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Workers’ Compensation Insurance
Some State Agencies Are Paying Millions of Dollars More Than Necessary to Provide Benefits to Their Employees

Report Number: 2019-106



Before the creation of workers’ compensation systems, civil courts were responsible for resolving disputes over responsibility for workplace injuries. The burden of proving that injuries were the result of employers’ negligence generally fell on the injured employees. However, by the early 1900s, states began to enact workers’ compensation laws. In the years that followed, California passed several workers’ compensation laws, eventually establishing a no-fault workers’ compensation system. Workers’ compensation in California is considered no-fault because employees no longer have to prove that their employers caused their injuries through negligence.

California’s workers’ compensation system benefits both employees and their employers. State law requires all employers to provide workers’ compensation benefits or workers’ compensation insurance that generally guarantee compensation for injuries, illnesses, and deaths occurring at and caused by their work. Furthermore, state law also generally standardized how employees’ permanent disability benefits are calculated. In exchange for these and other benefits, state law prohibits employees from suing their employers for most workplace injuries, illnesses, and deaths. For state employees, their respective agencies decide how to provide workers’ compensation. Below, we discuss the different options available to state agencies and explain in further detail how the workers’ compensation system functions.

Workers’ Compensation System

A California employer can provide workers’ compensation benefits through different methods, in part depending on whether it is a private entity or a public agency. As Table 1 shows, employers can be self-insured, insured through another entity, or for state agencies provide benefits through the state’s master agreement, which we describe later in the Introduction. Each option involves a different method of processing and paying benefits to injured workers. Given the different types of coverage, several state agencies are jointly involved in various aspects of the oversight and provision of workers’ compensation benefits, as Table 2 demonstrates.

Table 1
California Employers Use Three Approaches to Provide Workers’ Compensation Coverage

Who uses it Some private companies, some local governments, and the University of California. Private companies and a small number of state agencies. Most state agencies, including CAL FIRE, Caltrans, CHP, and Social Services.
How claims are administered Employers either manage claims internally or contract with a third-party administrator to manage claims. An insurance provider, such as State Fund, administers and processes claims. State Fund administers and processes claims.
How claims are paid Employers pay benefits directly. Employers make premium payments to an insurance provider that pays the cost of claims out of reserves the insurance provider manages. Agencies reimburse State Fund from their operational budgets for medical and disability payments made to injured employees.

Source: Analysis of state law, regulations, the master agreement, State Fund data, Department of Industrial Relations’ Office of Self-Insurance Plans’ data, Workers’ Compensation Insurance Rating Bureau of California reports, agency websites, and staff interviews.

Table 2
Multiple Entities Are Responsible for Providing and Overseeing Workers’ Compensation Programs for California Employees

California Department of Human Resources* A state agency that administers the workers’ compensation master agreement between State Fund and participating agencies.
California Department of Insurance A state agency that issues licenses to various entities, ensures insurers are solvent, resolves consumer complaints, and investigates and prosecutes insurance fraud.
Department of Industrial Relations A state agency that administers and enforces laws governing medical care and some workers’ compensation benefits.
Division of Workers’ Compensation The division within the Department of Industrial Relations responsible for monitoring the administration of workers’ compensation claims and for providing administrative and judicial services to assist state agencies in resolving disputes that arise in connection with claims for workers’ compensation benefits.
Office of Self-Insurance Plans A program within the Department of Industrial Relations responsible for the oversight and regulation of workers’ compensation self-insurance plans within California.
State Compensation Insurance Fund* A self-supporting, nonprofit enterprise fund created by the Legislature in 1913 that provides workers’ compensation insurance to California employers and that administers claims for state agencies that participate in the master agreement.
Workers’ Compensation Insurance Rating Bureau An unincorporated, private, nonprofit association that comprises all workers’ compensation insurance providers authorized to provide insurance in California. It gathers and compiles relevant statistics to develop state premium rates. It also collects information on payroll amounts, reserve amounts, and benefits amounts from insurance providers for the insurance commissioner to use in administering regulations.

Source: Analysis of state law, the master agreement, and agencies.

* Agencies reviewed for this audit. We include the other agencies in this table to provide additional context on workers’ compensation in California.

Under certain conditions, employers can become self-insured by applying to the Office of Self-Insurance Plans (self-insurance office), which is within the Department of Industrial Relations (Industrial Relations). The director of Industrial Relations may approve applicants if they furnish satisfactory proof of their ability to self-insure and to pay any compensation that may become due to their employees. Generally, self-insured private employers must use a certified third-party administrator for their first three years of self-insurance. Thereafter, they can choose to administer their claims themselves. According to the self-insurance office, more than 7,100 employers were self-insured as of 2017. This total represents 3,500 private employers and 3,600 public employers, including cities, counties, school districts, and the University of California.

If employers are unwilling or unable to become self-insurers, they can obtain coverage for workers’ compensation claims through insurance providers. Insurance providers manage and process claims. Insurance providers also pay for benefits out of funds, known as reserves, that they set aside for this purpose from employer premiums they receive. Alternatively, employers can purchase workers’ compensation insurance from the State Compensation Insurance Fund (State Fund), a nonprofit public enterprise fund that the Legislature created in 1913 to provide workers’ compensation insurance to California employers, including state agencies. State Fund is a quasipublic entity that competes with other insurers to provide workers’ compensation insurance to California employers. Although the majority of State Fund’s unresolved claims involve state agencies, it also provides insurance to private employers unable to obtain insurance from private insurers. According to the Workers’ Compensation Insurance Rating Bureau—a nonprofit association that the State authorized to gather and compile relevant statistics for insurance providers to develop state premium rates—more than 400 private workers’ compensation providers wrote 592,000 policies for private employers in 2018, while State Fund wrote another 121,000 policies.

Although state agencies are generally liable for their employees’ on-the-job injuries, state law does not require them to provide benefits through an insurer or through self-insurance. Instead, nearly all state agencies pay their workers’ compensation costs through a master agreement negotiated between State Fund and the California Department of Human Resources (CalHR).State Fund and CalHR recently renewed this agreement for July 2019 though June 2024. The previous term of the agreement was from July 2014 through June 2019. Nearly 90 percent of state agencies—or almost 190 agencies—provided workers’ compensation benefits through the master agreement during fiscal year 2017–18. Other agencies purchase insurance policies directly from State Fund, like many private employers. Specifically, as of June 2018, 32 agencies—21 of which employed fewer than 70 people—had such policies. Because State Fund does not separately account for these 32 agencies and the private employers that purchase insurance from it, we refer to both the state agencies and private entities that purchase insurance from State Fund as insured employers throughout this report.

Under the master agreement, State Fund administers, processes, and pays employee benefits for participating state agencies, and the agencies reimburse State Fund for the expenditures and the actual costs of services rendered. Although state law requires insurance providers to set aside reserves to pay for the cost of claims, state agencies under the master agreement reimburse State Fund using funds from their operational budgets. For example, if a state employee is injured while at work, the agency submits the employee’s claim to State Fund, which may pay for medical benefits or wage replacement. State Fund will then submit an invoice to the agency requesting reimbursement for any workers’ compensation expenditures. We discuss this process in more detail here. Additionally, State Fund charges each agency an annual fee for the costs of providing specified services, including administering claims and providing legal representation, based on that agency’s average number of open claims during the three most recently completed quarters.

At the Joint Legislative Audit Committee’s request, we focused this audit on State Fund’s management of workers’ compensation claims for four entities covered by the master agreement. As Table 3 shows, these four agencies are the California Department of Forestry and Fire Protection (CAL FIRE), the California Department of Transportation (Caltrans), the California Highway Patrol (CHP), and the California Department of Social Services (Social Services). We also assessed 10 other state agencies’ decisions to purchase workers’ compensation insurance from State Fund rather than participate in the master agreement.

Table 3
From Fiscal Years 2015–16 Through 2017–18, State Fund Established Almost 14,000 Claims for the Four Agencies We Reviewed

FISCAL YEARS 2015–16 THROUGH 2017–18
CAL FIRE Responds to 5,600 wildfires and 350,000 emergency calls per year. 7,685 4,345 $76.4 million
Caltrans Manages more than 50,000 miles of highways and freeways, provides intercity rail, and oversees airports. 20,160 4,522 74.5 million
CHP Provides uniform traffic law enforcement on highways statewide. 10,596 4,232 127.5 million
Social Services Provides aid, services, and protection to needy and vulnerable children and adults. 4,308 569 7.9 million
Totals for the Four Agencies We Reviewed 42,749 13,668 $286.3 million

Source: Analysis of claims established from fiscal years 2015–16 through 2017–18, CalHR’s workers’ compensation cost report for fiscal year 2017–18, and agency websites.

Workers' Compensation Benefits

Under the workers’ compensation system, injured state employees have access to certain benefits, regardless of whether their employing agencies provide those benefits under the master agreement or through insurance. For example, when a state employee submits a claim to an agency, state law requires that agency to cover specified medical costs up to $10,000 while State Fund determines whether to accept liability for the claim. Accepting liability generally means that State Fund agrees that the injury occurred while the individual was working and that the agency is therefore financially responsible for the associated workers’ compensation benefits. Throughout this report, we refer to this determination by State Fund as a liability decision and to instances in which State Fund accepts liability for work-related injuries as accepted claims.

State Employees Have Access to Different
Wage Replacement Programs Based on Their Employer and the Nature of Their Injury

Non-Work Related Injury:

Work-Related Injury:

Source: State law, CalHR, Industrial Relations, EDD website, Nonindustrial Disability Insurance and California State Disability Insurance informational brochures from EDD.

When injured state employees are unable to work but State Fund has not yet accepted their claims, they may be able to apply for California State Disability Insurance (disability insurance) through the Employment Development Department (EDD). Disability insurance provides partial wage replacement benefits for illnesses and injuries that are not work-related. It is funded by deductions from employees’ wages and state employers’ contributions. As the text box describes, state law provides at least two options for eligible state employees to receive disability insurance for injuries that are not work-related, depending on several factors. The disability insurance options are the California State Disability Insurance, which is also available to employees of private entities, or Nonindustrial Disability Insurance, which is available to certain state employees only. Because disability insurance is for injuries that are not work-related, employees are generally no longer eligible for it if State Fund accepts their claims. However, if State Fund rejects their claims, state employees may continue utilizing disability insurance until they can return to work, while paying for their medical care through their health insurance. If state employees are not eligible for or choose not to apply for either type of disability insurance, they may be able to utilize vacation or sick days or to take unpaid leaves of absence.

Once State Fund accepts claims for work-related injuries, state law requires agencies to provide specific benefits to compensate workers based on the severity of their injuries, as Figure 1 describes. In addition to paying for the cost of authorized medical expenses, agencies must also provide Industrial Disability Leave (IDL) payments to eligible state employees who are temporarily disabled because of work-related injuries. Once State Fund has accepted their claims, employees can receive IDL payments for up to 52 weeks within two years from the first day of their disabilities.Generally, State Fund may also provide temporary disability benefits to injured employees once they have exhausted the 52 weeks of IDL benefits. If the employees’ injuries become permanent, they can receive permanent disability payments according to their calculated level of disability. In addition, since at least 2004, agencies have been able to offer employees modified or alternative work assignments, depending on their disabilities and circumstances. Currently, if an agency does not offer regular, modified, or alternative work meeting specific criteria to employees whose injuries have resulted in permanent disabilities, the employees are eligible for vouchers to pay for education, retraining, or professional certification fees for use in another field. If injuries are fatal, agencies are responsible for reasonable burial expenses and paying to support surviving dependents for a specified time.

In total, State Fund paid more than $600 million in costs associated with state agencies’ workers’ compensation claims under the master agreement during fiscal year 2017–18. According to State Fund, more than $125 million of this amount related to 19,000 new state employee claims that agencies submitted during this time. State Fund’s data indicate that 76 percent of state employees’ claims that it closed from fiscal years 2015–16 through 2017–18 incurred less than $10,000 each in total costs.

Figure 1
Several Types of Benefits Are Available Through California’s Workers’ Compensation System

A chart describing the various types of workers’ compensation benefits available through California’s workers’ compensation system.

Source: Analysis of state law, regulations, and Industrial Relations’ Injured Workers Guidebook.

Processing and Resolving Claims

In accordance with state law and the master agreement, all agencies have an obligation to promptly report workplace injuries to State Fund. Within one business day of receiving notice or knowledge that an employee has incurred an injury meeting specific conditions that may be work-related—generally defined as the date of knowledge—an agency must provide the injured employee or the employee’s dependents an employee claim form (employee form). The agency must then file within five days an employer’s report of the injury (employer report) with State Fund.The employee form documents the date and type of injury, along with other facts. The employer report documents additional information about the employee’s injury and employment status. For example, the report specifically identifies the type of activity being performed at the time of the injury, the type of equipment involved, and the employee’s work schedule. After the employee or the employee’s dependents return the employee form, the agency has one working day to authorize up to $10,000 in approved medical treatment until State Fund accepts or rejects the claim.

State Fund plays a key role in processing claims, as Figure 2 shows. Generally, state regulations require State Fund to notify the employee regarding its decision to accept, reject, or delay its liability decision within 14 days of the date of knowledge. State Fund can delay a claim if the employee has not yet provided requested documentation or if it is waiting for the employee to receive a comprehensive medical evaluation. However, if State Fund does not accept or deny the claim within 90 days of the submission date of the employee form, the claim is presumed accepted.

Figure 2
State Fund Follows a Process for Handling the Medical Aspects of a Workers’ Compensation Claim

A flowchart outlining the process for handling medical aspects of a workers’ compensation claim.

Source: Review of state laws, regulations, and State Fund’s procedure manuals.

Note: A qualified medical examiner may be required when the employee and State Fund cannot agree on whether the injury was work-related or the level of permanent disability, among other things.

* The date an agency learns that one of its employees has suffered from a work-related injury is defined as the date-of-knowledge.

⏳ = Step must be completed under time requirements, which vary under different circumstances.

If the injured employee and the agency do not agree on whether an injury is work-related or disagree about other issues, the employee may be required to see a qualified medical evaluator (medical evaluator) in an appropriate specialty.Medical evaluators in California may specialize in one or more of 30 areas, including internal medicine, neurology, pain medicine, psychiatry, and hand and spine issues. According to state law, a claim administrator and a represented employee can resolve a disputed case by using a medical evaluator whom they select by agreement. Under the oversight of Industrial Relations’ Division of Workers’ Compensation (DWC), medical evaluators conduct evaluations and generate reports to help resolve disputes. These disputes may involve disagreement about whether injuries are work-related, the period of temporary disability, the degree of permanent disability, or the need for future medical treatment. To become medical evaluators, physicians must be licensed to practice in California, spend at least one-third of their total practice time providing direct medical treatment, not have specified conflicts of interest, and pass a medical evaluator competency exam. Certain types of medical providers must meet other requirements as well.

The State Provides Injured Workers
Multiple Ways to Return to Work

Generally, if an employee has some permanent disability and if a doctor has determined the employee can perform the physical requirements of a proposed job, the employer may provide the employee the following ways to return to work or may provide supplemental job displacement benefits.

Source: Analysis of state law and regulation.

Within five working days of an employee or agency requesting a medical evaluator, DWC is responsible for providing a randomly selected list of three medical evaluators (panel) to both parties. Generally, if the injured employee is represented by an attorney (represented employee), the parties each choose one medical evaluator to remove from the panel, and the injured employee then schedules an appointment with the remaining medical evaluator. An employee without legal representation generally selects one of the three evaluators from the panel and schedules an appointment. In both cases, the medical evaluator usually has up to 60 calendar days to conduct the evaluation (60-day window), unless the scheduling requirement is waived. If the medical evaluator is unavailable within the 60-day window and the scheduling requirement has not been extended or waived, state regulations generally allow the parties to apply for a replacement medical evaluator or panel from DWC. Such a request restarts the process. After the in-person evaluation, the medical evaluator submits a report to the employee and State Fund for use in resolving the dispute.

In addition, State Fund reviews treatments and medication proposed by an employee’s workers’ compensation physician and approves those deemed medically necessary—a process known as a utilization review. Once the employee’s physician determines the employee’s condition has stabilized and, with or without medical treatment, is not expected to get any better or any worse within a year, the employee is considered to have reached maximum medical improvement (maximum improvement). Once the employee reaches maximum improvement, State Fund can decide how to resolve the employee’s claim, as Figure 3 indicates. If the employee no longer requires any medical treatment and does not receive permanent disability benefits, State Fund may close the claim administratively. However, if the employee has some degree of permanent disability, a treating physician or medical evaluator may determine the extent of the disability and any work restrictions resulting from the injury. We describe in the text box the ways in which an employee with a permanent disability may return to work. State Fund uses this information to determine future disability payments and a possible settlement authorization request (settlement request).

Figure 3
State Fund Has Established a Process for Closing Claims

A flowchart outlining the procedures State Fund uses to close claims.

Source: Review of state law and State Fund’s procedure manuals.

State Fund and injured employees can consider two types of settlements, either a compromise and release agreement or stipulations with request for award (stipulations). Under a compromise and release agreement, the employee and State Fund negotiate the value of the claim payout, considering factors such as disability payments and possible future disability medical costs. If the employee and State Fund reach an agreement, the employee agrees to forego future benefits in exchange for a lump sum payment, and the agency is not responsible for providing future medical care to the employee. Alternatively, the employee may agree to stipulations, the terms of which may include specified disability payments and the right to receive medical treatment in the future. Under the master agreement, State Fund must obtain approval from an agency before entering into a settlement, unless the agency has established prior settlement authority for State Fund to settle cases without preapproval.

After the injured employee or the employee’s attorney has negotiated a settlement with State Fund, a workers’ compensation judge or the appeals board must approve it. If the injured employee and State Fund are unable to reach an agreement, both parties may appear at a mandatory settlement conference (settlement conference). If the parties are unable to reach an agreement at the settlement conference, the judge will generally schedule the claim for trial. After a trial, a judge will determine the outcome of the case and issue a finding and award if the judge determines compensation is owed to the injured worker.

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