The California State Auditor recently released a December 2017 audit report on fraud in the California workers’ comp system.
An unusual crossfire resulted, as the California Department of Insurance (the CDI) accepted the audit recommendations, but the Department of Industrial Relations disputed the recommendations, causing the State Auditor to fire back in rebuttal to the DIR’s response.
What’s up with all of this?
The audit (see a link at the bottom of this post) was done in response to a request of the Joint Legislative Audit Committee.
The macro conclusion of the audit is that California could improve its detection, investigation and prosecution of workers’ compensation fraud. The report acknowledges that the CDI estimates there is $1 billion to $3 billion in workers’ comp fraud in California annually.
Although the report acknowledges four types of fraud (injured employee fraud, employer fraud, insurer, claims adjuster or TPA fraud, and service provider fraud), the State Auditor provides very little emphasis on employer fraud.
This appears to be a major shortcoming of the audit report. Yes, the report does acknowledge that employer fraud includes illegally uninsured employers, employers who have misclassified worker duties, underreported payroll or prevented employees from reporting injuries. And the report acknowledges that this causes monetary losses, claiming that ..”the largest monetary losses result from provider fraud and, to a lesser extent, employer premium fraud.”However, the report fails to delve into efforts to stem the problem with these types of employer fraud.
It should be noted that in 2007 a report was done for CHSWC by UC Berkeley researchers Frank Neuhauser and Colleen Donovan (see links at bottom of this post) which estimated employer payroll fraud in the billions. An update of the report was done in 2009 (see link below). If the conclusions of those reports were accurate and are still applicable then that type of employer fraud may dwarf the provider and employee fraud that is the Audit report focus.
So the State Auditor’s report comes up short by failing to follow up on those findings.
But enough on that. Let’s look at some of the key findings the audit does outline.
The 2017 State Auditor report finds that “some insurers are significantly less likely than others to report suspected workers’ compensation fraud” . As a result, the audit recommends that the CDI “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 report also recommends that the CDI “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.”
The report also recommends that the CDI make progress in filling investigator positions. Over the last 4 years the CDI has been hemorrhaging investigators. And the CDI is advised to return spent funds to district attorney offices.
What recommendations did the State Auditor have that pertain to the DIR?
The State Auditor suggested that the DIR better document its fraud data analytics efforts
The State Auditor suggests that the legislature require workers’ comp insurers to periodically provide statements to injured workers showing what medical services have been billed by the provider. In a nutshell, the argument is that issuing periodic EOB statements (for example, quarterly) will enlist employees in detection of workers’ comp provider fraud. EOB statements have been used by Medicare for years and the audit report cites an Inspector General report on the value of EOBs in increasing awareness of Medicare fraud.
In a November 15.2017 letter to the State Auditor (see link below), DIR Director Christine Baker argues that sending millions of EOB statements would be expensive and unnecessary and that the current DIR anti-fraud efforts are working to root out bad-apple providers.
To which the State Auditor filed a rebuttal (see link below).
As far as the data analytics, I suspect that the DIR can and will eventually provide more information on what it is doing with its data mining efforts. I recall hearing Ms. Baker make references to this at several conferences in 2017.
But with EOBs there is a clear conflict of opinion.
There may be a number of California workers’ comp carriers or TPAs using EOB statements now, but personally I’m only aware of one carrier (Travelers) and one big self-insured (Disney). Blog readers may be aware of others.
The State Auditor cites the Disney experience in support of use of EOBs. But if there are others who use EOBs in the California system, there is no indication as to whether the State Auditor looked at them.
If nothing else, this would be a good research project for CHSWC to examine the administrative costs and actual results from EOB programs.
Here is the California State Auditor’s report (along with the DIR and CDI responses):
WorkersCompStudies2017FraudAudit(2017)
The 2007 CHSWC report on employer fraud can be found here:
http://www.dir.ca.gov/chswc/Reports/Fraud_in_WC_payroll_Report_Aug_14_2007.pdf
A 2009 update of the 2007 Neuhauser report can be found here:
http://www.dir.ca.gov/chswc/Reports/2011/Final_Report_FAC_Premium_Avoidance.pdf
Stay tuned. Between Christmas and New Years I will be posting my year end list of the top ten developments in California workers’ comp in 2017.
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Julius Young
