REPORT BLASTS AUDITS OF CALIFORNIA COMP

The system created to measure the effectiveness of workers compensation claims-handling in California is ineffective and must be fixed, a new report indicates.

The workers comp auditing program, created in 1991 by statutory reforms, fails to reliably measure systemwide claims-handling performance, gauge the level of unpaid or overpaid benefits or produce meaningful data that can be used to improve the system, the report states.

The report, released June 25 in San Diego by the Commission on Health and Safety and Workers Compensation, a broad-based governmental advisory body appointed to recommend improvements in the workers comp system, traces many claims administration problems to the "complex and cumbersome" structure of the state workers comp system and calls for a complete overhaul of the audit program.

Most notably, the report cites the complexity of mandatory workers comp benefit notices sent to injured workers, which it says "are not readily comprehensible and result in confusion to injured workers and all parties," as well as what it calls an "arcane" system of calculating benefits, which "invites confusion and error."

Legislation to revamp the audit program was introduced earlier this year. But Senate Industrial Relations Committee Chairwoman Hilda L. Solis, D- El Monte, removed the bill from consideration on July 1 in response to the commission's report.

"We've been getting beat over the head here in Sacramento over the audit process, but the commission's report proves that it's a flawed way to measure insurer claims performance," said Doug Widtfeldt, vp of the Assn. of California Insurance Cos., a property/casualty insurer trade organization in Sacramento.

"We thought it was a very good description of the problems that are out there within the system and did a terrific job of outlining the key deficits and limitations of the audit process," said a spokesman for the San Francisco-based California Workers Compensation Institute, a research organization funded mainly by insurers.

"We're not getting (sufficient appropriate) information from the current audit process, although this report clearly indicates that you could," the spokesman pointed out.

The report suggests that a worthwhile audit system "would decrease the delays and increase the efficiency of benefit delivery" and ensure that employees receive the appropriate amount of benefits, he said.

"It doesn't behoove anybody to have an inefficient (audit) system," the spokesman said.

Legislators requested the independent study of the state's claim audit program after Senate hearings earlier this year at which claimant attorneys and regulators used audit data to blast claims administrators for delays, non-payment of benefits and failure to notify workers of their rights.

At the hearing, California Division of Workers Compensation Administrative Director Casey Young stunned legislators when he used 1997 audit data to estimate there could be as much as $84 million in unpaid compensation owed to injured workers (BI, Feb. 23).

Mr. Young was not available for comment last week.

But, undermining that notion, the commission's report said, "The current audit function does not measure systemwide performance" and the use of confusing definitions and relatively young claims may make estimates based on audit data "unreliable."

The commission also found that claim handling under the present system is now so complex that DWC auditors report that "overpayments to injured workers may be as likely as underpayments."

This suggests there is little that claims operations can do to improve the error rate, absent an overhaul and simplification of the claims process, observers say.

"When you have a system in place where the likelihood of underpayment is the same as that of overpayment, the system has to be changed," said Mr. Widtfeldt of the ACIC.

"We need a system in place where we can tell who the bad players are, and even among companies that are trying to do a good job, what problems exist there so that they can address those problems," agreed the CWCI spokesman.

Some members of California's workers comp community also complain that some payers, particularly self-insured employers, are being audited more frequently than others, leading many to believe the audits aren't really random at all.

By statute, half the audits performed by the DWC each year are supposed to be random, while the remainder are based on complaints and prior-year infractions.

The University of California, which self-insures its workers comp exposure, has been audited eight times in eight years, said John Roberts, the university's Oakland-based workers compensation manager. All but one of the university's nine claims offices has been audited, he said.

"We're probably not going to have one for the next couple of years because finally we've prevailed upon the DWC audit staff to give us a break," he said. "Also, from a cost-benefit standpoint, they're not making any money off of us."

That's because the fines imposed against the university have dwindled over the years to less than $5,000 last year, according to Mr. Roberts.

But the cost to the university of complying with the audits has been substantial, he pointed out.

Mr. Roberts said he doesn't think the DWC has any vendetta against the university. Rather, he thinks the university is being targeted because of the way random audit targets are selected under the current system.

"There's an electronic hat, and names go in that hat based on the number of adjusting locations an organization has," he explained. Because the university has nine claims offices, "we have nine names in the hat. . .which makes us more vulnerable to audits," he said.

And because the average number of claims being handled by each office is rather small, Mr. Roberts estimates that as many as 40% of the university's claims files have been examined.

By contrast, perhaps as few as 5% of insurer claims files have been audited on average, he said. "Carriers generally have fewer offices but huge claim populations," he said.

And since the 1995 introduction of open rating, which has stimulated competition among workers comp insurers in the state, many insurers have consolidated claims offices to cut costs and be more efficient.

"And so both the risk of being audited and the percentage of files that wind up getting scrutinized in a DWC audit are much greater in a self-insurance environment than they are with carriers," Mr. Roberts concluded.

Mr. Widtfeldt agreed that the audit program disproportionately targets large self-insurers over insurers.

"The audit program is flawed in the way it selects audit subjects," he said.

Another problem with the state workers comp system is that, in many cases, the cost of implementing the regulations exceeds the fines levied, creating a disincentive for claims-paying organizations to comply, Mr. Roberts pointed out.

In its report, the commission concluded that improvements could and should be made to the program to identify poorly performing claims operations and to bring them into compliance:

* Simplify benefit notices so they provide meaningful information to injured workers and generate data that can be used to track the timeliness and accuracy of benefit delivery.

* Simplify and streamline the benefit notice program. Implement electronic reporting of key indicators derived from benefit notice information, and use this data to prioritize targeted audit subjects.

* Screen complaints to determine if a claims operation should be audited as a "poor performer."

* Streamline benefit calculation by establishing a single weekly benefit rate, to be paid an injured worker for all types of benefits. The number of weeks of payment should be the only changing dimension, with the minimum and maximum payment rates remaining unchanged.

* Improve administration of the audit function by instituting auditor performance standards, updating equipment and computer systems, assessing the need to reallocate DWC staff to the audit unit and using senior auditors to ensure quality control and productivity.

* Revamp the audit selection process to get a more balanced view of how the system operates. For example, all insurers, self-insured employers and third-party administrators should be audited every five years on a simplified audit basis.

* Increase penalties for violations that materially affect an injured worker and reduce or eliminate penalties for minor infractions.

Some proposed changes are regulatory, while others may require legislative action.

For example, the California Labor Code would have to be amended to change the rule that half of all audits be random while the remainder be targeted, said Christine Baker, the commission's executive officer.

Ms. Baker says she is preparing to take the recommendations to advisory working groups made up of representatives of the workers comp community so all stakeholders can help develop solutions. "We've come up with our findings, our recommendations, but the devil's in the details," she said. "That's why we're going to take it to the community."

Other states also are re-examining their audit functions, and the commission contacted eight other states for comparison purposes in conducting its review, said Ms. Baker.

Ms. Baker was the first manager of the audit unit when it was created in 1991. Prior to becoming executive officer of the commission created by the 1993 workers comp reforms, Ms. Baker was deputy director of the Division of Workers Compensation.