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Report Number: 2017-103		Abbreviations
Workers’ Compensation Insurance The State Needs to Strengthen Its Efforts to Reduce Fraud

Introduction

Background

California established its workers’ compensation insurance (workers’ compensation) system more than 100 years ago to protect both injured employees and their employers. Before implementation of the workers’ compensation system, the only legal remedy for work‑related injuries was to bring suit against employers and prove their liability. However, in 1911 and 1918, the public voted to amend the California Constitution to authorize the Legislature to create and enforce a workers’ compensation system that requires employers to cover the costs of specific benefits when employees are injured or disabled in the course of employment. At the same time, the system generally protected employers from employee lawsuits except when, among other things, the employers failed to carry insurance.

Currently, California’s workers’ compensation system provides several benefits that help injured employees. These benefits include health care, temporary and permanent disability payments, death benefit payments, and vouchers to help pay for retraining or skill enhancements. Employees are eligible for some or all of these benefits when they suffer injuries that arise out of their employment and occur in the course of their employment. In other words, a causal relationship must exist between their employment and their injuries, and their injuries must occur when they are working and doing reasonable activities that their employers permit. The text box describes the four key types of participants involved in workers’ compensation.

Administration of the Workers’ Compensation System

California’s workers’ compensation system is funded by employers rather than by taxes. Specifically, state law generally requires employers either to purchase insurance or to self‑insure. A 2016 report by the Department of Industrial Relations (Industrial Relations) estimated that the total systemwide cost for workers’ compensation was $25.1 billion for 2015. Figure 1 shows the distribution of the $25.1 billion among various cost categories. Industrial Relations’ report also stated that California’s workers’ compensation system covered 15.6 million employees working for about 936,000 employers in 2015 and that employees had nearly 607,000 occupational injuries and illnesses that year, ranging from minor medical treatment cases to catastrophic injuries and deaths.

Figure 1
Distribution of the 2015 Estimated Costs for the Workers’ Compensation System
(Dollars in Billions)

Source: Unaudited data from the 2016 Annual Report issued by the Commission on Health and Safety and Workers’ Compensation.

* Expenses consists of loss adjustments, commission and brokerage fees, other acquisition expenses, general expenses, and premium and other taxes.

† Indemnity consists of disability and death payments, life pensions, and vouchers for rehabilitation and education.

‡ Medical consists of payments for medical benefits, including physicians, hospitals, pharmacies, and interpreters.

Although employers fund the workers’ compensation system, a number of state agencies play roles in its administration. In particular, Industrial Relations has several units involved in the administration of the workers’ compensation system. For example, its Division of Workers’ Compensation is responsible for monitoring the administration of workers’ compensation claims and for providing administrative and judicial services to assist in resolving disputes. Furthermore, this division staffs 22 district offices and two satellite offices located around the State, called Workers’ Compensation Appeals Boards, that assist employers, injured employees, and others in the resolution of disputes that can arise from workers’ compensation claims. In addition, Industrial Relations’ Office of Self‑Insurance Plans is responsible for overseeing and regulating employers’ workers’ compensation self‑insurance within California. Finally, Industrial Relations’ Commission on Health and Safety and Workers’ Compensation is responsible for examining the workers’ compensation system and recommending administrative or legislative modifications to improve its operation.

In addition, the California Department of Insurance (CDI) is involved in the administration of the workers’ compensation system. Specifically, it is responsible for regulating the business of insurance in California, including workers’ compensation, under the direction of the insurance commissioner. CDI’s regulatory responsibilities include overseeing insurer solvency, licensing agents and brokers, and resolving consumer complaints. Further, it is responsible for investigating allegations of workers’ compensation fraud, as we discuss in a later section.

Finally, a private entity also plays a role in the administration of the workers’ compensation system. The Rating Bureau is an unincorporated, nonprofit association composed of all companies licensed to transact workers’ compensation insurance in the State. The Rating Bureau establishes what it refers to as pure premium rates for workers’ compensation insurance. It recommends these rates to the insurance commissioner. Insurers may use pure premium rates as benchmarks to develop their own premium rates to charge. To pay for its operations, the Rating Bureau uses insurer membership fees and assessments, rather than state funds.

Workers’ Compensation Fraud

CDI’s website mentions that workers’ compensation fraud costs employers—who fund the workers’ compensation system—amounts estimated to range from $1 billion to $3 billion annually. This equates to 4 percent to 12 percent of the system’s 2015 cost estimate, and the employers likely pass on these costs to their consumers. Furthermore, CDI’s data show that the total estimated chargeable fraud in workers’ compensation for fiscal year 2015–16 approached $970 million. CDI defines chargeable fraud as the total amount of suspects’ workers’ compensation fraud that district attorneys’ offices believe can be proven and can result in convictions.² Table 1 identifies the numbers of cases in court and the amounts of chargeable fraud by type from fiscal years 2013–14 through 2015–16.

Table 1
Number of Workers’ Compensation Fraud Cases in Court and Estimated Chargeable Fraud by Case Type
Fiscal Years 2013–14 Through 2015–16

	Fiscal year
Case Type	2013–14	2014–15	2015–16		Percent of 2015–16 Total
Number of Cases in Court
Claimant (Employee)	371	440	444		32.2%
Employer–Premium	178	160	192		13.9
Employer–Uninsured Employer	718	713	607		44.0
Provider	23	25	41		3.0
Insider (Insurer)	13	10	20		1.5
Other Types	68	61	75		5.4
Total number of cases in court	1,371	1,409	1,379		100.0%
Estimated Chargeable Fraud (in Thousands)*
Claimant (Employee)	$18,958	$16,985	$19,505		2.0%
Employer–Premium	128,772	115,929	133,741		13.8
Provider	129,808	509,049	812,339		83.8
Insider (Insurer)	1,723	1,692	1,154		0.1
Other types	2,810	2,532	2,748		0.3
Total estimated chargeable fraud	$282,071	$646,187	$969,487		100.00%

Source: District Attorney Program Reports (DAR) system provided by CDI.

Note: The DAR system does not separate medical fraud from other types of provider fraud—such as legal services, billing services, and translation services. Therefore, we attempted to quantify the estimated chargeable fraud for medical provider fraud using CDI’s Fraud Integrated Database, which separates provider fraud case referrals between medical and legal. For fiscal years 2013–14 through 2016–17, approximately 97 percent to 100 percent of the potential loss amount recorded for provider fraud case referrals were for medical providers.

* The DAR system did not include amounts of chargeable fraud for the fraud type Employer–Uninsured Employer.

As Figure 2 illustrates, fraud can occur in many ways within the workers’ compensation system. For example, employees can commit workers’ compensation fraud by falsely claiming injuries were work‑related, faking injuries, or continuing on disability when they are capable of returning to work. Employers can commit fraud by being uninsured or underinsured, preventing employees from reporting workplace injuries, misrepresenting facts to avoid liability, underreporting their payroll amounts, or misclassifying the work performed by their employees.³ Insurance companies can commit fraud by issuing fraudulent policies that they have no intention of honoring. Finally, service providers can commit fraud either by billing for services not provided or needed or by overbilling for services actually provided. Providers can also commit fraud by improperly referring injured employees to other service providers in exchange for illegal payments, often referred to as kickbacks.

Figure 2
Key Participants in California’s Workers’ Compensation System and Examples of How They May Commit Fraud

Source: California State Auditor’s analysis of state law, publications from and websites for CDI and Industrial Relations, Rating Bureau reports, and information from district attorneys’ offices.

Although uninsured employer fraud and employee fraud—as Table 1 indicates—are the most frequent types of workers’ compensation fraud cases, the largest monetary losses result from provider fraud and, to a lesser extent, employer premium fraud. A recent example highlights the scale of provider fraud. In 2017 two defendants who were associated with a single provider fraud case were charged with perpetrating workers’ compensation fraud, engaging in conspiracy, and paying kickbacks. In this case, three medical billing and medical management companies provided the means by which the two defendants were able to bill a total of $40 million in fraudulent claims. Of this amount, the two defendants received about $23.2 million.

The State’s Antifraud Efforts

To protect consumers, state and local entities play critical roles in fighting workers’ compensation fraud, as noted in the text box. These efforts generally fit into one of four categories: prevention, detection, investigation, and prosecution. Prevention consists of efforts to dissuade individuals and businesses from committing workers’ compensation fraud. These efforts can include outreach and education campaigns that inform employers and employees about how fraud can occur and explain its criminal consequences. Detection includes the work that the special investigative units of insurers perform to identify and refer possible instances of workers’ compensation fraud to the attention of authorities. Depending on the circumstances, investigations of fraud cases may be conducted by federal, state, or local authorities, or combinations of the three. Finally, county district attorneys’ offices prosecute workers’ compensation fraud cases. These prosecutions can result in convictions, imprisonment, fines, and restitution orders. Workers’ compensation fraud in California can be either a felony or a misdemeanor, depending on the facts and circumstances of a case.

Although Industrial Relations is responsible for monitoring the administration of California’s workers’ compensation claims, CDI is the lead state agency for the criminal investigation of workers’ compensation fraud. The mission statement for CDI’s Enforcement Branch charges it with protecting the public from economic loss and distress by actively investigating, arresting, and referring for prosecution or other adjudication those who commit insurance fraud. Although CDI can receive allegations of workers’ compensation fraud—called suspected fraudulent claim referrals (referrals)—from anyone, state law requires every insurance company to have or hire a special investigative unit that submits referrals to both CDI and district attorneys’ offices. When CDI receives a referral, it reviews it for accuracy and completeness, directs the referral to the appropriate regional office, performs preliminary intelligence gathering, and makes a decision about whether to initiate a formal investigation. Factors CDI considers when making a decision include public safety, evidence quality, the insurance commissioner’s strategic initiatives, and the availability of investigative resources. Figure 3 depicts the referral process.

Figure 3
Process to Initiate, Investigate, and Prosecute a Fraud Case in the Workers’ Compensation System

Source: CDI’s instructions for reporting suspected fraudulent insurance claims, CDI’s internal documents, district attorneys’ offices’ grant applications, the Insurance Code, and documents regarding SCIF.

* SCIF is a quasi‑public entity that competes with other insurers to provide workers’ compensation insurance. It is the largest workers’ compensation insurer in California. It is also a third‑party administrator for public employers in the State who opt to self‑insure or who are legally uninsured.

† State law requires that insurers, including self-insured employers, third‑party administrators, and SCIF, report suspected fraudulent claims to both the CDI and their local district attorneys’ offices.

‡ All other entities reporting suspected fraudulent claims send the referrals to CDI, their local district attorneys’ office, or both.

Based on the available information, CDI may open a case for investigation by its staff; agree to have a district attorney investigate the referral; jointly investigate the referral with a district attorney’s office; or close the referral due to insufficient evidence, insufficient resources, or other reasons. CDI’s investigators conduct fraud investigations at its nine regional offices, as Figure 4 depicts. Each regional office is assigned specific counties and works with the district attorneys’ offices in those counties.⁴ If CDI chooses to investigate a case itself, it can subsequently refer that case to a district attorney’s office for prosecution. Although CDI’s investigators fight several types of insurance fraud—including health care and automobile—its data indicate that from fiscal years 2013–14 through 2016–17, nearly 44 percent of the fraud investigation hours its staff charged involved workers’ compensation. Additionally, district attorneys’ offices may initiate their own cases based on referrals and complete both the investigative and prosecutorial efforts.

Figure 4
Map of CDI’s Regional Offices and of the District Attorneys’ Offices That Were Awarded Fraud Assessment Funds for Fiscal Year 2016–17

Source: CDI’s Fraud Division’s Report to the Fraud Assessment Commission for fiscal year 2016–17 and CDI’s grant distribution documents.

Notes: The Santa Cruz County District Attorney’s Office declined its $49,000 award without explanation.

Amador, Humboldt, and Yolo counties submitted applications representing their own counties plus seven others.

The State funds efforts to combat workers’ compensation fraud using an assessment that employers pay rather than the State’s General Fund. Specifically, in 1991 the State enacted legislation to establish the Fraud Commission to allocate funding to enhance state and local efforts to combat workers’ compensation fraud. The Fraud Commission consists of seven members, six of whom the Governor appoints as representatives of workers’ compensation stakeholder groups; the seventh is the president of the State Compensation Insurance Fund (SCIF) or a designee. The Fraud Commission annually establishes an aggregate assessment amount that employers must pay to support the Workers’ Compensation Insurance Fraud Program. The State uses the funds resulting from this assessment to help pay for CDI’s and the district attorneys’ offices’ efforts to fight workers’ compensation fraud.

State law requires that, after incidental expenses, CDI and the district attorneys’ offices each receive a minimum 40 percent of the fraud assessment funding. State law is largely silent on the allocation of the remaining 20 percent, giving the insurance commissioner and the Fraud Commission the discretion to allocate it however they deem appropriate between CDI and the district attorneys’ offices. For fiscal years 2013–14 through 2016–17, they allocated the discretionary 20 percent almost entirely to district attorneys’ offices, leaving CDI with the minimum 40 percent funding state law requires it to receive. For fiscal year 2016–17, the total fraud assessment amount was about $58.9 million. Figure 4 identifies the district attorneys’ offices that received awards for fraud assessment funding for fiscal year 2016–17, while Figure 5 shows a timeline of the Fraud Commission’s grant program.

Figure 5
Process for the Collection and Distribution of Fiscal Year 2017–18 Workers’ Compensation Assessment Funds

Sources: Insurance Code, California Code of Regulations, review of CDI’s internal documents, interviews with CDI staff, the fiscal year 2017–18 request for application, and Fraud Commission meeting minutes.

* According to the assistant chief of CDI, the insurance commissioner also decides, with the advice and consent of the Fraud Commission, how much of the discretionary 20 percent should be allocated to CDI or the district attorneys’ offices. She stated that, for at least the last decade, the 20 percent has been included within the proportion allocated to the district attorneys’ offices, without an annual redetermination.

Once the insurance commissioner and the Fraud Commission determine the assessment amount they will allocate to the district attorneys’ offices, a five‑person review panel develops recommendations for the distribution of these funds among the offices that applied for funding. The review panel consists of two members of the Fraud Commission, the chief of CDI’s Fraud Division or a designee, Industrial Relations’ director or a designee, and an expert in consumer crime investigation and prosecution whom the insurance commissioner designates. The insurance commissioner then considers the review panel’s recommendations and may make adjustments, which the Fraud Commission considers for approval. In the distribution decision for fiscal year 2017–18 allocations, the insurance commissioner adjusted the recommended allocations for five counties. However, none of the adjustments exceeded $11,500. Table 2 shows the funding awards to district attorneys’ offices and CDI for fiscal years 2013–14 through 2016–17.

Table 2
Workers’ Compensation Insurance Fraud Program Funding for County District Attorneys’ Offices and CDI
Fiscal Years 2013–14 Through 2016–17

	Fiscal Year
COUNTY	2013–14	2014–15	2015–16	2016–17
Alameda	$1,425,916	$1,435,733	$1,511,933	$1,511,933
Amador	410,333	386,479	386,479	393,896
Butte	75,421	65,514	76,000	76,378
Contra Costa	619,000	644,405	850,000	864,000
El Dorado	251,615	248,088	271,428	292,828
Fresno	1,152,108	1,114,206	1,236,000	1,116,000
Humboldt	179,016	168,480	200,000	200,000
Imperial	163,495	163,495	163,495	125,450
Kern	827,500	886,522	1,058,000	752,904
Kings	263,875	263,875	263,875	263,875
Los Angeles	5,805,244	5,869,952	6,458,643	6,729,177
Marin	233,585	233,868	245,648	245,000
Madera		15,000*
Merced	94,012	95,210	174,000	175,209
Monterey	607,200	605,320	660,000	660,000
Napa	130,153	130,741	135,500	123,609
Nevada	66,190	66,315	73,525	75,049
Orange	3,620,608	3,629,627	3,966,000	4,152,802
Placer			175,000	175,000
Riverside	1,529,658	1,588,669	2,020,000	2,084,970
Sacramento	880,794	880,635	910,000	952,027
San Bernardino	2,244,246	2,101,458	2,113,943	1,968,662
San Diego	4,477,303	4,567,000	4,990,459	5,028,198
San Francisco	702,366	679,946	713,943	758,121
San Joaquin	484,647	469,859	472,972	472,972
San Luis Obispo	62,254	55,803	54,419	54,419
San Mateo	680,286	689,314	691,588	677,353
Santa Barbara	272,800	272,800	340,420	331,499
Santa Clara	2,446,586	2,432,404	2,626,811	2,626,811
Santa Cruz	149,332	131,425	118,223	49,000†
Shasta	157,739	144,342	154,955	137,307
Siskiyou	34,606	43,384	52,992	46,832
Solano	169,710	169,710	175,742	169,476
Sonoma	56,804	35,388	66,800	82,120
Tehama	84,017	84,214	110,248	112,127
Tulare	504,211	499,033	499,258	501,165
Ventura	686,997	678,109	683,465	708,652
Yolo	224,765	228,069	250,067	257,010
Total County Funding	$31,774,392	$31,774,392	$34,951,831	$34,951,831
CDI Funding	21,395,608	21,395,608	23,535,169	23,535,169
Incidental Expenses‡	275,000	275,000	375,000	375,000
Total Assessment	$53,445,000	$53,445,000	$58,862,000	$58,862,000

Sources: CDI’s aggregate assessment and distribution tracking documents.

* Madera County declined its $15,000 funding award for fiscal year 2014–15.

† Santa Cruz County declined its $49,000 funding award for fiscal year 2016–17.

‡ Incidental expenses are those costs incurred by CDI and Industrial Relations to administer the program and may include the Fraud Commission’s expenses, Industrial Relations’ costs of collection of assessments, administrative support of CDI’s Fraud Division program component, and CDI’s management of the distribution and oversight of funds allocated to the district attorneys’ offices.

In addition to CDI and the Fraud Commission, Industrial Relations also takes steps to reduce workers’ compensation fraud. Specifically, to ensure employees receive appropriate workers’ compensation benefits in a timely manner, Industrial Relations audits insurers, self‑insured employers, and third‑party administrators for compliance with their obligations under the Labor Code and Industrial Relations’ regulations. Further, in 2016 the enactment of two bills gave Industrial Relations new tools to help combat workers’ compensation fraud. For example, one law allows it to automatically stay any liens providers of medical services file if those providers are charged with certain fraud‑related crimes.⁵ The other law requires the administrative director of Industrial Relations’ Division of Workers’ Compensation to promptly suspend providers from participating in the workers’ compensation system if they are convicted of certain crimes, including worker’s compensation fraud. Furthermore, Industrial Relations is the lead agency for the Labor Enforcement Task Force, a multiagency organization aimed at fighting the underground economy. This task force visits employers to ensure they are paying required taxes, fees, and penalties. The task force identifies workers’ compensation insurance violations as part of its efforts.

Scope and Methodology

The Joint Legislative Audit Committee (Audit Committee) directed the California State Auditor to audit public agencies’ processes for preventing, detecting, and prosecuting fraud in California’s workers’ compensation system. Table 3 lists the Audit Committee’s objectives and the methods we used to address them.

Table 3
Audit Objectives and the Methods Used to Address Them

	AUDIT OBJECTIVE	METHOD
1	Review and evaluate the laws, rules, and regulations significant to the audit objectives.	Reviewed relevant laws, rules, and other background materials related to the State’s antifraud efforts associated with workers’ compensation. Interviewed key staff at CDI, Industrial Relations, the Fraud Commission, and the district attorneys’ offices for Los Angeles, Orange, and San Diego counties.
2	Identify the state, local, and other agencies that are responsible for workers’ compensation system antifraud efforts and describe the relationships, roles, and responsibilities of these agencies in preventing, detecting, and prosecuting workers’ compensation fraud.	Interviewed key individuals at CDI, Industrial Relations, the Fraud Commission, and the district attorneys’ offices for Los Angeles, Orange, and San Diego counties. Reviewed laws, regulations, policies, annual reports, and websites related to workers’ compensation insurance.
3	Determine how and to what extent, if any, the various governmental agencies—including CDI and Industrial Relations—coordinate their efforts with insurers and self‑insured employers to prevent and detect workers’ compensation fraud. Identify any gaps or weaknesses in their coordination efforts and areas for improvement.	Examined the rates at which relatively larger insurers submitted referrals of possible workers’ compensation insurance fraud to CDI to assess their detection efforts. Attended the June 2017 meeting at which the five‑person review panel received budget proposals and heard presentations from representatives of county district attorneys’ offices regarding fraud assessment funds to identify how counties planned to use these funds to prevent, investigate, and prosecute workers’ compensation fraud. We also examined the proposals submitted by the three counties we visited to obtain more detailed information regarding their efforts. Examined reports and other documents regarding CDI’s and Industrial Relations’ participation in the Joint Enforcement Strike Force and the Labor Enforcement Task Force, both tasked to fight California’s underground economy, including ensuring employer compliance with workers’ compensation laws. Examined Industrial Relations’ audits of insurers, self-insured employers, and third-party administrators to ensure compliance with state workers’ compensation regulations regarding the provision of benefits. Examined the memorandum of understanding between Industrial Relations and CDI regarding the sharing of data for the purpose of identifying possible workers’ compensation fraud, examined examples of the information shared, and interviewed CDI staff to assess the effectiveness of the agreement’s results.
4	Evaluate whether the State’s existing system of distributing fraud assessment funds to local district attorneys’ offices has been effective in increasing the frequency with which workers’ compensation fraud cases have been accepted and successfully prosecuted.	Reviewed the State’s criteria and process for collecting and disbursing fraud assessment funds. Interviewed members of the Fraud Commission and the Review Panel, and relevant staff at CDI and three district attorneys’ offices. We also reviewed the Fraud Commission’s meeting minutes. To determine the local agencies to include as part of this audit, we examined information from CDI applicable to district attorneys’ offices, including the number of investigations opened, number of suspected fraudulent claims received, amount of fines and restitution ordered, and the average amount of grant funding received. Based on this information, we selected the district attorneys’ offices of Los Angeles, Orange, and San Diego counties. Reviewed and analyzed applications for fraud assessment funding submitted by the three district attorneys’ offices we selected, audit reports for the three district attorneys’ offices, and the budget and expenditure information for both CDI and the three district attorneys’ offices. Obtained and analyzed DAR system information for all county participants from fiscal years 2013–14 through 2015–16. Obtained and reviewed the Fraud Integrated Database, which contains referral information, and analyzed outcomes for both CDI and the participating district attorneys’ offices. Interviewed relevant staff and reviewed county applications for our selected district attorneys’ offices to determine how each office addressed investigation and prosecution, its performance measures, and its caseload for different fraud types.
5	Review the methods used and rationale for allocating fraud assessment funds between investigative and prosecutorial functions.
6	Evaluate the efficiency of CDI, Industrial Relations, and a selection of three local agencies in deploying their investigative and prosecutorial resources. Determine the extent to which resources are appropriately balanced between the investigative and prosecutorial functions.
7	Review and evaluate the effectiveness of CDI’s efforts to recruit and retain peace officer fraud investigators.	Reviewed documents obtained from CDI pertaining to its recruiting and retention efforts for fraud investigators, analyzed the number of CDI’s investigator positions authorized and filled, and interviewed key personnel. Analyzed personnel data from the State Controller’s Office for fiscal years 2013–14 through 2016–17 to determine the number of new hires and separations for fraud investigators at CDI.
8	Determine how antifraud resources pertaining to workers’ compensation are organized and directed in other large states. Assess whether there are alternative structures that would be more effective in identifying, prosecuting, and preventing fraud.	Based on state population statistics obtained from the U.S. Census Bureau’s website, we selected Florida, New York, and Texas as the other states to include as part of our audit. For the three selected states, we examined antifraud information from their websites, reviewed publicly available annual reports, and interviewed individuals involved with the antifraud efforts. Because our review of these three states failed to disclose alternative structures that would be more effective for California, we also interviewed the executive director of the Coalition Against Insurance Fraud (Coalition) to obtain perspective on nationwide antifraud efforts related to workers’ compensation. The Coalition’s executive director stated that California had the most robust system of antifraud for workers’ compensation and that not all states incorporate workers’ compensation into their fraud-fighting efforts.
9	To the extent possible, identify for the most recent three fiscal years the amount of discovered fraud perpetrated by insurers, employers, employees, medical providers, and attorneys.	Analyzed data from CDI’s DAR system and present this information in Table 1 in the Introduction.
10	Review and assess any other issues that are significant to the audit.	No additional reportable issues significant to the audit came to our attention.

Sources: California State Auditor’s analysis of the Audit Committee’s audit request number 2017‑103 as well as state law, regulations, and information and documentation identified in the column titled Method.

Assessment of Data Reliability

In performing this audit, we obtained electronic data files extracted from the data sources listed in Table 4. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that we use to support findings, conclusions, or recommendations. Table 4 describes the analyses we conducted using data from these sources, our methods for testing, and the results of our assessments. Although these determinations may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

Table 4
Methods Used to Assess Data Reliability

DATA SOURCE	PURPOSE	METHOD AND RESULT	CONCLUSION
State Controller’s Office Uniform State Payroll System Fiscal years 2013–14 through 2016–17	Identify CDI fraud investigators that were hired or separated during the audit period and the subsequent employing agencies for separated fraud investigators.	We performed dataset verification procedures and electronic testing of key data elements and did not identify any issues. To gain assurance of the completeness of the data, we verified it included payroll information for all CDI fraud investigators contained in the Fraud Integrated Database System and found no exceptions. To gain assurance over the accuracy of the data, we traced key data elements to source documentation for a selection of 29 fraud investigators and found no exceptions.	Sufficiently reliable for the purposes of the audit.
California Public Employees’ Retirement System (CalPERS) Actuarial Valuation System As of fiscal year 2015–16	Identify the age of CDI fraud investigators who separated from state service during the audit period.	We performed dataset verification procedures and electronic testing of key data elements and did not identify any issues. To gain assurance of the completeness of the data, we compared it to a listing of fraud investigators that separated from state service and found that the data did not contain birth-date information for three of the 41 fraud investigators. To gain assurance of the accuracy of the data, we traced key data elements to source documentation for a selection of 29 fraud investigators. We verified the birth-date information for 24 of the fraud investigators. However, we were unable to test the remaining five because CDI lacked source documentation for the birth dates.	Undetermined reliability for the purposes of this audit. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our findings, conclusions, and recommendations.
CDI Fraud Integrated Database System Fiscal years 2013–14 through 2016–17	Identify suspected fraudulent claims, associated dollar amounts, and related information, and calculate a referral rate per $10 million in earned workers’ compensation premiums.	We performed dataset verification procedures and electronic testing of key data elements and did not identify any issues. We did not perform accuracy and completeness testing on these data because the source documents required for this testing are stored at various locations throughout the State, making such testing cost‑prohibitive. To gain some assurance, we compared the data to published totals for the years that the information was available and found that the totals materially agreed with our data.	Undetermined reliability for the purposes of this audit. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our findings, conclusions, and recommendations.
CDI District Attorney Program Reports (DAR) system Fiscal years 2013–14 through 2016–17	Determine the number of cases and the amount of chargeable fraud by fraud type, and select district attorneys’ offices to visit.	We performed dataset verification procedures and electronic testing of key data elements and did not identify any issues. We did not perform accuracy and completeness testing on these data because the source information required for this testing is stored at various locations throughout the State, making such testing cost‑prohibitive. To gain some assurance of the data’s reliability, we reviewed the results found in CDI audit reports covering fiscal year 2014–15 for two of the three district attorneys’ offices we visited. Our review included steps to examine the case and chargeable fraud information the offices submitted to the DAR system. We found no reported findings.	Undetermined reliability for the purposes of this audit. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our findings, conclusions, and recommendations.
CDI Lists of the amounts of earned workers’ compensation premiums for California insurers for which CDI cites the National Association of Insurance Commissioners (NAIC) as the source 2015 and 2016	Identify California insurers with more than $150 million in earned workers’ compensation premiums and calculate a referral rate per $10 million in earned premiums.	We did not perform accuracy and completeness testing on these data because NAIC does not fall within our audit authority. To gain some assurance that CDI accurately reported the NAIC information, we compared earned premium totals obtained from CDI’s lists for a selection of insurers to comparable information shown on NAIC’s website and did not identify any issues.	Undetermined reliability for the purposes of this audit. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

Sources: California State Auditor’s analysis of various documents, interviews, and data obtained from the entities listed in this table.

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Footnotes

² CDI’s data include different estimates of workers’ compensation fraud amounts, including potential loss and suspected fraud loss‑to‑date. Because chargeable fraud is the amount that district attorneys’ offices believe they can prove, we opted to report this estimate. Go back to text

³ Insurers use factors such as employers’ payroll amounts, types of work performed, and safety histories to calculate workers’ compensation insurance premiums. For instance, if an employer reports it has seven administrative staff (for which insurers charge lower premiums) when in fact those employees are roofers (for which insurers charge higher premiums), the employer has engaged in fraud.
We also use the term employer fraud to include willfully uninsured employers. Although an employer that is willfully uninsured can be charged with a crime separate from fraud, the insurance commissioner and the Fraud Assessment Commission both mention willfully uninsured employers in their annual messages regarding objectives for the investigation and prosecution of workers’ compensation fraud. Go back to text

⁴ CDI divides Los Angeles County between two different regional offices. Go back to text

⁵ California law allows providers of services to injured workers to file liens in the workers’ compensation system to secure payment for those services. Go back to text

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