compensation (DWC) to monitor the performance of insurers, self-insured employers, and third-party administrators to ensure that industrially-injured workers were receiving proper benefits in a timely manner.

In April 1998, the Senate Industrial Relations Committee and the Assembly Insurance Committee jointly requested that the Commission undertake an evaluation of the effectiveness of the audit function of the Division of Workers' Compensation.

The study determined that although much time and effort was being expended by the DWC Audit Unit in performing audits of workers' compensation insurers, a redirection of these activities would produce more effective outcomes. The research team found that the current audit procedure did not include all insurers within a reasonable period of time, did not focus on the worst performers and concentrated penalties on relatively inconsequential violations.

After research and thoughtful discussions with the Audit Advisory Committee and other community members, the project team is recommending a new DWC Audit System. The focus of this new system would be

• To reward good performers by eliminating administrative penalties and resource requirements,

• To increase incentive to improve benefit delivery by raising administrative penalties substantially on poor performers,

• To focus administrative penalties on important violations,

• To provide balance to the audit process:

• Bad business practices by claims administrators mean that injured workers are not receiving proper indemnity payments and appropriate medical services in a timely manner.
• Excessive audit penalties and regulation mean employers are paying higher costs to deliver the same benefits.

The following is a summation of findings and recommendations from that study. Detailed descriptions are presented in the full report.

We believe that an audit function is an important and necessary component of the California workers' compensation system. If staffed appropriately and focused on critical areas, a workers' compensation audit function will continue to be a useful tool to ensure prompt and accurate delivery of benefits to industrially-injured workers.

The research team found the staff of the Audit Unit to be very knowledgeable, dedicated, and highly professional in their approach to and completion of their duties within the current parameters of the audit function. Suggestions for changes in this report should not be construed as criticism of overall Audit Unit staff performance.

However, we have determined that improvements could and should be made to this vital program. The following are findings on which the Legislature, the Commission, the DWC, and the workers' compensation community could base decisions to improve this function in the State of California.

Findings were noted in the following areas:

• Scope of audit function
• Audit process
• Audit penalties
• System complexity
• System performance measures
• Audit function administration
• Observations by Audit Unit staff

As a result of the Commission's analyses and with the participation of the Advisory Committee, proposals are being made to address system shortcomings or failures. These include recommendations regarding the DWC Audit Function and other aspects of the California workers' compensation system affecting benefit delivery.

Recommendations for the Audit function:

• Improve audit function administration and ensure sufficient staffing.
• Increase incentives for timely and accurate delivery of benefits.
• Improve targeting of poor performers.
• Revise audit process.

Recommendations for other aspects of the California workers' compensation system affecting benefit delivery:

• Pay all benefits at a single weekly rate.
• Simplify the calculation of permanent disability.
• Improve the Benefit Notice program.
• Change mechanism for Commission funding.

Under current DWC audit procedures, locations are rarely subject to random audits and almost never subject to targeted audits. The Commission recommends the replacement of current audit procedures with the following:

• Simplified audit, focusing on key violations.
• Auditing of all locations on a five-year cycle.
• Electronic monitoring of key performance indicators where possible.
• Increased use of targeted audits to identify poor performers.

The results of the routine audits should be used to:

• Identify poor performers for an in-depth review.
• Verify data integrity.
• Benchmark performance on key indicators.
• Rank performance of adjusting locations.

• Every location would be subject to a screening audit, called a Profile Audit Review (PAR), once every five years. The PAR is intended to identify the 5% to 10% 'worst performers'.
• Those locations which pass the PAR would pay any compensation due but would not pay administrative penalties.
• Those locations that fail the PAR (the 5% to 10% 'worst performers') would undergo a rigorous audit, called the Full Compliance Audit (FCA).
• Those locations passing the FCA would pay compensation due and administrative penalties associated with unpaid or late paid compensation at the level of current administrative penalties.
• Those locations failing the FCA would pay compensation due and penalties according to the proposed FCA Penalty Schedule on all violations.
• Based upon complaints or other indications of inadequate performance, a location may be targeted for a PAR or FCA audit at any time.

The Commission Research Team found that the current audit penalty structure offered insufficient incentives for good performance and was biased in its application. The Project Research Team recommends a penalty structure that would:

• Eliminate penalties for entities that meet or beat threshold levels of violations.
• Adjust penalty levels relative to the size of the entity or location.

These changes are meant to:

• Make the audit process more efficient;
• Increase incentives for poor performers to improve claims administration; and

• Eliminate the unequal application of penalties across entities of different sizes and different levels of decentralization.

If a location fails the FCA, the location would be subject to the following administrative penalties, based on the size of the location and the size of the sample selected for the auditing process.

If a location passes at the FCA level, administrative penalties for unpaid or late paid compensation would be paid at the minimum level (Rank 1).