Skip Repetitive Navigation Links
California State Auditor Logo  
Report Number: 2017-103


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



Our review of processes for preventing, detecting, and prosecuting fraud in California’s workers’ compensation system revealed the following:

Results in Brief

The system for workers’ compensation insurance (workers’ compensation) in California requires employers to provide benefits to employees who are injured or disabled in the course of employment. These benefits include covering the costs associated with health care and other services necessary for injured employees to return to work, providing disability payments, and compensating injured employees who cannot fully return to work. In exchange, employers generally have protection against law suits filed by employees related to workplace injuries. The Department of Industrial Relations (Industrial Relations) is responsible for monitoring the administration of claims filed through the workers’ compensation system, which California has had in place for over 100 years. A 2016 report by Industrial Relations indicates that the workers’ compensation system cost the State’s employers—who pay for the system by either purchasing workers’ compensation policies or self‑insuring—$25.1 billion in 2015.

In part because of its size and complexity, the workers’ compensation system creates ample opportunity for fraud. This fraud can take many forms, including employees who claim to be injured when they are not or health care providers who bill insurers for services or treatments they did not provide. A number of state and local entities are involved in preventing, detecting, and prosecuting such fraud. In particular, the California Department of Insurance (CDI) is the lead state agency for the criminal investigation of workers’ compensation fraud. It receives case referrals from insurers, law enforcement agencies, third parties, employers, and employees. Depending on the circumstances, CDI, the county district attorneys’ offices, or both will investigate these referrals. The county district attorneys’ offices also have responsibility for prosecuting workers’ compensation fraud cases when appropriate. Their prosecutions can result in convictions, financial penalties, and court‑ordered restitution. In order to help pay for these antifraud efforts, the State created the Fraud Assessment Commission (Fraud Commission), which sets an annual total assessment amount to be collected from employers. The insurance commissioner—who is in charge of CDI—and the Fraud Commission then allocate the assessment funds to CDI and the district attorneys’ offices.

Despite the State’s efforts, we identified certain weaknesses in its 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, insurers vary significantly in the number of fraud referrals they submit. We calculated the referral rates for 21 insurers that each had more than $150 million in earned workers’ compensation premiums for 2015 and 2016.1 We found that eight of these 21 insurers submitted one or fewer referrals per $10 million in earned premiums in at least one of the two years we examined. In fact, two insurers submitted no referrals for one of the years. These low referral rates could indicate that the insurers are not referring suspected workers’ compensation fraud to CDI and the district attorneys’ offices, leaving this potential fraud uninvestigated. Nonetheless, CDI does not include referral rates as a criterion when selecting insurers whose special investigative units it will audit.

In addition, Industrial Relations has not yet fully documented its procedures for using a tool that may enable it to detect provider fraud more quickly. Provider fraud cases can continue unnoticed for years and a single case can cost insurers millions of dollars. To address this, Industrial Relations is in the early stages of implementing data analytics, which should help it to predict which providers may be committing such fraud. According to a consultant Industrial Relations commissioned, data analytics is a rapidly developing field of information science that involves intensive examination of large volumes of data to develop deeper insights, make predictions, and generate recommendations. Because data analytics may provide high rates of return, Industrial Relations should fully document its plan for using data analytics to uncover provider fraud as soon as possible.

In addition, California could further improve its efforts to detect workers’ compensation fraud by requiring insurers to periodically issue explanation of benefits statements (EOB statements) to injured employees. These statements list the types of services providers rendered to injured employees, the dates the providers rendered the services, and the fees they received for the services. Consequently, EOB statements provide injured employees with the opportunity to review the services for which providers have billed insurers and potentially identify fraudulent charges. Nonetheless, the State does not currently require insurers to issue EOB statements to injured employees.

The State could also do more to improve its investigation of workers’ compensation fraud. Specifically, CDI’s high vacancy rate for its fraud investigator positions limits its ability to investigate suspected fraudulent workers’ compensation claims. According to calculations based on data as of February 2017, CDI had a statewide vacancy rate for fraud investigators of 27 percent. Further, in a recent budget change proposal, CDI asserted it had the available resources to investigate only 5 percent of the suspected fraudulent claims it receives annually across all types of insurance. In fact, our analysis of data from its case management system indicates that CDI closes about 40 percent of the workers’ compensation referrals it receives without investigation due to insufficient resources. In these instances, CDI may be allowing fraudulent activities to continue without investigation. In addition, vacant fraud investigator positions place a burden on the district attorneys’ offices that depend on CDI’s investigators as part of the investigative and prosecutorial process. Nonetheless, we observed that CDI omitted from its recruitment plan activities to recruit experienced and retired law enforcement officers and lacked a retention plan for addressing its high vacancy rate.

Further, the State has made certain funding decisions that may also negatively affect its effort to fight workers’ compensation fraud. State law mandates that the insurance commissioner and the Fraud Commission must allocate to both CDI and the district attorneys’ offices a minimum of 40 percent each of the total workers’ compensation fraud assessment funds the State collects from employers each fiscal year. The insurance commissioner and the Fraud Commission can allocate the remaining 20 percent of the funds at their discretion. In recent years, CDI has received only its minimum 40 percent allotment—$24 million per year in fiscal years 2015–16 and 2016–17—but was unable to spend $2.4 million (10 percent) of that amount in fiscal year 2015–16, in large part because of its vacant positions. However, instead of redirecting CDI’s unspent funds to the district attorneys’ offices, the insurance commissioner and the Fraud Commission used the funding to offset—or reduce—a subsequent year’s collection from employers. If they had chosen to redirect the funds, the insurance commissioner and the Fraud Commission could have avoided reducing the amount of money available for investigating and prosecuting workers’ compensation fraud.

Selected Recommendations


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.


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.

To better address vacancies in its fraud investigator positions, CDI should take the following actions by June 30, 2018:

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.

Industrial Relations

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.

Agency Comments

Industrial Relations disagrees with both our recommendation to the Legislature and the recommendation we directed to it. CDI agrees with the recommendations we made to it.


1 The term earned premiums refers to the amount of premiums an insurer recognizes as revenue for a certain period of time, such as a year. Go back to text

Back to top