1. Commission on Health & Safety & Workers' Comp

Study of Division of Workers' Compensation's (DWC) audit function

Background

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 DWC audit function.

Description

The Commission project team researched the issue and conducted thoughtful discussions with DWC audit unit management and staff, the audit study advisory committee and other community members.

The research team found that the 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. Under those procedures, locations are rarely subject to random audits and almost never subject to targeted audits.

The study participants concluded 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.

Recommendations

The Commission recommended revisions to the audit function, in order to:

• Reward good performers by eliminating administrative penalties and resource requirements.
• Increase incentive to improve benefit delivery by raising administrative penalties substantially on poor performers.
• Focus administrative penalties on important violations.

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 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.

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

Further information

Division of workers’ compensation audit function, 1998