Subchapter A. GENERAL RULES FOR ENFORCEMENT

The Texas Workers' Compensation Commission (the commission) proposes amendments to §180.1, §180.3, §180.6, §180.8, new §§180.10 - 180.18, and the simultaneous repeal of §180.4 concerning Monitoring and Enforcement.

The proposed amendments, additions, and deletions primarily address the requirements of Texas Labor Code §415.021(a) as amended by the 77th Texas Legislature through House Bill 2600 (HB-2600). Section 415.021(a) provides that the commission may assess an administrative penalty against a system participant who commits an administrative violation and that the commission is to adopt a schedule of specific monetary administrative penalties for specific violations under the Texas Workers' Compensation Act (Act). HB-2600 also made changes to enhance the commission's authority relating to compliance in the delivery of medical benefits - quality of care issues. These proposed rules do not address the area of quality of care. Violations involving quality of care issues may be addressed in other rules at a later date.

The Texas Register published text shows the text of new rules and words proposed to be added to or deleted from current rules being amended, and should be read to determine all proposed changes.

Enforcement Philosophy

The commission believes that the purpose of enforcement action is to ensure future compliance; compliance is the ultimate goal. As important as issuing penalties can be to achieving that goal, doing so is but one tool that the commission has at its disposal to change behavior. There are other tools that the commission has and will continue to use in ensuring that system participants achieve a high level of compliance. Education and incentives are other important tools for changing behavior.

Statutory Enforcement Provisions

Texas Labor Code §415.021(c) provides that "In assessing an administrative penalty, the commission shall consider:

(1) the seriousness of the violation, including the nature, circumstances, consequences, extent, and gravity of the prohibited act;

(2) the history and extent of previous administrative violations;

(3) the demonstrated good faith of the violator, including actions taken to rectify the consequences of the prohibited act;

(4) the economic benefit resulting from the prohibited act;

(5) the penalty necessary to deter future violations; and

(6) other matters that justice may require."

To do this, the commission developed and utilized a series of penalty matrices based on these factors. Because of the complexity of the violations and specific requirements of this subsection, some of the formulas used in the penalty calculations were extremely complicated. While rational and appropriate, these formulas would be very hard to translate into rules that everyone could easily understand.

HB-2600 further changed the penalty assessment requirements by amending §415.021(a) to include the following sentence: "Notwithstanding Subsection (c), the commission by rule shall adopt a schedule of specific monetary administrative penalties for specific violations under this subtitle."

In developing an enforcement strategy, the commission has taken into consideration all the factors identified in Texas Labor Code §415.021(c). Due to the complexity of the workers' compensation system, simplistic matrices for the above six factors cannot be easily displayed. For instance, the economic benefit to a violator in issuing a check one day late is not calculated as easily as a penalty would under the Texas Commission on Environmental Quality rules where the violator failed to install a pump (one could obtain the cost of the pump and apply that cost to the economic benefit to the violator). While the six factors may not be specifically apparent in each of the penalty schedules, they are all applied and are notable in areas such as the Base Penalty and the Review and Audit Modifiers. The Base Penalty and the Review and Audit Modifiers often address several factors at the same time.

The Base Penalty calculations outlined in § 180.15 serve to apply several of the factors listed in Texas Labor Code §415.021(c). First, the base penalties differ depending on the seriousness of the violation. For instance, the commission believes that the issuance of a late check is more serious than the issuance of a check in the wrong amount. Secondly, the base penalties also take into consideration the economic benefit to the violator of committing the violation. For violations involving more than one benefit period, each additional benefit period increases the base penalty by 25%. The base penalty also is designed to deter the violator from continuing to commit similar violations in the future. The commission believes, based on its past experience in enforcing the requirements of the Act and Rules, that the base penalties are set at a rate high enough to encourage system participants to change their behavior rather than to continue committing violations.

The Review and Audit Modifiers explained in §§180.16 and 180.17 also address other factors outlined in Texas Labor Code §415.021(c). The base calculation of penalties can be adjusted through specified modifiers. If the commission believes the violator has demonstrated good faith in trying to rectify the consequences, the penalty is adjusted accordingly. For instance, if the violator recognizes the violation and self-corrects prior to another participant's (including the commission) bringing the matter to the violator's attention. Likewise, modifiers will be applied if the commission believes that there was demonstrable harm to the affected party(s). This takes into account at least two factors: (1) the seriousness of the violation, including the consequences of the prohibited act; and (2) the factor of "other matters that justice may require." The history modifier clearly identifies how the commission addresses §415.021(c)(2).

The commission's goal is to make the rules easy to understand, but comprehensive enough to handle the complexities of the workers' compensation system. While the penalty formulas need to be simple to use, they should not be so simple that they produce results that are ineffective or unreasonable. Penalty rules require some complexity to produce penalties that are appropriate to a multitude of circumstances on a wide variety of violations. To make the rules easier to understand, the commission is proposing several small rules organized around basic concepts, rather than one large rule. This enables the concepts to be presented in bite-sized chunks that move from the general to the specific as the rules progress.

The commission has also made available on its website ( www.twcc.state.tx.us ) a spreadsheet to aid system participants in calculating penalties in accordance with the proposed rules. This spreadsheet will be available during the public comment period to allow those commenting on the rules to easily see exactly how penalties will be calculated. The spreadsheet will be modified to reflect the final versions of the formulas at the time the rules are adopted so that it will be available to system participants in the future.

Calculating a penalty will require basic knowledge of the type of violation for which a penalty is to be calculated. For example, most penalty formulas require the user to calculate the number of days of noncompliance. If a system participant wants to know the penalty amount for filing a report late, the system participant must know both the due date for the report and the date the violator is deemed to have come into compliance. If either of these dates is unknown, then the user will be unable to calculate the penalty amount.

The proposed rules develop a system that offers incentives for high rates of compliance and disincentives for low rates of compliance. There are significant penalty enhancers that can be used when a violator knew that there was a compliance problem and failed to correct it. Occasional mistakes may be explainable but continued noncompliance is not. This incremental enforcement approach coupled with better understanding of the penalties for committing violations is designed to encourage violators who have been identified as having committed violations to change their behavior and to provide a deterrent effect for those who have compliance problems that have not yet been identified by the commission.

Rule Development

The commission drew on several sources in the development of these rules. First, penalty rules from other Texas state agencies were reviewed. However, these rules of other agencies were found to be significantly different than in the workers' compensation system. Many other agencies do have penalty formulas, but these formulas tend to fall into one of two approaches, neither of which translates well to the workers' compensation system.

The first approach involves an enforcement method in which the basic duties are both fewer and simpler. In this approach, many of the formulas only consider two factors: "did a violation occur and is it a first, second, or third offense?" For example, the Texas Board of Barber Examiners' rules provide that, if a barber tech practices outside the scope of his or her license, the penalty is a $500 fine for a first offense; $750 for a second offense; and $1000 for a third offense.

An insurance carrier in the workers' compensation system may issue hundreds of benefit checks each month. A doctor may have to file dozens of required reports. An employer may have to file a number of reports per injury and have a number of injuries that they are responsible for as well. The number of specific duties with which a workers' compensation system participant is expected to comply is much larger than the number of duties which participants in many of these other systems are expected to meet. Further, given the numerous factors that separate violations from each other, this enforcement approach does not allow the commission enough flexibility to ensure that penalty amounts reflect the seriousness of the violations while also taking into account appropriate mitigating factors. For instance, being 10 days late filing a form is more serious than being one day late filing that same form. Therefore, the penalty amount should be different for 10 days of noncompliance than it is for one day of noncompliance. As such, this enforcement approach did not provide a good model for developing these rules.

The other common enforcement approach that the commission noted in its review of other agency penalty rules generally involves a range of penalty amounts for a given offense and then the application of various factors. Many of these other agency's rules read like Texas Labor Code §415.021(c) - specifying what factors are to be considered with little specific guidance on how those factors are to be considered.

The problem with this approach is that it makes it difficult to ensure consistent penalties for similar violations under similar circumstances. The commission believes that all system participants should be treated the same way. Generally, penalty amounts should not be dependent on the skill of the negotiator or inappropriate external pressure. It is for this reason that the commission long ago abandoned negotiation of penalty amounts. Instead, the commission applies the facts of the cases and applies formulas consistent with the facts to ensure that penalty amounts are consistent. The proposed rules continue this tradition.

Thus, other state agency penalty rules were not a primary influence for development of these rules. However, the commission did incorporate some of their components into the penalty methodologies contained within these rules. For example, the Texas Department of Human Services penalty rules (40 TAC §90.236) provide that the consideration of prior history is limited to two years and the proposed rules incorporate a limitation on consideration of previous history in assessing penalties.

Another source the commission considered in developing these rules was penalty formulas used by workers' compensation regulatory agencies in other states. However, there was difficulty doing this as well. First, few other states have enforcement programs similar to that in Texas. Many states' enforcement efforts are limited to ensuring that employers maintain coverage (which is not required in Texas) and preventing fraud (which is an important part of the commission's enforcement efforts but is not the subject of these rules).

There are several states such as Florida and California that have more extensive enforcement authority, but even their programs are different from that of Texas. The Legislature in Texas has vested within the commission the authority to regulate and take enforcement action against all system participants. Neither the California nor the Florida Divisions of Workers' Compensation monitor or take enforcement action against health care providers for their actions and inactions that affect benefit delivery. Florida's penalty rules focus on carriers, employers, and claims handlers while California's penalty rules primarily focus on carriers and claims handlers.

There are other differences between these other states and Texas that make it difficult to use them as a model. The program in place in California at the time these proposed rules were developed did not review most individual violation referrals made against regulated parties. While complaints could be used as a factor in selecting a carrier or claims handler, the individual allegations might not be reviewed. In Texas, the commission does not have the resources to conduct full-fledged audits of every employer, doctor, carrier, etc. for which it receives a complaint. Therefore, reviewing alleged violations of noncompliance with the Act and Rules serves as a valuable means to ensure that the commission has some enforcement presence in all areas of the system. Because system participants know that the commission can review any allegation that it receives, they understand that noncompliance carries risk of enforcement action. California's program also involves much more intensive audits. Texas is not able to conduct this type of audits with its available resources. This means that California's penalty formulas take into account the fact that when audited, every violation that a carrier or claims handler commits could be discovered and subject to fines.

Florida, on the other hand, relies extensively on a self-reporting system. Texas experimented with such a system on a voluntary basis in the mid-nineties but discovered that most insurance carriers were either incapable or unwilling to accurately report violations to the commission. In addition, Florida also provides penalties for ranges of noncompliance rather than a formula. For example, Florida's rules provide that if an employer is 1-7 days late in filing a first report of injury, the penalty is $100 while the penalty for being 8-14 days late is $200. The commission does not like this approach because it results in the penalty for an eight-day late filing to be twice as high as both a seven-day late filing and a one-day late filing.

However, as was the case with the penalty formulas from other Texas state agencies, reviewing the formulas from other states provided ideas that were incorporated into the proposed rules and helped validate concepts already in use by the commission and proposed to be continued under the new rules. For example, Florida's rules set minimal performance standards just as these proposed rules. California's penalties include consideration for self-identification and self-correction of problems which is a similar concept used in these proposed rules.

The commission sought input from system participants in a number of ways. First, the commission developed a discussion paper and survey that was distributed to a group of stakeholders who were involved in the development of HB-2600 (this group is hereafter referred to as the "stakeholder group"). The paper and survey were then discussed at a stakeholder group meeting held at the commission in May of 2002.

In addition, the commission sought input during its 2002 Education Conference in a breakout session attended primarily by carriers, employers, and health care providers. The session was held twice with a total of approximately 230 in attendance. The session was held in a discussion format designed to elicit input from attendees on a number of subjects including enforcement philosophy, compliance standards, and penalty amounts. In addition, attendees of the conference were provided an enforcement questionnaire (different than the one originally provided to the stakeholder group ) in order to get thoughts on specific scenarios (such as how much the penalty should be for a seven-day late payment of income benefits or what the compliance standard for timely filing work status reports should be).

Following the Education Conference sessions, the commission again sought input from the stakeholder group and gave them copies of the survey used at the conference. A number of stakeholder members provided input through the second survey.

Through these efforts, the commission was able to obtain important input on enforcement. Some of the ideas submitted were not incorporated due to difficulty of implementation or lack of resources (such as one idea that would require the commission to audit every payment in a file before being able to issue a penalty even if the only issue was the initial payment). Nevertheless, this input was important and influenced various provisions of the proposed rules.

Finally, the commission drew on its own internal experience of enforcing various provisions of the Act and Rules. Since 1991, the commission has utilized a number of different approaches to enforcement and penalty proposals. Some of these approaches were successful while others were not. However, by considering this experience, system participant input, and ideas from other state workers' compensation systems and other Texas regulatory agencies, the commission was able to develop a set of proposed rules that it believes will achieve the goals set by the Legislature.

Effectiveness

The rules include an educational component. The rules provide that generally a system participant will receive a warning letter for a first offense. The warning (like other violation notices) identifies the relevant requirements of the Act or rule and explains how the violator's behavior failed to meet those requirements. This ensures that the violator understands the requirements prior to facing a monetary sanction.

As noted, the proposed rules also attempt to offer incentives for high compliance and disincentives for low compliance. The rules set compliance standards that, if met, provide that a violator may not receive penalties on the few violations committed (assuming certain criteria are met). The rules also adjust penalties for overall compliance. The further a participant is away from the compliance standards, the higher the penalty amounts. In addition, penalty amounts increase with continued noncompliance; thus, prior history is an important factor under the proposed rules. This incremental enforcement approach applies steady pressure to encourage violators to place a higher priority on compliance with the Act and commission Rules.

PROPOSED RULES PROVISIONS

Amendment of §180.1 - Definitions

Section 180.1 provides a set of common definitions to be used with the rules in Chapter 180. The amendments to this rule primarily involve the addition of new definitions necessary to implement the other new and amended rules in the Chapter. New definitions include: "Accident Prevention Services Inspection," "Act," "Audit Violations," "Compliance Audit (also Performance Review)," "Compliance Category," "Compliance Rate," "Compliance Standard," "Matter of Practice," "Notice of Intent (NOI)," "Notice of Violation (NOV)," "Performance Review," "Referral Violations," "Representative Violation," "Violation Review," and "Warning Letter." In addition, the definitions of "Significant Violation" and "Violation" were amended. Most of these definitions are self-explanatory as described in the rules themselves but several bear additional discussion.

Violations are generally discovered through "Compliance Audits" or "Violation Reviews." Compliance audits involve utilizing statistical sampling methodology or a census to determine overall compliance with one or more provisions of the Act or Rules. Therefore, the results of a compliance audit (called "Audit Violations") are representative of the auditee's performance. Violation Reviews, however, are not statistically based. They are generally conducted based upon the commission receiving an allegation of noncompliance. The findings of a violation review may or may not be representative of the overall performance. If the cause of the violation discovered through a violation review (called a "Referral Violation") is found to be procedural or programming based, it can be considered an indication of a possible large-scale problem but not proof in and of itself.

The addition of definitions for "Notice of Intent (NOI)," "Notice of Violation (NOV)," and "Warning Letter" merely provides more formal definitions for concepts that have long been utilized by the commission and, in the case of the latter two, are referenced already in commission rules.

The proposed definition of "Significant Violation" is amended to include fraudulent behavior and violations of an agreement, or commission decision, or order.

The proposed amendment to the definition of "Violation" clarifies that a violation can involve failing to timely fulfill a duty or failing to fulfill the duty in the manner required (whether timely or not). This amendment does not change existing agency policy or interpretation of the Act and Rules.

Amendment of §180.3 - Currently Titled "Performance Review of Insurance Carrier" Proposed to be Re-titled "Compliance Audits"

Most of the proposed amendments track the commission's current audit processes. However, the commission is also proposing to include in the rule a policy change regarding publication of audit reports. Other minor clarifications are included as well.

Subsection (a) identifies the scope of the rule. It is proposed to be amended to explain that the commission shall audit the records of system participants and their agents for compliance with the Act and Rules. It is also proposed that the "division of compliance and practices" be replaced with "the commission" because this rule will be used by more than just the compliance and practices division. As noted when Chapter 180 was re-titled last year, many parts of the agency are responsible for monitoring system participants.

Subsection (b) is proposed to be broadened to allow audits to be conducted at locations other than the offices of the insurance carriers or their agents. The rule is also broadened to reflect its applicability to all system participants, not just to carriers and their agents or those with whom they contract. In addition, the rule recognizes that the commission has the authority to utilize external expertise to assist with or even conduct audits. This authority is not new.

Current subsection (c) is proposed to be deleted as it is not necessary due to the use of the more general term "the commission" rather than specific divisions within the commission.

Proposed amendments to current subsection (d) (which would be redesignated as subsection (c)) limit the applicability of the rule to audits. The reason for this is that the requirement to provide advance notice of the audit is primarily to allow the auditee to arrange for appropriate workspace and ensure that relevant staff is available to work with the auditors.

Proposed amendments to current subsection (e) (which would be redesignated as subsection (d)) primarily broaden the language to apply to other types of auditees in addition to insurance carriers.

Proposed amendments to current subsection (f) (which would be redesignated as subsection (e)) clarify that any system participant may be called upon to provide records for audit even if the records are needed to audit another system participant. For example, when reviewing the medical practices of a doctor, the commission might need carrier records. The reverse is true as well. The commission currently has and uses this authority to obtain and audit records in this manner; thus, the proposed change is clarifying in nature.

Proposed amendments to current subsections (g) and (h) (which would be redesignated as subsections (f) and (g), respectively) would change the rule to match current auditing practices. When the commission initially began audits, its procedure was to conduct the audits, issue the findings in the form of a final report, and then issue penalties when appropriate. If the auditee disagreed with any of the findings, they could appeal the penalties. The commission learned through experience in the appeal process, that auditees sometimes provided additional information that would cause the commission to change its position. While this approach is one means to come to consensus on the findings, the commission felt that it was inefficient in that it occurred months after the audit was "complete" and it also involved expensive "discovery" and/or hearing time.

Therefore, the commission changed its audit processes to give the auditee the opportunity to respond to the findings prior to the issuance of a final report. The process now involves issuing initial findings to which the auditee can respond. The response from the auditee is the auditee's best opportunity to provide an explanation that may change or eliminate commission findings. As the proposed language indicates, the commission reviews any response and usually will provide the auditee an explanation of any changes to the initial findings or a reason why the auditee's position on one or more findings was not accepted. These opportunities for communication help the commission ensure that the final findings are (if not agreed upon) fully explained so that the auditee understands both what the commission is concerned about and why, and so that the commission is aware of factors the auditee believes are relevant.

The commission proposes new subsection (h). The commission believes that good performance should be publicly recognized and that poor performance should be subject to public scrutiny as well. From discussions with system participants, the commission believes that concern over public image may be one of the best motivations to encourage system participants to meet or exceed standards. Therefore, new subsection (h) allows the commission to publish final audit reports (with confidential claimant information redacted) on its website.

As an added incentive to get a noncompliant system participant to change its behavior, the rule provides that the commission may, in its discretion, delay publishing a final audit report in order to provide the auditee a chance to correct their behavior to meet standards. Those concerned about the more public nature of an audit will be motivated to pay greater attention to compliance, thereby enabling the commission to more closely achieve its responsibilities in enforcing the Act and Rules.

Publication of audit reports will do more than provide a reason to improve performance of those who need it. Publication will also be very educational to other system participants. Commission audit reports are comprehensive and include documents from all stages in the audit. These generally include the initial notification of audit, the initial findings, the auditee's response (if any), the summary of changed/unchanged findings, list of proposed enforcement actions (with settlement if any), and a final report. Therefore, an interested party can see how the commission interprets the requirements of a given rule and make any necessary changes.

Proposed amendments to subsection (i) change the requirements that all reports be forwarded to licensing or certification authorities. Instead, the commission will provide a final audit report only when it deems it appropriate or when a licensing or certification authority requests the report. The commission has found that some authorities are only interested in these reports under certain conditions. For example, the Board of Medical Examiners might not be interested in an audit report that focuses on timely filing of TWCC-69 reports but would be interested in one that finds that a doctor conducts unnecessary surgeries. Likewise, the Texas Department of Insurance might be interested if the commission found that a carrier unreasonably delayed or denied claims as a matter of practice, but might not be as interested in a report that showed that a carrier was miscalculating the due date of the waiting period for temporary income benefits.

Subsection (j) is proposed to be modified because the commission is not currently authorized to bill for audits in all situations. The Act places limitations and requirements on the audit, which may be billed per Texas Labor Code §§413.015 and 414.004. The proposed changes also clarify the types of expenses that are considered part of the audit and are to be included in an audit bill.

Subsection (k) is proposed to be modified to change the number of days allowed for payment of an audit bill from 40 to 25 days to better match the commission's financial management automation systems.

Deletion of §180.4 - Review of Employer Compliance

Because the proposed amendments to §180.3 would broaden that rule to address audits of all types of system participants, a separate rule covering the audit of employers is unnecessary. Therefore, the repeal of current §180.4 is proposed.

Amendment of §180.6 - Currently Titled "Evidence of Patterns of Conduct," Proposed to be Re-Titled "Evidence of Patterns of Practice"

The proposed amendments to this rule change the term "pattern of conduct" to "pattern of practice" which is a term that is defined in §180.1.

Amendment of §180.8 - Currently Titled "Notice of Administrative Violation and Penalty," Proposed to be Re-Titled "Notices of Violation, Warning Letters, and Notices of Intent"

Proposed amendments to §180.8 are intended to broaden the rule to match existing commission processes. Major changes include adding provisions relating to Warning Letters and Notices of Intent (notices sent out prior to a formal notice of violation). Other minor clarifications are included.

Proposed amendments to subsection (a) change "notice of administrative violation" to "notice of violation." In addition, subsection (a) is proposed to be amended by removing references to certain rules and a reference to the division of compliance and practices.

Subsection (b) is proposed to be amended to better explain the information that is included in a NOV. In order to prove that a violation exists, the commission must identify what conduct the relevant Act or rule required and identify the facts of the case and how the charged system participant's behavior failed to meet or to timely meet the requirements. NOVs should include these provisions so the charged system participant will better understand the nature of the violation. This not only makes it easier for the charged system participant to defend the violation in an appeal, it also may reduce appeals that are made solely due to lack of understanding of the violation. The commission also proposes deleting language referencing that a NOV will include language in rules governing appeals.

Subsection (c) is proposed to be amended to use "shall" instead of "must" and to explain that appeals are to be filed with the chief clerk of proceedings rather than referencing §§145.3 and 148.3 of this title (both relating to Requesting a Hearing).

Subsection (e) is proposed to be amended to reference the commission rather than the division of compliance and practices and to clarify that the decision to postpone action is at the discretion of the commission.

The commission proposes adding a new subsection (f) that formally explains how the commission will issue Warning Letters. Warning Letters have been used by the commission for years as a means to educate system participants regarding requirements that they failed to meet. Warning Letters are similar to NOVs; however, the appeal process for Warning Letters does not involve SOAH unless the commission attempts to use that Warning as a penalty enhancer for a subsequent similar violation committed. Issuing Warning Letters prior to issuing other sanctions or penalties (where appropriate) offers an important means of ensuring that system participants have been informed of their responsibilities and given the opportunity to improve prior to a sanction being issued.

The commission proposes adding a new subsection (g) that introduces the concept of Notices of Intent (NOIs) into the rules. As noted in the discussion regarding audits, the commission offers auditees an opportunity to respond to findings of an audit prior to the commission finalizing the findings and taking enforcement actions. The commission also generally offers this opportunity when it discovers a violation through a violation review. This opportunity is offered through a NOI.

The NOI is similar to a NOV or a Warning Letter in that it summarizes the duty that is alleged to have been breached and it identifies the facts that establish that a violation was committed. The difference between the NOI and the NOV and Warning Letter is that the NOI offers the alleged violator the opportunity to respond to disprove the violation and it will generally offer a settlement agreement (under the conditions described in proposed new subsection (h)). While the NOI offers the alleged violator the opportunity to convince the commission that there was no violation, it has an added benefit in that it allows the commission the opportunity to identify any actions that it believes are necessary for the alleged violator to come into compliance.

Proposed new subsection (h) addresses settlement agreements in which a proposed penalty would be reduced by one-half in exchange for agreements on the part of the violator. As with other new provisions to this rule, the commission has long used settlement agreements in its enforcement processes.

The commission views settlement agreements as a valid means of achieving compliance in many cases. Because they require the violator to agree to take steps to improve compliance (as well as come into compliance on the immediate case) in order to receive a reduced penalty, the interests of compliance are served (which, of course is the goal of enforcement action). In addition, the commission and the violator avoid potentially lengthy and costly litigation if the chief disagreement was over the amount of the penalty. However, if a violator enters into a settlement agreement but then does not deliver improved compliance, the commission can refuse to offer agreements to the violator in the future or pursue enforcement of the agreement or a violation for breach of the agreement.

Proposed New §180.10 - Duration and Extent of Noncompliance

As subsection (a) indicates, the purpose of this rule is to present various concepts that are generally applicable to violation matters.

Subsection (b) provides that violations are measured in "number of days of noncompliance" and explains how to calculate them. These concepts are important because most penalty calculations under these rules are based, at least in part, on the number of days of noncompliance involved in the violation.

Subsection (c) explains how some violations may be grouped together and treated as one violation while others cannot. The concepts in this subsection are similar to longstanding agency policy, although some changes were necessary to make them easier to understand. It should be noted that subsection (e) of the rule uses carrier violations as examples because these types of groupings are most applicable to carrier offenses. Generally, grouping violations results in a lower penalty than would be issued if each violation were pursued separately. The commission believes that the methodology in this subsection is appropriate because, in some cases, the violator has failed to meet one duty but this one failure affected multiple payments. In essence, the violator committed one larger violation and not several smaller ones. The language in subsection (c) not only explains the concepts, it also provides examples.

Proposed new §180.11 - Compliance Categories

As subsection (a) indicates, the purpose of this rule is to define various categories in which duties under the Act and/or rules can be placed. The Act and Rules place numerous individual duties on system participants. Therefore, there are numerous different types of violations that can occur. The rules being proposed provide formulas to calculate penalties on nearly all these violations. To avoid the development of an excessive number of formulas (and rules that are hundreds of pages long), the commission has grouped similar duties into ten broad Compliance Categories (each of which has its own penalty formula(s) as described in other rules).

In identifying the categories, the commission evaluated the basic duties under the Act and Rules and looked for common elements among them. For example, individual report filing duties (Employer's First Reports of Injury, Work Status Reports, etc.) are similar and can be grouped in a common "Communication" category as described in proposed subsection (b).

While the commission believes that the categories have been defined in such a way that it should be relatively clear into which category a given duty falls, it is possible that a given duty could arguably be put in more than one category (this is particularly likely if a new duty is added to the Act or Rules which is unlike any that are currently in place). The rule provides that the duty is placed in the more specific category. When evaluating performance or taking enforcement action covered by these rules, knowing the correct compliance category is important to ensuring that the rules are correctly applied.

Proposed subsection (b) identifies ten compliance categories. In order to reduce confusion about the applicability of the categories, each category definition lists common examples of the types of duties and/or violations that are placed in the category. The lists are not all-inclusive.

Subsection (b)(1) describes the "Communication" category. This category includes all duties relating to timely filing complete/correct reports, filings, notices, or other communications required under the Act and Rules (not just required reports on commission forms), as well as providing documentation when and as required. As the rule notes, common examples of these duties include: Employers filing Employer's First Reports of Injury, Wage Statements, and Supplemental Reports of Injury; Doctors filing Work Status Reports and Reports of Medical Evaluation; and Carriers filing notifications of coverage or notices of initiation of benefits, and providing a List of Policyholder accounts prior to an Accident Prevention Services Inspection. The duties in this category apply to all system participants. For example, employers report wage information, doctors report work status information, employees report return to work information, carriers report claim actions, etc. Nearly all basic reporting duties fall in this category and they are of critical importance to making the system operate as intended and to allow for effective monitoring of compliance.

The subsection also describes common violations relating to communication. These include: failure to timely file a report; providing incorrect information on a report; and failure to file a complete report in the form and manner prescribed by the commission (such as failing to electronically transmit a TWCC-69 or failing to electronically file a TWCC-21 via EDI).

These are merely examples and should not be read as inclusive. However, there is one important exception to this category. That exception relates to accurate electronic submission of data to the commission, which has its own Compliance Category. The reasons for this separation come from some of the differences in the type of communications being performed and because the commission believes that the Compliance Standard for the "Data Submission Accuracy" category should be higher than the compliance standard for the basic "Communication " category.

Subsection (b)(2) describes the "General Benefit Delivery" category. This category includes carrier duties relating to compensability issues, the payment or denial of indemnity benefits (income or death benefits), attorney fees, and burial benefits. In some ways, the category can be thought of as a "non-medical" category. This category also includes duties relating to paying attorney fees because most attorney fees are paid out of, and more or less simultaneously with, indemnity benefits. Also included are burial benefits as they fit better in this category than any other.

Common violations relating to these duties include: failure to timely pay or dispute indemnity benefits/attorney fees/burial benefits; failure to properly pay interest on accrued but unpaid income benefits; failure to pay indemnity benefits/attorney fees/burial benefits at the correct rate; and denial, suspension, or reduction of compensability, indemnity benefits, attorney fees, or burial benefits without providing a sufficient explanation or in an unreasonable manner.

Subsection (b)(3) describes the "Seeking Medical Reimbursement" category. This category includes all administrative duties relating to the proper submission of medical bills, requests for reconsideration, requests for refunds, and requests for medical dispute resolution for payment. Basically, these duties involve the health care provider's duties relating to seeking reimbursement for services provided to an employee whether at the initial billing level or at the dispute resolution level. However, the category focuses on administrative issues only. The category also includes carrier requests for refunds because that involves "seeking medical reimbursement."

Common violations relating to these duties include: failure to use the correct medical billing forms; failure to use appropriate billing codes required by rule; failure to provide documentation required by rule; improper filing of requests for reconsideration; failure to request refunds in the form and manner prescribed by the commission; failure to exhaust administrative remedies before pursuing reimbursement in civil court; and improper pursuit of a private claim against a claimant.

Subsection (b)(4) describes the "Medical Bill/Refund Processing" category. This category includes all duties relating to the processing and payment/denial of medical bills, travel reimbursements, requests for reconsideration, refund requests and participating in the medical dispute resolution process. The duties in this category are primarily the carrier's (because it focuses mostly on medical bill and travel reimbursement processing duties) but health care providers also have some responsibilities here (when required to respond to a refund request).

The category also includes processing claimant requests for travel reimbursements because travel reimbursement is related to medical benefit delivery and because the amount of time to review a travel request is the same period of time the carrier has to review a medical bill.

Common violations relating to these duties include: improper return of a medical bill or a request for reconsideration; failure to timely take final action on a properly completed medical bill, travel reimbursement or reconsideration request; failure to properly pay interest when owed; failure to make payment in accordance with the Act and Rules; and reduction or denial of medical benefits without providing a sufficient explanation.

Subsection (b)(5) describes the "Requesting Preauthorization or Concurrent Review" category. This category includes all administrative duties relating to requesting preauthorization or concurrent review, requests for reconsideration, and requests for medical dispute resolution. But the category focuses on administrative issues only (no issues of medical judgment/quality of care). The duties in this category are primarily a health care provider's because health care providers are generally the ones that request preauthorization and/or concurrent review.

Common violations relating to these duties include: submitting incomplete requests; submitting improper re-requests (i.e. not utilizing the reconsideration or dispute resolution processes); and improper filing of requests for reconsideration.

Subsection (b)(6) describes the "Processing Requests for Preauthorization, Concurrent Review and Medical Dispute Resolution" category. This category includes all duties relating to processing and responding to requests for preauthorization/concurrent review, requests for reconsideration, and participating in the medical dispute resolution process. These duties are performed by carriers and their agents.

Common violations relating to these duties include failure to: timely respond to a request; provide the requestor a reasonable opportunity to discuss the request prior to issuing a denial; and provide a sufficient explanation for not approving a request (such as approving part of the request and not providing a reason for not approving the entire request).

Subsection (b)(7) describes the "Data Submission Accuracy" category. This category includes duties relating to accurate submission of data to the commission (whether electronically or otherwise) in the format required. Though data submission is generally a "report" or a "filing," this category is separate from the Communication category because Data Submission Accuracy has a different Compliance Standard (as identified in §180.12 of this title (relating to Compliance Standards and Compliance Rates)).

The most common examples of duties in this category relate to insurance carriers who are required to submit accurate data to the commission regarding claim status. These data submissions are usually reported electronically and involve medical or indemnity benefits; however, the proposed rule is applicable to the submission of data electronically or otherwise. These data submissions form the basis of many of the commission's monitoring and enforcement efforts.

Subsection (b)(8) describes the "Accident Prevention Services" category. This category includes duties relating to providing required accident prevention services to employers. The duties are primarily contained in Texas Labor Code Chapter 411, Subchapter E and Chapter 166 of the commission's rules (relating to Workers' Health and Safety - Accident Prevention Services). However, not all duties from those portions of the Act and Rules are contained in this category. Duties relating to Communication and Data Submission Accuracy are included in those respective Compliance Categories rather than in Accident Prevention Services. For example, a duty such as submitting a policyholder list prior to an Accident Prevention Inspection would fall under the "Communication" category. Whether a duty outlined in Chapter 166 belongs in the Accident Prevention Services compliance category depends on whether or not the duty is tied to actually providing Accident Prevention Services to a policyholder.

Common violations relating to these duties include: failure to provide an onsite visit or other appropriate services as required by rule; failure to make an onsite inspection within three days of a report of a fatality; and utilization of unqualified staff to provide services.

Subsection (b)(9) describes the "Attendance" category. This category includes duties relating to attending benefit review conferences, contested case hearings, and required medical examinations (including attending designated doctor examinations).

Subsection (b)(10) describes the "Record-Keeping" category. This category includes duties relating to maintaining all required records in the form and manner and for the period prescribed by the commission.

Proposed new §180.12 - Compliance Standards and Compliance Rates

As subsection (a) indicates, the purpose of the rule is to identify the Compliance Standards that system participants are minimally expected to meet in each Compliance Category and how the commission will calculate Compliance Rates to determine whether the standards have been met. This rule will primarily be used with the compliance audit process whereby a system participant will be audited for compliance with one or more duties (and thus one or more Compliance Categories) to produce a Compliance Rate. That rate is then compared to the applicable Compliance Standard(s) to determine the extent to which a system participant exceeded or failed to meet the standard(s).

Subsection (b) emphasizes that nothing in this section, chapter, or title is to be interpreted as an endorsement of noncompliance or as encouraging or condoning violation of the Act or Rules. Though the section identifies minimal Compliance Standards and though achieving these standards may result in reduced enforcement action for noncompliance, no such consideration or reduction shall take place if the noncompliance involved a significant violation. Through these standards, the commission expects system participants to strive for total compliance. Nevertheless, the commission recognizes that mistakes can sometimes occur, given human error and the complexities of the system.

Subsection (c) specifies what the Compliance Standards are. Unless otherwise noted by the rules, the Compliance Standard for all duties under the Act and Rules is 95%. The one exception is in the area of Data Submission Accuracy. As already noted, accurate data is critical to the commission's ability to monitor system compliance. Therefore, the commission believes that the Compliance Standard for Data Submission Accuracy should be higher and has proposed that it be 98%. The following factual example shows why this is important.

The commission monitors, among other things, timeliness of the initial payment of temporary income benefits (TIBs) for reporting to the legislature. Several years ago, the commission began to notice a decrease in timeliness of initial payments that it was unable to explain. Initially, the commission thought the problem might be an aberration but performance continued to get noticeably worse month after month. The commission considered whether the problems might have been caused by changes in rules or forms that could have confused carriers, but was not able to identify any logical explanation for the trend other than a drop in payment compliance or a drop in data accuracy. Through some data analysis and a series of audits, the commission was able to determine that the problem was largely attributed to data accuracy problems.

There are three dates that go into the calculation of the affected performance measures. The three dates are: Carrier's First Written Notice of Injury (Notice), Benefit Accrual Date (Accrual), and Initial Payment Date (Payment). The basic formula is that if the Payment is more than seven days after the later of Accrual or Notice, the initial payment is late. If any of these dates is wrong, the commission cannot accurately determine whether the payment was timely.

Originally, the commission obtained the data for these three dates from a commission form that was filled out by insurance carriers and sent to the commission. The commission later introduced an electronic reporting mechanism, known as (EDI), to replace the paper form. The transfer from paper reporting to EDI reporting took a number of years but the slide in the performance measures matched the period during which EDI reporting was becoming more prevalent. In fact, there appeared to be a direct, inverse relationship between EDI reporting increasing and initial payment performance decreasing.

As it turned out, performance itself was good for many carriers and was certainly much better than the data suggested. In one case, the carrier's actual performance was among the best the commission had ever found when conducting audits but it appeared from the data they submitted that the carrier's performance was among the worst. As a result of incorrect data, the commission was forced to spend significant resources on what appeared to be an epidemic of poor performance and was unable to spend those resources auditing system participants with actual significant problems.

Inaccurate system data makes it more difficult for the commission to monitor the system and to identify participants requiring improvement in one or more areas. In the case of the initial payment data, it appears that a large number of carriers had simply programmed the wrong value to fill one of the three key fields. The commission must be able to depend on multiple data elements if it is going to enhance its monitoring and enforcement efforts. For these reasons, the commission proposes a higher Compliance Standard for the "Data Submission Accuracy" category.

Subsection (d) addresses how the commission shall determine whether a system participant has met Compliance Standards. Because the standards are expressed as percentages (that is, percent in compliance), the commission believes that the appropriate method to test standards is using either a census or statistical sampling to determine the system participant's Compliance Rate. Censuses involve testing an entire universe of duties in a given period for compliance. There are a number of different statistical sampling methods that can be used to measure compliance and project the findings of the sample on the entire universe. Generally, the commission uses simple statistical sampling for compliance audits.

For example, the commission might be interested in auditing an employer's compliance with requirements for timely filing TWCC-1 forms. To determine this, the commission might look at all of the employer's filings over a given period (a census) or might conduct a statistical sampling of all the employer's filings within a given period. Because few employers file more than a few dozen TWCC-1 forms per month and because auditing TWCC-1 forms for timeliness is not very labor-intensive, in this case the commission would probably use a census.

However, if the commission wanted to review a carrier's timeliness of paying or disputing medical bills, the commission would likely use a sample because most carriers process hundreds or thousands of bills each month. Therefore, it is often not feasible to conduct a census on an audit such as this.

The advantage of statistical sampling over a census is that it allows the commission to review fewer filings, bills, payments, claims, etc. in order to determine if a Compliance Standard has been met. The disadvantage of statistical sampling when compared to a census is that a census is perfectly accurate while statistical sampling have margins of error built into them. Thus, the commission must determine for each audit it will conduct what is the best method to achieve the degree of accuracy desired given the limited resources available to the commission."

While a census will tell you exactly what percentage of filings, bills, payments, claims, etc. are in compliance, statistical sampling will give you the range in which the compliance falls. This range is determined by taking the compliance rate of the sample and then subtracting the margin of error to get the lower range and then adding the margin of error to the Compliance Rate for the sample. For example, if the commission determined that 91 out of 100 filings that were sampled were timely and that there was a margin of error of 5.61% then the compliance range would be from 85.39% to 96.61%. Statistical sampling results are also sometimes expressed as a number "plus or minus" the margin of error. In this example this would be 91% plus or minus 5.61%.

The margin of error in a statistical sample is actually a variable concept. The same statistical sample can be interpreted different ways resulting in different margins of error. The reason for this is that the margin of error is highly dependent on the level of confidence in which the sampler wants to express the results - the higher the confidence, the larger the margin of error.

The easiest way to think about the confidence level is to think of it as the probability that the statistical sample selected is "accurate." In our previous example, the statistical sample found that 91% of the filings were timely. Using the margin of error, it was then determined that the Compliance Rate for all filings in the universe from which the statistical sample was selected was in the range from 85.39% to 96.61%. In order to know how strong this projection is, the confidence level is needed. In this case, the confidence level was 95%. This means that the commission is 95% certain that the projection is accurate.

Another way to understand the 95% confidence level is to say that if the commission took 20 statistical samples out of the same universe, the compliance level in 19 of the samples (95% of them) would fall in the 85.39% to 96.61% range. Still another way to look at it is that if the commission were to do a census of the universe instead of statistical sampling, there is a 95% chance that the census would find that the true Compliance Rate fell within the range predicted by the statistical sample.

The commission uses 95% confidence to project its samples because, depending on what the Compliance Rate is, penalties can be increased or reduced. Therefore, it is important that the commission is very certain of the results of its Compliance Audits - 95% confidence does that.

Subsection (d) explains that when using a census, the Compliance Rate for a Compliance Category is the proportion of the system participant's duties that were met. Calculating the Compliance Rate when using a statistical sample is a bit more complicated because, as noted, samples are generally used to calculate the range of possibilities. However, the commission must be able to determine if a system participant's compliance was above a certain level (the Compliance Standard) and if not, to find out the extent to which the goal was missed.

The commission had previously attempted to use the compliance range concept to measure compliance but found that system participants were confused by it. Ultimately, the easiest way to communicate the standards and a given participant's performance is by using a single number. The commission turned to a different method of expressing compliance and has been using it for more than six years. This method is called the "Least Likely Compliance Rate" and the proposed rule continues using this method with samples to determine how close or far away a participant is from the Compliance Standards.

The Least Likely Compliance Rate is calculated by subtracting the margin of error of the statistical sample (calculated based upon 95% confidence) from the proportion of the system participant's duties in the sample that were met - it is the lower end of the compliance range. In the example discussed above, the Least Likely Compliance Rate is 85.39%.

When the concept was first introduced, some questioned why the lower end of the range was used. This is because by using the lower end of the range, the commission can safely say that it is 95% certain that a participant's overall compliance is no less than the Least Likely Compliance Rate.

Proposed new §180.13 - Warning Letter Criteria; Relevant Time Period

Proposed subsection (a) of the rule indicates, the purpose of the rule is to outline some of the commission's general enforcement policies.

Subsection (b) explains that the commission may, in its discretion, issue a Warning Letter instead of an administrative penalty under certain circumstances, such as when the violation involved no more than one day of noncompliance, the violator is not in continued noncompliance, and the conduct was not a significant violation. This is because violations that meet these criteria are generally not as serious as some other actions that warrant more significant enforcement action. For example, if a violator filed a form or made a payment one day late on a single occasion, this section would likely apply. But if the same violator had a history of being one day late filing forms or issuing payments, then the commission would likely seek to impose a more serious sanction, such as an administrative penalty.

Subsection (b) further outlines circumstances under which the commission will issue Warning Letters rather than taking other enforcement action. Because violations can be discovered through Violation Reviews (these violations are called "Referral Violations") or through a Compliance Audit (these violations are called "Audit Violations"), the subsection provides slightly different conditions for issuing Warning Letters.

For Referral Violations, the rule adds an additional criteria for the issuance of a Warning Letter instead of a penalty by stating that the violator had not been previously notified of a compliance problem in the same Compliance Category in the one year prior to the first day of noncompliance for the current violation. This will ensure that the violator had some prior notice of possible problems before issuing a penalty in most situations. The rule uses a period of one year because it is reasonable for a violator to know that there have been problems if they have received notice within the 12 months prior to the date the current violation occurred.

For Audit Violations, the rule adds an additional criteria for the issuance of a Warning Letter instead of a penalty by stating that in a given Compliance Category, the violator met or exceeded the Compliance Standard for the Compliance Category or the commission only identified one violation in that category. This provides a strong incentive for system participants to achieve the Compliance Standards. If they meet or exceed the standards and don't have any continued noncompliance or significant violations, they will likely not be fined. This is part of the reason that the standards were set high. The commission wants to provide the maximum reward only to the highest achievers (though in proposed new §180.17 (relating to Audit Modifiers), the commission provides consideration for those who come reasonably close to the standards).

Subsection (c) explains that, because enforcement action is most effective when taken close to the date the violation occurred, the commission generally will not initiate enforcement action against a violator if the violation was reported to the commission more than one year after the last day of noncompliance, unless there is continued noncompliance or it was a significant violation. There are other reasons beyond the effectiveness of the action that support this proposed one-year time frame.

Enforcement action is primarily intended to improve the overall compliance of system participants. It is not intended to be malicious, to avenge or compensate the "wronged," or to raise revenue for the state. The commission has observed that some system participants report violations alleged to have occurred several years earlier and, sometimes, even more than five years earlier. Concentrating on more recent violations will enable the commission to better ensure present and future compliance.

The proposed language does not prevent the commission from taking enforcement action for violations that occurred more than one year after the last day of noncompliance because it can take weeks (and months in some cases) to complete a Violation Review. The commission wanted to ensure that, if continued noncompliance was reported, it could be reviewed and action taken if appropriate.

This one-year period does not apply to Audit Violations (in part because Audits necessarily involve delay before they can be conducted). The commission may, in its discretion, review compliance and initiate enforcement action regardless of when the violation occurred if it deems it appropriate. For example, if the commission believes that a case that was not "timely reported" represents an egregious violation, then the commission will pursue the matter in any way it deems appropriate.

Proposed new §180.14 General Provisions for Penalty Calculations

As subsection (a) explains, the purpose of this rule is to explain the basic process for calculating penalty amounts. The rule references the other key rules that are involved in the final calculations.

Subsection (b) explains that, if a violation falls into an identified Compliance Category, the penalty to be assessed for that violation is determined by multiplying the appropriate Base Penalty calculated in §180.15 of this title (relating to Base Penalties) by the appropriate modifiers based upon whether the violation was discovered as part of an audit or not. Each Compliance Category has a relatively simple Base Penalty formula (some categories have more than one formula for reasons that are discussed in this preamble). For example, the Base Penalty for a Communication Violation, such as a late filing of a TWCC-1 or TWCC-73, would be $50 plus $10 per day of noncompliance, not to exceed $250 for a Class D administrative violation. So, the first step in a penalty calculation is to determine which category the violation falls into and calculate the Base Penalty.

Once a Base Penalty is calculated, it is multiplied by the appropriate modifiers. There are separate modifiers for violations discovered as part of a Violation Review and violations discovered as part of a Compliance Audit. The reasons for this are tied to the way the commission identified the violation. Reviews and Audits focus on different things. Since most Violation Reviews are initiated based upon a referral sent to the commission by a "wronged" party, the commission generally has additional records and other information that help establish the violation's occurrence, as well as any aggravating and mitigating circumstances surrounding the violation; this information is less identifiable or available during an audit. But, while reviews have the advantage of being more in depth with regard to that violation, audits have the advantage of allowing the commission to determine whether an individual violation represents a significant problem or an isolated incident.

Therefore, Review Modifiers adjust penalties based upon aggravating and mitigating circumstances surrounding the violation and prior history; while Audit Modifiers adjust penalties based upon the Compliance Rate achieved in the applicable Compliance Category, prior history, and the proportion of the violator's universe that was reviewed in the audit.

The exact methodologies used for these modifiers are contained in proposed new §180.16 (relating to Review Modifiers) and §180.17 (relating to Audit Modifiers). Although both Referral and Audit Violations include consideration for prior history, they do so in different manners (owing to the fact that in an audit, it is possible to compare the Compliance Rate for a new audit to the rate in a similar prior audit to see whether performance improved, declined, or remained essentially unchanged).

Subsection (c) identifies several additional provisions relating to penalties. First, the commission will issue the maximum administrative penalty allowed by the Act if the commission is alleging that a violation was committed willfully or intentionally. The commission believes that enforcement action addressing willful or intentional violations should be designed to be punitive as well as deterrent.

Another general provision explains that, if a violation involves failure to comply with an order or decision of the commission, the calculation is performed by first identifying the appropriate Compliance Category pertaining to the underlying duty and then doubling the penalty for that violation. For example, if a carrier was ordered to pay temporary income benefits and either failed to timely comply or failed to fully comply (e.g., by underpaying) with the order, then the penalty would be calculated based upon the General Benefit Delivery category and then doubled. Violations involving orders are doubled because the violator had notice of what was required of it and failed to comply.

There are two other basic penalty provisions. The first is that penalties may not exceed the maximum administrative penalty allowed by the Act for that violation. This means that if the maximum penalty for a violation is $500 but there are so many aggravating factors that the penalty produced under the rules is higher than the maximum, the penalty cannot exceed $500. The commission's authority to assess penalties is limited by the maximum amounts prescribed by the Act. System participants should be aware however, that each day of noncompliance may constitute an additional violation subject to the maximum penalty.

Finally, the commission will round all penalties down to the nearest dollar. Doing so, simplifies record-keeping. To prevent multiple rounding downward, the rounding only occurs at the end of the penalty calculation.

Subsection (d) addresses the situation where a violation might involve a duty that is not covered by an existing Compliance Category (such as fraud, quality of care issues or another duty not yet identified). As noted, the commission believes that the formulas laid out in these rules will address 99% of all penalties issued by the commission. However, there will be some that are not covered by the rules. For example, the Legislature could create a new duty that is unlike any duty currently in place and thus the duty would not fit into a Compliance Category. In this situation, until the commission gains sufficient experience and amends the rules to address the duty, the commission will calculate the penalty in accordance with the six factors identified by Texas Labor Code §415.021(c).

Proposed new §180.15 Base Penalties

As subsection (a) of the rule explains, this rule identifies the Base Penalty formulas for each Compliance Category that are used in the first step in calculating penalties (as described in §180.14).

Subsection (b) explains that Base Penalty formulas include a limit on how high the Base Penalty may go but that the limit applies only to the Base Penalty itself. The final penalty can exceed the limits by multiplying the Base Penalty by the applicable modifiers. The reason for the limits on the Base Penalties is to ensure that the modifiers can have an effect on the final penalty amounts. If the base formulas regularly produced penalties that reached the statutory maximum, the various aggravating modifiers that the commission has included in the rules would have no effect.

Subsection (b)(1) provides the Base Penalty for Communication Violations, that is, violations of duties that are contained in the Communication Compliance Category. Unlike violations in most other categories, violations of duties in the Communication category include four different administrative violation types (Class A, B, C, and D). Since each class of violation carries a separate maximum penalty ($10,000, $5,000, $1,000 and $500, respectively), having exactly the same formula for each class would not adequately ensure that penalties for different types of violation are sufficiently different. The commission has established a separate Base Penalty for each administrative violation class. However, the formulas themselves are closely related. For example, the maximum statutory penalty for a Class A administrative violation or a penalty being issued under §415.021(b) (dealing with repeated violations or violations of orders) is twice as high as the maximum statutory penalty for a Class B administrative violation. Therefore, the Base Penalty for Class A administrative violations is twice as high as the Base Penalty for Class B administrative violations. The maximum Base Penalty for each formula in this subsection is half of the maximum statutory penalty for the class of violation.

Violations are generally measured in terms of the number of days of noncompliance, and the base penalty formulas include consideration for the number days of noncompliance. The Base Penalty formulas for Communication violations are 10% of the statutory maximum penalty plus 2% per day of noncompliance. Specifically, the Base Penalty for Class A Communication violations is $1,000 plus $200 per day of noncompliance, not to exceed $5000 for a Class A administrative violation or a penalty to be issued under Texas Labor Code §415.021(b); the Base Penalty for Class B Communication violations is $500 plus $100 per day of noncompliance, not to exceed $2500; $100 plus $20 per day of noncompliance, not to exceed $500 for a Class C administrative violation; and $50 plus $10 per day of noncompliance, not to exceed $250 for a Class D administrative violation.

Subsection (b)(2) provides the Base Penalty formula for General Benefit Delivery Violations (violations of duties that are contained within the General Benefit Delivery Compliance Category). This rule differs from the Communication Base Penalties in that almost all violations in this category are Class B administrative violations and subject to a penalty not to exceed $5000 (though each day of noncompliance is usually a separate violation). Therefore, there is no need for four different formulas.

The Base Penalty has three parts: it starts with $350 and then is increased by $25 per day of noncompliance for the first three days of noncompliance and is increased by $50 per day of noncompliance for each day over three. Therefore, if a carrier was seven days late in making a payment, the Base Penalty would be $625. The penalty amount for the first three days of noncompliance is lower than the penalty amount for subsequent days to further separate the more minor violations from the more serious ones.

Regardless of the applicable formula, the maximum Base Penalty under this rule is not to exceed the greater of $5,000 or twice the dollar value of the affected amount (which includes the amount unpaid plus any owed interest). The limit is the greater of these two numbers to ensure that the penalty amount will be greater than the amount owed, making it more expensive to remain noncompliant than it is to timely pay any owed moneys.

Similar violations can sometimes be grouped together and treated as one violation. Although the commission will be treating such violations as one violation, it will be considered a more serious violation. For example, if a carrier makes a payment of temporary income benefits (TIBs) 43 days late and the payment was for five weeks of benefits, the violation is more significant than if the carrier was 43 days late paying a single week of TIBs. Therefore, the rule provides that the Base Penalty in these situations is increased by 25% per affected benefit period. The rule includes examples illustrating how this works.

Another way that General Benefit Delivery violations differ from Communication violations is that these violations can involve both late payments and underpayments. To address this, the Base Penalty can be adjusted when an underpayment is involved. Communication violations are not divided into two types of violations, as are General Benefit Delivery violations. Communications are either timely made in the correct manner or they are not. When a communication is made but is not made in the manner required, it is not considered to have been made in compliance.

The rule provides that the Base Penalty shall be reduced by 75% if the underpayment was less than or equal to 5% of the amount due or by 50% if the underpayment was more than 5% of the amount due but less than or equal to 20% of the amount due. However, if the underpayment was more than 20% of the amount due, then there is no reduction. The purpose of giving the biggest reduction for the smallest mistakes is to encourage people to be as accurate as possible. Also, these adjustments are intended to apply to timely underpayments, and not late underpayments. If a payment is both late and underpaid, the adjustment does not apply.

The rule provides for another adjustment when the affected benefit payment involved a payment that was reduced by post-injury earnings (PIE). The reason for this is that the amount of harm experienced when an employee is receiving PIE and has a late "partial" TIBs or supplemental income benefits (SIBs) payment (as opposed to full TIBs or SIBs) is less than when the employee has no other source of income. Essentially, if the TIBs are late and the employee has PIE, the employee is less detrimentally affected. The adjustment involves multiplying the Base Penalty by the PIE and then dividing by the Average Weekly Wage (AWW). Mathematically, this formula reads (Base Penalty ( PIE) ( AWW. This proportionately reduces the penalty amount. If a TIBs check was seven days late, the Base Penalty would be $625. However, if that payment had been for a partial week of TIBs where the employee's AWW was $500 and the PIE was $250, then the Base Penalty would be $312.50 (penalties are rounded down after all modifiers are applied). This is because the Base Penalty of $625 is multiplied by the PIE of $250 and then divided by the AWW of $500.

Finally, benefits are usually paid weekly but sometimes they are paid monthly. A monthly benefit that is paid late or underpaid will generally involve more harm to the wronged party because it involves 4.34821 times more money (4.34821 is the average number of weeks in a month). Therefore, the rule provides that the Base Penalty for violations involving a monthly benefit period is multiplied by 4.34821 up to a maximum of the greater of $21,741.00 ($5000 ( 4.34821) or twice the amount affected.

Subsection (b)(3) addresses the base penalty for Seeking Medical Reimbursement Violations (violations of duties in the Seeking Medical Reimbursement Compliance Category). Like the Communication Violations, Seeking Medical Reimbursement Violations have more than one Base Penalty Formula.

The first Base Penalty addresses improperly pursuing a private claim against a claimant or pursuing a claim in civil court prior to exhausting administrative remedies at the commission. These are some of the most serious violations that can be committed in the system. In both cases, these actions can contribute to high costs and low quality by allowing care that might not be reasonable or necessary to be paid and/or by allowing fees higher than those allowed to be paid. When a provider gives care that is not reasonable or necessary and is able to obtain payment for those services (whether by committing a violation or otherwise), the provider has no incentive to change behavior. To the extent that the provider committed a violation to obtain payment to which it was not entitled, the violation needs to be addressed with enforcement action. The same is true if a carrier attempts to obtain a refund without first exhausting administrative remedies at the commission.

In addition, when a provider pursues a private claim against a claimant, even if the claimant does not pay the bill, the claimant's credit history could be negatively impacted for years by the improper pursuit of a bill. The commission is proposing to set the penalty amount at twice the value of the claim being improperly pursued to enhance the penalty's deterrent effect.

The Legislature vested the commission with the responsibility for initial dispute resolution. This allows disputes to be resolved at the earliest stage possible and it ensures that disputes are reviewed by those with expertise to resolve them consistently and effectively. While the Act allows appeals of commission dispute resolution decisions, the requirement to first go through the commission helps ensure that when a decision is appealed, those handling the appeal at the next level have the opinion of experts (that of the commission's medical dispute resolution officer for fee-related disputes, and that of the independent review organization for necessity-related disputes).

The second Base Penalty provided for in this subsection addresses other types of billing/refund requesting errors such as providing erroneous identification information (e.g., the name of the injured employee, the provider of the care, or the place care was provided), erroneous treatment/billing information (e.g., procedure codes or modifiers), failing to attach required documentation, and committing other procedural violations (e.g., not using the correct forms or not providing explanations documenting reasons for requests for reconsideration or Medical Dispute Resolution).

The types of violation issues covered by the second Base Penalty include both minor and more serious violations. When the violation merely inconveniences the carrier processing the bill or the provider responding to a refund request, the violation can be addressed with relatively light enforcement action. Therefore, in most cases, the Base Penalty for these violations is capped at $200 because the violation itself carries a certain amount of negative reinforcement (improperly completed bills are often denied or returned, necessitating rebilling). Generally, the penalty amounts are $25 plus $1 per identified error related to basic identification information, plus $1 per identified error related to submitting treatment/billing information in accordance with commission rules and fee guidelines, plus $25 for not attaching required documentation, plus $25 per each other procedural violation associated with medical billing/refund requesting. However, if the violation resulted in payment to which a system participant was not entitled (e.g., if the provider unbundled services and received higher payment), then the cap on the Base Penalty is not in effect and the penalty is increased by twice the value of the payment the provider improperly obtained in order to provide a deterrent to committing such violations.

Subsection (b)(4) addresses the Base Penalty for Medical Bill/Refund Processing Violations (that is, violations of duties contained in the Medical Bill/Refund Processing Compliance Category). There are similarities between violations relating to General Benefit Delivery and violations in the Medical Bill/Refund Processing category. But, generally, the penalties for General Benefit Delivery violations (such as late payment of TIBs) are much higher than a violation in this category. There are several reasons for this. First, most violations under the General Benefit Delivery category involve the sole or nearly sole source of income for the wronged party. Most violations in the medical category involve late, underpaid, or improperly denied medical bills. The commission believes that prompt and proper payment of medical bills is extremely important to the workers' compensation system. However, the commission believes that, barring significant aggravating factors (such as a violation being committed willfully/intentionally or the violator having a pattern of practice of these violations), these violations do not have the same impact as a violation in the General Benefit Delivery category.

When setting the penalties for General Benefit Delivery violations, the commission considered and rejected the idea that the penalty should be heavily based on the amount of benefits that were due. The reason for this is that benefits are related to the AWW. A late payment of $240 to one injured employee is just as bad as a late payment of $480 to another employee. Assuming that the benefits are full TIBs, these benefits represent the employee's sole income/income replacement for the week.

However, this reasoning does not apply for violations relating to Medical Bill/Refund Processing because, as noted, each bill is likely one of many. Therefore, the overall impact of a single violation is less for Medical Bill/Refund Processing violations. However, because provider bills and carrier refunds vary widely (even a single provider's bills can vary significantly), the amount of the bill should be an important factor in the setting of the penalty amounts. Thus, the commission proposes to set the Base Penalty formula at 10% of the amount affected plus $10 per day of noncompliance, not to exceed the lesser of $10,000 or twice the dollar value of the benefits affected. The rule explains that "benefits affected" includes owed interest and the lesser of the maximum allowable reimbursement under the Act and Rules or the amount billed by the provider.

While the penalty amounts prescribed by this rule may appear to be relatively small, carriers process thousands of medical bills. Therefore, a relatively low penalty on numerous violations will have a cumulative effect that will provide sufficient incentive for a carrier to strive for compliance.

The Base Penalty for Medical Bill/Refund Processing violations does contain one provision that is almost identical to an analogous provision of the Base Penalty for General Benefit Delivery violations. This provision relates to adjusting the Base Penalty when the violation involves an underpayment.

In both cases, the Base Penalty shall be reduced by 75% if the underpayment was less than or equal to 5% of the amount affected or by 50% if the underpayment was more than 5% of the amount affected but less than or equal to 20% of the amount due. However, if the underpayment was more than 20% of the amount affected, then there is no reduction. The purpose of giving the biggest reduction for the smallest mistakes is to encourage accuracy to the extent possible. Just as was the case in General Benefit Delivery violations, these adjustments are intended to apply to timely underpayments, not late underpayments. If a payment is both late and underpaid, the adjustment does not apply.

Subsection (b)(5) addresses Base Penalty Calculations relating to Requesting Preauthorization or Concurrent Review Violations (violations of duties in the Requesting Preauthorization or Concurrent Review Compliance Category). The Base Penalty formula for this category is similar to the second one for Seeking Medical Reimbursement violations but is essentially doubled because there is more harm associated with these violations. When a medical bill is improperly submitted and is returned or denied or when a preauthorization/concurrent review request is submitted improperly, injured employees may have an unnecessary delay in the provision of care. In addition to prolonging the employee's discomfort and recovery, this can add costs to the system (particularly if TIBs are being paid). However, carriers generally pay more to have preauthorization requests processed than they do to process medical bills. So, it is generally more costly for carriers to deal with improperly submitted preauthorization/concurrent review requests than improperly submitted medical bills.

The Base Penalty equals $50 plus $2 per identified error related to basic identification information plus $50 for committing other procedural violations (such as not using the correct forms or not providing explanations documenting reasons for requests for reconsideration or Medical Dispute Resolution) associated with Preauthorization/Concurrent Request Violations. The cap on the Base Penalty is $400.

Subsection (b)(6) addresses the Base Penalty for Processing Requests for Preauthorization, Concurrent Review and Medical Dispute Resolution Violations (violations of duties in the Processing Requests for Preauthorization, Concurrent Review and Medical Dispute Resolution Compliance Category). In developing these penalties, the commission considered the fact that the carrier has a very short period to respond to requests and that only a few hours' delay could be the difference between a violation and a nonviolation. However, carriers have an important duty to timely fulfill their responsibilities relating to these requests to ensure that the delay in the provision of care or resolution of a dispute is minimized. Therefore, the commission proposes a relatively steep penalty (when compared with other violation types) to emphasize the importance that the commission places on these duties. However, because the commission recognizes that sometimes a carrier might commit a violation of these duties that is of a less significant nature, the rule provides that if the violation only involves an administrative issue associated with the manner in which the carrier's response to the request was made (e.g., does not involve timeliness or the reason for a denial), the Base Penalty shall be reduced in half.

Subsection (b)(7) addresses the Base Penalty for Data Submission Accuracy Violations (violations of the Data Submission Accuracy Compliance Category duties). As the rule notes, the Base Penalty is dependent on the types and number of data elements in the data submission that were not accurately submitted to the commission. Under this rule, each record that contains errors is considered a separate violation. For the purposes of this section, "record" refers to each individual record contained in a data submission, not the batch transmission itself (e.g., a medical bill or an electronic data interchange transmission). For example, if a carrier submits a batch of 2000 medical bills and 12 of the bills contain errors then there would be a total of 12 violations (one for each of the 12 records that had errors).

The Base Penalty for Data Submission Accuracy Violations is $25 plus $1 per identified inaccuracy related to basic identification information, plus $1 per identified inaccuracy related to benefit information (e.g., benefit amounts, benefit periods, medical procedure coding or modifiers) plus $25 per identified inaccuracy associated with a duty of the system participant making the submission (such as a carrier incorrectly submitting the date a bill or notice of an injury was received or the date payment or dispute made).

This last part, relating to inaccuracies associated with a duty of the system participant making the submission, is intended to ensure that penalties increase when a violator submits data that inhibits the commission's ability to monitor that system participant. For example, if a carrier incorrectly submits the date that medical bills are received or paid, that would inhibit the commission's ability to monitor that carrier's timeliness of medical bill processing.

The Base Penalties for these violations are capped at $250. While this is a relatively small amount, it is worth noting that many system participants (particularly carriers) have to submit thousands of records to the commission. Thus, a relatively low penalty on many violations will add up quickly enough that there will be sufficient incentive to strive for compliance.

Subsection (b)(8) addresses the Base Penalty for Accident Prevention Services Violations (violations of the Accident Prevention Services Compliance Category duties). Accident prevention services are services that are provided by insurance carriers to their policyholders to help reduce the frequency and severity of workplace injuries and illnesses. There are two Base Penalties relating to these duties.

Most accident prevention service duties are based, at least partially, on premium amounts. The Base Penalty for providing late or inappropriate accident prevention services is based on the premium amount (between 1% and 1.5% of the premium amount). Therefore, the commission proposes to set the Base Penalty at 2% of the premium amount to ensure that there is an incentive to provide the services as required (it will be more cost-effective to provide the services than to pay the penalties).

Accident prevention services are provided by "Field Safety Representatives" who must meet certain qualifications. The Base Penalty for using an unqualified Field Safety Representative is based upon the number of policies serviced by the unqualified system participant. Specifically, it is $250 plus $250 per policy serviced that calendar year by an unqualified Field Safety Representative, not to exceed $5,000. In addition, if the services provided turn out to have been inappropriate or not timely provided, the carrier faces penalties for those violations as well.

Subsection (b)(9) addresses the Base Penalty for Attendance Violations (violations of the Attendance Compliance Category duties). The commission proposes to set this Base Penalty at $100 per violation because that is the amount of money a doctor is paid for a missed or rescheduled appointment without proper notice.

Subsection (b)(10) addresses the Base Penalty for Record-Keeping Violations (violations of the Record-Keeping Compliance Category duties). In determining what the appropriate penalty formula might be for these violations, the commission examined what types of violations these are. These violations are the type that would prevent the commission from proving that the violator committed other more serious violations. The commission was therefore concerned that the penalties should be high enough to provide an incentive to discontinue such violations. For example, if the penalty for failing to date-stamp receipt of a document was lower than the penalty for failing to timely take an action based upon the receipt of that document, there would be an incentive to fail to date stamp the document which would then hide the failure to timely take action based on it.

To address this, if the violator's Record-Keeping violation prevents the commission from verifying that another violation occurred, the Base Penalty is the lesser of the maximum penalty allowable under this section for the violation that the commission cannot verify due to violator's failure to maintain the required documentation or $10,000 (which is the maximum penalty allowable by the Act for this type of violation). However, if it does not appear that the violation had such an effect, the penalty is $25 per affected record.

Proposed new §180.16 Review Modifiers

This rule identifies the modifiers that are used to adjust Base Penalties on violations discovered through a Violation Review or means other than a commission audit of the violator that involved a census or statistical sample. This rule does apply to violations discovered through an audit of an entity other than the violator.

When the commission conducts an audit, the commission will often identify additional violations by system participants other than the primary subject of the audit. For example, when evaluating a carrier's compliance with duties associated with temporary income benefits (TIBs), the commission will often identify violations by the employers and doctors involved in the same claims. In such a case, the census or statistical sample taken involved the carrier's universe of claims where TIBs were due. However, this is the carrier's universe. It is not the employers' or doctors' universe of claims where TWCC-1s or TWCC-73s are due. Therefore, it is not possible to take the violations committed by these "secondary violators" and establish whether or not they met or missed the Compliance Standards (which is the hallmark of compliance audits and thus using the Audit Modifiers).

Subsection (b) lists aggravating and mitigating factors that can increase or decrease the Base Penalty. Because the modifiers are all multipliers, it does not matter in what order they are applied. Further, multiple modifiers may be used on a single penalty.

The first modifier is an aggravator that increases the penalty by 50% if another person had previously notified the violator of the noncompliance and yet the noncompliance was corrected only after contact by the commission. The commission receives many violation referrals that could have easily been resolved by the parties. But, because the violators refuse to correct their behavior and come into compliance, the commission must spend a significant amount of resources on these cases. Therefore, the purpose of this modifier is to provide a disincentive to remaining in noncompliance after a person has been notified that there is a violation requiring correction.

The second modifier is also an aggravator. This modifier increases a penalty by 100% if the commission believes that the violation was a representative violation. Generally, the commission doesn't know whether a violation discovered through a Violation Review is representative of a true compliance problem or an aberration. Usually, the commission can only make such determinations through a Compliance Audit. The commission is sometimes able to discover that the cause of the violation was procedural or programming based. When this occurs, the commission can be reasonably sure that the violator is committing similar violations in similar situations (in accordance with their procedure or programming). A higher penalty is appropriate to provide an additional incentive to change their behavior because the higher penalty may cost the violator more money than it would to change its procedures or programming to correct the problem.

The third modifier is another aggravator that can increase the penalty by 100%. This modifier is applied if the commission finds that the violation resulted in demonstrable harm to the affected party(s) and the violator failed to take actions to rectify the consequences of the violation prior to the commission issuing a Notice of Violation under §180.8 of this title (relating to Notices of Violation, Warning Letters, and Notices of Intent). This modifier is designed to encourage violators to make good faith efforts to rectify the consequences of their violations.

Demonstrable harm can take many forms depending on the circumstances of the violation. For example, if a doctor failed to timely file a TWCC-73 notifying the carrier and employer that the employee was able to return to work, this could cause the carrier to overpay income benefits to the injured employee. Another example would be if the carrier failed to timely pay benefits to an injured employee and a check bounced as a result. Still another example would be if an employer failed to timely or accurately report wage information to the carrier and the claimant did not receive the proper amount of benefits that the employee would have received had the information been timely/accurately reported.

The modifier applies if the corrective action(s) is not taken before the commission takes enforcement action. If the corrective action is taken after the commission issues the Notice of Violation, the modifier still applies. The reason for this is that the modifier is intended to serve as an incentive to take corrective actions. If violators can avoid the modifier by failing to take corrective actions until long after the violation (such as during an appeal as a means to get the fine reduced), then the commission will have spent valuable resources on the appeal and the wronged party will have waited that much longer to be made whole. Good faith efforts must be timely made.

This modifier applies even if the wronged party later recants their claim of harm. The commission has seen circumstances where there was demonstrable harm to a party but by the time the case comes up for appeal, the violator was able to convince the wronged party to either withdraw their position or ask that the commission reduce the proposed penalty. The commission believes that this is inappropriate because, as noted, good faith efforts must be timely made to be considered to have been made in "good faith." The commission wants to encourage corrective actions to be taken as soon as possible. That is why the commission does not believe that the modifier should be withdrawn after being applied.

Good faith efforts designed to rectify the consequences of a violation can take many forms. However, simply performing other duties under the Act is not one of them. For example, when a carrier makes a late payment to a claimant, the carrier is required to pay interest on the accrued but unpaid amount. Paying that interest does not represent a good faith effort - it represents taking an action to avoid committing a second violation.

The commission has also included a mitigating modifier that reduces the Base Penalty by 50% if the noncompliance was corrected prior to contact by another person related to the violation. This mitigator is designed to provide an incentive for violators to have processes to perform quality control checks on their work and take corrective action when a problem is discovered rather than allowing the violation to go unnoticed or remaining unaware of their own mistakes. One of the best ways to improve compliance is for system participants to have a reason to monitor themselves.

This modifier does not apply to a violation involving a late action because, in almost all cases, a late action is "corrected" when it is taken. For example, if a doctor files a report late, the penalty should not be reduced simply because the doctor filed the report before the tardiness was noticed.

Subsection (c) addresses the Review History Modifier that is used to increase penalties based upon the violator's past experience of committing similar violations (violations that fall into the same Compliance Category) as evidenced by prior notice to the violator (prior violations). The reason that history is used as a factor to increase penalties is that the more history a violator has, the greater the commission believes that improvement is necessary and the greater the concern the previous penalties were not sufficiently high enough to motivate the violator. Worth noting here is that, although this Review History Modifier is for use with Referral Violations, the prior violations that are included in the calculation include both Referral and Audit Violations. Both types of violations are included because they represent instances where the violator was previously notified of similar problems and thus it is reasonable to include them.

When developing these penalty proposed rules, the commission and system participants were concerned that simply increasing the penalty by a flat percentage for each prior violation could eventually cause penalties to get unreasonably high. Moreover, including all prior history would mean that a violator would not be rewarded for improvement (which is the goal of taking enforcement actions). Therefore, the commission developed the concept of the History Period that is the period of time prior to the violation in which prior violations are counted up for calculating the Review History Modifier. Though the commission has not aggressively used history in its current enforcement methods, when it has, it has used the two years prior to the first day of noncompliance for the current violation. Part of the reason that the commission did not aggressively use prior history to increase all penalties in the past was due to the difficulty that the commission had identifying prior violations. The commission has better automation tools that will simplify this task in the future.

The rule uses a two year History Period except in two circumstances. The first is where the commission is alleging that the violation is part of a pattern of practice. Patterns of practice (particularly uncorrected patterns of practice) are very serious and deserve to have significant enforcement action applied to them. Further, in some cases, the patterns can be established over a longer period than two years.

The second circumstance where the History Period is not limited to two years is when the violation was discovered as part of an Accident Prevention Services Inspection under Texas Labor Code §411.064 and Chapter 166 of this Title (relating to Workers' Health and Safety - Accident Prevention Services). For these violations, all prior violations from the prior two inspections are counted as prior violations. The reason for this is that Accident Prevention Services Inspections only occur approximately every two years and the commission believes that it is necessary to have at least two cycles for history purposes.

Another concern that the commission had in terms of using prior history was dealing with differences in size between larger and smaller violators. For example, if the employer who committed the violation of filing ten late TWCC-1 forms only had 20 injured employees in a two-year period, then ten would be a significant number of prior violations. But if the violator had several hundred injured employees each year, then ten would be a relatively low number. Also troubling was the fact that using a flat rate history modifier applied in all situations did not allow consideration of whether the violator's compliance history was improving over time (which, again, is the purpose of enforcement action). The commission considered various methods of trying to adjust history for violator size but determined that there was no way to do so satisfactorily that would be easy to administer.

To address this concern in a way that both reduces the size issue and accounts for changes in performance, the rule provides that (other than for violations discovered through an Accident Prevention Services Inspection) the Review History Modifier is applied if the number of prior violations in the first year of the History Period is more than four or greater than and equal to the number of prior violations in the second year of the History Period. The two years of the History Period are in reverse chronological order: the first year of the History Period is the year closest to the first day of noncompliance for the current violation, while the second year immediately precedes the first year. By dividing the History Period into two periods and comparing them, the commission can see whether the violator's performance has been improving, declining, or steady. If performance was improving, then the Review History Modifier is not applied. If performance was declining or steady, then the Review History Modifier is applied. The reason that the Review History Modifier is applied when performance was unchanged is because compliance should be improving if the commission took enforcement action. If the commission did not increase penalties when violators failed to improve, this would be a disincentive for a system participant to improve in the area of compliance.

The rule also sets a threshold in use of history. Since application of the Review History Modifier is dependent upon changes in performance, the commission wanted to be sure that there was a sufficient number of prior violations to use to determine if performance is improving. If there were no threshold, then a violator who went from one violation during the second year of the History Period to two violations during the first year, would be considered to have declining performance under the rule. However, such a relatively low number of prior violations during each of the two years of the History Period makes it difficult for the commission to ascertain their significance. While this approach does not completely solve the "large" violator problem, it does give the violator a way to avoid having penalties increased based on history - by improving performance. While larger violators face significantly higher penalties when their performance is unchanged (due to the sheer volume of prior violations they might have), they also may have an easier time improving their performance because it may take a smaller change to have an effect on the history.

Regarding the modifiers themselves, the rule applies different modifier amounts for different types of violations. These differing modifiers are based on several factors, such as the importance of the duty that was violated, the frequency with which a duty arises (the greater the frequency the greater the number of violations that the commission would expect to be committed and therefore the greater the concern that penalty amounts rise too quickly), and the seriousness of the possible consequences.

The Review History Modifier for Communication Violations and Accident Prevention Services Violations is 1 plus .05 per prior violation. Essentially, if the Review History Modifier is to be utilized, each prior violation in the history period adds 5% to the current violation.

The Review History Modifier for General Benefit Delivery Violations, Seeking Medical Reimbursement Violations, Medical Bill/Refund Processing Violations, and Data Submission Accuracy Violations is 1 plus .025 per prior violation. The reason that the modifier for these violations is lower than the modifier for Communication Violations is that it is likely that far more of these violations will occur. The typical TIBs claims will have at least twice as many TIBs payments to be made by the carrier than reports to be filed by the employer.

The Review History Modifier for Requesting Preauthorization or Concurrent Review Violations and Processing Requests for Preauthorization, Concurrent Review and Medical Dispute Resolution Violations is 1 plus .1 per prior violation. The reason that the modifier for these violations is significantly higher than it is for Communication Violations is that, as discussed earlier in the preamble, these violations generally result in more serious consequences.

The Review History Modifier for Attendance Violations is 1 plus .5 per prior violation because these violations should be very rare. They are not the type of violation that occur accidentally. Further, to pursue such a violation, the commission must make a determination that there was no good cause to fail to attend in the first place. If a violator has enough history of committing these violations that the Review History Modifier is to be applied, the noncompliance is serious.

The Review History Modifier for Record-Keeping Violations is 1 plus .05 per violation. Although the frequency of these duties is relatively high (like the General Benefit Delivery Violations), the consequences for failing to meet those duties are serious. Again, the commission wants to ensure that there is not an incentive for violators to hide their violations by failing in their record-keeping duties.

Proposed new §180.17 Audit Modifiers

The modifiers in this rule only apply to penalties being issued for violations discovered through a Compliance Audit of the violator that used either a census or a statistical sample. The modifiers in this rule adjust penalties for the violator's overall level of compliance based on the violator's history and whether a census or statistical sampling was used in the audit.

Subsection (b) addresses the Audit Modifier which is used to increase or decrease penalties based upon the Compliance Rate(s) calculated in accordance with §180.12(c). The modifier reduces penalties in half if the violator is reasonably close (within 5 percentage points) to the Compliance Standard. The purpose of this is to reward violators who are close to the standard. Under §180.13, the commission will generally issue Warning Letters if the violator met the Compliance Standard. If the violator is no more than ten percentage points below the Compliance Standard, the Audit Modifier is 1.

However, if the violator is more than 10 percentage points but no more than 15 percentage points below the Compliance Standard, the Audit Modifier is 1.5. This means that the Base Penalties will be increased by 50%. The modifier continues to escalate as the violator's performance moves further away from the Compliance Standard. For example, penalties are doubled if the violator is up to 20 percentage points below the standard, tripled if up to 30 percentage points below the standard, and quadrupled if more than 35 percentage points below the Compliance Standard. These modifiers are intentionally tiered to ensure that the compliance performance of system participants will continue to improve.

Subsection (c) provides for the Audit History Modifier for Audit Violations that work significantly differently than it does for the Referral Violations. The reason for this difference is that with audits, the commission can compare actual performance to determine whether it is improving, declining, or holding steady. Audit History Modifiers reduce penalties when performance is improving but increase penalties if performance does not improve or if performance decreases. If the current Compliance Rate is 30 percentage points or greater than the prior audit, the Audit History Modifier is .25 (reducing the penalty by 75%); between 20.00 and 29.99 percentage points higher than the prior audit, the Audit History Modifier is .5 (reducing the penalty by 50%); between 10.00 and 19.99 percentage points higher than the prior audit, the Audit History Modifier is .75 (reducing the penalty by 25%); or between 0 and 9.99 percentage points higher than the prior audit, the Audit History Modifier is 1 (meaning that there is no effect on penalties). If the current Compliance Rate is between 0 and 5 percentage points less than the prior audit, the Audit History Modifier is 1.25 (increasing the penalties by 25%); between 5.01 and 9.99 percentage points less than the prior audit, the Audit History Modifier is 1.5 (raising penalties by 50%); or, if there is a 10 or more percentage point drop, the Audit History Modifier is 2 (doubling the penalties).

Taken together, the Audit Modifier and the Audit History Modifier adjust penalties for current compliance and past compliance. Using them in conjunction makes the penalty formulas in these rules quite sensitive. For example, if a doctor was found to have 70% timeliness in filing TWCC-69s, that would be relatively low compliance and the Audit Modifier would increase the penalties by 50%. However, if the doctor had 70% compliance and this 70% was up from 50%, the penalties would be reduced by 50% (essentially canceling themselves out). While some would suggest that 70% is still poor compliance, most would agree that 50% was far worse and it is appropriate to "reward" the doctor for the improvement. If the doctor does not continue to improve, then the Audit History Modifier won't reduce the penalties; it will start to increase them.

Subsection (d) addresses the Sampling Modifier, which is used to modify penalties issued in response to violations discovered in an audit that used a statistical sample rather than a census. As previously discussed, one of the advantages of sampling is that it allows the review of a relatively small volume of reports, bills, payments, etc. to predict overall compliance. However, the large/small violator problem is also present here, as with the Review Modifiers. The issue here however, is reversed. In audits, because of limited resources, the commission is more likely to use statistical sampling on larger violators than on smaller ones. This means that smaller system participants are more likely to have greater exposure to penalty. For example, if the commission determines that a sample size of 400 claims is sufficient to achieve the degree of accuracy required for an audit, a carrier with only 200 claims will face potential enforcement action on every violation it committed while a large carrier with 4000 claims would only face the potential of enforcement action on roughly 10% of its violations (assuming that the statistical sample was properly selected). If this were not addressed somehow, larger system participants would have less incentive to improve performance. This is where the Sampling Modifier comes in. The modifier is used to adjust penalty amounts on discovered violations based upon the number of violations predicted by the sample. The commission will not be issuing real penalties for predicted violations; rather, the commission will raise the penalty amounts for the identified violations to account for the fact that the commission is 95% certain that the violator has committed additional, similar violations. That is, each penalty would be increased to reflect the fact that it is a representative violation.

The proposed rule places some limits on this modifier. First, the Sampling Modifier is only used if the violator is more than 10 percentage points below the Compliance Standard on an initial audit or more than 5 percentage points below the Compliance Standard on a subsequent audit. The reason for this is to provide an incentive to improve. Second, the Sampling Modifier raises penalties proportionately but places an upper limit on itself to keep penalties reasonable.

The commission expects that some violators will object to the idea of having penalties increased based upon predicted violations. The commission also expects that some will object to having their performance measured using the Least Likely Compliance Rate model (or other reasonable sampling methodology). In those situations where the violator is very close to the cutoff point where the Sampling Modifier would not be used or where the violator might not receive penalties at all, some may object because they are close to the Compliance Standard and a larger sample might show they were within the standard.

To address this concern, the rule provides that the violator can offer to have the sample size expanded (even into a census) if the violator enters into a binding agreement to pay the additional costs associated with the audit. The commission will then take enforcement action based upon all violations identified in those Compliance Categories for which the expanded sample/census finds that the violator did not meet or exceed the Compliance Standard. This means that, if the violator found not to have met standards, all additional violations discovered through the expanded audit will be pursued (with the application of the Sampling Modifier if the expanded audit was not a census and the violator did not reach the cutoff). However, if the violator wants to expand the audit, the violator must agree to pay for the expanded sample or census, even if it means that the commission must hire outside contract auditors (under §180.17) to conduct the audit.

Proposed new §180.18 Applicability

This rule identifies the effective date of the proposed rules. In order to provide a clear starting point of these rules, the commission is proposing to apply these new penalty schedules to compliance audits initiated and allegations of noncompliance received on or after the effective date of this rule. Any violations discovered through a compliance audits initiated or allegations of noncompliance received prior to the effective date of this rule will be assessed penalties in accordance with §415.021(c).

Steve Quick, Director of Compliance and Practices, has determined the following with respect to fiscal impact for the first five-year period the proposed rules are in effect.

There will be no fiscal implications for state or local government as a result of enforcing or administering the rule. Local governments do not have regulatory authority with respect to these rules. The commission's enforcement procedures will not change from that currently utilized. Local state government as covered regulated entities will be impacted in the same manner as persons required to comply with the rules as proposed.

Mr. Quick has also determined that, for each year of the first five years the rule as proposed is in effect, the public benefits anticipated as a result of enforcing the rule primarily will be increased awareness of the penalty schedule to all system participants. The rules will also serve as public notice to the general public and to those subject to violations under these rules by informing how the commission will take action with system participants who commit violations under the Act and Rules. The rules will inform potential violators of the methodology the commission will apply to determine penalty amounts for non-compliance with the Act and Rules. By informing the general public of the possible penalty amounts for specific infractions of the Act and Rules, there can be a decrease of disputes filed by the system participants concerning the amount of the penalty. The reduction of disputes can potentially save the costs involved with litigation.

There will be no adverse economic impact to the workers' compensation system as a whole. There will be no anticipated economic costs to persons required to comply with the rules as proposed because the basic enforcement process is not changed by these rules. However, the economic impact to any system participant is directly dependent on the system participants themselves and the willingness to achieve compliance at the compliance goals proposed in these rules. Insurance carriers, health care providers, employees and employers have already been subject to penalties assessed by the commission for violations of the Act and Rules. These proposed rules serve as publication of the commission's methodology and the application of assessing penalties.

There will be no adverse economic impact on small businesses or micro-businesses. There will be only a proportionate difference in the cost of compliance for small businesses and micro-businesses as compared to the largest businesses, including state and local government entities. The commission was able to develop formulas that take into consideration changes in the violator's performance, when those changes occurred, and the sample size of the universe. The same basic processes and procedures apply, regardless of the size or volume of the business. Ultimately, the economic impact to any business regardless of their size is their willingness to come into compliance with the Act and Rules.

Comments on the proposal must be received by 5:00 p.m., April 14, 2003. You may comment via the Internet by accessing the commission's website at www.twcc.state.tx.us and then clicking on "Laws, Rules & Forms" and then "Proposed Rules." This medium for commenting will help you organize your comments. You may also comment by emailing your comments to RuleComments@twcc.state.tx.us or by mailing or delivering your comments to Nell Cheslock at the Office of the General Counsel, Mailstop #4-D, Texas Workers' Compensation Commission, Southfield Building, 4000 South IH-35, Austin, Texas 78704-7491.

Commenters are requested to clearly identify by number the specific rule and paragraph commented upon. The commission may not be able to respond to comments that cannot be linked to a particular proposed rule. Along with your comment, it is suggested that you include the reasoning for the comment in order for commission staff to fully evaluate your recommendations.

The commission has also made available on its website www.twcc.state.tx.us a spreadsheet to aid system participants in calculating penalties in accordance with the proposed rules. This spreadsheet will be available during the public comment period to allow those commenting on the rules to easily see exactly how penalties will be calculated. The spreadsheet will be modified to reflect the final versions of the formulas at the time the rules are adopted so that it will be available to system participants in the future.

Based upon various considerations, including comments received and the staff's or commissioner's review of those comments, or based upon the commissioner's action at the public meeting, the rule as adopted may be revised from the rule as proposed in whole or in part. Persons in support of the rule as proposed, in whole or in part, may wish to comment to that effect.

A public hearing on this proposal will be held on April 11, 2003, at the Austin central office of the commission (Southfield Building, 4000 South IH-35, Austin, Texas). Those persons interested in attending the public hearing should contact the commission's Office of Executive Communication at (512) 804-4430 to confirm the date, time, and location of the public hearing for this proposal. The public hearing schedule will also be available on the commission's website at www.twcc.state.tx.us.