Section III
Commission on Health and Safety and Workers' Compensation

1995-96 Annual Report

Section III

Workers' Compensation Issues

Claims Adjudication

Case Openings

The following chart and table show a significant increase in Applications for Adjudication of Claim received by the Division of Workers' Compensation in 1994 and 1995.

This increase may be temporary and the result of a change in legal procedures.

During the so-called "window period" from January 1, 1991 through December 31, 1993, the claim form completed by the injured worker and submitted to the employer was the jurisdictional document which started all formal proceedings, including discovery, statute of limitations, depositions, subpoenaing medical documents, etc. During this window period, the number of formal applications filed with the WCAB declined.

Starting January 1, 1994, a formal application filed with the WCAB was required to establish jurisdiction and commence proceedings. Also, many window period claims became ready for litigation, and formal applications were filed to establish cases for those claims.

Further analysis of the opening documents workload (window period vs. post-window period) is required to determine the actual long-term increase, if any, in applications for adjudication of claim.

Note that the Opening Documents chart does not include preapplications -- liens and other documents -- as opening documents to preclude doublecounting.

Opening Document199019911992199319941995
Application 107,834 69,204 91,523 92,944 130,217 161,724
Original Compromise and Release 14,804 39,293 60,092 64,468 58,191 46,777
Original Stipulation 9,108 19,356 21,905 21,348 25,650 34,056
Total 131,746 127,853 173,520 178,760 214,058 242,557


The following table and chart shows certain categories of decisions issued by the Division of Workers' Compensation.

The category of "decision on merit" refers to a decision made by a workers' compensation judge on the merits of a disputed case. The decision "Finding and Award" means that the injured worker is to receive benefit(s) that were disputed, while "Finding and Order" usually indicates that no additional benefit is to be awarded.

The category of "settlement" refers to an approval by a workers' compensation judge on a settlement previously agreed-to by the parties to the case.

The category "order" refers to decisions made by a workers' compensation judge about certain matters relating to the case. Only two major types of the many types of orders are shown. Therefore, please note that minor decisions issued by DWC are not shown.

Type of Decision199019911992199319941995
Decision on Merit:
Finding & Award 9,376 9,811 7,673 8,304 7,560 7,890
Decision on Merit:
Finding & Order 4,4904,7094,5076,4615,8776,043
Compromise & Release134,690160,990135,792156,999137,162116,485
Attorney Fee15,52219,57521,31829,63729,87030,047

Timeliness of Actions

It has been difficult to determine the time required for a case to be resolved in the Division of Workers' Compensation. However, statistics in DWC's July 1, 1996 report to the Legislature, Governor and the Commission indicate that as of March 31, 1996, the average time from request to conference is 88 days, while the average time from request to trial is 208 days.

Vocational Rehabilitation

The 1993 workers' compensation reform legislation made major changes affecting the level and delivery of the vocational rehabilitation benefit. The most significant changes are as follows:

The Commission endeavors to measure the impact of the reform changes on vocational rehabilitation program. In order to do so, it is necessary to set up a model to get baseline information that will provide comparative data in future years regarding the number of workers undergoing vocational rehabilitation, the duration and cost of rehabilitation programs and services and the results produced by these programs and services.

The Vocational Rehabilitation Reform Study

The Commission contracted with the UC Berkeley Survey Research Center (SRC) to conduct the Vocational Rehabilitation Reform Study. The study, initiated in July 1995, is ongoing and a final report is expected in mid-1997.

The primary objective of the study is to help the Commission in evaluating the impact of the reform legislation on the vocational rehabilitation system. Questions to be answered include: Did the reforms reduce the cost of the rehabilitation benefit for employers? How have changes affected outcomes for injured workers?

The Commission and project team are assisted in this effort by the Vocational Rehabilitation Project Advisory Committee, comprised of interested members of the workers' compensation community.

The study is establishing baseline data for continued monitoring of rehabilitation services and will measure changes in the workloads for DWC rehabilitation consultants, caseloads in the DWC Rehabilitation Unit's dispute resolution process, and caseloads in the WCAB system. The study also includes a review of Vocational Rehabilitation literature.

Based on projections from current data from the DWC Rehabilitation Unit, sixty percent of Rehabilitation claims after January 1, 1994 will not involve case make-up or closure. In addition, the total number of claims for vocational rehabilitation is declining due to an overall decline in permanent disability claims.

As indicated in the graph below, these two forces will combine to reduce the workload requirements for case make-up. From a level of approximately 4,000 cases per month, experienced during 1992 to 1995, the number of cases requiring entry into the computer case tracking system is expected to decline to approximately 1,000 cases per month by late 1997. Another 1,500 claims per month will be sent to the Rehabilitation Unit, but will not be made up into cases on the computer system or the files in the Rehabilitation district offices. While this is a projected 75% reduction in cases entered, not all work is eliminated for unentered claims. They still require handling by the clerical staff and sometimes, checking against the computer system.

A decline in the number of claims in the system combined with the administrative decision by DWC not to enter on the computer system claims in which the worker is represented and there is no dispute, will reduce the workload to close cases. From an average of 4,000 case closures per month during the last four years, the number of cases closed on the computer system is expected to decline gradually to approximately 1,000 per month at the beginning of 1999.

Rehabilitation plan approvals are showing a sharp decline after peaking in 1993. This is likely the result of the decline in all reported injuries after 1991.

Also, vocational rehabilitation plans on claims that have dates of injury after January 1, 1994 and are represented by an attorney do not require approval by the DWC Rehabilitation Unit.

Rehabilitation plan disapprovals have shown a sharp decline since 1991. The San Francisco region seems to be running counter to this trend in 1994 and 1995.

Plan disapprovals are likely to represent greater workloads than approvals. Approvals can be the result of no action taken by the DWC Rehabilitation Unit within 30 days. Disapprovals require active review of the plan documents and notification of the parties.

Decisions and Orders (D & O) following conferences are an important indicator of workloads in the Rehabilitation Unit. Since these represent a conference held and a decision issued, a D & O will represent two work intensive activities undertaken by the consultants.

The sharp rise in D & Os could indicate that despite the decline in nearly all other measures of workload (e.g., openings, closures, approvals and disapprovals), the Rehabilitation Unit may not be experiencing an overall decline in manpower requirements.

This sharp rise in D & Os could be the result of an increase in disputes due to changes made by the 1993 reforms and/or the timing of disputes on the 1994 and 1995 injury year claims.

Alternatively, this could be an artifact of an administrative change. Most of the increase is in the San Francisco region. The SF region has consistently had 50% more D & Os relative to its caseload than the state average, while the Pomona region has been 50-70% below the state average.

The percent of workers successfully returning to work at rehabilitation plan completion has been declining since 1991 from over 57% to under 49%. The portion of plans terminated prior to completion has declined. Unfortunately, the percentage of workers not working at plan completion has increased from 28% of those receiving services in 1991 to 43% of those receiving services in 1995.

Potential Circumvention of Rehabilitation Cap

It has been reported that Qualified Rehabilitation Representatives may be writing plans that use funds from State Disability Insurance (SDI) to supplement the vocational rehabilitation benefit.

This situation has arisen since the 1993 reform imposed a cap of $16,000 on the total vocational rehabilitation benefit, which under previous statute had no limit. In order to write plans which meet their clients' needs, QRRs are looking for resources in other places.

This potential circumvention of the cap raises concern. While this circumvention may be technically legal under the current regulations and statutes, it violates the spirit of the law and the intent of the parties to the reform negotiations.

SDI benefits are intended mainly for nonoccupational injuries. There are situations where, once benefits in the compensation system are exhausted, SDI begins paying benefits for occupational injuries. This occurs where there is a statutory limit on the payment of workers' compensation temporary disability benefits.

Workers' compensation temporary disability (TTD) benefits are paid up to the point where:

  1. the worker is permanent and stationary (P&S), after which permanent disability and/or Vocational Rehabilitation Maintenance Allowance (VRMA) benefits are paid, or

  2. the worker is not P&S, but is able to return to work, or

  3. a statutory limit (if any) is reached.

Consequently, to receive the SDI benefits while circumventing the cap, the worker would have to be:

  1. ineligible or no longer eligible for temporary disability benefits, and

  2. ineligible or no longer eligible for VRMA, and

  3. not able to return to work under SDI criteria.

Representatives at EDD/SDI have indicated that SDI treats workers' inability to return to work at their usual occupation as being generally unable to return to work. In other words, SDI interprets the ability to return to work as ability to return to the at injury occupation.

It appears once a worker has 'exhausted' VMRA but has not completed a plan that would prepare the worker for return to work in a new occupation, that the worker could be eligible for SDI payments.

The definition of exhausting VMRA is the critical issue. Two examples will be useful to illustrate this point:

  1. The worker undertakes a VR plan that extends for more than 52 weeks. For example, a community college program lasting two academic years (or the last two years of a four year college degree program that was previously partially completed). The worker spends $10,000 on 52 weeks of VMRA, and the remainder of funds under the cap on QRR services and tuition. This would exhaust her 52 week VMRA benefit, while leaving her incompletely trained in the new profession. It appears she would be legally entitled to continue the final year of education/training while obtaining SDI benefits.

  2. The worker undertakes a VR plan that extends for one year. The tuition at the private training school costs $9,000, QRR services cost $4,500, and transportation and incidentals cost $2,500. This worker may be able to decline VRMA payments, spend the $16,000 cap on the above package, and legally apply to EDD for SDI because VRMA is "exhausted".

The Commission recommends that a work group be convened to develop an issue paper on this subject, which could serve as the basis for remedial action if needed.

Disability Evaluation

The Permanent Disability Rating Schedule

The 1993 reform legislation directs the administrative director of the DWC to revise the schedule for the determination of permanent disabilities. A discussion of this requirement is contained in the "Agency and Program Operations" section of this report.

Incomplete Physician Reports

Incomplete physician reports have been cited as a major factor leading to inconsistency in permanent disability ratings. Many of DWC's disability evaluators state that their largest problem with the current system is the poor quality of medical reports that they have to rate.

Despite the incomplete nature of these reports, it is reported that the Disability Evaluation Unit (DEU) is rating the reports, sending them out and is having them returned for re-rating. This churning results in delays and additional costs to all parties in the system.

Physician Report Study

The Commission has contracted with UC Berkeley's Survey Research Center for a study of physician reports used in the permanent disability rating process. The study will determine the nature and magnitude of the problem, ascertain who is producing incomplete reports and why, develop quantitative analysis, provide recommendations for improving the quality of reports and calculate the cost/benefit of possible modifications.

The evaluation will be done on a random sample of reports drawn from the Disability Evaluation Unit. The sample will be drawn in conjunction with the Industrial Medical Council, who will determine the status of the reporting doctor -- QME or treating physician -- and participate in the evaluation of the reports done by QMEs. The costs of reports will be estimated separately using data drawn from one or more bill review companies or carriers.

The study is expected to be completed by the end of 1996.

Summary Permanent Disability Ratings

In an effort to reduce litigation, the California's workers' compensation reform provided a mechanism for an injured worker to obtain a summary permanent disability rating from DWC's Disability Evaluation Unit (DEU). The DWC is mandated to provide summary ratings within 20 days from the receipt of the medical report. With the provision of the summary rating, the workers' compensation claim may be settled without the need for formal litigation before the appeals board.

The Medical-Legal study (discussed later in this section) determined that the summary rating process is not being used and no concomitant reduction in litigation was observed.

However, previous DEU backlogs in the provision of summary ratings may have impacted the full utilization of this process (See the Agency Operations section of this report for a discussion of those backlogs and the efforts to reduce them). The DWC Administrative Director in essence suspended the summary rating process for a time, by urging the workers' compensation community to self-rate cases, develop a proposed settlement, and submit it to DWC for review and approval.

Permanent Disability Benefit and Program

The Commission realizes that the rating of permanent disability is one of the most difficult tasks of the workers' compensation system. The difficulty lies in the very process of estimating the degree of a worker's impairment and the amount of economic loss caused by such impairment. This process more often than not leads to disputes and litigation. The manner in which California rates and compensates injured workers for total and partial permanent disability has enormous impact on the adequacy of their benefits, their ability to return to gainful employment, the smooth operation of DWC's adjudication system and the cost of the workers' compensation system to employers.

The Commission is also aware that the pending revision of the Permanent Disability Rating Schedule is not a long term solution for either promptness of rating or equity in permanent disability monies paid.

The Commission decided to explore the feasibility of conducting a study that would look at California's permanent disability benefit levels, the rating methods and the cost of providing those benefits in comparison to similar systems in other states. It is clear that this issue is very complex and should be addressed carefully and systematically.

Permanent Disability Fact-Finding Hearing

In January 1996, the Commission held a public fact-finding hearing in Los Angeles to bring representatives from the California workers' compensation community together to identify problems and propose solutions to challenges noted in the California permanent disability benefit structure and program.

Summarized below are key points from oral and written testimony by employee and employer representatives, insurers, attorneys, vocational rehabilitation and health care providers, public officials and program administrators:

Permanent Disability Study

Pursuant to the strong support and encouragement received from throughout the workers' compensation community to continue its investigation of the permanent disability system in California, the Commission issued a Request for Proposal for a study by an independent research organization.

The Commission voted to contract with RAND Corporation, which achieved the highest score in the competitive Request for Proposals process.

The Industrial Medical Council joined with the Commission in this effort and is contributing towards the cost of the study. The IMC is interested in the nature of impairment and evaluation, particularly the relationship between vocational rehabilitation and permanent disability rating.

As with all Commission projects and studies, a Permanent Disability Study Advisory Committee composed of interested members of the workers' compensation community, was formed to assist RAND and the Commission in this endeavor. The first meeting of the Advisory Committee was held in July 1996.

The study will be conducted over the course of a year; a report is expected by mid-1997.

Medical Issues

Psychiatric and Post Termination Claims

The 1993 reform legislation limited the ability of persons to file psychiatric "stress" and post-termination claims because it was widely believed that many were fraudulent and in a great many instances were in retaliation for a lay-off resulting from a reduction in the work force.

The Medical-Legal Study (discussed under "Medical-Legal" in this report section) determined that the number of psychiatric claims (permanent disability claims with at least one psychiatric medical-legal examination) declined over 90 percent between accident years 1991 and 1993.

Differences between Workers' Compensation and Group Health

Medical costs and utilization continue to be significant issues in the California workers' compensation system.

The California Workers' Compensation Institute conducted a study of medical care for back injuries in California published in January 1996. The study compared workers' compensation medical treatment and medical care for non-occupational back injuries covered by group health. The findings revealed significant differences between the two in medical costs, utilization of services, and treatment patterns.

The research is based on an analysis of medical treatment provided in 1990 and 1991 for 22,656 workers' compensation back injuries and 14,712 group medical back claims in California.

Revision of Official Medical Fee Schedule

The Official Medical Fee Schedule (OMFS), adopted and revised through the public hearing process by the DWC administrative director, is used for billing medical treatment under workers' compensation.

The OFMC version in use in 1993 was criticized as outdated because it did not cover many common procedures and did not apply to pharmaceutical or hospital charges. The reform legislation directed the Division of Workers' Compensation to update the fee schedule to address these concerns.

The DWC issued a major revision to the medical fee schedule effective April 1, 1994. The 1994 version was based on the American Medical Association's Comprehensive Procedural Terminology (CPT), a standardized coding system used by most non-workers' compensation health care providers, and added many new procedures, outpatient hospital charges and drug charges.

DWC reports that the OMFS was revised again. The 1996 schedule, which contains a number of changes from the 1994 edition, must be used for all medical treatment provided injured workers on or after January 1, 1996. The changes in the 1996 version primarily address issues which arose after the implementation of the major changes contained in the 1994 version of the fee schedule.

Major changes in the 1996 OMFS include:

The 1996 version also includes a number of appendices, including an updated compilation of related statutes and regulations, a summary of the additions, deletions, and revisions of CPT Codes, and copies of relevant forms.

Hospital Fee Schedule

The reform legislation requires that the DWC issue a Hospital Fee Schedule by January 1, 1995. That mandate has not as yet been met.

The Division of Workers' Compensation reports that the Hospital Fee Schedule has proved to be both a technical and administratively difficult subject that is still being worked out.

The Division held public hearings in December 1995 on the proposed schedule. The Division proposed that the maximum payment will be 1.2 times the product of a factor calculated annually for each hospital using data published by the Health Care Financing Administration (HCFA) and the Diagnosis Related Groups (DRG) weight. Each year the Division will publish the hospital factors, applicable DRG weights and other information necessary to make payments under this fee schedule at least 45 days before any changes take effect.

During the hearings and the subsequent comment period, the Division received constructive feedback on alternatives and modifications to the schedule. The Division has incorporated some of these changes into revised regulations, which they plan to release soon for public comment. DWC anticipates that the fee schedule shall be effective for all inpatient hospital admissions on or after January 1, 1997.

Utilization Review Regulations

Legislative changes in 1993 required the DWC Administrative Director to "adopt model utilization protocols in order to provide utilization review standards" [Labor Code Section 139(e)(8)]. Pursuant to that statutory mandate, utilization review standards -- CCR §9792.6 -- were adopted as regulations effective July 20, 1995.

In response to the regulations, insurers and self-insured employers choosing to implement medical utilization review as part of the medical delivery process were required to advise the DWC administrative director when their programs were operational. According to the division, insurers and self-insured employers must "maintain, and make available to the administrative director on request, a written summary..." of their program. Any entity's utilization review program not in compliance with the regulations by July 1, 1996 may be subject to action on the part of the Administrative Director.

The regulations describe utilization review as a "system used to manage costs and improve patient care and decision making through case by case assessment of the frequency, duration, level and appropriateness of medical care and services to determine whether medical treatment is or was reasonably required to cure or relieve the effects of the injury..." The adopted utilization review regulations do not apply to medical treatment involving AOE-COE disputes nor to fee schedule type of billing disputes.

While the regulations permit a wide variety of types of utilization programs that a self-insured employer or insurer may implement, minimal standards must be met to assure regulatory compliance:

The Industrial Medical Council (IMC) is currently considering a number of treatment protocols. Public hearings were held in May, June and July 1996 for the IMC's proposed post traumatic stress disorder, low back and upper extremity/neck protocols. Treatment guidelines for contact dermatitis and occupational asthma have already been adopted. The Division of Workers' Compensation is considering if the IMC guidelines should be specifically mandated for use in utilization review programs.

24-Hour Care Pilot Project

With the passage of Assembly Bill 3757 (Bronzan) in 1992, California established a pilot project to test the feasibility of merging occupational and nonoccupational medical care into one insurance product offering "24-hour" coverage.

Under the "24 -Hour" Coverage concept, all of a participating employee's health care needs, including job related injuries covered under workers' compensation insurance, are provided by one exclusive provider of health care services.

Traditionally, many employers offer a health care plan as an employee benefit, providing for the general medical needs of workers and their families. In addition, every employer in the state must also provide coverage for work-related injuries, either by having a workers' compensation insurance policy or by receiving approval to self-insure their liabilities.

Under the 24-hour care approach, insurers provide employers an insurance option combining state required workers' compensation coverage and managed care group health into a single benefit that participating employers may offer employees on a voluntary basis. The major goals of this coverage are to increase continuity of care for workers' compensation claimants and to lower the overall costs of medical and injury claims. Employees who opt to participate will benefit by having the same doctor or medical facility care for all of their medical needs, thereby assuring access and continuity of care. Medical treatment provided for work related injuries will continue to be provided without coinsurance, deductibles or premium copayment by employees.

The pilot project is intended to show whether a single 24-hour health coverage plan can reduce employers' overall health care costs by reducing duplicative administrative costs for separate occupational and group health care coverage and by dampening incentives for litigation to determine which insurer is liable for treating an employee's injury.

Four pilot projects operating in San Diego, Los Angeles, Sacramento, and Santa Clara Counties, have been approved by the Division of Workers' Compensation:

These three year pilot programs are among the first in the nation to test this innovative approach. Several insurers have indicated that participating employers could be eligible to receive a reduction in their workers' compensation insurance premium rates.

An evaluation study of the 24-hour care demonstration projects will be conducted by the UCLA Center for Health Policy Research, in conjunction with the RAND Corporation and UC Berkeley, partially funded by a grant from the Robert Wood Johnson Foundation. This study will evaluate the impact of the pilot programs on the number and types of workers' compensation claims; claimant satisfaction and outcomes, including return to work; utilization of health care services; and overall costs of workers' compensation and group health premiums and claims. The evaluation will include an analysis of workers compensation claims, a survey of employers and a baseline survey to examine who does or does not enroll in 24-hour pilot programs. An interim progress report from DWC is due to the Legislature during the summer of 1996, and a final report by the end of 1998.

The Health Care Organization Program

Legislation enacted as part of the workers' compensation reform effort of 1993 was intended to expand the use of managed care in workers' compensation, as a means of reducing medical costs and facilitating better management of workers' compensation cases.

The Health Care Organization or HCO program, which came into effect following passage of the 1993 reform legislation, expanded the use of managed care techniques in the workers' compensation system by allowing employers and insurers to contract with certified health care organizations to provide medical treatment for industrially injured workers.

HCOs are medical care systems that offer managed care services for work-related injuries and illnesses. Ideally, HCOs should offer quality medical care with occupational medicine expertise; lower medical costs for employers through the use of managed care techniques such as provider networks, utilization management and case management; and coordination of medical treatment with workplace health and safety measures and return-to-work services.

A certified HCO would:

Employers that contract with HCOs may control the medical care of injured employees for longer than the current 30-day period after date of injury, as follows:

At least one of the HCOs must offer a fee-for-service option. Employees may still predesignate any physician as their primary treating physician and thereby avoid having any period of employer control over medical care for work-related injuries.

HCO Certification Process

The reform legislation of 1993 enacted a complex scheme to permit various entities to become certified as health care organizations (HCOs).

Health insurers, HMOs and other entities authorized as workers' compensation health care providers (such as workers' compensation insurers and third-party administrators) may apply to become certified as HCOs. Health insurers and HMOs that are properly licensed by the Department of Insurance or the Department of Corporations, respectively, may apply to the administrative director of the Division of Workers' Compensation for HCO certification. Other entities must first become authorized by the Department of Corporations as a workers' compensation health care provider organization (WCHCPO) before applying to the administrative director to become a certified HCO.

DWC examines the application for HCO certification to insure that the health care organizations have considered the following kinds of issues in establishing their system for health care delivery in the workers' compensation context:

Certified HCOs

As of July 1996, DWC reported that there were eight entities certified as Health Care Organizations:

FHP Life Ins. Co. MetraComp/Conservco
Greaney Medical Group, P.C.Eisenhower Medical Center
Little Company of MaryHealth Plan of the Redwoods
MetraComp SelectUS CompCare

Seven other applications have been received by the HCO program and are in various levels of review. Four of these are applications of insurance carriers already reviewed by the Department of Insurance, while three are health care service plans or HMOs licensed by and currently being jointly evaluated by DWC and the Department of Corporations (DOC). Other applications have been pre-filed with the DOC but have not yet been received by DWC.


Employers, insurers and health care providers are critical of both the structure of the HCO statute and the manner in which the DWC is implementing the law. Employers argue that the law gives the employee too many opportunities to opt out of treatment by the HCO, that the program is too complex and too cumbersome to administer, that it is duplicative and burdensome to require HCO applicants to obtain certification from two different state agencies, that the DWC requires too much data to be reported by HCOs, and that it is duplicative to require HCOs to offer health and safety consultations already available from the Department of Industrial Relations and workers' compensation insurers.

On the other hand, some observers believe that it is important to retain the various opportunities for injured employees to opt out of treatment from the HCO if they grow dissatisfied with their medical care. They also believe that it is important to retain the requirement for HCOs to offer health and safety consultation services since there are reports that some workers' compensation insurers are cutting back on the level of such services offered.

In the summer of 1995, the Division of Workers' Compensation (DWC) conducted a survey of employer, insurer, medical, and other organizations to describe current practices in the delivery of medical services in workers' compensation, and to elicit the views of system participants as to the effects of the reform legislation on workers' compensation medical care. The survey found widespread use of a variety of cost-containment and case management techniques, but little consensus as to the definition of "managed care" in workers' compensation.

There was general agreement that the 1993 legislation is excessively complex and has created barriers which outweigh the incentives for the expansion of managed care through the use of certified Health Care Organizations. Issues most frequently identified include the required choice of HCOs, variable days of employer medical control, and regulatory complexity. The survey identified problem areas which, respondents contend, prevent the workers' compensation community from more fully reaping the benefits of managed care, such as lower costs and improved care, that were anticipated when the HCO law was passed.

The survey included approximately a hundred participants, including existing HCOs and applicants, workers' compensation insurance carriers, self-insured employers, HMOs, preferred provider organizations, medical groups, labor unions, and industry consultants. Reports from the survey indicate a general agreement that the 1993 legislation was conceptually good; however, respondents also felt the legislation was excessively complex and had created barriers which outweigh the incentives for the expansion of managed care through the use of certified HCOs.

Issues most frequently identified in the survey include the requirement that employers offer employees a choice of more than one HCO, that the period of time during which the employer maintains control of medical treatment can vary from 90 to 365 days, and that the regulations governing the program are overly complex.

Proposed Legislation

The Division of Workers' Compensation is sponsoring legislation to address the concerns identified in the survey. The legislation would:

Implementation of these changes would facilitate certification of more HCOs, make the use of certified HCOs easier for employers, strengthen the extended length of medical control, and encourage participation in a system which provides some assurances regarding quality of care with expanded use of managed care in California's workers' compensation system.

Medical-Legal Evaluations

Reform legislation changes to medical-legal evaluations were intended to reduce both the cost and the frequency of litigation, which drive up the price of workers' compensation insurance to employers and lead to long delays in case resolution and the delivery of benefits to injured workers.

The concern over reasonable charges and payments for medical-legal reports has a long history. For years, neither the Labor Code nor the regulations provided guidance what constituted "reasonable". Then, in 1986, the payment for the reasonable value of an initial medical-legal report was governed by Labor Code Section 4624. This section mandated that fees for initial comprehensive industrial medical-legal reports were presumed reasonable, though rebuttable, if the physician's (treating, AME, IME or QME) charges did not exceed fee specified by the DWC administrative director. The administrative director calculated these specified fees by using initial medical legal report charges from the 12 months ending the previous December 31. Reasonable fees were based on the 80th percentile of the administrative director's calculations unless the medical provider or payer proved that the specified fee was incorrect. Effective January 1, 1990, the 80th percentile was dropped to the 73rd.

By pegging the fee level to the amounts billed, rather than actually paid, in the prior year, this method contained a built-in incentive for medical-legal cost inflation as evaluators were encouraged to bill at higher rates in order to increase payments the following year.

Medical-Legal Fee Schedule

Since the costs of medical legal reports was still an outstanding issue during 1993 reform efforts, further legislative changes took place. Labor Code Section 5307.6 was enacted and the statute mandated that the administrative director adopt and revise a medical-legal fee schedule.

The fee schedule -- CCR §9795 -- went into effect on August 3, 1993. The fee schedule applies to all medical-legal evaluations, not just the initial evaluation. While there is some discussion as to whether the schedule uses "complexity of the evaluation" as a dominant factor in identifying the level of service rather than the "times to perform procedures", complexity was intended to be the primary determinant for payment purposes [CCR §9795(b)].

In June 1996, the Industrial Medical Council began holding meetings with an industry advisory committee that will assist the IMC in its efforts to update the medical-legal fee schedule.

Medical-Legal Study

In 1995, the Commission, with the interest and support of the workers' compensation community, contracted with the University of California at Berkeley Survey Research Center for a study of medical-legal evaluations.

The study analysis was based upon the Workers' Compensation Insurance Rating Bureau's (WCIRB) Permanent Disability Claim Survey, a set of data created by the WCIRB at the request of the Legislature to evaluate the 1989 reforms. Since that time, the WCIRB has continued to collect these data on an annual basis. The WCIRB data summarizes accident claim activity, including such measures as the degree of impairment, the type and cost of specialty exams, whether the case was settled and, if so, the method of settlement employed.

The analysis covered samples of 1989 through 1994 accident year claims from insured employers. Data from self-insured employers and public agencies are not reported to the WCIRB and are therefore not included in the study.

The study report and findings were published in July 1996.


The study determined that the cost of medical-legal examinations on partial permanent disability (PPD) claims has declined significantly since its peak during the 1991 accident year. For the insured community, the total cost of medical-legal exams performed on PPD claims by 40 months after the accident year, has dropped 84 percent from a high of $394.5 million for the 1991 accident year to an estimated $64.5 million for the 1994 accident year.

Total costs are calculated by multiplying the number of PPD claims by the average number of exams per claim and then by the average cost per exam. The study determined that the decline in total medical-legal exam costs is due to a reduction in each of these components which make up the total cost.

The number of PPD claims decreased from about 137,000 in 1989 to an estimated 100,400 in 1994. This decrease was driven by declines in both the number of workers covered by workers' compensation insurance and the number of reported injuries. A significant portion of the decline may also be due to the steep drop in the number of claims with a psychiatric component.

Number of PPD Claims

(Thousands, 30 Months after policy inception)

Change from previous year
1993 (est.)
1994 (est.)

The average cost per medical-legal exam has dropped nearly 40 percent from a high of $987 for 1990 accident year claims to an estimated $606 for 1994 accident year claims. The study team determined that the decrease is the result of two important changes: revisions to the Medical-Legal Fee Schedule and the decline in the number of the more expensive psychiatric exams.

Average Cost of Medical-Legal Exams

(By Accident Year, at 40 months)

YearAverage Cost
1989 $965
1990 $987
1991 $959
1992 $875
1993 (est.) $606
1994 (est.) $606

The average number of medical-legal exams per claim has dropped by half from 2.2 in accident year 1991s to an estimated 1.1 in accident year 1994. Almost all of the decrease occurred in claims with legal representation.

This substantial decline is attributed in part to reforms implemented to reduce the "dueling docs" syndrome in the past which contributed to complications and delays in claim resolution. Before the reforms, applicant and/or defense attorneys could attempt to bolster a claim by obtaining multiple reports by forensic doctors. Changes include establishing treating physician reports as presumed correct except with a preponderance of evidence, limiting the number of exams allowed per specialty in litigated cases, and limits on the compensability of psychiatric aspects.

Much of the improvement in the average number and average cost of medical legal exams per claim is a result of reductions in the number and cost of psychiatric medical legal exams. The total cost of psychiatric medical-legal exams dropped from $93.8 million for 1991 accident year claims to an estimated $5.9 million for 1994 accident year claims.

While the study showed that some of the reforms have achieved significant changes and savings in the workers' compensation process, not all efforts have been as successful. The introduction of mandatory settlement conferences was meant to reduce the need for formal hearings and decisions and to speed the resolution of workers' compensation cases. However, data from the study suggest that this goal has not as yet been achieved. Instead of reaching voluntary settlements that do not necessitate active involvement by the DWC, parties are increasingly using one or more dispute resolution methods.

As shown in the chart below, there has been a decline in the percentage of cases where a voluntary agreement was reached without intervention by the DWC/WCAB. This movement from voluntary settlement to dispute mechanisms has not been accompanied by a reduction in the need for formal decisions to resolve claims; the proportion of cases settled through formal hearings has not changed. This has resulted in an overall increase in the cases where the DWC has been involved.

Average Number of Medical-Legal Exams
(At 28 months from the beginning of the accident year)
Injury Type/Representation
Minor - No Attorney
Minor - Attorney
Major - No Attorney
Major - Attorney

Note: "Major" means a claim with a permanent disability rating of 25% or more.

"Minor" means a claim with a permanent disability rating of less than 25%.

This increased usage of dispute resolution mechanisms may have unintended impacts upon the frequency of medical-legal reports. The study found that claims which use one or more dispute resolution mechanisms average 15 to 40 percent more medical-legal exams. The apparent movement from voluntary settlement to other resolution mechanisms may thus be attenuating some of the savings to the system achieved with the overall reduction in the numbers of medical-legal exams.

The study team also determined that there have been no significant improvements in the rate at which workers' compensation cases close in the 1990s. So increased use of arbitration and mediation apparently has not resulted in a more rapid settlement of cases. Consequently, costs incurred to the DWC for these new programs are not being offset by gains in quicker resolution.

Next Steps

The Commission has contracted with UC Berkeley Survey Research Center to continue this analysis for another year. An additional study report is expected in July 1997.

The study team recommended that certain changes be made in the survey document to address issues arising from the legislative reforms. The WCIRB has indicated its willingness to work with the Commission and the study team to make feasible modifications.

Alternative Benefit Delivery Systems

The Commission is monitoring one of the provisions of the 1993 workers' compensation reform package known informally as the "carve-out", since certain employees and employers are carved out from the traditional workers' compensation system. For the first time, authorized parties may agree through collective bargaining to alternative methods for resolving workers' compensation disputes.

The "carve-out" program was modeled on a similar experiment in Massachusetts, where Bechtel and the Pioneer Valley Building and Construction Trades Council had a collective bargaining agreement governing a single construction project.

California Labor Code section 3201.5, established by the 1993 Senate Bill 983 (Leroy Greene), allows unions and employers in the construction industry to create what is close to an alternative workers' compensation system. Through collective bargaining, the parties may agree on an exclusive list of medical providers and evaluators, on return-to-work and vocational rehabilitation programs, and an "alternative dispute resolution system" to replace most DWC and WCAB procedures.

The statute gives the parties great leeway to establish the kind of system they want -- but there are two important limits: (1) the agreement may not diminish compensation to injured workers, and (2) the final step of the "alternative dispute resolution system" must be appeal to the Workers' Compensation Appeals Board.

At first limited to the construction industry, in 1994 Senate Bill 853 (Greene) expanded the range of eligible employers to include businesses in rock, sand, gravel, cement and asphalt operations; heavy duty mechanics; surveying; and construction inspection.

Under the original provisions of the construction carve-out, the administrative director was to look at the proposed agreements, see if they complied with the law, and issue comments, but the division did not have approval/disapproval authority. The 1994 revision gave the DWC administrative director the power of approval and allowed the division to insure that the parties were eligible to participate. The parties must also submit a copy of the agreement, although they do not need the DWC administrative director's approval of the agreement itself.

Pursuant to the requirements in Labor Code Section 3201.5(i), the DWC must report to the Legislature by June 30, 1996 and annually thereafter on the number of employers and employees covered by carve-out agreements, as well as other data about claims costs and vocational rehabilitation.

The Division of Workers' Compensation reports that seven carve-out agreements have been reached:

  1. An agreement between the California Building & Construction Trades Council, AFL-CIO, and the Metropolitan Water District of Southern California. This is a project labor agreement covering all contractors and sub-contractors on a $2 billion, 5-year construction project called the Domenigoni Reservoir.

  2. An agreement between the District Council of the International Brotherhood of Electrical Workers and its 20 local unions and a multi-employer group called the National Electrical Contractors Association, consisting of about 300 contractors. Each individual employer must sign up. More than 100 have done so.

  3. An agreement between the Southern California District of Carpenters and its 19 local unions and six different multi-employer groups consisting of about 1000 contractors. Each individual contractor decides whether or not to sign the master carve-out agreement.

  4. An agreement between the Southern California Pipe Trades District Council No. 16 and a multi-employer group called the Plumbing & Piping Industry Council, Inc.

  5. Two agreements between the Cherne Contracting Corporation and Steamfitters Local 250 covering two projects at different oil refineries.

  6. An agreement between TIMEC Co., Inc., and TIMEC Southern California, Inc., and the International Union of Petroleum and Industrial Workers.

  7. An agreement between the Contra Costa Building & Construction Trades Council, AFL-CIO, and the Contra Costa Water District. This is a series of three project labor agreements covering all contractors and sub-contractors on a $200,000,000, two and a half year dam project called the Los Vaqueros Project.


Supported by 1991 and 1993 legislation, efforts to combat workers' compensation fraud continue. Besides stiffening penalties, obliging specified parties to report suspected fraud to the Department of Insurance (DOI) and mandating adherence to medical-legal/medical billing and reporting requirements, the legislation created an employer assessment to fund anti-fraud activities.

The provisions of the 1993 reform legislation:

The legislation also established the Fraud Assessment Commission. The Commission was charged with determining the actual assessment amount after considering advice and recommendations from both the Insurance Commissioner and DOI's Fraud Division. The initial fraud assessment amount was $3 million. The assessment was increased to $10 million for fiscal year 1992/93 and then raised to $25 million for fiscal year 1993/94 and thereafter. Recently, the Fraud Assessment Commission authorized the Department of Insurance to distribute a total of $28 million for fiscal year 1996/97. The additional $3 million will be funded from collected fines and civil penalties levied because of violations, restitutions and interest rather than from increased employer assessment. After incidental expenses, the Insurance Commissioner with the advice and consent of the Fraud Division and the Fraud Assessment Commission distributes half of the funds to applying California district attorneys' offices.

The California Department of Insurance Fraud Division reports 505 arrests for workers' compensation fraud from July 1, 1992 through June 30, 1996. Forty-one percent of all of these arrests -- 205 -- occurred during fiscal year 1995/96. Additionally, district attorneys reported 272 arrests by the end of the 1994/95 fiscal year for a total arrest count of 777. There have been 355 convictions in fiscal years 1992/93 through 1994/95.

The Fraud Division counted 3,945 reports of suspected workers' compensation fraud claims during fiscal year 1995/96, a decrease from the all time high of 8,342 suspected claims reported in fiscal year 1992/93. Successful efforts in combating fraud and the decline in claim frequency often are cited as the reasons for the decrease in the number of referrals. However, the number of case assignments to investigators have reached an all time high -- 904 assignments -- during fiscal year 1995/96. Since July 1992, the Department of Insurance has assigned a total of 2,089 cases for investigation.

The fraud prosecutions funded by this new program, as well as a renewed determination on the part of workers' compensation insurers to fight fraud, have driven many of the most egregious practitioners out of business and have helped reduce the number of workers' compensation claims.

Recognizing that insurer Special Investigative Units (SIU) are the first line of defense in fighting workers' compensation fraud, the Legislature in 1991 adopted statutes requiring all insurers to maintain a SIU. The Fraud Division is responsible for overseeing the SIUs. As of July 1, 1996, the Fraud Division established a performance audit process to determine whether they are in compliance with the code and regulatory requirements to combat fraud.