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Report Number: 2017-103


Workers’ Compensation Insurance
The State Needs to Strengthen Its Efforts to Reduce Fraud

Responses to the Audit

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Department of Industrial Relations

November 15, 2017

Elaine M. Howle, State Auditor
California State Auditor’s Office
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re: Response to the State Auditor’s Draft Report “Workers’ Compensation Insurance: The State Needs to Strengthen Its Efforts to Reduce Fraud.”


Dear Ms. Howle:

On behalf of the Labor and Workforce Development Agency, as Director of the Department of Industrial Relations (DIR), I appreciate the opportunity to respond to the State Auditor’s draft report on workers’ compensation insurance and the DIR’s role in reducing fraud in the workers’ comp system.


With respect to the DIR’s portion of the audit, the State Auditor identified one area for improvement and recommended that the DIR formalize its efforts surrounding its use of data analytics. The State Auditor also recommends that the Legislature require workers’ compensation insurers to send “evidence of benefit” (EOB) notices to hundreds of thousands of injured workers in California every year. Although we welcome the State Auditor’s recommendations and take them very seriously, in the DIR’s view, these recommendations are misplaced and would create costly burdens for the workers’ comp system without providing sufficient benefits in reducing fraud.

Auditor’s Recommendation to the Legislature

To better ensure that the payments insurers issue to providers for workers’ compensation claims are based on valid services, the Legislature should require workers’ compensation insurers to periodically provide EOB statements to injured workers.

The DIR’s Response:


The Auditor’s recommendation to require insurers to send millions of EOB notices fails to advance the intended goal of preventing fraud, because it focuses solely on approved treatment, for which controls—such as utilization review, independent medical review, and independent bill review—are already in place. Requiring insurers to mail out notices for even a fraction of the annual 8 million approved treatments and services would create significant costs that would then be passed on to covered employers without any concrete evidence that doing so would curb fraud in the workers’ comp system. This administrative burden would likely also lead to an increase in premium rates with no deterrent impacts on fraud.


By contrast, the use of EOBs could provide some benefit if it were targeted at medical providers who treat injured workers independently on a lien basis, an area of the workers’ comp system that has proven more susceptible to fraud and abuse because of the lack of oversight of treatment by employers and insurers. Unfortunately, a requirement for insurers to issue an EOB notification, as recommended by the Audit, may likely exempt this small share of providers for the simple reason that insurers may be unaware of the services rendered on a lien basis.

Auditor’s Recommendation to the DIR

To ensure the growth and effectiveness of its data mining efforts to identify provider fraud, Industrial Relations should better document its data analytics effort within its protocol manual by June 30, 2018.

The DIR’s Response:


The DIR’s efforts to carry out the legislative mandates in SB 1160/AB 1244 to combat fraud in the workers’ compensation system are documented and have proven successful, resulting in:


The DIR will continue its efforts to combat fraud and correct any mistaken perception by the State Auditor that the department’s efforts are insufficiently documented by updating the demonstrated results on the DIR website and responding to the Auditor, as required, by June 30, 2018.

If you need additional information regarding the DIR’s responses, please do not hesitate to contact Christopher Jagard, Chief Counsel for the department.


Christine Baker
Director of Industrial Relations



To provide clarity and perspective, we are commenting on Industrial Relations’ response to our audit. The numbers below correspond to the numbers we have placed in the margin of Industrial Relations’ response.


Contrary to the assertion by Industrial Relations’ director, our recommendations regarding EOB statements and data analytics are not “misplaced”. We made these two recommendations specifically to help the State to better identify possible instances of provider fraud in California’s workers’ compensation system. As Table 1 shows, the amount of chargeable provider fraud increased from $130 million in fiscal year 2013–14 to $812 million in fiscal year 2015–16, a 525 percent increase over this time period. If provider fraud continues to be as costly to California’s employers and ultimately its consumers, we believe the Legislature—to which the California Constitution gives “plenary power” to “...enforce a complete system of workers’ compensation”—should take additional steps to better combat this type of fraud. Further, the director asserts that these two recommendations would “create costly burdens for the workers’ compensation system without providing sufficient benefits,” but she did not provide adequate support for her position during the audit. We address this point more specifically in the following comments.


Industrial Relations’ director mischaracterizes our recommendation; we did not recommend that the State “require insurers to send millions of EOB” statements nor did we make this recommendation with “the intended goal of preventing fraud.” Our recommendation of our report states, “To better ensure that the payments insurers issue to providers for workers’ compensation claims are based on valid services, the Legislature should require workers’ compensation insurers to periodically provide EOB statements to injured employees.” In Chapter 1 we clearly states that we intended this recommendation to better detect possible instances of provider fraud. Furthermore, we reported that participants involved in both the workers’ compensation system and the fight against fraud see the added value that EOB statements provide. For example, we point out in Chapter 1 that the Disney manager of workers’ compensation stated that EOB statements can help uncover provider billing mistakes, billing mischief, and fraud. We also mention in Chapter 1 that the benefits of EOB statements would likely outweigh any perceived drawbacks and cite the Disney manager, who indicated in Chapter 1 that the belief that EOB statements cost too much is a misconception.


Despite the director’s opinion regarding the absence of concrete evidence that EOB statements would help curb fraud, we state in Chapter 1 of our report that certain government agencies and some insurers outside of the workers’ compensation program already use EOB statements to help fight fraud.


Industrial Relations’ director states that EOB statements “could provide some benefit” if they were targeted at providers who treat injured employees independently on a lien basis. Our viewpoint differs. Regardless of whether they pay workers’ compensation claims submitted directly from service providers or in accordance with the liens process, insurers and employers can still use EOB statements to engage injured employees in the effort to better detect provider fraud in the workers’ compensation system.


The director’s statement notwithstanding, Industrial Relations’ data analytics efforts are insufficiently documented. The director’s comments in her response regarding Industrial Relations’ recent efforts regarding liens are not relevant to our finding. We point out in Chapter 1 that Industrial Relations’ effort to identify previously unknown provider fraud is still in the nascent stages and that it has not yet fully documented its procedures for these predictive analytics. Furthermore, given the expense that California’s employers and ultimately its consumers face from provider fraud as Table 1 indicates, we believe it is important for Industrial Relations to properly document how it intends to guide its predictive data analytics efforts for unveiling previously unknown provider fraud. Finally, we are unsure how Industrial Relations’ “updating the demonstrated results on the DIR website” will address our recommendation to better document its data analytics effort related to provider fraud. We anticipate that the status updates Industrial Relations provides us within 60 days, six months, and one year of our report’s publication date will better describe how it intends to address this recommendation.

Department of Insurance

November 17, 2017


The Honorable Elaine M. Howle, CPA
California State Auditor
621 Capital Mall, Suite 1200
Sacramento, CA 95814

Dear Ms. Howle:

Thank you for the opportunity to comment upon the California State Auditor's draft report entitled Workers’ Compensation Insurance: The State Needs to Strengthen Its Efforts to Reduce Fraud” (2017-103). We would like to thank you and your staff for your professional approach in conducting this audit. It is our understanding that your team likewise found the staff at the California Department of Insurance (CDI) to be accessible and cooperative, and knowledgeable about the matters related to your inquiry.

California consumers, employees, and businesses continue to face unparalleled economic challenges in uncertain times. This means that vigilance in the fight against workers’ compensation insurance fraud is more important than ever. CDI continues to increase its efforts to combat workers’ compensation insurance fraud and these efforts are enhanced through partnerships and cooperation with the Fraud Assessment Commission (FAC), district attorneys, allied law enforcement, state and local agencies, the insurance industry, employers and the public.

CDI’s responses to the recommendations related to CDI in the draft report are as follows:

Chapter 1, Recommendation 1: CDI should…by June 30, 2018: Create a public report that ranks workers’ compensation insurers based on the effectiveness of their antifraud efforts, including the rate at which they submit fraud referrals.

CDI agrees with the recommendation to create a public report that ranks workers’ compensation insurers based on the effectiveness of their antifraud efforts, including the rate at which they submit fraud referrals. The public report would need to comply with confidentiality limitations associated with certain anti-fraud information related to the insurers’ efforts.

Chapter 1, Recommendation 2: CDI should…by June 30, 2018: Add a requirement that it consider rates of fraud claims referrals when selecting insurers to audit and that it give priority to those insurers with high premiums and very low numbers of referrals.

CDI already considers the relationship between the number of fraud-claims referrals to the number of reported claims and insurers’ Special Investigations Unit (SIU) investigations when selecting insurers to audit. CDI agrees with this recommendation that it also consider rates of fraud claim referrals compared to total Workers’ Compensation premium when selecting insurers to audit and, in addition to the audit selection fraud claim referral ratios currently being used by CDI, that it give priority consideration to those insurers with high premiums and low numbers of referrals. An insurer with a high earned premium and a low referral rate does not necessarily mean, however, that the insurer is not aggressive in its efforts to detect, investigate, and refer suspected fraud. If an insurer is primarily providing workers’ compensation insurance to industries with a lower risk of worker injuries, the actual claims submitted to the insurer may not be proportional to the earned premium.

Chapter 2, Recommendations 1 and 2: To better address vacancies in its fraud investigator positions, CDI should take the following actions by June 30, 2018:

The primary reason for vacancies in the fraud investigator positions has been the large pay disparity that existed, and still exists significantly, between CDI fraud investigator positions and similar investigators who are paid much more at other state agencies. CDI has found it difficult to recruit and retain investigators when they can make much more at other agencies for the same work. Pay levels are set by the Legislature and the Governor after collective bargaining, and like every agency, CDI is limited by those pay levels. Prior to July of 2017, CDI was only authorized to pay its investigators roughly 17% less than investigators performing similar functions at other agencies, including the California Department of Justice (DOJ) and the California Department of Corrections and Rehabilitation (CDCR). Achieving pay parity with other law enforcement agencies has been one of CDI’s top priorities. Since April 2011, CDI has asked CalHR to obtain a salary adjustment for CDI investigators so CDI can remain competitive with other state law enforcement agencies. In 2016, CalHR addressed a portion of the pay disparity through labor negotiations.

These efforts resulted in a 5% special salary adjustment for CDI investigators; however, that adjustment did not sufficiently reduce the pay disparity between CDI and DOJ. As a result of further requests by CDI, CalHR proposed and the Legislature acted to modify the collective bargaining agreement in February 2017 to provide a 7.44% salary increase for CDI investigators who have been at the maximum salary of Range C for twelve qualifying months. While these salary increases are welcome improvements, they only became effective July 1, 2017, and so it is too soon to see any improvement in recruitment and retention. It must also be noted, however, that despite these increases, until the state addresses the significant pay disparity that remains between CDI Investigators and comparable positions with DOJ and CDCR, that disparity will continue to negatively impact the ability of CDI to fill vacancies and to retain investigators.

Chapter 2, Recommendation 1: Develop and implement a retention plan. This plan should be based on the results of in-person exit interviews with separating staff or similar tools such as satisfaction surveys to identify and address potential causes for separation. CDI should share the results of any trends arising from its exit interviews as well as its analyses of survey responses with the appropriate units as it deems necessary.

CDI agrees with this recommendation.

Chapter 2, Recommendation 2: Revise its recruiting plan to include the recruitment and hiring of retired local law enforcement officers.

CDI agrees with this recommendation, and will amend its recruitment plan to expressly incorporate CDI’s ongoing efforts to recruit and hire retired local law enforcement officers.

Chapter 2, Recommendation 3: CDI should within 60 days and periodically thereafter, meet with the Fraud Commission and agree upon specific information to include in the Fraud Division’s report to the Fraud Commission.

CDI agrees with this recommendation. CDI currently provides the FAC an Annual Report regarding Fraud Division spending, outcomes, and other mandated information. Holding periodic meetings between CDI and the FAC regarding the content of the annual report will ensure that additional content can be added to ensure the FAC has all of the relevant information it believes it needs to make informed decisions.

Chapter 2, Recommendation 4: CDI should by June 30, 2018, develop and implement a process to augment funding to district attorneys should CDI have unspent funds, rather than using the unspent funds to offset collections in subsequent years.

CDI agrees with this recommendation and will commence efforts to develop and implement a process to augment funding to district attorneys should CDI have unspent funds.

Thank you again for the opportunity to provide these comments. In the event you have any questions or require any additional information, please feel free to contact me, or Deputy General Counsel Michael J. Levy.



Joel Laucher
Chief Deputy Insurance Commissioner

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