Warnings on Workers’ Comp Flaws Ignored

Los Angeles city officials had repeated warnings for at least five years that the city workers’ compensation system was badly flawed, and even ripe for fraud, but they did little to correct the problems, documents show.

By the time serious attempts to reform the system began this year, police say, taxpayers may have been cheated out of as much as $1 million by an alleged fraud ring.

A task force reported that the city’s expenses for injured workers had spiraled out of control, with municipal employees filing injury claims at nearly twice the rate of other government employees and payments per worker averaging $2,169, more than 2 1/2 times the national average.

The warnings from the task force--appointed by Mayor Richard Riordan and City Atty. James K. Hahn--were far from the first to confront the Workers’ Compensation Division.

Auditors from within city government and from the private sector have warned since at least 1989 that the city paid too much for worker injury cases and that screening to prevent excessive payments to employees, physicians and others was in disarray.

The story of the workers’ compensation system’s imperviousness to change is one of reforms being lost or diluted as they passed through layers of bureaucracy, of elected officials refusing to make short-term payments for potential long-term gains and of the system’s resistance to reform.

“If they had implemented some of the recommendations, we think it would have prevented much of the fraud that is alleged to have taken place,” said City Controller Rick Tuttle, whose office audited the workers’ compensation system twice in the last five years.

Though others familiar with the workers’ compensation system agreed that reforms could have saved money, they questioned whether any safeguards can prevent abuse by high-ranking and trusted employees. One such employee is under investigation for allegedly conspiring to defraud the system of about $1 million. Thelma Bowman, a principal workers’ compensation analyst who supervised 20 employees, was recently placed on paid administrative leave pending completion of the investigation.

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“It’s certainly exceedingly difficult to prevent (fraud) when you have collusion from a high level on the inside,” said Carol Williams, assistant chief of the Workers’ Compensation Division since late 1990.

What is not in dispute is the need for reform of the city’s program for paying injured workers.

The total cost of the city’s workers’ compensation claims jumped more than 2 1/2 times over a decade to $86.5 million in 1992-93. With an all-time high of 42,000 cases now open, there is the equivalent of nearly one claim for each city employee. About one-third of those are suspected to be files for employees who have returned to work or left city employment, files that should have been closed so that they did not become susceptible to fraudulent billings.

As early as a 1989 audit, City Administrative Officer Keith Comrie cited the potential for fraud and recommended hiring a private firm to reduce some of the caseload for workers’ compensation analysts, who have reportedly carried up to seven times the recommended caseload.

Comrie’s office also said a computer system should be revamped to ensure the accuracy of payouts and a form created for employees to verify that they had received the treatment that a doctor said they had.

The fate of the verification form typifies that of other reform proposals.

Comrie’s report suggested that without such verification of the patients, doctors “may bill against a legitimate claim number for inflated or fraudulent service costs.” In fact, three doctors are being investigated for just such billings.

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But the administrators of the Workers’ Compensation Division resisted the change. They reported that they had policies to “provide appropriate control over the bill-paying process.” They also wrote to Comrie that it could be cumbersome and difficult for an overworked staff to process more paperwork.

Workers’ compensation managers further cited an opinion from the city attorney’s office that said employee verification could be requested but that if it was not received doctors would still have to be paid. Assistant City Atty. Thomas Theis wrote at the time that because an employee’s signature was not specifically required in the state Labor Code, the lack of a signature could not be used to deny payment.

Comrie’s auditors to this day defend the proposal for the verification safeguard, saying it would have drawn attention to doctors who submitted many bills without signatures.

But at the time--faced with the opposition from Workers’ Compensation managers and the city attorney’s opinion--Comrie’s office backed off on the recommendation. The City Council tabled the idea.

Another recommendation of the Comrie audit, hiring a private firm to reduce the backlog of workers’ compensation cases, also fell by the wayside. Although $200,000 was set aside and the City Council was told the work would begin by early 1991, the Workers’ Compensation Division let the program languish.

Jurutha Brown, former head of the division, and her supervisor, Ray Allen, both said they were waiting for an outside auditor to complete a top-to-bottom review of the workers’ compensation system before beginning attempts to reduce the case backlog.

Allen said he was not convinced that such a contract would be the most cost-beneficial and that he also lacked enough staff to draft a proposal to private firms.

Tuttle’s office was the next to make an effort with the Workers’ Compensation Division in a 1990 audit and a review two years later of the division’s computer system.

In a 1992 report, the firm of Balbin & Co. of Los Angeles detailed 14 weaknesses in the workers’ compensation system and recommended improvements including: improved documentation by analysts when billings and payments differed; creation of flow charts so employees could better understand processing of claims, and promulgation of rules that allowed only supervisors to increase the maximum amount that could be paid on an employee’s claim.

But, in a harshly worded response, the Personnel Department said that about half the recommendations were superfluous and that existing procedures were sufficient. Other changes were being put in place, the memo promised, but it also accused the auditing firm of a “lack of a full understanding of the system itself and of the complexities of workers’ compensation in general.”

Jim Armstrong, auditing director for the controller’s office, said in an interview this week that Brown obstructed that audit by failing to cooperate with the firm. “It would be kind if I used the word uncooperative to describe her,” Armstrong said.

Brown said it was the firm’s chief auditor who caused conflict by refusing “to understand how our system worked and how the city worked.” She said that, inexplicably, recommendations were made for improvements that were already in place.

By the time the Workers’ Compensation Division made its final response to the audit, Stanley Gronos had replaced Brown. (Brown had been moved to another post, as part of a routine rotation within the Personnel Department.) The workers’ compensation management agreed to at least study many of the auditor’s proposals, to decide whether they could be implemented.

Controller’s office auditors said that they had hoped for more than the lukewarm response, but that they have limited staffing to enforce audits and were forced to move to other matters. “We are somewhat reliant on management’s representations they are going to take action and make changes,” Armstrong said.

The most anticipated review of the department, though, was the study by the Newport Beach-based firm of Warren, McVeigh. The report was conceived in 1989 as the comprehensive review that would draw a new course for administering injured workers’ claims.

When a first draft of the report was ready in March, 1992, it provided a sharp rebuke of the entire Workers’ Compensation Division, calling its performance “well below the industry standard.”

The firm also found that city analysts were hopeless about making improvements. Employees shifted blame to others, and few took responsibility to complete a task, the report said.

But the observations and nearly 50 recommended reforms were not disseminated for 21 months to the commission that oversees the Personnel Department.

A source familiar with the report said that division managers Brown and Gronos failed to respond to the audit, leaving it in a draft form that could not be released to the commission and the public. “These things don’t have to be released until they are finalized,” said the source. “Would you want that report released?”

Brown and Gronos denied that they tried to hold up the report. Their supervisor, Allen, said the report languished in part because of the shift in command of the worker’s compensation section from Brown to Gronos. He conceded that the completion of the report “took way too long” and “shouldn’t have happened.”

When it was released in December, it became part of a blueprint for the first substantive changes in the Workers’ Compensation Division.

Faye Washington became head of the Personnel Department in the following months and began to institute many of the recommended changes.

A risk manager is expected to be hired within the next few weeks to revamp the entire system for paying injured employees and their doctors. A proposal is expected to go to the City Council by the end of the month to hire a firm to reduce the massive case backlog. And the council will also soon be asked to hire a private firm to manage some new cases and to test Mayor Richard Riordan’s theory that an outside contractor can do the job more efficiently.

“Most important, there is an acknowledgment that the system is broke and we do need to fix it,” Washington said.

The Warren, McVeigh report also supported the Workers’ Compensation Division management in calling for a massive increase in staffing, to a total of 40 analysts from 19.

Similar requests have been sent to the mayor and City Council repeatedly since 1989, but most have been rebuffed because of the city’s tight finances.

Councilman Zev Yaroslavsky, chairman of the council’s Budget and Finance Committee, said the managers of the workers’ compensation system never properly emphasized the dire need for more analysts. “Department general managers know that when you urgently need a hiring freeze exemption, that you should call the mayor, the head of the Budget and Finance Committee or the head of the Personnel Committee,” Yaroslavsky said. “No such call was made.”