Report 2017-103 All Recommendation Responses

Report 2017-103: Workers' Compensation Insurance: The State Needs to Strengthen Its Efforts to Reduce Fraud (Release Date: December 2017)

Recommendation for Legislative Action

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.

Description of Legislative Action

Legislation has not been introduced to address this specific recommendation.

  • Legislative Action Current As-of: June 2018

California State Auditor's Assessment of 6-Month Status: No Action Taken


Description of Legislative Action

Legislation has not been introduced to address this specific recommendation.

  • Legislative Action Current As-of: February 2018

California State Auditor's Assessment of 60-Day Status: No Action Taken


Recommendation #2 To: Insurance, Department of

To reduce insurers' potential underreporting of workers' compensation fraud, 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.

6-Month Agency Response

CDI created its first public report. It is posted online at: https://www.insurance.ca.gov/0300-fraud/0100-fraud-division-overview/12-siu/. The report covers calendar year 2016 activity. In November 2018, the CDI will issue a report that addresses calendar year 2017 activity. Each November thereafter, a subsequent calendar year report will be issued.

  • Completion Date: June 2018
  • Response Date: June 2018

California State Auditor's Assessment of 6-Month Status: Fully Implemented

A link to CDI's 2016 annual report titled "Report on Insurer Workers' Compensation Fraud Detection, Investigation and Referral" can be found at the URL CDI provided in its response.


60-Day Agency Response

CDI has tentatively identified a number of factors it is considering including in its public report that will rank workers' compensation insurers based on their antifraud efforts, including the following:

1) The percentage of total insurer claims that resulted in SIU investigations.

2) The percentage of total insurer claims that resulted in fraud referrals to CDI.

3) The percentage of SIU investigations that resulted in fraud referrals to CDI and the DAs.

4) The number of quality/thorough referrals, as a percentage of total fraud referrals (quality/thorough referrals measured as the number of cases closed due to insufficient resources and the number of cases CDI or a DA opened).

5) The number of fraud referrals that were closed due to insufficient evidence (referrals lacking sufficient quality or thorough investigative information) as a percentage of total fraud referrals, would factor into this ranking as a negative ratio.

6) The number of arrests that originated from the insurer's fraud referrals, as a percentage of total fraud referrals.

7) Total fraud referrals as a percentage of total premiums.

8) The number of noncompliance findings from SIU Field Exams, Desk Reviews, or noncompliance with CDI investigative demand letters would be factored into this ranking as a negative ratio.

CDI is in the process of analyzing the potential ranking methodology to determine whether it would violate any confidentiality requirements and whether the eight factors being considered for inclusion provide a meaningful basis for ranking worker's compensation insurers. The anticipated date of completion of its first public report card is June 1, 2018.

  • Estimated Completion Date: June 1, 2018
  • Response Date: February 2018

California State Auditor's Assessment of 60-Day Status: Pending


Recommendation #3 To: Insurance, Department of

To reduce insurers' potential underreporting of workers' compensation fraud, CDI should, by June 30, 2018, add a requirement that it consider rates of fraud claim referrals when selecting insurers to audit and that it give priority to those insurers with high volumes of premiums and very low numbers of referrals.

60-Day Agency Response

In response to the CSA Auditors' recommendations and in advance of the subsequent CSA Audit Report, CDI added a broad-based Analytical Review Examination to its FY 2017/18 SIU Examination Plan (Attachment A, Line 28). This Examination is in process and it comprises a review of referral ratios for all insurers across all lines of insurance. CDI will factor in total premiums along with reported claims and SIU investigations and give priority to those insurers with high premium and/or claims and low referral rates as part of its Examination. The basic premise underlying analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. In the case of total premium, total claims, SIU investigations, and referrals to CDI reported by the insurer on its SIU Annual Report, we would expect to see certain relationships between these statistics. High premium and low referral insurers are part of this examination. However, CDI will need to be aware of particular conditions that can cause variations in these relationships such as the insurance lines offered by the insurer, whether the insurer offers unique or specialty insurance products, whether the insurer provides coverage high or low risk industries, and the insurers' SIU structure.

In addition to conducting this evaluation, CDI added the two high-premium/low referral insurers (that it has not recently examined) to its FY 2017/18 SIU Examination Plan. Insurers P & Q per Figure 6 in the CSA Report were added to the FY 2017/18 SIU Examination Plan on December 8, 2017. An updated Examination Plan approved on January 8, 2018 (Attachment B) shows that these examinations have been tentatively scheduled.

CDI's then-current examination selection methodologies identified 6 of the 8 high-premium/low referral insurers noted by CSA. The status listing indicates CDI audited and/or was auditing these 6. The other 2 insurers have been added.

  • Completion Date: December 2017
  • Response Date: February 2018

California State Auditor's Assessment of 60-Day Status: Fully Implemented


Recommendation #4 To: Industrial Relations, Department of

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

60-Day Agency Response

Thank you for the opportunity to address the CSA's report's finding and recommendation pertinent to DIR.

Following the landmark SB 863 reforms that succeeded in delivering better benefits to workers and controlling costs for employers, DIR proactively began tackling system abuse in partnership with district attorney's offices and other agencies, including CDI. We formalized efforts though MOUs and information sharing agreements to facilitate coordinated prosecution.

As demonstrated on the DIR website and in the Anti-Fraud Unit progress report (see supporting documentation), the department is aggressively combatting fraudulent activity among workers' compensation providers using the tools provided by SB 1160 and AB 1244. In addition to stopping the funding stream from lien payments during criminal prosecution and suspending convicted providers from practicing, DIR is consolidating and dismissing thousands of non-viable liens from the system (see AFU Protocol Manual submitted).

DIR has also been aggressively pursuing identification of fraudulent activity and exploitation of the workers' compensation system using data analytics, as documented in detail in an independent report by the RAND Corporation. To accomplish this, DIR is employing the multiple techniques recommended, including predictive modeling, network analysis, and rule-based pattern detection (see Data Analytics Overview submitted). Additionally, monthly meetings convene legal staff and analysts to discuss insights and links for data exploration and possible fraud detection.

While DIR is continually refining the approaches used to effectively identify suspicious behaviors, the nascent efforts to date have yielded promise. In addition to establishing a formal referral process with CDI, DIR is assisting prosecutors statewide with information about potential fraud and abuse that has gone undetected to date.

With this submission, DIR regards our status as fully compliant with the CSA's recommendation.

  • Completion Date: February 2018
  • Response Date: February 2018

California State Auditor's Assessment of 60-Day Status: Fully Implemented


Recommendation #5 To: Insurance, Department of

To better address vacancies in its fraud investigator positions, CDI should, by June 30, 2018, 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 other than pay. 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.

6-Month Agency Response

CDI completed the Fraud Division Retention Plan on June 6, 2018. Implementation of the Retention Plan is ongoing.

  • Completion Date: June 2018
  • Response Date: June 2018

California State Auditor's Assessment of 6-Month Status: Fully Implemented


60-Day Agency Response

The Recruitment and Background Investigations Team was tasked with the development of the retention plan. Currently, the team is in the planning stages, scoping the plan's content and how it will be implemented throughout the Enforcement Branch. The team intends to have the retention plan ready for review by the Deputy Commissioner on March 12, 2018, and final Executive Staff review on March 30, 2018. Final adoption of the retention plan by June 1, 2018.

The retention plan will include best practices and guidelines on how CDI can better implement exit surveys and exit interviews as part of the employee separation process. The retention plan will address how and what information gained from exit interviews and exit surveys should be shared with the identified staff of the Enforcement Branch to determine the primary causes of employee turnover aside from pay. In developing the retention plan, the current CDI Employee Exit Questionnaire will be reviewed for viability to determine if it needs to be revised to better identify reasons for employee turnover.

The retention plan will include common reasons for employee turnover and suggested solutions for each reason. The development of supervisory staff and methods to improve organizational culture will also be included in the retention plan. Please find attached a 60 Day Update Memorandum for further details in regards to the development of the retention plan. (Attachment C.)

  • Estimated Completion Date: June 1, 2018
  • Response Date: February 2018

California State Auditor's Assessment of 60-Day Status: Pending


Recommendation #6 To: Insurance, Department of

To better address vacancies in its fraud investigator positions, CDI should, by June 30, 2018, revise its recruiting plan to include the recruitment and hiring of retired local law enforcement officers.

60-Day Agency Response

A new "Objective 13" was added to CDI's Recruiting Plan (Attachment D) to include the recruitment and hiring of current and retired local law enforcement officers. It emphasizes the benefit CDI has received from the hiring of qualified applicants who were current or former law enforcement officers, and the value they bring to CDI from their enforcement experience and as mentors.

  • Completion Date: December 2017
  • Response Date: February 2018

California State Auditor's Assessment of 60-Day Status: Fully Implemented


Recommendation #7 To: Insurance, Department of

To better enable the Fraud Commission to determine an appropriate amount for the total annual fraud assessment, 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. Additional information could, for example, include a comparison of proposed, projected, and actual expenditures by category for a specific fiscal year, calculated using a consistent methodology.

60-Day Agency Response

On January 10, 2018, representatives of the Fraud Division met with the Fraud Assessment Commission (FAC) to discuss the Fraud Division Report with the FAC. The discussion centered on whether additional information should be added to the Fraud Division Report to better enable the FAC to determine an appropriate amount for the total annual fraud assessment. The members of the FAC were each provided with a copy of the latest annual Fraud Division Report (previously provided to CSA), and the Fraud Division asked the FAC to review the report and determine whether the Fraud Division should add new information or expand on the details to make the report more useful. The Deputy Commissioner of the Fraud Division informed the FAC that staff continues to be available anytime to discuss any issues pertaining to improving the quality and utility of the report.

The FAC members agreed to reexamine the report and provide their additional conclusions at the next scheduled meeting on June 20, 2018. None of the FAC members felt it was necessary to convene a meeting prior to this date. Additionally, on an annual basis, the Fraud Division will ask the FAC to decide if there is any additional information they would like included in the Fraud Division Report. This request will be made at the time the Fraud Division Report is distributed to the FAC.

  • Completion Date: January 2018
  • Response Date: February 2018

California State Auditor's Assessment of 60-Day Status: Fully Implemented


Recommendation #8 To: Insurance, Department of

To better ensure the timely and effective use of fraud assessment funds to fight workers' compensation fraud in California, CDI should, by June 30, 2018, develop and implement a process to use its unspent funds to augment funding to district attorneys' offices rather than to offset collections from employers for subsequent years.

60-Day Agency Response

Implemented on February, 2018 and ongoing.

This process will be an additional component of the standard Request for Applications (RFA) (Attachment E) review, grant awarding process and Aggregate Assessment determination.

A revised RFA was generated and has been distributed to all California counties on February 7, 2018 for the current grant cycle. The RFA explains that unused Fraud Division funds at the end of the fiscal year may be redirected to grant applicants. This process will also be explained during February's Grant Information Webinar and county representatives will have the opportunity to ask questions regarding the process during the 2018/2019 Grant Workshops held statewide in March. Applicants will therefore be able to contemplate a possible supplemental award during the grant period, and style their applications accordingly.

After the close of the fiscal year, when the amount of any unused funds that had been allocated to the Fraud Division has been ascertained, the Commissioner's Review Panel will identify counties that should receive excess funds. The Review Panel will determine recommended eligibility for excess funds based on those grant applications that have the potential to have the greatest impact on workers' compensation insurance fraud activity. The Commissioner will make his/her decision concerning the disbursement of possible additional funds based on the Review Panel's recommendation. As with initial grant awards, the Fraud Assessment Commission (FAC) will be asked to give its advice and consent to the Commissioner's decision.

  • Completion Date: February 2018
  • Response Date: February 2018

California State Auditor's Assessment of 60-Day Status: Fully Implemented


All Recommendations in 2017-103

Agency responses received are posted verbatim.