Skip Repetitive Navigation Links
California State Auditor Logo COMMITMENT • INTEGRITY • LEADERSHIP

Workers’ Compensation Insurance
Some State Agencies Are Paying Millions of Dollars More Than Necessary to Provide Benefits to Their Employees

Report Number: 2019-106

Summary

Audit Highlights . . .

Our audit of workers’ compensation insurance used by state agencies revealed the following:

Results in Brief

State law requires state agencies—like other California employers—to provide workers’ compensation benefits to state employees who are injured or disabled in the course of their employment. In addition to covering the costs of medical expenses, these benefits may provide injured employees with a portion of their wages while they recover, as well as payments for permanent disability. State law allows agencies to decide how to provide workers’ compensation benefits to their employees. Almost 90 percent of them choose to do so using a master agreement that the California Department of Human Resources (CalHR) negotiated on their behalf with the State Compensation Insurance Fund (State Fund), a nonprofit entity that also provides workers’ compensation insurance to private businesses. Under the master agreement, state agencies reimburse State Fund for the actual cost of workers’ compensation claims, rather than paying for insurance or maintaining a workers’ compensation reserve. According to CalHR data, nearly 190 agencies provided benefits through the master agreement in fiscal year 2017–18, while 32 agencies opted to purchase insurance from State Fund.

When we reviewed the costs of 10 of the 32 agencies that purchased insurance from State Fund in fiscal year 2017–18, we found that each of these agencies consistently paid more in insurance premiums than it would have paid had it provided benefits under the master agreement. We estimate that from fiscal years 2013–14 through 2017–18, these 10 agencies collectively paid an average of $5.7 million per year in premiums but would have paid an average of less than $1.6 million per year under the master agreement. For example, the California Department of Food and Agriculture paid an average of nearly $1 million per year in premiums, even though we estimate that its average annual cost under the master agreement for claims would have been less than $250,000. In fact, had the 10 agencies used the master agreement, they could have saved the State more than $20 million during the period we reviewed. However, CalHR is not required to assist agencies in deciding whether purchasing workers’ compensation insurance or using the master agreement is likely to be more cost-effective for them.

In addition, we reviewed four state agencies that provide workers’ compensation benefits through the master agreement—the California Department of Forestry and Fire Protection, the California Department of Transportation, the California Highway Patrol, and the California Department of Social Services—to determine whether they met state-mandated timelines for processing claims and whether any delays affected the ability of injured employees to receive care. We reviewed eight claims per agency—32 claims in total—and found that the four agencies missed some deadlines specified in state law. However, because state law requires agencies to provide each injured employee with up to $10,000 in medical benefits until State Fund either accepts or denies a claim, none of the few delays we noted affected the injured employees’ access to necessary medical treatments.

Although State Fund also met the majority of the mandated time frames for processing the claims we reviewed at the four agencies, a lack of qualified medical evaluators (medical evaluators) to produce timely medical evaluation reports resulted in it automatically denying some of these claims. If an employee and State Fund cannot agree on whether an injury is work-related, the employee may be required to see a medical evaluator. Upon receiving a request, the Department of Industrial Relations’ Division of Workers’ Compensation must generate a randomly selected list of three medical evaluators (panel). Generally, if the injured employee is represented by an attorney, the parties each choose one medical evaluator to remove from the panel, and the injured employee then schedules an appointment with the remaining medical evaluator. State regulation requires the selected medical evaluator to be available within 60 days to conduct an evaluation of the injured employee. If the medical evaluator is unavailable within this window, state regulation generally allows the requester to ask for a replacement panel, thereby restarting the process.

When medical evaluators are unavailable, injured employees may face delays in receiving benefits. Specifically, State Fund automatically denied four of 32 claims we reviewed because the employees could not obtain timely appointments for medical evaluations within 90 days, the legal deadline to deny claims before they are presumed to be accepted. Although State Fund may subsequently accept a claim if a medical evaluator determines that the injury was work-related, until it is accepted the injured employee does not receive the appropriate type of workers’ compensation benefit. State Fund did not accept these four claims until an average of four months later, after the employees finally obtained appointments with the medical evaluators.

A shortage of medical evaluators likely contributed to these delays in claim resolutions. Requests for replacement medical evaluators because the original evaluators were not available for appointments within the 60-day window more than quadrupled from fiscal years 2013–14 through 2017–18. Representatives of the four agencies we reviewed explained that when injured employees do not receive workers’ compensation benefits because they are unable to obtain timely appointments for medical evaluations, it may force the employees to seek temporary benefits from other sources such as Nonindustrial Disability Insurance. In addition, having medical evaluators available to conduct timely appointments for evaluations can help ensure that employees return to work as soon as they are medically able and prevent unnecessary disability payments. For example, we reviewed a claim in which an agency paid an employee more than twice the amount in disability payments than it might have if State Fund had received a timely medical evaluation report declaring that the employee’s condition had reached maximum medical improvement.

Finally, State Fund does not always provide state agencies with enough time to review settlement authorization requests (settlement requests) before the mandatory settlement conferences (settlement conferences) in which State Fund and injured employees attempt to come to agreement to avoid seeking a trial. State Fund must obtain approval from agencies before entering into settlements, unless the agencies have authorized State Fund to settle cases without such preapproval. State Fund and several of the agencies we reviewed indicated that State Fund should provide agencies with 30 days to review settlement requests before the settlement conferences. However, State Fund did not provide agencies with 30 days to respond to the settlement requests for eight of the 15 claims we reviewed that involved settlement conferences. When settlement requests are not available for agencies to adequately review before settlement conferences, it may delay the settlement authorization process and lead to agencies’ having to pay additional expenses if the cases go to trial.

Selected Recommendations

CalHR

To ensure that all state agencies provide workers’ compensation in the most cost-effective manner, CalHR should provide each agency that purchases workers’ compensation insurance with a cost-benefit analysis every five years that compares the cost of purchasing this insurance through State Fund with the cost of obtaining coverage through the master agreement.

State Fund

To ensure that state agencies have adequate time to review settlement requests and provide settlement authority, State Fund should create and follow a policy by May 2020 to provide settlement authorization requests to agencies at least 30 days before settlement conferences.

Agency Comments

CalHR agreed to implement our recommendation. State Fund did not agree with our recommendation, asserting that it will strive to meet a guideline that State Fund will complete settlement requests at the earliest opportunity.





Back to top