Chapter 4.5. Division of Workers' Compensation
Subchapter 1.5. Injuries on or After January 1, 1990
Article 1. Audit, General Definitions

§ 10107.1. Notice of Audit; Claim File Selection; Production of Claim Files; Auditing Procedure.

For audits conducted on or after January 1, 2003:

(a) Once a subject has been selected for an audit, the Audit Unit shall serve a Notice of Audit on the claims administrator. The Notice of Audit shall inform the claims administrator of its selection for audit, and may include a request to provide the Audit Unit with a claim log or logs. If the Audit Unit has requested claim logs, the audit subject shall provide two copies of each requested claim log within 14 days of the date of the receipt of the Notice of Audit. Only one copy of the requested claim log or logs shall be provided within 14 days of the date of the receipt of the Notice of Audit by the claims administrator if the copy is provided via electronic submission to the Audit Unit mailbox at [e-mail].

(b) At least 14 days before the audit is scheduled, the Audit Unit shall send the audit subject a Notice of Audit Commencement identifying the claims to be audited. The audit shall commence no less than 14 days from the date the Notice of Audit Commencement was sent, unless the audit subject and Audit Unit agrees to earlier commencement. Claims selected for audit that are administered at the home of a telecommuting adjuster must be presented for audit at a California office location of the administrator, at a California location of the self insured employer, an Audit Unit office, or a Workers' Compensation Appeals Board district office. Other arrangements may be made as agreed between the audit subject and the Audit Unit.

(c) For profile audit reviews conducted pursuant to Labor Code section 129(b)(1), the Audit Unit shall randomly select samples of indemnity claims from the most recent three years of the audit subject's claim logs or from the list of claims for those years as reported to the Division of Workers' Compensation pursuant to Labor Code section 138.6 as part of the Workers' Compensation Information System. Claim samples randomly selected under this subdivision shall not include claims with a single indemnity payment that cannot be classified under the profile audit review performance standards set forth in subdivision (c)(3)(A) through (C)(3)(E). If any of the years have been the subject of a previous audit, claims will be randomly selected from the most recent unaudited year(s).

(1) The initial number of indemnity claims randomly selected for audit will be determined based on the following table:

Population	Sample Size
5 or less	all
6-10	1 less than total
11-13	2 less than total
14-16	3 less than total
17-18	4 less than total
19-20	5 less than total
21-23	6 less than total
24	17
25-26	18
27-29	19
30-31	20
32-33	21
34-36	22
37-39	23
40-41	24
42-44	25
45-48	26
49-51	27
52-55	28
56-58	29
59-62	30
63-67	31
68-72	32
73-77	33
78-82	34
83-88	35
89-95	36
96-102	37
103-110	38
111-119	39
120-128	40
129-139	41
140-151	42
152-164	43
165-179	44
180-197	45
198-217	46
218-241	47
242-269	48
270-304	49
305-346	50
347-399	51
400-468	52
469-562	53
563-696	54
697-905	55
906-1,272	56
1,273-2,091	57
2,092-5,530	58
5,531 +	59

(2) In addition to the randomly selected indemnity claims, the Audit Unit may audit any claims for which it has received a complaint or information over the past three years that indicate a failure to pay indemnity, including any companion claim needed to ascertain the extent to which benefits have been provided. Claims with complaints that are randomly selected will be audited as part of the random sample and included in the performance rating.

Complaints not involving a failure to pay indemnity will be provided to the audit subject, if confidentiality has not been requested, for review and corrective action, if warranted. Within 30 days of receipt of the report of audit findings issued pursuant to subdivision (f) of this section, the audit subject shall provide a written response to the Audit Unit, stating its review findings and corrective actions, if any.

(3) After reviewing the claims selected pursuant to subdivision (c)(1), the Audit Unit shall calculate the audit subject's profile audit review performance rating based on its review of the randomly selected claims. The profile audit review performance rating will be calculated as follows:

(A) The factor for the failure to pay accrued and undisputed indemnity shall be determined by:

1. Dividing the number of randomly selected claims with violations involving the failure to pay indemnity [pursuant to California Code of Regulations, title 8, section 10111.2, subdivisions (a)(1), (a)(2), (a)(3), (a)(4), and (a)(10)] by the number of randomly selected claims with accrued and payable indemnity, to produce a frequency rate.

2. Dividing the total amount of unpaid indemnity in randomly selected claims by the number of randomly selected claims with accrued and payable indemnity, to produce an average amount of unpaid indemnity per file with the obligation to pay indemnity.

3. Dividing the average amount of unpaid indemnity per randomly selected audited claim with the obligation to pay indemnity for the audit subject by the average amount of unpaid indemnity per randomly selected audited claim for all audit subjects for the three calendar years before the year preceding the year in which the current audit was commenced, to produce a severity rate.

4. Multiplying the frequency rate by the severity rate by a modifier of 2 to determine the factor for the failure to pay accrued and undisputed indemnity.

(B) The factor for the late first payment of temporary disability indemnity shall be determined by dividing the number of randomly selected claims with violations involving the late first payment of temporary disability indemnity [pursuant to section 10111.2, subdivisions (a)(5), (a)(8), and (a)(10)], or in claims that involve salary continuation, failure to comply with the requirements for first notices advising the injured employee of the provision of salary continuation in lieu of first temporary disability payments [pursuant to section 10111.2, subdivisions (b)(8)(B) and (b)(8)(C)], by the number of randomly selected claims in which temporary disability payments or first notices advising the injured employee of the provision of salary continuation in lieu of first temporary disability notices were required. In any claim that involves the payment of both salary continuation in lieu of first temporary disability payments and temporary disability payments, each benefit type paid will be considered in calculating this factor.

(C) The factor for the late first payment of permanent disability indemnity, vocational rehabilitation maintenance allowance, and death benefits [pursuant to section 10111.2, subdivisions (a)(6), (a)(7), (a)(8), and (a)(10)] shall be determined by dividing the numbers of randomly selected claims with violations involving late first payments of those benefits by the numbers of randomly selected claims with payments for those benefits. In calculation of this factor, claims shall be counted for each type of exposure and late first payment.

(D) The factor for late subsequent indemnity payments [pursuant to section 10111.2, subdivisions (a)(8), (a)(9), and (a)(10)] shall be determined by dividing the number of randomly selected claims with violations involving late indemnity payments subsequent to first payment by the number of randomly selected claims with subsequent indemnity payments.

(E) The factor for failure to comply with requirements for notices advising injured employees of the process for selecting Agreed Medical Examiners and/or Qualified Medical Examiners, and for injured workers with injuries prior to January 1, 2004, failure to comply with the requirements for notices advising injured workers of potential eligibility for vocational rehabilitation, or for injured workers with injuries on or after January 1, 2004, failure to comply with the requirements for notices advising injured workers of the right to the supplemental job displacement benefit, shall be determined by dividing the numbers of randomly selected claims with violations involving the failure to comply with the applicable requirement to issue the notices by the numbers of randomly selected claims with the requirement to issue the notices. In calculation of this factor, claims shall be counted for each type of exposure and violation.

(F) The audit subject's profile audit review performance rating will be determined by adding the factors calculated pursuant to subdivisions (c)(3)(A) through (c)(3)(E).

(4) If the audit subject's profile audit review performance rating meets or exceeds the worst 20% of performance ratings for all final audit reports issued for audits commenced the three calendar years before the year preceding the year in which the current audit was commenced, the Audit Unit will issue Notices of Compensation Due pursuant to California Code of Regulations, title 8, section 10110 but will assess no administrative penalties for violations found in the profile audit review.

(5) If the audit subject's profile audit review performance rating fails to meet or exceed the rating of the worst 20% of performance ratings as calculated based on all final audit findings as published in the Annual DWC Audit Reports over the three calendar years before the year preceding the year in which the current audit was commenced, the Audit Unit will conduct a full compliance audit by randomly selecting and auditing an additional sample of indemnity claims pursuant to subdivision (d). Written notification of the Audit Unit's findings from the profile audit review, the calculation of the profile audit review performance rating, and intent to proceed to a full compliance audit, will be provided to the audit subject in time for the timely filing of an objection. The audit subject may dispute whether or not a full compliance audit is merited under this subdivision at a post-profile audit review conference. Unless the audit subject demonstrates that the factual basis for the Audit Unit's calculation of the profile audit review performance rating is incorrect within two working days of the receipt of the rating or at the post profile audit review conference, the Audit Unit may complete the full compliance audit. The audit subject may appeal the issues pursuant to California Code of Regulations, title 8, section 10115.1 following the issuance of the final audit report. Failure of the audit subject to raise factual issues related to failing to meet or exceed the profile audit review performance standard within two working days of the receipt of the profile audit review performance rating or during the post-profile audit review conference shall constitute a waiver of appeal on those issues.

(d) If the audit subjects fails to meet or exceed the profile audit review performance standard, the Audit Unit shall conduct a full compliance audit by selecting and auditing an additional sample of indemnity claims.

(1) The total number of indemnity claims randomly selected for audit, including the number audited pursuant to subdivision (c)(1), will be determined based on the following table:

Population	Sample Size
8 or less	all
9-15	1 less than total
16-19	2 less than total
20-23	3 less than total
24-27	4 less than total
28-30	5 less than total
31-33	6 less than total
34-36	7 less than total
37-38	8 less than total
39-41	9 less than total
42	32
43-44	33
45	34
46-47	35
48-49	36
50-51	37
52-53	38
54-55	39
56-57	40
58-59	41
60-61	42
62-63	43
64-65	44
66-67	45
68-70	46
71-72	47
73-74	48
75-77	49
78-79	50
80-82	51
83-84	52
85-87	53
88-89	54
90-92	55
93-95	56
96-98	57
99-101	58
102-104	59
105-107	60
108-110	61
111-114	62
115-117	63
118-120	64
121-124	65
125-128	66
129-131	67
132-135	68
136-139	69
140-143	70
144-148	71
149-152	72
153-156	73
157-161	74
162-166	75
167-171	76
172-176	77
177-181	78
182-187	79
188-192	80
193-198	81
199-204	82
205-210	83
211-217	84
218-223	85
224-230	86
231-238	87
239-245	88
246-253	89
254-261	90
262-270	91
271-279	92
280-288	93
289-298	94
299-308	95
309-319	96
320-330	97
331-342	98
343-354	99
355-367	100
368-381	101
382-396	102
397-411	103
412-427	104
428-444	105
445-463	106
464-482	107
483-503	108
504-525	109
526-549	110
550-575	111
576-603	112
604-633	113
634-665	114
666-700	115
701-739	116
740-781	117
782-827	118
828-879	119
880-936	120
937-1,000	121
1,001-1,072	122
1,073-1,154	123
1,155-1,248	124
1,249-1,356	125
1,357-1,483	126
1,484-1,633	127
1,634-1,814	128
1,815-2,036	129
2,037-2,315	130
2,316-2,677	131
2,678-3,163	132
3,164-3,852	133
3,853-4,904	134
4,905-6,710	135
6,711-10,530	136
10,531-23,993	137
23,994 +	138

(2) In addition to the randomly selected indemnity claims, the Audit Unit may audit any claims for which it has received a complaint or information over the past three years that indicate a failure to pay indemnity or late-paid indemnity, including any companion claim needed to ascertain the extent to which benefits have been provided.

Complaints not involving a failure to pay indemnity or late paid indemnity will be provided to the audit subject, if confidentiality has not been requested, for self-review and corrective action, if warranted. Within 30 days of receipt of the report of audit findings issued pursuant to subdivision (f) of this section, the audit subject shall provide a written response to the Audit Unit stating its review findings and corrective actions, if any.

(3) After reviewing the claims selected pursuant to subdivision (d)(1), the Audit Unit shall calculate the audit subject's full compliance audit performance rating.

(A) The audit subject's full compliance audit performance rating will be calculated pursuant to subdivision (c)(3), except that it shall be based on the review of all claims selected pursuant to subdivision (d)(1).

(B) If the audit subject's full compliance audit performance rating meets or exceeds the worst 10% of performance ratings for all final audit reports issued for audits commenced in the three calendar years before the year preceding the year in which the current audit was commenced, the Audit Unit will issue Notices of Compensation Due pursuant to section 10110 and will assess administrative penalties only for violations involving unpaid and late paid compensation, pursuant to Labor Code section 129.5(c)(2).

(e) If the audit subject's full compliance audit performance rating fails to meet or exceed the rating of the worst 10% of performance ratings for all final audit reports issued for audits commenced in the three calendar years before the year preceding the year in which the current audit was commenced, the Audit Unit will audit all claims selected for audit for all violations, and also randomly select a sample of denied claims. Written notification of the Audit Unit's findings from the full compliance audit, the calculation of the full compliance audit performance rating, and intent to audit a sample of denied claims and assess penalties pursuant to Labor Code section 129.5(c)(3), will be provided to the audit subject in time for the timely filing of an objection. The audit subject may dispute whether or not it met or exceeded the full compliance audit performance standard at a meet and confer audit review conference. Unless the audit subject demonstrates that the factual basis for the Audit Unit's calculation of the full compliance audit performance rating is incorrect within two working days of the receipt of the rating or at the meet and confer audit review conference, the Audit Unit may complete the full compliance audit. The audit subject may appeal pursuant to section 10115.1 following the issuance of the final audit report. Failure of the audit subject to raise factual issues related to failing to meet or exceed the full compliance audit performance standard within two working days of the receipt of the full compliance audit performance rating or during the meet and confer audit review conference shall constitute a waiver of appeal on those issues.

(1) The number of denied claims randomly selected for audit will be based on the following table:

Population	Sample Size
6 or less	all
7-10	1 less than total
11-14	2 less than total
15-17	3 less than total
18	14
19-20	15
21	16
22-23	17
24-25	18
26-27	19
28-29	20
30-31	21
32-33	22
34-36	23
37-38	24
39-41	25
42-43	26
44-46	27
47-49	28
50-52	29
53-55	30
56-59	31
60-63	32
64-67	33
68-71	34
72-75	35
76-80	36
81-85	37
86-90	38
91-96	39
97-102	40
103-109	41
110-116	42
117-124	43
125-132	44
133-141	45
142-151	46
152-163	47
164-175	48
176-189	49
190-205	50
206-222	51
223-242	52
243-265	53
266-292	54
293-323	55
324-360	56
361-405	57
406-461	58
462-531	59
532-623	60
624-749	61
750-931	62
932-1,217	63
1,218-1,731	64
1,732-2,934	65
2,935-8,990	66
8,991 +	67

(2) In addition to the random samples of indemnity and denied claims, the Audit Unit may select for audit all claims for which the Division received complaints or information over the past three years that indicate the possible existence of any claims handling violations, including any companion claim(s) needed to ascertain the extent to which benefits have been provided.

(f) Following the conclusion of the audit, the Audit Unit shall issue a report of audit findings which may include, but is not limited to, the following: one or more requests for additional documentation or compliance, Notices of Intention to Issue Notice of Compensation Due, Preliminary Notices of Penalty Assessments, Notices of Compensation Due, or Notices of Penalty Assessments. If any additional requested documentation is not provided within thirty days of receipt of the report, additional audit penalties may be assessed under California Code of Regulations, title 8, section 10111.2(b)(23) of these Regulations.

(g) The audit subject shall pay all expenses of an audit of an adjusting location outside the State of California, including per diem, travel expense, and compensated overtime of audit personnel.

(h) The audit subject shall make each of the claim files selected for audit available at the audit site at the time of audit commencement. Claims will include but not be limited to the required contents of California Code of Regulations, title 8, section 10101.1. If claim files are maintained in an electronic or other non-paper storage medium, the claims administrator shall, upon request, provide to the Audit Unit, at the Audit Unit's discretion, direct computer access to electronic claim files and/or legible printed paper copies of the claim files, including all records of compensation payments. If a randomly selected indemnity, medical-only, or denied claim has been incorrectly classified as to type by the audit subject, the Audit Unit may randomly select an additional correctly designated claim file for audit, and may also assess penalties as appropriate in the misdesignated claim initially selected. If the audit subject fails to produce a claim selected for audit, the Audit Unit may assess a penalty for failure to produce the claim pursuant to section 10111.2(b)(3) and may also select for audit another claim of the same type to complete the random sample. If, after the issuance of the Notice of Audit Commencement that notified the audit subject that the claim was selected for audit, the audit subject has transferred a claim to a different adjusting location of the company being audited, the audit subject shall nonetheless produce the claim for audit within five working days of request, unless additional time is agreed upon by both the Audit Unit and the audit subject.

(i) The Audit Unit shall have discretion to audit claims in addition to those identified with the Notice of Audit Commencement. The audit subject shall make each of the additional claims selected for audit available at the audit site as follows:

(1) Open claims and closed claims stored on site within one working day of request;

(2) Closed claims stored off site within five working days of request, unless additional time is agreed upon by both the Audit Unit and the audit subject.

(j) The audit subject shall provide the auditor(s) an adequate, safe, and healthful workspace during the audit, which allows the auditors a reasonable degree of privacy. If the Audit Unit determines that this workspace is not provided, the Audit Unit may require the audit subject to deliver the files to another California office location of the audit subject, an Audit Unit office, or a Workers' Compensation Appeals Board district office, for completion of the audit. Other arrangements may be made as agreed between the audit subject and the Audit Unit.

(k) The Audit Unit may obtain and retain copies of documentation or information from claim files to support the assessment of penalties.

(l) The audit subject shall have the opportunity to discuss preliminary findings and provide additional information at a post-audit conference.

(m) The Audit Unit may at any time request additional information or documentation related to the claims being audited in order to complete its audit. Such information may include documentation demonstrating that, as specified by Labor Code sections 3751 and 3752, compensation has not been reduced or affected by any insurance, contribution, or other benefit due to or received by or from the employee. The audit subject shall provide any requested documentation or other information within ten working days from the Audit Unit's request, unless the Audit Unit extends the time for good cause.

Note: Authority cited: Sections 59, 129, 129.5, 133 and 5307.3, Labor Code. Reference: Sections 11180, 11180.5, 11181 and 11182, Government Code; and Sections 111, 124, 129, 129.5, 139.5, 3751, 3752, 4658.5 and 4658.6, Labor Code.

HISTORY

1. New section filed 12-30-2002; operative 1-1-2003 pursuant to Government Code section 11343.4 (Register 2003, No. 1).

2. Change without regulatory effect amending subsections (c)(3)(A)(i-a) and (c)(3)(A)(i-c) filed 5-1-2003 pursuant to section 100, title 1, California Code of Regulations (Register 2003, No. 18).

3. Amendment of subsection (c)(3)(A)v. filed 10-6-2003; operative 12-1-2003 (Register 2003, No. 41).

4. Amendment of section and Note filed 4-20-2009; operative 5-20-2009 (Register 2009, No. 17).