Performance audit, Industrial Commission of Arizona

              PERFORMANCE AUDIT
." INDUSTRIAL COMMISSION
OF ARIZONA
Report to the Arizona Legislature
By the Auditor General
June 1995
Report # 95- I
L
DOUGLAS R. NORTON, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
DEPYTI AUDlTOll GENERAL
June 7, 1995
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Ms. Gay Conrad Kruglick, Chairman
Industrial Commission of Arizona
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Industrial Commission of Arizona. This report is in response to a May 5, 1993,
resolution of the Joint Legislative Audit Committee.
We found the Industrial Commission of Arizona ( ICA) to be generally well- managed
and adequately performing its responsibilities. However, we also found ICA can
strengthen its workplace safety and health enforcement by focusing its efforts on those
employers with the most hazardous worksites and by more appropriately penalizing
violators. In addition, Arizona can increase its emphasis on accident prevention by
requiring accident prevention programs for hazardous industries. These programs
have been found nationally to increase safety and lessen costs to business. Finally,
ICA can improve its timeliness in resolving protested claims, and can improve its
enforcement efforts against uninsured businesses.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on June 8.
Sincerely,
DO^ R. Norton
Auditor General
2 9 1 0 NORTH 44Tn STREET . SUITE 4 1 0 . PHOENIX, ARIZONA 8 5 0 1 8 ( 602) 553- 0333 FAX ( 602) 5 5 3 - 0 0 5 1
SUMMARY
The Office of the Auditor General has conducted a performance audit and Sunset review
of the Industrial Commission of Arizona pursuant to a May 5,1993, resolution of the Joint
Legislative Audit Committee. The audit was conducted under the authority vested in the
Auditor General by Arizona Revised Statutes ( A. R. S.) 5541- 2951 through 41- 2957.
The Industrial Commission of Arizona ( ICA) was established in 1925 to administer and
regulate workers' compensation, ensure workplace safety, license employment agencies,
and generally administer and enforce all laws for the protection of employee life, health,
safety, and welfare not specifically delegated to others. The agency is overseen by a five-member
commission responsible for promulgating rules and regulations, commuting
workers' compensation awards to a lump sum, licensing self- insured employers for work-ers'
compensation, and hiring the ICA Director. In fiscal year 1993- 94, ICA had 290 em-ployees,
and expended $ 13.6 million for agency operations and $ 18.6 million in non-appropriated
monies for expenses of injured employees.
We found ICA to be generally well- managed and adequately performing its responsibili-ties.
Our audit proposes consideration of legislation requiring employer- operated acci-dent
prevention programs and provides recommendations for improvement in three ICA
program areas.
ICA Can Strengthen
Workplace Safety and Health Enforcement
( See pages 5 through 14)
The Commission can improve its enforcement of workplace safety and health require-ments.
Since ICA can inspect only a small percentage of Arizona's approximately 97,000
employers each year, it is important that they focus their efforts on those with the most
hazardous worksites. However, we found that ICA's current selection methods do not
adequately target its limited inspection resources to those worksites most likely to have
serious safety and health problems. The Commission could better target inspections if it
incorporated employer- specific violation and injury data into its inspection selection pro-cess.
Information concerning employers' previous violation history and injury rates has
been found by the U. S. General Accounting Office ( GAO) and others to be a good indica-tor
of problem worksites.
In addition, even when inspections occur and violations are found, ICA does not ad-equately
penalize violators. Although penalties are designed to discourage employers
from violating occupational safety and health laws, our review of ICA inspection and
penalty data showed that penalties are often low. In calendar year 1993, ICA's average
cited penalties for serious safety and health violations were $ 784 and $ 775, respectively.
These penalties were on average more than $ 300 under the penalties cited by the federal
Occupational Safety and Health Administration ( OSHA) and the other states we reviewed.
Although average penalty amounts increased during our audit in 1994, ICA's penalties
for serious safety violations continued to lag behind federal OSHA and other states in
OSHA Region IX ( California, Nevada, and Hawaii). In addition, we found that the major-ity
of ICA's penalties are subsequently reduced during informal conferences with em-ployers.
Greater Emphasis on
Accident Prevention Needed
( See pages 15 through 18)
Although ICA can maximize the deterrent effect of its enforcement efforts by better tar-geting
inspections and issuing stiffer penalties, employers need to be given more respon-sibility
for worker safety and health. With a ratio of 1 inspector to approximately 4,200
employers, ICA cannot directly regulate all Arizona worksites. Arizona should require
employers to accept more of their responsibility to identify and correct workplace haz-ards.
This could be accomplished by adopting legislation requiring employers to estab-lish
accident prevention programs, as is currently required by at least 11 other states.
According to a recent study commissioned by the federal Occupational Safety and Health
Administration, these programs are effective both in terms of reducing employee injuries
and associated employer costs. The study indicates that for every dollar spent on accident
prevention programs, employers would save an estimated $ 3.50 to $ 5. ICA has existing
resources that could be used to provide consultation and training assistance to employers
in developing such programs.
ICA Can Improve Its
Workers' Compensation Adjudication
System ( See pages 19 through 24)
The Commission's growing caseload limits its ability to resolve protests involving work-ers'
compensation claims in a timely fashion. Our review of 100 protested claims revealed
that it took ICA a median time of 126 days to hear cases after protests were scheduled for
hearing. However, prior to July 26,1993, the informal policy was to hear cases 60 days
after hearings were scheduled and after that date a 90- day standard was in effect. Delays
in resolving protested claims appear to be due, at least in part, to the growing number of
protests. The number of protests referred to ICA's Administrative Law Judge ( ALJ) Divi-sion
increased from 8,406 in fiscal year 1991- 92 to 10,301 in fiscal year 1993- 94, and is
expected to continue rising. ICA could reduce the number of formal hearings by using in-house
prehearing settlement conferences or conciliation processes to encourage parties to
settle cases prior to hearing.
Resolution of workers' compensation claim disputes is also delayed by the need to hold
subsequent hearings, most often to obtain medical testimony. Our review of protested
claim case files showed that 57 percent of the protests heard by the ALJ Division required
at least one subsequent hearing. These subsequent hearings extend the process a median
of 54 days, and additional hearings extend it even further. ICA could reduce the number
of cases requiring further hearings, and reduce delays in those cases requiring subse-quent
hearings, by using telephone conferences, medical depositions, or standardized
medical reports to gather needed information.
ICA Needs To Improve Enforcement Efforts
Against Uninsured Businesses
( See pages 25 through 30)
ICA needs to improve its efforts to encourage employer compliance with mandatory
workers' compensation insurance requirements. Payments from the Special Fund, estab-lished
to pay the expenses of injured workers of uninsured employers, have grown 388
percent over the past 10 years and now approach $ 5 million per year. However, little
action is taken against the uninsured employers who are legally responsible for these
payments. ICA recovers less than 20 percent of the payments made from the Special Fund,
and does not consistently assess penalties against employers for not having insurance. In
1 case we reviewed, ICA 3 times waived penalties for an employer who had more than 20
no- insurance violations. In addition, we found there is a backlog in handling no- insur-ance
cases. ICA's Legal Division has approximately 450 cases awaiting initial action and
approximately 110 cases that should have been referred to outside collectors.
Greater emphasis on identifying uninsured employers is also needed. Our 1984 audit
recommended that the Commission take steps to identify uninsured employers before
workers' compensation claims are received. While ICA has taken some steps in response
to our recommendation, more could be done to proactively identify uninsured employ-ers.
The Commission could: 1) develop a better database to monitor compliance with
workers' compensation insurance requirements and 2) work with other agencies to assist
with compliance monitoring. For example, the Registrar of Contractors now requires proof
of workers' compensation insurance before issuing or renewing a contractor license.
Table of Contents
Page
Introduction and Background .................................................................. 1
Finding I: ICA Can Strengthen
Workplace Safety and
Health Enforcement ........................................................................ 5.
ICA Can Better Target Safety
and Health Inspections .......................................................................................... 5.. .
Low and Frequently Reduced
Penalties Limit the Impact of
ICA Enforcement Efforts ....................................................................................... 8.. .
Recommendations ................................................................................................ 1.. 4
Finding II: Greater Emphasis on
Accident Prevention Needed ......................................................... 15
Accident Prevention Programs
Needed to Reduce Injuries
and Costs ............................................................................................................. 1.. 5..
ICA Has Resources Available
to Help Implement
Prevention Programs .......................................................................................... 1.. 7..
Recommendation .................................................................................................... 1 8
Finding Ill: ICA Can Improve Its
Workers' Compensation
Adjudication System ...................................................................... 19
Disputed Claims Need
Timely Adjudication ............................................................................................. 1.. 9
Table of Contents
Page
Finding Ill: ( Con't)
ICA's Current Adjudication
Process Is Overburdened ....................................................................................... 2. 0
An Alternative Dispute Resolution
Program Could Reduce the Number
of Cases Requiring Formal Hearings ..................................................................... 2 1
Changes Can Also Benefit Cases
That Proceed Through the
Hearing Process ..................................................................................................... 2.. 2
Recommendations ..............................................................................................-. 2.. 4.
Finding IV: ICA Needs To Improve
Enforcement Efforts Against
Uninsured Businesses .................................................................. 25
No- Insurance Claims Have
Caused Significant Increases
In Special Fund Payments ................................................................................... 2.. 5.
Enforcement Appears Weak and
Is Impacted by Backlog of Cases ............................................................................ 2 7
More Can Be Done to
Identify Uninsured Employers
Before Injuries Occur ............................................................................................ 2.. 8.
Recommendations ............................................................................................... 3.0.. .
Sunset Factors ...................................................................................... 31
Agency Response
Table 1
Table 2
Figure 1
Tables
Page
Average Cited Serious Penalties
for Arizona, Federal OSHA, Other States with
Safety Jurisdiction, and Region IX States
( Calendar Years 1993 and 1994) ..................................................... 1. 1
Administrative Law Judge Division
Historic and Projected Workers'
Compensation Caseloads ................................................................ 2 1
Figure
Annual Disbursements and Repayments of
No- Insurance Claims 1979 through 1993 ....................................... 26
vii
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit and Sunset review
of the Industrial Commission of Arizona ( ICA), pursuant to a May 5,1993, resolution of
the Joint Legislative Audit Committee. This audit was conducted under the authority
vested in the Auditor General by A. R. S. 5541- 2951 through 41- 2957.
Originally created in 1925, the Industrial Commission was established to administer and
regulate workers' compensation, ensure safety in the workplace, license employment
agencies, and generally administer and enforce all laws for the protection of life, health,
safety, and welfare of employees, where such duty is not specifically delegated to others.
While the purpose of the agency has remained unchanged, the Industrial Commission
was substantially reorganized in 1968. The original Commission, which functioned as a
state- owned insurance company with authority to regulate all other insurers providing
workers' compensation coverage in the State, was restructured when legislation created a
separate agency, the State Compensation Fund, to provide workers' compensation insur-ance.
In addition, the Arizona State Department of Insurance assumed the duty of licens-ing
workers' compensation insurance carriers.
Importance of ICA
ICA oversees a number of programs that help regulate and protect Arizona's workers.
Some examples of important responsibilities include the following:
Workplace safety - One of the ICA's functions is to regulate workplace safety. ICA's
Arizona Division of Occupational Safety and Health ( ADOSH) administers Arizona's
occupational and safety laws to ensure workplace safety. As of November 1993, Arizona
had approximately 97,000 employers and 1.6 million employees who were under ICA's
regulatory authority.
In calendar year 1992, the most recent year for which data were available, there were 8.6
occupational injuries and illnesses resulting in 62.5 lost workdays reported per 100 full-time
workers. The construction industry represents the highest injury category with 16
occupational injuries and illnesses per 100 full- time workers in calendar year 1992.
Workers' compensation - Statutes require all workers' compensation claims to be filed
with ICA. In addition, ICA adjudicates cases regarding disputed claims. In fiscal year
1993- 94, ICA received 180,050 claims and forwarded 10,301 disputed claim cases to be
adjudicated by the Administrative Law Judge ( ALn Division. As part of our review, we
examined cases where benefits were decided without the need of adjudication and found
it took an average of 16 days to process these undisputed claims, within the mandated 21
days.
Organization
and Personnel
The agency is overseen by a five- member commission appointed by the Governor. The
Commission is responsible for promulgating rules and regulations, approving self- insur-ers
for workers' compensation, determining whether to commute individual workers'
compensation benefits to a lump sum settlement, and hiring the ICA Director. Under
direction of the Commission, the Director administers the various agency activities.
ICA is organized into seven divisions and a Director's office to carry out its statutory
functions, as shown on page 3.
Budget
ICA receives no funding from the State General Fund. The Commission utilizes two ma-jor
funds: the Administrative Fund and the Special Fund. These funds are supported by
a surcharge on workers' compensation insurance premiums paid by Arizona employers.
Tax rates vary depending on financial needs. The Administrative Fund supports most
agency operations. The tax rate for this fund, which can range from 0 to 3 percent of
premiums, is currently set at 1.25 percent. The Administrative Fund budget is appropri-ated
by the Legislature. For fiscal year 1993- 94 ICA expended $ 13,622,274 from the Ad-ministrative
Fund, federal, and other funds.
The Special Fund is used to provide benefits to injured workers whose employers did not
obtain workers' compensation insurance. The Special Fund budget is not appropriated
by the Legislature. In fiscal year 1993- 94, Special Fund Expenditures totaled $ 18.6 mil-lion.
The Special Fund surcharge, which can vary from 0 to 1.5 percent of premiums, is
currently 0 percent. ICA uses an investment board to advise the Commission on sur-charge
rates. The Commission then annually sets the surcharge levels for both funds.
Based on actuarial analyses and a relatively strong investment performance, the Commis-sion
determined that a surcharge was not needed for the Special Fund in 1995. The Spe-cial
Fund's total assets are valued at approximately $ 200 million.
Statutes mandate that fines and penalties collected through the OSHA program be depos-ited
in the State General Fund. In fiscal year 1993, over $ 1 million was remitted.
Audit Scope
Our review found that ICA is generally well- managed and sufficiently performing its
duties. Our findings and recommendations address four areas.
The need to improve targeting and enforcement of businesses violating workplace safety
and health regulations.
H The need to require employer- operated accident prevention programs.
H The need to more quickly resolve disputed workers' compensation cases.
H The need to improve enforcement of mandatory workers' compensation insurance re-quirements.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Commission, Director, and
staff of the Industrial Commission of Arizona for their cooperation and assistance through-out
the audit.
FINDING I
ICA CAN STRENGTHEN
WORKPLACE SAFETY AND
HEALTH ENFORCEMENT
The Industrial Commission of Arizona ( ICA) can improve its enforcement of worker safety
and health requirements. ICA inspections identify fewer employers with serious viola-tions
than programs in several other states, suggesting that it could more effectively tar-get
its inspections on those employers most likely to have workplace safety and health
violations. The Commission can also increase the deterrent effect of the penalties it im-poses
for violations. ICA's average penalties for serious safety and health violations in
1993 and 1994 were generally lower ( sometimes several hundred dollars lower) than those
assessed by the federal government and other states we reviewed. In addition, the major-ity
of ICA's penalties are subsequently reduced during informal conferences with the
employers.
ICA's Arizona Division of Occupational Safety and Health ( ADOSH) has primary re-sponsibility
for the enforcement of worker safety and health statutes in the State. The
federal Occupational Safety and Health Administration ( OSHA) delegates this responsi-bility
to states that establish laws similar to theirs. ADOSH has 31 enforcement staff, most
of whom conduct safety and health inspections of Arizona businesses and public entities.
Employers are required to comply with various health and safety standards. If found out
of compliance, they may be subject to enforcement action that typically involves a pen-alty.
In calendar year 1993, ADOSH conducted 1,952 inspections, found 2,931 minor and
833 major violations, and issued penalties totaling $ 827,048.
ICA Can Better Target
Safety and Health Inspections
The Commission can improve its targeting of compliance inspections. Since ICA can in-spect
only a small percentage of Arizona employers each year, it is critical that limited
inspection resources be focused on those employers most likely to have problems that
could result in employee injuries and illnesses. In addition, ICA may be able to increase
the number of inspections performed by making greater use of partial inspections.
Targeting is key to the effectiveness of inspections - ICA cannot reasonably inspect all
employers in Arizona and it does not need to. With an effective targeting strategy, the
Commission can focus its inspection efforts on those employers who are likely to have
serious workplace safety and health problems. In this way, ICA can have a greater impact
on eliminating workplace hazards.
ICA has 23 inspectors to enforce safety and health standards for more than 97,000 em-ployers
with approximately 1.6 million workers. This equates to 1 compliance officer for
over 4,200 employers in Arizona. As a result, most employers are rarely inspected, and
even employers in high- hazard industries are inspected infrequently. In calendar year
1993, ICA staff inspected approximately 1,950 ( 2 percent) of all employers. ICA inspec-tors
annually perform more inspections per inspector than most other states. Further-more,
although ICA focuses its efforts on firms in the high- hazard manufacturing and
construction industries ( 77 percent of all inspections), only 8.2 percent of manufacturing
employers and 11.1 percent of construction employers were inspected in 1993.
Employers with the highest risk of injuries and illnesses are not adequately targeted -
ICA's current inspection selection methods do not ensure that worksites with the greatest
potential safety and health problems are inspected. ICA focuses its inspection efforts on
the most hazardous industries. However, because of the large number of businesses within
those industries and ICAfs limited manpower, ICA needs to direct its efforts to those
businesses within the hazardous industries that have a poor track record for safety. Be-cause
ICA only targets inspections on hazardous industries instead of problem businesses
within those industries, serious violations are uncovered in only 1 out of every 4 inspec-tions,
and no violations are identified in more than 40 percent of all inspections performed.
In contrast, several other states we contacted identify safety and health problems more
frequently in the inspections they perform. For instance, Oregon's inspection staff identi-fied
serious, willful, or repeat violations in 43 percent of all inspections, and found no
violations in only 20 percent of the inspections performed. Washington and Minnesota
also found problems more frequently with serious, willful, and repeat violations identi-fied
in 43 percent and 42 percent of all inspections, respectively.
ICA could improve inspection targeting through use of employer- specific data - ICA's
past inspections have focused on the high- hazard construction and manufacturing indus-tries.
The Commission continues to devote much of its inspection resources to monitoring
workplace safety and health at construction sites. In addition, in October 1992, ICA began
targeting employers with 50 or more workers' compensation claims for inspection. While
ICA's emphasis on construction inspections appears appropriate, and focusing on em-ployers
with numerous workers' compensation claims has led to the identification of
more serious violations per inspection, more can be done to target problem employers.
We found several problems with ICA's current inspection targeting methods. For in-stance:
History of serious violations not considered - ICA does not consider the previous
violation history of each employer when determining who will receive manufacturing
and construction inspections. There may be wide disparity in the violation history of
employers, even in the same industry. For example, our review of records concerning
10 masonry contractors showed that the number of serious, willful, and repeat viola-
tions ranged from 0 to 18 during a 3- year period. The United States General Account-ing
Office ( GAO) found that an employer's previous violation history is a good indica-tor
of worksite conditions and should be considered in targeting inspections.
Data on injury rates not utilized - ICA's claim inspections have focused on employ-ers
with 50 or more workers' compensation claims in a year. This approach tends to
focus inspection efforts on employers with a large number of employees rather than
those employers ( regardless of how many employees) with the highest injury rates.
Furthermore, ICA does not consider information concerning the seriousness, types,
and causes of injuries at each worksite when targeting claim inspections. Incorporating
this type of data into the selection process would enable ICA to better target inspec-tions
on those with the most frequent and severe injuries. A recent study commissioned
by federal OSHA found that consideration of worksite- specific injury data could en-hance
inspection targeting effectiveness. Similarly, a Michigan disability prevention
study reported that the past injury experience at a worksite was the most useful predic-tor
of current injuries.
Other states have utilized employer- specific data to increase the effectiveness of inspec-tion
targeting efforts. For instance, Oregon targets employers with claims rates that ex-ceed
the state average. Their priority inspections include those with the most workers'
compensation claims and previous serious violations. Similarly, Washington targets em-ployers
based on a variety of data that include: claims history ( including seriousness,
type, and cause), previous violations, and industry. Minnesota develops inspection tar-geting
lists using individual worksite data, supplementing them with information from
OSHA's list of hazardous industries. As mentioned previously, each of these states iden-tify
serious, willful, and repeat violations at a much hgher rate than Arizona. Officials
from these states told us that use of employer- specific data has enabled them to better
target problem employers.
Before ICA can incorporate employer- specific data into its inspection selection process, it
must improve its recordkeeping and data management. For instance, ICA cannot easily
generate information concerning employers' violation histories because it does not main-tain
a unique identification number for each employer. Additionally, ICA does not rou-tinely
analyze or report data regarding the seriousness, causes, and types of injuries re-ported
in workers' compensation claims, which would enable the commission to pre-cisely
target hazards causing injuries at particular worksites. Improved data manage-ment
and recordkeeping in these areas would provide the information needed to target
employers for inspection based on their previous violation history and workers' compen-sation
claim experience.
Greater use of partial inspections wolild allow stafS to perform Inore inspections - In
addition to better targeting inspections, ICA may be able to expand the number of inspec-tions
performed by making increased use of partial inspections. These inspections would
focus only on specific safety and health problems identified through a review of pertinent
records. For instance, instead of conducting a comprehensive review of hundreds of safety
and health requirements, inspectors could limit their review to problems that led to pre-vious
violations or injuries, as well as problems found among similar employers. For
example, construction inspections could be focused on the four groups of hazards that
cause the most construction fatalities and serious injuries.
ICA seldom performs partial inspections as part of its routine monitoring of compliance
with workplace safety and health standards. According to agency records, in the 3- year
period ended March 31,1994, ICA conducted 216 partial inspections and 3,571 compre-hensive
inspections using their inspection targeting approach.
Focused partial inspections take less time to perform. According to an ADOSH supervi-sor,
only a half day or less is needed for partial inspections, whereas comprehensive in-spections
require a full day or more. As a result, increased use of partial inspections would
enable the Commission to inspect more employers with its existing resources. For ex-ample,
if ICA staff had utilized partial inspections rather than comprehensive inspections
in a third of the programmed inspections done in 1993, they could have used the time
saved to conduct nearly 300 additional partial inspections.
Federal OSHA established a policy in 1994 requiring use of focused partial inspections to
increase the number of construction sites inspected. These inspections are to focus on the
four groups of hazards discussed above. A field test of the policy, conducted by OSHA
staff in New York, found that focused partial inspections took approximately a third as
long as comprehensive inspections, and yet the quality of inspection was not diminished.
ICA adopted this policy in October 1994 and has conducted 26 of these focused partial
inspections as of April 30,1995.
Low and Frequently Reduced
Penalties Limit the Impact of
ICA Enforcement Efforts
Even when inspections are conducted and serious violations are found, ICA penalties
often do not send a strong message to violators. Although penalties can deter employers
from violating safety and health regulations and, as a result, minimize work- related inju-ries
and illnesses, the deterrent effect of ICA's enforcement activities is hampered by low
cited penalties and frequent reductions after citations are issued.
Penalties are an important tool in achieving a safe workplace - Penalties are intended
to deter employers from violating occupational safety and health standards designed to
reduce workplace hazards. Congressional intent is clear concerning penalties for viola-tions:
". . . companies which operate in a reckless manner should be dealt withFrmly and effectively
so that this cause of industrial injury can be eliminated." To enhance the deterrent effect of
penalties, the federal and state governments recently approved significant ( sevenfold)
increases in the maximum penalty amounts for workplace safety and health violations.
ADOSH assesses penalties for violations of safety and health regulations found during
workplace inspections. Four types of violations may be cited:
Nonserious
A violation not likely to cause death or serious physical harm
to an employee. Penalties are rarely assessed, but these viola-tions
carry a statutory maximum of $ 7,000. For example, a
nonserious violation could be for failure to have an ADOSH
poster displayed.
A violation likely to result in death or serious physical harm t
an employee. Penalty amounts range up to the statutory maxi
mum of $ 7,000. Failure to ensure that employees wear fall pro
tection equipment when working at heights is an example of
serious violation.
A violation previously found during an inspection of the em-ployer.
Penalty amounts range from $ 200 for a repeat nonserious
violation to the statutory maximum of $ 70,000. Many repeat
violations cited are for reoccurrences of nonserious violations.
I Willful
Any violation that the employer knew placed employees in
danger and did not correct. Penalty amounts range from a mini-mum
of $ 5,000 to the statutory maximum of $ 70,000. Willful
violations that result in permanent disability or death to an
employee carry an additional $ 25,000 penalty to be paid to sur-
I vivors. I
Factors used in calculating penalties - The method used by ICA to calculate penalties,
which was developed by the federal government and is also used by federal OSHA and
many other states, is designed to lead to penalty amounts that are often far below the
allowable maximum. This method, which is based on federal and state statutes, considers
four factors in determining penalty amounts. These factors include the seriousness of the
violation, the number of employees an employer has within Arizona, the good faith of an
employer, and an employer's previous inspection history.
To illustrate how these factors can lead to penalties that are substantially less than the
statutory maximum, consider the following example. In 1993, two demolition employees
were throwing lumber off of a roof at an Air Force base when one employee lost his
balance and fell 24 feet to the bottom of a concrete loading dock. The employee suffered a
broken ankle, elbow, and nose. ICA cited the employer for not requiring employees to
wear appropriate safety gear that would have prevented a fall. The employer admitted
that management decided against having employees wear the protective equipment in an
attempt to " speed up the job." ICA judged the employer to have committed a serious
violation which carried a penalty of $ 2,500. Under federal guidelines they reduced this
penalty further:
To adjust for size ( the employer had 15 employees), ICA took off 60 percent, or $ 1,500.
H To adjust for " good faith," ICA determined that the employer had developed a safety
program and took off 15 percent, or $ 375.
H To adjust for history, ICA took off 10 percent, or $ 250, because although previously
inspected, the employer had no violations.
This resulted in an 85 percent reduction from the $ 2,500 initial penalty. The employer was
issued a $ 375 citation for this violation of state law.
Issued penalties are low - Although ICA uses the same basic formula to calculate pen-alty
amounts, we found its average penalties for safety and health violations were gener-ally
lower than those issued by OSHA and other states. As shown in Table 1 ( see page ll),
Arizona's penalties for serious violations averaged $ 300 to $ 400 less than the average
penalties issued by OSHA in 1993. In addition, of the 21 states with workplace safety and
health jurisdiction, 13 states had higher average penalties for serious safety violations
than Arizona and 16 had Eugher penalties for health violations in 1993. Finally, Arizona
had considerably lower safety violation penalties in 1993 than other states ( California,
Hawaii, and Nevada) within OSHA Region IX. The average penalty issued by ICA for
serious violations increased during the course of our audit. Penalties for serious safety
and health violations issued by ICA in 1994 averaged $ 974 and $ 1,206 respectively. While
ICA's average penalty for serious health violations was comparable to federal OSHA and
other states in 1994, their average penalty for serious safety violations continued to lag
behind OSHA and other Region IX states.
Table 1
Average Cited Serious Penalties
for Arizona, Federal OSHA, Other States with
Safety Jurisdiction, and Region IX States
Calendar Years 1993 and 1994
Other States
Violation Federal with Safety Other Region IX States
Type Year Arizona OSHA Jurisdiction California Hawaii Nevada
Safety 1993 $ 784 $ 1,092 $ 875 $ 1,643 $ 1,655 $ 1,625
1994 974 1,136 858 1,605 1,139 2,190
Health 1993 775 1,151 1,018 1,014 894 1,512
1994 1,206 1,229 1,030 1,258 900 1,969
Source: Federal OSHA, Office of State Programs, for Calendar Years 1993 and 1994.
Arizona's lower average penalty amounts may be due to a variety of factors. Penalties
may be lower due to the severity level of serious violations as determined by ICA. As part
of the penalty formula, ICA must determine and assign one of six levels of severity for
serious violations. Based on that determination, the penalty amount varies from $ 1,500 to
$ 5,000. The case described on page 10 provides an example of how the severity level may
not be appropriately applied, resulting in a lower penalty. For that case, ICA applied a
" low severity" level with an associated initial penalty of $ 2,500; whereas, according to
their guidelines, a medium severity level should have been applied because the injured
employee was hospitalized. A medium severity level would have resulted in an initial
penalty of $ 3,500.
Differences in average penalty amounts may also be due to variations in inspection fre-quency,
the types of businesses the agency targets for inspection, or how the agencies
apply the penalty formula. For instance, if inspections occur infrequently and the busi-nesses
have not been inspected within three years, the formula allowance of a 10 percent
reduction for a favorable inspection history in the past three years would be applied more
often. In addition, although ICA uses the same formula reductions as federal OSHA and
other states, considerable discretion is given in their application. As a result, ICA may be
giving these reductions more frequently than other states.
Lower penalties do not, however, appear to be related to differences in the size of em-ployers.
ICA officials have suggested that the agency has lower average penalties because
the State's businesses tend to have fewer employees than those in other states and, there-fore,
qualify for larger formula discounts. However, the average number of employees
working for Arizona businesses is comparable to the averages for the nation and other
states in OSHA Region IX. l
Whatever the causes for its lower penalties, ICA could substantially strengthen their pen-alties
by using the statutory maximum of $ 7,000 as the basis for calculating penalties for
serious violations. Currently ICA has administratively set a maximum penalty of $ 5,000
as the starting point for calculating penalties for serious violations rather than using the
maximum allowed by statute of $ 7,000. Other states have adjusted the penalty structures
that they use. For example, North Carolina and Tennessee recently modified their formu-las
so that gravity- based penalties for serious violations with a high probability of caus-ing
serious injury or illness begin at the $ 7,000 maximum. If ICA made such a change it
would be consistent with the policy it recently adopted for willful violations. ICA re-cently
changed to using the statutory maximum of $ 70,000 for willful violations with a
high probability of causing severe injury or illness. Previously, ICA had administratively
set a maximum of $ 35,000 for these penalties.
Penalties often reduced after citations are issued - Even though cited penalties are gen-erally
small, ICA frequently reduces penalties after issuing citations. We found that 62
percent of all penalties issued by ICA for serious violations in calendar year 1993 were
later reduced, with the median reduction being 25 percent.
Employers found in violation of workplace safety and'health requirements have several
options once they receive a citation from ICA. They have 15 working days to: 1) accept the
citation, correct the violation, and pay the penalty; 2) hold an informal conference with an
ADOSH supervisor to discuss the violation and negotiate an informal settlement agree-ment,
or 3) formally contest the citation, resulting in a scheduled hearing before ICA's
Administrative Law Judge ( ALJ) Division or a formal settlement by ICA's Legal Division
prior to the hearing.
Those who challenge citations issued by ICA often receive an additional reduction in
their penalty amount. Our review of ICA penalty data for calendar year 1993 found that
62 percent of all penalties for serious violations were reduced. The median reduction in
these cases was 25 percent, or $ 219. The median penalty for serious violations of work-place
safety and health violations after reductions at informal and formal conferences
was $ 563.
1. According to the Department of Economic Security, in 1993, Arizona's average employer size was 16.95
employees. In Region IX, only Nevada had a larger average employer size. For example, Calrfornia's
average is 16.34, and Hawaii's is 15.66. According to the GAO, the average employer size in the United
States is 15.27.
Even in cases involving willful violations or violations resulting in employees' injury or
death, penalty amounts are frequently reduced after citations are issued. The following
examples illustrate the reductions that can occur in these situations.
In 1992, an employee of a swimming pool construction company was killed while work-ing
with a highly flammable chemical, acetone, in the deep end of a swimming pool.
The employee used a wet/ dry vacuum to remove some water that had accumulated
overnight. The vacuum created a spark that ignited the acetone, creating a large fireball
that burned over 70 percent of the employee's body and resulted in his death several
days later. The employer was initially cited for three violations - two willful and one
nonserious. The statutory maximum penalties for these violations would be $ 147,000.
However, the employer was assessed a penalty of only $ 71,000 because the Commis-sion
used the administrative maximums in effect at that time rather than using the
statutory maximum when calculating penalty amounts. These penalties were later re-duced
58 percent, to $ 29,500, by ICA's Legal Division in a formal settlement agreement
with the emp1oyer. l
In 1993, an employee was severely burned, requiring hospitalization, after being di-rected
to mix two chemicals that reacted violently and erupted from a steel drum. The
employer was cited for not providing the employee with training on the use of these
chemicals, and a $ 3,000 penalty was issued for this and another serious violation. The
penalty was later reduced 25 percent to $ 2,250 after an informal conference because the
employer promptly corrected the problem, even though correction is required in all
circumstances under existing state law.
Reductions occur so frequently because ICA has a standard practice of offering 25 percent
reductions to all employers who attend an informal conference and show a " positive
attitude" toward safety. ICA officials said that this practice encourages employers to settle
rather than contesting the penalty. In fact, only 95 cases were contested in fiscal year 1994,
and only 14 of these cases went to hearing. ICA's concern is that without the additional 25
percent reduction, the number of employers contesting the citation amount will increase,
thereby raising ICA's legal defense costs. However, because of the relatively low citation
amounts overall, it seems unlikely that employers would invest their time and money for
legal expenses to potentially save between $ 200 and $ 300 for a typical case.
1. ICA also assessed the employer a $ 25,000 penalty to be paid to the victim's survivors when willful
safety and health violations result in an employee's death. According to state law, the $ 25,000 is to be
assessed in addition to other penalties.
RECOMMENDATIONS
1. To improve the effectiveness of the inspection scheduling program, ICA should:
H Target employers with a history of serious violations
H Review employer claims experience and target employers with high claims rates
H Increase utilization of partial inspections
H Improve recordkeeping and data analysis by developing a common employer iden-tification
number, tracking individual employer performance, and analyzing claims
trends in employers and industries.
2. To strengthen the deterrent effect of penalties, ICA should:
Use the legal maximum as the starting penalty for violations with a high probabil-ity
of causing severe injury and death
H Discontinue the policy of giving a 25 percent reduction to employers at the infor-mal
conference stage.
FINDING II
GREATER EMPHASIS ON
ACCIDENT PREVENTION NEEDED
Although ICA can better deter workplace injuries and illnesses by strengthening its en-forcement
program, greater emphasis on accident prevention is needed. With a ratio of 1
inspector to approximately 4,200 employers, ICA cannot directly regulate all Arizona
worksites. ICA should require employers to accept more of their responsibility to identify
and correct their workplace hazards. This could be accomplished by requiring employers
to establish accident prevention programs. These programs have been found to reduce
employee injuries and associated employer costs in other states. ICA has existing resources
that could be used to provide consultation and training assistance to employers in devel-oping
such programs.
Accident Prevention Programs
Needed to Reduce Injuries and Costs
Workplace safety and health programs can benefit both the employee and the employer.
These programs are designed to prevent work- related injuries and illnesses through em-ployee
education and elimination of potential hazards. Studies have shown that accident
prevention programs in other states have reduced injuries and costs.
Accident prevention programs are designed to identify, prevent, and control hazards
that can lead to workplace injuries and illnesses. These programs often include a training
component to raise employee awareness of safety and health issues. In addition, pro-grams
typically emphasize self- inspection and other self- assessment activities to identify
potential hazards before injuries occur. Programs generally require top management in-volvement
as well as the participation of workers at all levels of an organization.
Effective accident prevention programs have been established in a number of states. Fed-eral
OSHA contracted with Meridian Research, Inc., for a study of the costs, benefits, and
effectiveness of workplace safety and health pr0grams. l The resulting report, referred to
as the Meridian Repmt, identified 11 states with responsibility for safety and health en-forcement
that have regulations or statutes requiring worker protection program^.^ These
1. A report of the study's findings, entitled Reviezu and Analysis of State- mandated and Other Worker Protec-tion
Programs - Final Report, was submitted to OSHA's Office of Program Evaluation on January 31,
1994.
2. These 11 states include Alaska, California, Hawaii, Mchigan, Minnesota, New Mexico, Nevada, North
Carolina, Oregon, Tennessee, and Washington.
programs have been found to be effective both in terms of reducing employee injuries
and associated costs.
Programs reduce rates of injury and illness - The Meridian Report indicates that com-panies
with accident prevention programs consistently have injury and illness rates
considerably below those of companies that have not actively implemented such pro-grams.
For example, the report indicates that a cable manufacturing company reduced
its accident rate from two times to one- half the industry average after implementing an
accident prevention program. The study also reports that a large Arizona copper mine
with an accident prevention program has a safety performance three times better than
the national average. In addition, a California Department of Insurance study found
that employers, even in low- risk industries or those dominated by small firms, who
have implemented workplace safety and health programs have reduced injuries and
illnesses by an average of 40 percent. Oregon has also experienced significant reduc-tions
in injury and illness rates since reforming workplace safety and health programs
in 1990. l
r Cost savings for employers and state regulators - According to the Meridian Report,
employers save an estimated $ 3.50 to $ 5 for every $ 1 spent on accident prevention
programs. These cost savings are due to reductions of injuries that resulted in lost work
time and higher workers' compensation premiums and related costs. Not included are
the secondary benefits of increased productivity, enhanced communication and mo-rale,
and improved employee- management relations. Meridian Research, Inc. estimated
program costs to be approximately $ 149 per employee per year. State officials reported
that accident prevention programs contribute to lower workers' compensation costs
because of reductions in work- related injuries and illnesses. Officials in states requir-ing
employer- operated workplace safety and health programs have also reported that
these programs have improved inspection efficiency and have led to more effective use
of limited state resources. In Oregon, workers' compensation insurance rates have de-clined
each year since accident prevention program requirements were reformed in
1990. Oregon has estimated its savings in workers' compensation premiums to be over
$ 200 million in 4 years.
The success of accident prevention programs has led to their endorsement by key organi-zations.
For instance, the National Conference of State Legislatures ( NCSL) recommends
that states consider legislation requiring employers to develop safety plans or programs
to encourage prevention of injuries and illnesses. In addition, the GAO has suggested
1. In addition to establishing accident prevention program requirements, Oregon also expanded the nurn-ber
of compliance and consultation officers in 1990.
requiring high- risk employers to develop safety and health programs. They recommended
that OSHA implement evaluation procedures to determine what groups of employers
should be required to have comprehensive safety and health programs.
Accident prevention programs could be required of all or a portion of employers. Regu-lations
in Alaska, California, Hawaii, Nevada, and Washington apply to all employers,
without exception. Other states limit coverage depending upon employer size, industry,
or workers' compensation claims experience. For instance, Oregon requires accident pre-vention
programs for: 1) employers with more than 10 employees, 2) employers with
fewer than 10 employees and with lost workday incidence rates in the top 10 percent of
their industry, and 3) employers with fewer than 10 employees and with workers' com-pensation
premium rates in the top 25 percent.
ICA Has Resources
Available to Help Implement
Prevention Programs
ICA's Consultation and Training Section could assist employers in establishing accident
prevention programs. Currently, few employers take advantage of the section's services.
Refocusing the section's tasks could improve its effectiveness in helping businesses main-tain
safe workplaces.
ICA offers consultation and training services to employers at no cost. The Commission
has allocated 11 FTEs to provide consultation and training services to employers. Em-ployers
contact ADOSH's consultation section and request that a consultant survey their
worksite for potential safety and health hazards. ICA agrees to inspect but not cite viola-tions
if found. ICA reports their findings and requires the timely abatement of all haz-ards.
Training programs developed by ICA staff are also available upon request to trade
associations and individual employers. Courses are available in a variety of subject areas
including forklift operation, excavation, roofing, and ergonomics.
Few employers utilize currently available consultation and training services. Although
Arizona has more than 97,000 employers, only 631 requested consultations in fiscal year
1994. In addition, although ICA sent a letter in May 1994 to the 221 employers with 50 or
more workers' compensation claims during the previous year recommending that they
obtain consultation or training assistance from the Commission, only 5 employers had
requested these services 75 days after the letter was issued.
If accident prevention programs are required, the Consultation and Training Section could
shift its focus to helping employers set up programs.
RECOMMENDATION
To increase employer involvement in workplace safety and health, ICA should de-velop,
for legislative consideration, a statutory change requiring employers in high-risk
industries and employers with high incidences of workplace injuries to create acci-dent
prevention programs.
FINDING Ill
ICA CAN IMPROVE
ITS WORKERS' COMPENSATION
ADJUDICATION SYSTEM
ICA can improve its workers' compensation dispute resolution process. The increasing
number of protested claims received by ICA hinders its ability to resolve contested cases
in a timely manner and delays benefit payments to injured workers. To reduce the num-ber
of cases that go through the formal hearing process, ICA should adopt an informal
dispute resolution program. In addition, for cases requiring formal hearings, delay can be
minimized by using alternative techniques for obtaining medical testimony.
The Workmens' Compensation Act, the Youth Employment Act, and the Occupational
Safety and Health Act require ICA to adjudicate all disputes of injured workers, employ-ers,
insurance carriers, and other interested parties. ICA has established an Administra-tive
Law Judge ( ALJ) Division, with assistance from the Claims Division, to perform this
function.' Workers' compensation claims are received by the Claims Division, which then
notifies the insurance carrier. The insurance carrier can either accept or reject the claim.
Any interested party can then request a hearing on the claim before an Administrative
Law Judge. A hearing request can be based on many issues including compensability,
claim reopening, continuing of benefits, or loss of earning capacity disputes.
Disputed Claims Need
Timely Adjudication
Timely processing of disputed claims is important to avoid undue hardship to injured
workers if, in fact, they are entitled to compensation. The following example illustrates
the delays that can occur:
On October 24, 1991, a construction worker fell and was injured while working on
stilts. He was provided compensation and medical treatment benefits until May 14,
1993, at which time they were terminated by the insurance carrier, with the conclusion
that there was no permanent disability. On June 10, 1993, the injured worker filed a
1. The ALJ Division employed 21 Administrative Law Judges and 33 additional staff and expended
$ 3,619,400 in fiscal year 1992- 93, representing the largest budgeted area at ICA. The Claims Division
funded 83 positions and expended $ 2,530,200 in fiscal year 1992- 93. Together, these divisions accounted
for 46.7 percent of ICA's total fiscal year 1992- 93 budget.
protest with ICA, claiming that medical treatment was still needed and that there was
a permanent injury. ICA initially scheduled a hearing for this matter on October 21,
1993,113 days after the notice of hearing was mailed and 53 days longer than ICA's
standard ( at the time) of 60 days. The hearing was reset for January 19,1994, to allow
combining this protest with one filed for the same worker on another injury. At the
January 19, 1994, hearing it was decided that further medical testimony was needed
and a follow- up hearing was scheduled for February 17,1994. That hearing was post-poned
because the doctor could not attend. Subsequent hearings to obtain medical
evidence were held on March 4, March 31, and April 4,1994. The ICA administrative
law judge who heard the case issued a final order on April 12, 1994, awarding further
medical treatment and ruling that a permanent partial disability did occur. Thus, the
injured worker's protest was substantiated and the insurance company was liable for
continued compensation and medical costs. However, during the 10- month timeframe
from the worker's protest of discontinued benefits until ICA restored them, the worker
did not receive any medical or compensation benefits.
ICA's Current Adjudication
Process Is Overburdened
An increase in the number of workers' compensation claims has negatively impacted the
agency's adjudication system. A case backlog has developed that can be attributed to an
increasing caseload, which is expected to grow. In addition, our review found it took
twice as long to hold the initial hearing than the department's goal stipulated at the time
of our review.
Cases referred to hearing are increasing - The number of protested claim cases referred
to the ALJ Division for hearing has grown over the past three years and further increases
are expected in the years ahead. As shown in Table 2 ( see page 21), the number of work-ers'
compensation cases referred to the ALJ Division rose from 8,406 cases in fiscal year
1991- 92 to 10,301 cases in fiscal year 1993- 94, an increase of 23 percent. This trend is ex-pected
to continue. By fiscal year 1996- 97, it is anticipated that the ALJ Division will
receive approximately 14,000 protested claims cases. Assuming no change in current staff
levels, the caseload per judge is expected to increase nearly 60 percent between fiscal
years 1991- 92 and 1996- 97.
Initial hearings are delayed - Formal hearings to resolve disputes have not been held in
a timely fashion. We examined 100 protested claims cases closed in calendar year 1993
and found it took a median time of 126 days from the time the protest was scheduled for
hearing until the hearing was actually held. ICA's informal policy until July 26,1993, was
to convene initial hearings 60 days after the case was scheduled for hearing by the ALJ
Division. After July 26,1993, ICA revised its policy to convene initial hearings in 90 days.
Table 2
Administrative Law Judge Division
Historic and Proiected Workers' Compensation case load^(^)
Cases Referred Number of Ave. No. of Cases
Fiscal Year to ALJ Division Judaes ( FTEs) Per Judge
1991- 1992 8,406
1992- 1993 9,538
1993- 1994 10,301
1994- 1995 ( b) 11,400
1995- 1996 ( b) 12,600
1996- 1997 ( b) 14,000
( a) Projections were calculated by using the average increase for the previous three years.
( b) Estimated.
Source: Auditor General Staff analysis of caseload and staffing information provided by ICA's ALJ Divi-sion.
An Alternative Dispute Resolution Program
Could Reduce the Number of Cases
Requiring Formal Hearings
ICA should consider modifying its existing adjudication process to include informal reso-lution
methods to resolve disputed cases. Methods such as prehearing settlement confer-ences
and conciliation could decrease the number of disputed cases that require a hear-ing,
thereby minimizing benefit payment delays to applicants.
Establishment of an alternative dispute resolution ( ADR) program could enable ICA to
better accommodate its growing caseload by limiting the number of cases that require a
formal hearing. In mid- 1993 the Industrial Commission strongly encouraged judges to
seek case resolution prior to hearings if possible. As a result, currently about 50 percent of
all cases referred to the ALJ Division are resolved by outside parties ( such as the claimant,
insurance carrier, or employer), before a hearing takes place. However, our review of
ADR systems found that ICA could further reduce the number of cases that require a
formal hearing. ICA's Chief ALJ concurs, estimating that at least 25 percent of the Division's
remaining caseload could be reduced through mandatory prehearing settlement confer-ences.
Instead of relying on outside party efforts to informally resolve a dispute, ALJ's could
assume a more active role by conducting prehearing settlement conferences similar to
those held by the Maricopa County Superior Court. These conferences are held approxi-mately
two weeks before going to formal hearing and involve the plaintiff, defendant,
judge, and applicable attorneys. A Superior Court judge estimated that prehearing settle-ment
conferences have allowed the Maricopa County Superior Court to successfully de-crease
its scheduled formal trial caseload by about 50 percent.
A prehearing settlement conference is not the only option available to ICA, however. Our
review of other state programs showed that ICA could implement a conciliation process
similar to Massachusetts'. Conciliation is an informal meeting between the injured party,
the insurer, and an in- house conciliator and takes place within 15 days of a claim's re-ceipt.
Its purpose is to reach a voluntary agreement between the injured party and the
insurer before the case is referred to the next step in the process. The Massachusetts Work-ers'
Compensation Advisory Council estimated that conciliation successfully resolves 46
percent of the disputed cases.
Regardless of the ADR method that ICA chooses, it should ensure that the method se-lected
will sufficiently reduce the number of cases that currently proceed to hearing. Hence,
to assure that the selected ADR method will be effective we recommend first implement-ing
it as a pilot program.
Changes Can Also Benefit Cases
That Proceed Through
the Hearing Process
For those cases that proceed further in the hearing process, ICA could reduce delays caused
by subsequent hearings if it utilized alternative methods for obtaining testimony. Cur-rently,
ICA uses subsequent hearings to obtain medical testimony, extending the hearing
process and delaying a judge from issuing a decision. By redesigning the way medical
testimony is obtained, ICA can reduce delays.
Subsequent hearings lengthen the process - Our analysis of 100 protested claims cases
showed 57 percent of these cases heard by the ALJ Division had at least one additional
hearing. These subsequent hearings, which typically are held to obtain doctors' testimony,
extended the process a median of 54 days for the initial subsequent hearing and even
longer for additional hearings.
The following example illustrates how subsequent hearings can prolong the process:
A case involving a roofing foreman took 269 days to resolve because multiple hearings
were needed to obtain medical testimony. The applicant suffered an injury to his right
knee, hip, and back when he fell through a roof. Due to continuing back problems, he
filed a petition to reopen his claim. The petition was denied and the applicant requested
a hearing on June 30, 1992. On October 20, 1992, an initial hearing was held and a
subsequent hearing was scheduled for January 27, 1993, to obtain additional medical
testimony from two doctors. Only one doctor appeared at this hearing, so a third hear-ing
was scheduled for February 24,1993, to obtain the second doctor's testimony. On
March 26,1993, after a lengthy hearing process, a decision was finally issued.
Subsequent hearings can be reduced - Interviews with officials from other states, Ari-zona
attorneys, and ICA's Administrative Law Judges indicated that other alternatives
for obtaining medical testimony are available that could lessen delays associated with
subsequent hearings. For example, telephone conferences could be a viable alternative to
live medical testimony. These conferences allow doctors to remain at their offices when
giving testimony instead of requiring them to appear in court. This option can shorten the
hearing process since telephone conferences can be scheduled sooner than live medical
testimony. State law, however, may not allow for mandatory telephone conferences. Ac-cording
to some legal experts, if either party or the judge wants to " see" the witness, they
have the right to do so. Telephone conferences could certainly be used, however, if both
parties stipulate their approval. For example, Nevada's regulations allow for telephone
conferences if the witnesses' qualifications are not challenged.
Other choices are available to the ALJ Division to reduce the need for live medical testi-mony.
An ICA review of other states showed that some states rely on medical depositions
and standardized medical reports. For example, Maine, Michigan, and Ohio use medical
depositions to obtain a doctor's testimony. Wisconsin and Tennessee use standardized
medical reports. Currently, ICA uses medical reports, but they are not uniform. The Na-tional
Conference of State Legislatures recommends requiring standardized reporting by
health care providers. Standardized reporting would allow ICA to ensure that doctors
provide all information typically needed to make protest decisions.
Whatever alternative ICA chooses, if properly used, would either reduce the number of
subsequent hearings held and/ or shorten the time it takes to schedule a subsequent hear-ing,
thereby shortening the hearing process.
RECOMMENDATIONS
1. ICA should pilot test an alternative dispute resolution program to reduce the number
of disputed cases that go to hearing.
2. ICA should adopt other methods, such as telephone conferences, medical depositions,
and standardized medical reports, to obtain medical testimony.
FINDING IV
ICA NEEDS TO IMPROVE ENFORCEMENT
EFFORTS AGAINST UNINSURED BUSINESSES
Current program efforts appear to do little to encourage compliance with the mandatory
workers' compensation insurance law. Monies paid out annually by ICA to cover the
costs of claims filed by injured employees of uninsured employers have grown 388 per-cent
since our 1984 audit. ICA's efforts to recover medical costs paid by the Special Fund
and to penalize uninsured employers have been weak and do little to encourage compli-ance
with insurance requirements. In addition, ICA lacks an adequate mechanism for
identifying uninsured employers before workers' compensation claims are received.
Arizona Revised Statutes ( A. R. S.) @ 23- 902 and 23- 961 require most employers to secure
workers' compensation for their employees by obtaining insurance from an authorized
carrier or by furnishing the Commission with satisfactory proof of financial ability to self-insure.
For injured employees of employers who fail to obtain insurance, the State has a
Special Fund, with current assets of approximately $ 200 million, that covers medical and
rehabilitative costs. Employers without insurance have an unfair advantage over those
who comply with the law because they are not paying workers' compensation insurance
premiums or the surcharge on those premiums that is used to support ICA operations
and the Special Fund. According to figures provided by the Arizona Department of In-surance,
businesses on average paid over $ 10,000 for workers' compensation insurance in
1993. Premiums are based on job risk for injury and total payroll. For example, a 5- person
clerical firm would pay approximately $ 500 annually, whereas a 5- person roofing con-tractor
could pay as much as $ 29,220 annually. Statutes allow ICA to pursue employers
without insurance to: 1) recover costs borne by the Special Fund and 2) assess penalties
for operating without insurance.
No- Insurance Claims Have Caused Significant
Increases In Special Fund Payments
Payments made from ICA's Special Fund for no- insurance claims have grown substan-tially
over the past 10 years, whle repayment of those claims by the non- insured busi-nesses
has remained low. Previously, we found that payments for no- insurance claims
grew from $ 448,000 in 1979 to $ 984,000 in 1983. Since that time, disbursements for no-insurance
claims have grown to nearly $ 5 million annually. As shown in Figure 1 ( see
page 26), ICA paid out approximately $ 4.8 million for no- insurance claims in 1993, a 388
percent increase over disbursements only 10 years earlier1.
1. This growth has occurred despite a reduction in the number of no- insurance claims accepted for pay-ment
over the past five years.
( This Page Intentionally Left Blank)
Figure 1
Annual Disbursements and
Repayments
of No- Insurance Claims
1979 throuah 1993
Annual Repayments
by uninsured businesses
Annual Disbursements
to injured workers whose
employers failed to obtain
workers' compensation in-surance
Source: Compiled from Special Fund disbursements and reimbursement information provided
by ICA's Legal Division.
However, the Commission continues to recover only a small fraction of the monies owed
to the Special Fund by employers responsible for no- insurance claims. As reported in our
1984 audit report, ICA recovered only 15.9 percent of the monies paid out for no- insur-ance
claims between 1979 and 1983. For the 5- year period ending in December 1993, ICA
recovered only $ 4,214,309 ( or 18.6 percent) of the $ 22,675,759 in total no- insurance claims
disbursed from the Special Fund. l
Enforcement Appears Weak and
Is Impacted by Backlog of Cases
Without strong enforcement of the no- insurance laws, employers have little incentive to
obtain workers' compensation insurance. Our review of ICA's enforcement efforts found
that ICA does not always utilize the enforcement tools allowed by statute. In addition, the
enforcement unit suffers from a large backlog of cases. ICA needs to analyze various
alternatives for addressing the backlog.
ICA's Legal Division investigates and enforces against uninsured businesses. The Divi-sion
utilizes one attorney, a legal secretary, and a part- time investigator to handle cases.
After processing and investigating, the Legal Division determines sanctions and penal-ties
that will be applied against no- insurance offender^.^ The Division first attempts to
collect monies owed using its own staff. However, if that is not successful, cases are then
referred to the Attorney General's collections unit. In fiscal year 1993- 94 the Division
received 1,144 referrals for collection, and 1,797 complaints concerning uninsured em-ployers.
Enforcement tools not consistently applied - Our review found that ICA does not con-sistently
utilize or apply the enforcement tools available against no- insurance violators.
Our review of a random selection of 30 cases from fiscal year 1992- 93 found ICA rarely
takes enforcement actions against violators. For example, in 9 of 30 cases, ICA's Special
1. According to ICA, some monies are not collected because businesses have declared bankruptcy. ICA
estimates that approximately $ 3.8 million was uncollectable due to bankruptcies between 1990 and 1993.
However, even with this accounted for, there was still over $ 10.2 million that was not collected during this
same time period.
2. ICA is authorized by A. R. S. 523- 907 to issue penalties to those violating workers' compensation insurance
requirements. Subsection C requires ICA to assess a penalty of 10 percent of the amount disbursed from
the Special Fund or $ 500, whichever is greater, to uninsured employers whose employees have received
workers' compensation benefits through the Special Fund. Subsections F and G of the statute authorize
the Commission to assess civil penalties of up to $ 500 against uninsured employers.
Fund Division never forwarded these cases to the Legal Division for enforcement. The
Special Fund Division previously had an unofficial policy of closing cases if the employer
paid the medical and other costs and subsequently obtained insurance. According to the
Special Fund monitor, the policy was revised in fiscal year 1992- 93 to refer all claims to
the Legal Division. We found, however, that some claims in fiscal year 1993- 94 were not
referred. Nonreferral of these claims to the Legal Division results in no penalty to em-ployers
for failure to carry required insurance.
ICA appears reluctant to act even when faced with repeated violations or broken prom-ises.
In one case, ICA waived penalties three times on an employer that had more than 20
no- insurance violations. That same employer had also obtained insurance two previous
times and had canceled the first policy once and let the second expire another time. An-other
case revealed that although an uninsured employer had agreed in February 1994 to
pay $ 305 monthly on a debt of $ 13,000, ICA had yet to receive a payment as of September
1994, and there was no indication of any follow- up action by ICA to collect.
Large case backlog impacts timely enforcement - The Legal Division has not been able
to process and investigate no- insurance cases in a timely manner. As of February 1995,
112 cases dating back to February 1994 that should be referred for outside collection have
yet to be processed. In addition, 454 referrals regarding employers with no insurance
dating as far back as June 1994 have yet to be processed and investigated. Further, an-other
568 cases are at various stages of the process. The backlog has not decreased since
the time we initially reviewed it in October 1994. ICA currently has a full- time clerk and
an attorney who devotes partial time toward no- insurance enforcement. To reduce the
backlog and improve timeliness, ICA needs to analyze whether its processes could be
made more efficient, whether staff from other ICA units could be utilized to reduce the
backlog, or whether ICA could contract out some of the work. According to ICA, one
additional staff was added in its recent legislative budget appropriation. Again, ICA will
need to monitor its backlog to determine if this additional staff is sufficient or if other
measures or staff would be needed.
More Can Be Done to
Identify Uninsured Employers
Before Injuries Occur
ICA can do more to identify uninsured employers before no- insurance claims are re-ceived.
Since our last audit of the agency, we found that ICA has had little success in
implementing programs to effectively identify uninsured employers. Specifically, our 1984
review of the agency recommended that the Commission proactively work to identify
uninsured employers. While the agency has taken some positive steps, these measures
have had limited success. For example:
ICA has been unsuccessful in developing an automated approach to identifying
noncompliers - In 1991, ICA attempted to identify uninsured employers by compar-ing
its employer database to yellow page listings through a software package. How-ever,
ICA stopped using the package one year later when it was discovered that em-ployer
names used in the software package were not compatible with names from the
ICA files.
Notification cards are not being used to identify uninsured employers - Statutes
require that a carrier notification card be sent to ICA each time an employer obtains
new coverage, cancels his or her policy, or fails to renew coverage. ICA abandoned
the use of these cards as a means of identifying uninsured employers after it was
determined that the agency lacked the necessary resources to investigate these refer-rals.
The carrier notification cards are still used to update ICA's existing database, and
these cards could still be used to identify uninsured employers.
Although ICA has attempted to improve the manner in which it identifies uninsured
employers, two additional strategies should be implemented to enhance uninsured em-ployer
identification.
Develop a compliance database using the federal tax identification number - With
more than 97,000 employers in the State, ICA's potentially most effective strategy for
identifying uninsured employers is the use of computer matching. ICA needs to de-velop
a database for such matching. A key component of such a database is establish-ing
a unique identifier for each employer. The federal taxpayer number is a unique
identifier and is already maintained by other federal and state agencies with whom
ICA might want to match computer files. If ICA has these numbers for the employers,
and if the carrier notification cards described above are modified to include them,
then ICA can routinely do computer matching to determine if the employers are main-taining
coverage.
Further, using these numbers, ICA could cross match its database with those of other
agencies to identify uninsured employers. For instance, ICA could compare its data-base
with the Arizona Department of Economic Security's ( DES) database of employ-ers
with unemployment insurance to identify potential noncompliers. DES officials are
authorized by A. R. S. 523- 722 to share employer information with public employees in
other state agencies, and have expressed a willingness to assist ICA both in the de-
velopment of a compliance database and the ongoing comparison of data to identify
uninsured employers. DES database contains such information as the federal tax iden-tification
numbers, business names, and business addresses.
The Arizona Department of Revenue ( DOR) also maintains automated data regarding
Arizona employers that could prove useful to ICA. However, A. R. S. 542- 108 currently
restricts DOR from sharing confidential tax information with non- taxing agencies.
The Department's General Counsel indicated that DOR would be willing to work
with ICA to eliminate these restrictions if suitable data could not be obtained from
other sources.
1 Coordinate with other agencies to identify uninsured employers - ICA should work
with other governmental entities to secure the names of uninsured employers. For
instance, legislation recently passed requiring the Registrar of Contractors to obtain
proof of workers' compensation insurance before issuing or renewing a license. ICA
could develop agreements with other governmental agencies to check employer com-pliance
with workers' compensation insurance requirements and notify the Commis-sion
when noncompliers are found.
RECOMMENDATIONS
1. ICA should consistently apply penalties against employers who fail to obtain work-ers'
compensation insurance.
2. To address the backlog of no- insurance enforcement cases, ICA should examine pro-cesses
for potential improvement, consider reallocating resources to bolster compli-ance
and collection efforts, or determine whether some functions could be handled
using outside contractors.
3. ICA should develop programs to monitor compliance with mandatory workers' com-pensation
insurance requirements.
a. ICA should develop a new database, or modify its existing employer database, to
help it identify uninsured employers. The database should include a unique iden-tifier
for each employer, such as the employer federal tax identification number.
b. ICA should modify existing carrier notification cards to capture employer federal
taxpayer numbers.
c. The agency should consider matching ICA data against employer information main-tained
by the Department of Economic Security.
4. ICA should investigate the possibility of working with other governmental entities
to identify existing uninsured employers.
SUNSET FACTORS
In accordance with A. R. S. 5 41- 2954, the Legislature should consider the following 12
factors in determining whether the Industrial Commission of Arizona should be contin-ued
or terminated.
1. Objective and purpose in establishing the Commission.
Originally created in 1925, the Industrial Commission was established to adminis-ter
and regulate workers' compensation, ensure safety in the workplace, license
employment agencies, and generally administer and enforce all laws for the pro-tection
of life, health, safety, and welfare of employees, where such duty is not
specifically delegated to others.
While the purpose of the agency has remained unchanged, the Industrial Commis-sion
was substantially reorganized in 1968. The original Commission, which func-tioned
as a state- owned insurance company with authority to regulate all other
insurers providing workers' compensation coverage in the State, was restructured
when legislation created a separate agency, the State Compensation Fund. In addi-tion,
the Arizona State Department of Insurance assumed the duty of licensing
workers' compensation insurance carriers.
2. The effectiveness with which the Commission has met its objectives and
purpose and the efficiency with which the Commission has operated.
ICA appears to be generally well- managed and sufficiently carrying out its duties.
ICA, however, can improve its effectiveness and efficiency in fulfilling its statu-tory
responsibility to protect public health, safety, and welfare. Our review found
that ICA's enforcement of occupational safety and health requirements could be
improved by targeting those employers most likely to have violations and by dis-continuing
the practice of providing an additional 25 percent reduction in penal-ties
for violations ( see Finding I, pages 5 through 14). In addition, while the agency
is timely in processing undisputed workers' compensation claims, we found that
the Commission should implement an informal dispute resolution program to re-duce
the number of disputed cases that require a formal hearing and shorten the
timeframe of cases requiring a hearing ( see Finding 111, pages 19 through 24). Fi-nally,
ICA could improve its efforts to enforce employer compliance with manda-tory
workers' compensation insurance requirements ( see Finding IV, pages 25
through 30).
3. The extent to which the Commission has operated within the public interest.
ICA has operated within the public interest through its administration of programs
to protect employee health, safety, and welfare. For instance, the Commission op-erates
an occupational safety and health program that seeks to minimize injuries
and illnesses through inspection, enforcement, and educational efforts. In addi-tion,
ICA oversees Arizona's workers compensation system. In fiscal year 1993- 94,
ICA received over 180,000 workers' compensation claims and was asked to adjudi-cate
more than 10,000 protested claims. The Commission also administers the Spe-cial
Fund, which is used to provide benefits to injured workers whose employers
fail to carry required workers' compensation insurance. Finally, the agency's op-erations
have benefited workers, employers, and the general public through vari-ous
activities including its elevator inspection program, wage dispute resolution
program, and employment agency licensing program.
However, the Commission could do more to operate in the public interest by tar-geting
for inspection those workplaces most likely to have serious safety and health
problems and placing greater emphasis on accident prevention. The agency could
also do more to adequately assess penalties that are designed to discourage em-ployers
from violating laws designed to safeguard the public. Furthermore, the
agency could implement an alternative dispute resolution program to expedite its
workers' compensation adjudication process, thereby minimizing benefit payment
delays to injured workers.
4. The extent to which rules adopted by the Commission are consistent with
the legislative mandate.
Based on our limited review and according to the agency's Chief Counsel, all rules
promulgated are consistent with each division's legislative mandate.
5. The extent to which the Commission has encouraged input from the public
before adopting its rules and the extent to which it has informed the public
as to its actions and their expected impact on the public.
The Industrial Commission is proactive in seeking input from the public before
promulgating its rules. For example, for rules pertaining to hearing procedures
and bad faith/ unfair claims processing, the Commission appointed a committee
made up, in part, of representatives of outside interested parties who actually helped
develop the proposed rules. In other cases, proposed rules have been submitted to
the public for further comment during public hearing. The Commission holds regu-lar
meetings to discuss such administrative matters. Our review found these meet-ings
are appropriately posted in compliance with the open meeting law.
The Industrial Commission uses several avenues to keep the public informed of its
actions. According to the agency's Director, the Arizona Division of Occupational
Safety and Health ( ADOSH) sends out a newsletter to interested parties and orga-nizations
while its Claims Division conducts an annual seminar/ workshop for in-surance
carriers, self- insured employers, workers' compensation attorneys, and
others interested in the field to inform the industry of major program changes.
Additionally, mini- seminars are put on by the Administration, ADOSH, and Claims
Divisions.
6. The extent to which the Commission has been able to investigate and re-solve
complaints that are within its jurisdiction.
A. R. S. § 23- 107( B) provides that the Commission has the authority to investigate
complaints made by any person involving workplace safety. Complaints, regard-less
of type, are investigated and resolved by various divisions within the agency.
For example, workers' compensation complaints are investigated by the Claims
Division; occupational safety and health- related complaints by ADOSH; and is-sues
involving child labor laws, employee paid fee employment agencies, career
counselors, and wage claim law by the agency's Labor Division. Furthermore, the
Commission investigates and resolves complaints that relate to licensing of self-insured
employers, and the Legal Division if they relate to uninsured employers.
Our review of the agency's complaint resolution processes found that ICA's Legal
Division has a backlog of complaint referrals pertaining to uninsured employers.
( See Finding IV, pages 25 through 30.) A11 other types of complaints are investi-gated
and resolved in a timely manner.
7. The extent to which the Attorney General or any other applicable agency of
state government has the authority to prosecute actions under the enabling
legislation.
The Industrial Commission's Chief Counsel prosecutes the citations and penalties
issued by the divisions of the agency. Criminal sanctions can be prosecuted by the
agency's Chief Counsel, State Attorney General, or County Attorney on behalf of
the State, depending on the violation.
8. The extent to which the Commission has addressed deficiencies in its en-abling
statutes which prevent it from fulfilling its statutory mandate.
Several changes have been made to agency statutes over the years and several bills
were passed in the years 1990,1991, and 1992. In 1990, Senate Bill 1187 amended
A. R. S. 923- 1061, which remedied an inequity requiring a claimant to file a petition
to reopen a claim before receiving emergency medical care. In 1991, Senate Bill
1021 amended the State's Administrative Procedures Act which allowed the In-dustrial
Commission to adopt federal standards within the guidelines allowed by
the U. S. Department of Labor, Occupational Safety, and Health Administration.
Furthermore, in 1992, Senate Bill 1059 amended A. R. S. 523- 418 which provided for
significant increases in penalties for State Occupational Safety and Health viola-tions.
9. The extent to which changes are necessary in the laws of the Commission to
adequately comply with the factors listed in the subsection.
Based on input from ICA, the Legislature should consider requiring employers in
high- risk industries and employers with hgh incidences of workplace injuries to
implement accident prevention programs ( see Finding 11, pages 15 through 18).
10. The extent to which the termination of the Commission would significantly
harm the public health, safety, or welfare.
Termination of the Commission could significantly harm the public health, safety,
and welfare as it could lead to less employee protection. In addition, the State
General Fund would lose in excess of $ 1 million dollars annually in revenues from
penalties collected under its OSHA program. This would impact other state activi-ties
such as the Department of Agriculture's Workers' Safety Training Program
which is specifically funded from these revenues.
11. The extent to which the level of regulation exercised by the Commission is
appropriate and whether less or more stringent levels of regulation would be
appropriate.
The current level of regulation appears generally appropriate. However, to maxi-mize
workplace safety and health throughout the State, we found that the State
should place more emphasis on the employers' responsibility for worker safety
and health. Specifically, ICA should request a statutory change requiring certain
employers to develop accident prevention programs ( see Finding 11, pages 15
through 18).
12. The extent to which the Commission has used private contractors in the
performance of its duties and how effective use of private contractors could
be accomplished.
Private contractors are used extensively by the Agency for activities such as invest-ment,
collection, hearings, and janitorial services. Due to the nature of the func-tions
of the agency, ICA's use of private sector contractors appears to be appropri-ate.
Our audit work does not indicate the need for further private sector contract-ing.
P. O. Box 19070
PHOENIX. ARIZONA 85005- 9070
June 1, 1995
LARRY ETCHECHURYD. IRECTOR
( 602) 542- 44 1 1
FU ( 602) 542- 3 104
Mr. Douglas Norton, Auditor General
Office of the Auditor General ( 2910 N. 44th Street, Suite 410
Phoenix, A2 85018
The following is the Industrial Commission of Arizona's ( ICA)
I response to the Performance Audit conducted in accordance with A. R. S. 141- 2954.
I Response to Finding I
While we agree that there is always room for improvement, we
generally disagree with the Auditor's premise, in Finding I, that
m the ICA needs to strengthen workplace safety and health enforcement.
First, the ICA believes that its targeting system does
adequately identify those worksites where injuries and illnesses
are occurring or are most likely to occur. In the latter part of
1992, the ICA developed an inspection scheduling system for fixed
sites utilizing workersf compensation claims data. This system
produces a computer generated report listing every employer who
has five or more claims per year. The ICAfs compliance
supervisors review this report, exclude those that are on the
list simply because of their size, or those that have recently
been inspected, and schedule those remaining employers for an
inspection. Additionally, employee complaints received regarding
employers on the claims list are scheduled for comprehensive
inspections irrespective of the items contained in the
complaint. A " claims inspection" includes an analysis of claims
history and the causal factors associated with each claim. A
comprehensive inspection is conducted of the employer's facility,
violations of occupational safety and health standards are cited
and serious violations are assessed penalties. If causal factors
for workers' compensation claims go beyond those violations
cited, the ICA includes its safety and health recommendations to
the employer in a letter.
After reviewing the results of inspections conducted using
this system, we noted a 17% increase in the number of serious
violations. Even more important is the fact that citations and
recommendations resulting from these inspections can be directly
related to the causes of injuries and illnesses. While the ICA
readily agrees that refinements can be made to this system, we
THE INDUSTRIAL COMMISSION COMPLIES WlTH THE AMERICANS WlTH DISABILITIES ACT OF 1990. IFYOU NEED THIS DOCUMENT IN ALTERNATIVE IFO RMAT, CONTACT SPECIAL SERVICES AT ( 602) 542- 5991.
June 1, 1995
Page Two
believe that this system does what was intended - identify those
employers incurring the injuries and illnesses in our state.
As to the Auditor General's premise that penalties are too
low, the ICA again respectfully disagrees. The penalty system
utilized by the Arizona Division of Occupational Safety and
Health ( ADOSH) is exactly the same as that utilized by the U. S.
Department of Labor's Occupational Safety and Health
Administration. Annually, the Federal government reviews all
elements of ADOSH1s program and has concluded that the penalties
assessed were appropriate given the average size of employers
inspected, which was approximately one- half of the size of those
employers inspected nationally.
The Commission reviews all proposed ADOSH penalties ( over
$ 200) and modifies those proposals as necessary depending upon
the circumstances, exposures and severity of the hazard being
addressed. The maximum penalty assessed to an employer by the
Commission has been $ 160,000. In almost all of the penalties
approved by the Commission, Commission members, who range in
background from representatives of organized labor to small and
large business representatives, have unanimously agreed on the
penalties assessed. The Commission's decisions regarding
penalties have also been reviewed by the federal government, and
they have concluded that the resultant penalties have been
appropriate. Accordingly, the ICA feels very confident that the
penalties assessed appropriately reflect the hazards identified.
As to the reduction of penalties, it is true that the
majority of penalties protested are reduced within an average
range of 19% to 21%. The rationale and importance of the
reductions are the issues with which we disagree with the Auditor
General.
After a citation ( and a penalty) is issued, and during the
informal conference/ protest period, if an employer agrees to
correct the violations - and establishes a commitment to be more
proactive with its safety and health program, then the penalties
may be reduced a maximum of 25% l. This policy has resulted in
the following actions:
( 1) Less resources spent in litigation. Compliance officers
are able to conduct more inspections without having to
spend their time testifying in court. Attorneys can
spend their resources on litigating the more
1 This policy is in effect and applies to all employers except
those in which the Commission determines the violations to be
egregious ( most failure to abate, repeat and willful violations).
June 1, 1995
Page Three
serious/ significant cases. Also, judges can spend their
resources on other cases such as workers' compensation
disputes.
( 2) It encourages an employer to make a commitment with
respect to its safety and health program. This provides
an incentive to implement an effective program that will
result in reduction of injuries and illnesses long after
ADOSH has left the premises.
( 3) Abatement of violations are accomplished faster which
also results in fewer injuries/ illnesses. 1 fitatio n
is protested, violations- are not required to be abated
until after the issue is resolved in a hearing,
approximately 90 to 120 days later. When the citation
becomes final, follow- up inspections are conducted to
verify abatement of all serious, repeat willful and
failure to abate citations.
Accordingly, the Commission believes its current practice of
selective reduction of penalties serves an important purpose in
providing a necessary balance between appropriate enforcement,
encouragement of employers' safety , and health efforts and
effective utilization of resources.
The mission statement of the Arizona Division of Occupational
Safety and Health is to reduce injuries and illnesses by ensuring
that employers comply with occupational safety and health
standards and recognized safety and health practices. From 1984
through 1993, on a per capita basis, Arizona's Loss Work Day
Incidence Rate has decreased 19% and its overall injury and
illness incidence rate has decreased 11%. This is particularly
important when one realizes during that same period employment
increased 31%. These Arizona reductions are significantly higher
than comparable national data, which in all probability had
higher penalties assessed per violation. Given these results,
the Commission feels that the level of safety and health
enforcement in Arizona is appropriate.
Response to Finding I1
The ICA agrees with the Auditor General's Finding TI
recommending a requirement for employers to ' establish mandatory
accident prevention programs. Since this finding would require
legislative action, the ICA recommends that if the legislature
concurs with the need for this legislation, that it approach the
subject with positive incentives instead of the typical
regulatory format utilized by our bordering states.
The Commission recommends legislation that would provide a
reduction in workers1 compensation premiums ( in the neighborhood
of 5%) if employers ( all employers irrespective of size) had in
June 1, 1995
Page Four
place a formal safety and health program and their injury and
illness experience was average or better. ( An effective measure
could be an experience modification rate of 1.0 or lower, which
could be evaluated annually by their workers ' compensation
insurance carrier). In our opinion, this would provide a
positive incentive for employers, particularly smaller employers,
to be more proactive with their safety and health programs.
ADOSH1s Consultation and Training Section and workers1
compensation insurance carriers are available to provide
technical assistance to employers at no charge.
Response to Finding I11
The ICA agrees with the Auditor General's Finding I11 that
ICA can improve its workers' compensation dispute resolution
process. The Industrial Commission, in 1992, prior to the
Auditor General's audit, began the process of conducting an
extensive review of the hearing process relative to disputes over
workers' compensation claims. As a result of that review, in
July 1993 the Commission established an alternative dispute
resolution program utilizing prehearing settlement conferences to
attempt resolution of disputes without the need for an
administrative hearing. The results of that program were
successful. Approximately 40% of the cases were resolved without
the need for a hearing. Since that time, another type of ( pilot)
alternative dispute resolution program, similar to Maricopa
County Superior Court settlement conferences, has been
implemented. The Administrative Law Judges selected for this
program have been formally trained by a Superior Court Judge
familiar with settlement conferences and we have in excess of 35
cases which are currently included in the program. The ICA will
be evaluating the results of this pilot program to determine if
more widespread implementation is necessary.
Currently, it is taking 122 days from the date a request for
hearing is filed to the date of the initial hearing. With the
recent hiring of three vacant judge positions, the ICA is
anticipating that period ( for the initial hearing) to be reduced
to 90 days by the end of the year. *
The issue of further hearings has been a longstanding
problem. We are reviewing various options to reduce the delays
caused by those further hearings.
Response to Finding IV
The ICA agrees with the Auditor General's Finding IV
recommending that the ICA improve its enforcement efforts against
uninsured employers.
Since the last audit report, the ICA has increased its
enforcement and collection efforts dramatically. We have made
June 1, 1995
Page Five
legislative changes to increase enforcement activity. To enhance
our collection efforts, the ICA has litigated bankruptcy cases to
establish legal precedents. The ICA has added personnel in the
past and in FY ' 96 will be adding another person. Yet, with all
of this, given existing bankruptcy laws and the precarious
financial stability of the uninsured employer population; our
success, after the fact, in recovering costs has been limited.
As the Auditor General has recommended, our greatest success
will come if the ICA can access a complete employer data base.
This will allow us to find employers without workers1
compensation insurance before injuries and illnesses occur. The
only complete data base we know of is found with the Department
of Revenue ( DOR). The important information in this data base
are the names and addresses of Arizona employers.
While the Auditor General does mention Federal I. D. numbers,
given the confidentiality constraints related to divulging
Federal I.. numbers, in all probability, the ICA will not be
able to cross- match Federal I. D. numbers ( insurance companies who
provide coverage information to the ICA cannot compel an employer
to provide a Federal I. D. number because of confidentiality
laws). Nevertheless, the ICA will be able to cross- match by name
and address, which is a significant advance over what currently
exists.
As to accessing Department of Economic Security Unemployment
Insurance data base, the ICA has been told by the supervisor in
that section that since they utilize DOR1s information, the ICA
cannot access their data base because of the confidentiality
restrictions placed upon them by DOR. Currently the ICA is in
discussions with DOR to attempt to gain access under Title 42 as
a taxing agency. We are hopeful that this can be accomplished
administratively, without the need for additional legislation.
Mr. Norton, in closing, I would like to say that even though
the performance audit process is a long and certainly involved
one, the Commision appreciates the professional manner in which
your auditors have conducted themselves.