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Report Number: 2017-103


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

December 12, 20172017-103

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814

Dear Governor and Legislative Leaders:

As requested by the Joint Legislative Audit Committee, the California State Auditor presents this audit report concerning public agencies’ processes for preventing, detecting, and prosecuting fraud occurring in the State’s workers’ compensation insurance (workers’ compensation) system. This report concludes the State needs to strengthen its efforts to reduce workers’ compensation fraud. The Department of Industrial Relations (Industrial Relations) estimates that workers’ compensation cost the State’s employers—who pay for the system by either purchasing insurance policies or self-insuring—$25.1 billion in 2015. Furthermore, the California Department of Insurance (CDI) states that the amount of workers’ compensation fraud in the State ranges from an estimated $1 billion to $3 billion annually. Public agencies involved in preventing, detecting, and prosecuting workers’ compensation fraud include CDI, Industrial Relations, and county district attorneys’ offices.

We identified certain weaknesses in the State’s processes for detecting workers’ compensation fraud. For example, although state law requires insurers to refer to CDI and district attorneys’ offices any claims that show reasonable evidence of fraud, some insurers are significantly less likely than others to report suspected fraud. For the 21 insurers that we examined, the number of referrals ranged from zero to more than 350 for the two years we reviewed; eight insurers had rates of one or fewer referrals per $10 million in earned premiums (the high was 11 referrals per $10 million). These eight insurers collectively had $3.9 billion in earned premiums in 2016, which represented 31 percent of earned premiums in California. We also observed that Industrial Relations has not yet fully documented its procedures for using predictive data analytics, a tool that should enable it to detec tpotential provider fraud more quickly, and that California could improve its efforts to detect potential workers’ compensation fraud by requiring insurers to periodically issue explanation of benefits statements to injured employees.

We also identified concerns regarding the investigation and prosecution of workers’ compensation fraud. Specifically, CDI’s 27 percent vacancy rate for its fraud investigator positions—calculated based on data as of February 2017—likely limits its ability to investigate suspected fraudulent workers’ compensation claims. Although the State has reduced the pay gap between fraud investigators and other similar law enforcement positions, CDI lacks a retention plan and its recruitment plan omits activities to recruit retired law enforcement officers. Finally, rather than redirecting $2.4 million from fiscal year 2015–16 in unspent CDI funds to district attorney’s offices to bolster their investigation and prosecution efforts to fight workers’ compensation fraud, the insurance commissioner and the Fraud Assessment Commission opted to reduce the amount of funds employers would have otherwise had to pay in a subsequent year.

Respectfully submitted,

State Auditor

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