Bulletin 98-04
November 4, 1998

Revised DWC Audit Regulations Go Into Effect on Nov. 25

 The revised regulations will help the Audit Unit better allocate its resources as well as perform more audits overall by focusing more of its attention on audit subjects with poor performance records and spending less time at adjusting locations where fewer problems are being found.  In addition, the new rules will provide a better methodology for choosing subjects for non-random audits and in selecting claims to be reviewed.

 Other provisions strengthen and clarify the administrative penalty schedule, including a new $5,000 penalty for providing auditors a backdated or otherwise altered or fraudulent document.  The new rules also set a standard for referrals to the Administrative Director for possible assessment of a civil penalty of up to $100,000 for knowingly committing specified prohibited practices with a frequency to indicate a general business practice.

 The revised regulations were developed with the full participation of the workers' compensation community.  The original draft regulations were proposed at public hearings held in November 1997 and have been subject to several additional public comment periods since then.

 The revisions included input from DWC's Audit Simplification Subcommittee, an advisory panel consisting of representatives from the insurance industry, self-insured employers, third-party administrators, as well as applicant's and defense attorneys. The committee was helpful in providing ideas and proposals from the community for streamlining the audit process and increasing the efficiency of the audit program.

 Specifically, the revised audit regulations, which are contained in Sections 10106 through 10113 of Title 8, California Code of Regulations, will:

  • Set forth the criteria to be used in selecting claims administrators for non-random audits on the basis of prior audit performance.

  • Specifically name the Audit Unit as the investigatory arm of the Administrative Director in regards to business practices for which the civil penalty may be assessed.

  • Revise the methodology for choosing the number of indemnity claims to be examined at each audit location, so that auditors will not be required to allocate more resources than necessary to review files at adjusting locations with relatively low violation rates.  Indemnity claims will be sampled with a two-tiered approach.  An initial sample will be examined, and if the violations identified exceed specified performance standards, the sample will be expanded. The revised rules also provide audit subjects with notice of the random sampling methodology used in selecting the number of claims to be reviewed at an adjusting location.

  •  Prevent audit subjects from escaping the possibility of a follow-up non-random audit by cleaning up their file penalties after being notified which files will be examined. Under the new rules, violations that are corrected only after notice of the file being selected for audit will be assessed as though the required act had not been done at all, rather than as if it were merely done late.

  • Restructure the schedule of administrative penalties for violations to provide incentives for good performance by reducing and eliminating penalties for failure to issue benefit notices and late benefit notices if specified performance standards are met.

  • Add a $5,000 penalty for providing a backdated or otherwise altered or fraudulent document to the Audit Unit or intentionally withholding a document from the Audit Unit which act would have the effect of avoiding liability for the payment of compensation or an audit penalty.

  • The California Labor Code currently provides that claims administrators who knowingly commit specified prohibited practices with a frequency that suggests that those practices are a general business practice may be assessed a civil penalty of up to $100,000 by the Administrative Director.  The amended rules provide notice to administrators that if, on the basis of two consecutive audits, an audit subject qualifies for a third non-random audit of indemnity and or denied claims, the Audit Unit will refer the audit subject to the Administrative Director for the possible assessment of a civil penalty.
  •  The revised audit regulations, as well as the other Title 8 DWC and WCAB regulations, can be accessed from the Department of Industrial Relation's website at http://www.dir.ca.gov.