EXECUTIVE SUMMARY

Background

On July 30, 1993 the "Risk Management & Liability Cost Study" prepared by the firms McGladrey & Pullen and Advanced Risk Management Techniques, Inc.(ARM Tech) was submitted to the Economy & Efficiency Commission of Los Angeles County (EEC). Based upon this report (the McGladrey report) the EEC prepared a separate report entitled "Los Angeles County Risk Management Program Review," dated September, 1993. At its meeting on September 21, 1993, the Los Angeles County Board of Supervisors considered the EEC and McGladrey studies and directed county staff to take various actions based upon recommendations in the reports.

ARM Tech was engaged by the EEC for the purpose of performing a follow-up study to review departmental actions. In addition, the Commission desired that this review consider possible revisions to the recommendations or modifications to the implementation plan.

Methodology

The information necessary to complete this follow-up study was assembled by the staff of EEC and consisted of written reports from various County departments addressing specific recommendations and actions taken, or to be taken. Reports used in preparing this report were submitted by the following county departments or agencies:

Findings

Los Angeles County staff has demonstrated effort and diligence in responding to the Board's directions and the recommendations contained in the initial reports. The importance of risk management, liability loss reduction and cost control activities has been re-emphasized. Progress has been made in addressing many of the key areas needing improvement, indicating a collaborative effort to achieve the common goal of liability cost reduction.

The major areas of the McGladrey and EEC reports in which recommendations were made and which are the focus of subsequent County activities include:

• Consolidation of risk management activities
  
• Modification of claims management practices
  
• Development of a new cost allocation plan
  
• Establishment of an integrated risk management information system
  
• Implementation of a legal defense cost containment program
  
• Expanding liability loss control activities

Conclusions

Substantial progress has been made toward the implementation of a comprehensive liability cost reduction program involving several key County departments. In any organization as large and complex as the County, significant changes require time and resources. Major projects, such as the development and implementation of a centralized risk management information system and the liability cost allocation program are expected to take more time to complete. A summary of the recommendations made in this report as a result of this Follow-up Review is presented in Exhibit 1. A summary of the progress the County has made in complying with the EEC report recommendations is shown on Exhibit 2.

A more detailed discussion of the recommendations and these findings are contained in the remainder of this report.

CONSOLIDATION OF RISK MANAGEMENT ACTIVITIES

Objective of EEC Recommendations & Board Directives

One of the major recommendations in the McGladrey report is that the County consolidate its liability risk management into a single liability program unit. The purpose of this unit would be to create a more centralized approach to liability cost control, placing the

MODIFICATION OF CLAIMS MANAGEMENT PRACTICES

Contract for Claims Audit of County's Contract Claims Administrators

Objective of EEC Recommendations & Board Directives

The EEC report recommends that the County engage an independent, qualified liability claims auditor to perform an audit of the County's two contract claims administration firms--CWC and PRM. Such audits are customary and accepted practice of self-insured entities. Most public entities have audits performed of their third party claims administrators at least once every two years.

An claims audit should involve an in-depth review of a representative sample of open and closed claims handled by each claims administrative firm. Normally, a sample of between 10-20% of the claims is sufficient for the auditor to determine the quality of service provided. The scope of the audit normally includes:

• Assessing the accuracy of reserving and the timeliness of payments;
  
• Verifying that effective claims investigative techniques are used;
  
• Evaluating the results of settlement negotiations;
  
• Analyzing the caseloads of each adjuster;
  
• Evaluating the firms litigation management techniques and legal defense cost containment practices;
  
• Analyzing the firm's pursuit of subrogation recoveries.

The McGladrey report recommended that an independent audit, conducted either annually or bi-annually, replacing the County's practice of sending County Counsel staff on-site to the claims administrators' offices to conduct file reviews (prior to July 1, 1993 the site audits were performed by RIMA staff). It was the opinion of EEC's consultants that the County Counsel's staff assigned to the file reviews did not have sufficient experience and technical knowledge of liability claims adjusting to perform meaningful audits.

County Action To-Date

Effective July 1, 1994, CAO/RMO has been reassigned the responsibility of monitoring the performance of the County's contract claims administration firms (CWC and PRM). The CAO, Auditor-Controller and County Counsel concur with the E.E.C. recommendation of an independent claims audit. On September 21, 1994, the Board of Supervisors directed the Auditor-Controller to contract for an independent claims review. A request for proposals was issued by the County and the firm Warren, McVeigh and Griffin was selected. The audit has been completed.

Evaluation of Progress Made by County

The County has satisfied the recommendation for an independent claims audit of its contract claims administration firms.

Recommendation

2. The County should continue the practice of engaging the services of a qualified, independent claims auditor. Audits of the County's third party claims administration firms should be performed at least once every two years.

Review & Recommend Changes to Liability Claims Settlement Authority

Objective of EEC Recommendations & Board Directives

Board of Supervisors Directive No.7 instructed staff to review and recommend changes in the schedule of settlement authority for liability claims. The EEC report recommends that the existing levels of settlement authority be increased to promote more timely and less expensive resolution of small dollar value claims in which liability the County's liability is clear. Both of the County's contract claims administration firms indicated that an increase in settlement authority would be beneficial and would promote a more expeditious resolution of low value claims. The County's settlement authority level for its claims administrators ($3000) had not been increased since 1975 and for County Counsel ($20,000) since 1984.

It continues to be the opinion of consultants that these levels and the Claims Board settlement authority (currently $100,000), should be increased to allow the County's contractors and staff to perform settlement activities without unnecessary delay.

County Action To-Date

Both the County Counsel and Auditor-Controller's offices have studied the issue of settlement authority and recommend changes to the existing levels. These recommendations are:

Evaluation of Progress Made by County

It appears that the evaluations of settlement authority by Auditor-Controller and County Counsel's offices were sufficient to support their respective recommendations.

Recommendation

3. The liability claims settlement authority should be increased in accordance with the recommendations of the County Counsel and Auditor-Controller. The Claims Board authority should be increased to $150,000. A comparison of current authority to that recommended is shown below:

These recommended levels reflect the current dollar value of claims adjusted for increases in the consumer price index since the last changes to the settlement authority. The levels are consistent with the original stated objective of expediting resolution of claims against the County.

The Board of Supervisors, of course, would retain authority for settlements in excess of $150,000. Further consideration should be given to increasing the authority of County Counsel to $50,000, as requested by County Counsel.

DEVELOPMENT OF A NEW COST ALLOCATION PLAN

Objective of EEC Recommendations & Board Directives

The EEC and McGladrey report recommendations, and the corresponding Board of Supervisors directive, was for the CAO and Auditor-Controller to establish a liability cost allocation plan supportive of an effective risk management program. The McGladrey study found that the liability cost allocation plan in effect during FY1992-93 and FY 1993-94:

• Lacked management goals and performance measures;
  
• Was not consistently applied;
  
• Was not clearly communicated and understood by the departments;
  
• Did not apply the charges to departments on a timely basis.

ESTABLISHMENT OF AN INTEGRATED RISK MANAGEMENT INFORMATION SYSTEM

Objective of EEC Recommendations & Board Directives

During the course of the original work on this issue, it was determined that multiple tort liability information databases exist within the County -- most are incompatible in terms of design and data definition. These separate databases exist in:

• RMO (through contract claims administration firms, Carl Warren and Co. [CWC] and Professional Risk Management [PRM]), administered by RMO.
  
• County Counsel's Office (seven separate databases).
  
• Public Works Department
  
• Sheriff's Department

The existence of the multiple, independent databases make it extremely difficult for the Board, County management, and staff responsible for liability program management to produce a timely report which provides complete and consistent liability program cost information. As a result, departments are not provided with complete information concerning liability costs which are to be charged to their budgets. Complete statistics on all types and causes of liability losses are not available to direct loss control activities. Neither the Board, nor county management receive a report concerning the overall program cost of the tort liabilities of the County.

As a result of this deficiency it was recommended and the Board directed staff to establish an automated tort liability management information data base and reporting system for the purpose of collecting, compiling, and generating more accurate, complete and timely information. The uses of the integrated data would be:

• Management review and decision-making;
  
• Budgeting, accounting, and financial planning;
  
• Administration of the Claim file management;
  
• Loss Control analysis;
  
• Administration of Litigation management;
  
• Departmental (cost center) information needs -- management, budgeting, loss control; Actuarial and statistical analysis;
  
• General program analysis; and
  
• Cost allocation.

County Action To-Date

Included in the CAO's Countywide Plan for the Uniform Administration of Risk Management is an outline of a general plan for the County to develop and implement an integrated risk management information system. To accomplish this task, the CAO established a task force comprised of representatives of RMO, County Counsel, ISD-Information Technology Services, Auditor-Controller, and key County Departments (Sheriff, Health, and Public Works). The objectives of the task force were to:

1. Discuss system objectives, needs, and technical issues;
   
2. Develop a system with central storage, retrieval and reporting capabilities;
   
3. Submit its recommendations to the Board.

Based upon the CAO's March 15, 1994 Risk Management Program Review, the Task Force agreed on the following system objectives and requirements:

• Provide departments with a centralized electronic data base for the storage and retrieval of comprehensive incident and claims information;
  
• Provide departments with the ability to obtain timely, standardized reports via electronic means; and
  
• Provide departments with limited ad hoc reporting capabilities.

This document further states, "The proposed system will establish a centralized electronic database which will provide access to the database of Corporate Systems, Professional Risk Management, Inc., and County Counsel. The system will be capable of producing comprehensive statistical and financial information and risk management reports for distribution to the Board, department heads and program managers."

Based upon information contained in the "Information Sheet" (undated), ISD-ITS and RMO identified three alternative courses of action that could result in a viable solution to consolidating the Countywide risk management data, so that comprehensive information can be quickly and easily obtained to meet the Board's requirement, and the information needs of the CAO, County Counsel and departments." The three courses of action are:

Option I--Individual Access of Current Systems: This approach would entail both a manual compilation of the data from the existing multiple systems and modifications to existing systems to produce new reports (estimated cost--$150,000);

Option II--Software Interface to Existing Systems: This would require the purchase of a software system (unidentified) which would be used as an interface and translator of the data in the existing systems (estimated cost--$50,000 to $75,000);

Option III--Develop a Comprehensive Risk Management Data Base System: This approach would require the development of a new, comprehensive data base system to replace the existing, multiple systems (estimated cost--$300,000).

DEVELOPMENT OF A LEGAL DEFENSE COST CONTAINMENT PROGRAM

Objective of EEC Recommendations & Board Directives

As stated in the previous chapter, a major concern of the EEC and its consultants is the significant cost increases experienced by the County for outside legal defense services during the past five to seven years. Costs to defend general and automobile liability claims increased from FY 1984/85 to FY 1991-92, as did medical malpractice claims during the same period.

Legal defense costs have become a significant factor for public and private self-insured entities throughout the United States. As a result many such organizations have developed and adopted aggressive legal cost containment measures. The EEC and its consultants recommended, and the Board concurred, that the County evaluate and adopt appropriate measures to contain future cost increases. Such measures could include:

• Greater use, when practical, of alternative dispute resolution techniques, such a mediation and arbitration;
  
• Creative arrangements with outside firms, such as flat fees, annual retainers, bulk case deals, compensation based upon speed of case resolution and outcome, and incentives for reduced discovery costs;
  
• Assigning accident investigation and discovery support activities to in-house staff: and
  
• Increasing in-house legal defense resources, thereby reducing reliance on outside firms.

Other cost containment measures were identified, but have been addressed in previous sections of this report.

County Action To-Date

The County Counsel has responded to the Board's directive and the E.E.C. recommendations in a memorandum dated January 7, 1994. This correspondence addressed the first two of the four items listed in Section (A) above.

"We have independently identified the need for closer monitoring of the fees, litigation plans and cost of outside legal defense firms and on July 1 began an aggressive monitoring program to cut both fees and costs. Our goal is to cut billings on the litigation panels by 10% and to establish uniform fixed reimbursable rates for controlling costs.

Early projections confirm that the billings for this fiscal year will be at least 10% less than those for the last and that costs are being billed at our established uniform rates.

We are constantly exploring the possibility of creative arrangements with outside defense firms, such a flat fees, annual retainers, bulk case deals, compensation based upon speed of case resolution and outcome, and incentives for reduced discovery costs."

Contract for Performance and Cost Audit of Outside Legal Defense Counsel

Objective of EEC Recommendations & Board Directives

The McGladrey report identified legal defense costs as a major contributing factor to the County's increasing overall tort liability costs. In certain areas, defense costs have risen significantly over a five year period. In FY 1991-92 there were 49 outside defense firms with annual billings to the County of approximately $24 million.

As a result of the cost escalation, it was recommended by the EEC and its consultants that the County engage a firm to conduct an audit of the outside defense firms with the largest billings to the County (firms with annual billings in excess of $3 million). The purpose of an audit would be (1) to identify any billing practices which may result in excessive, inaccurate, or unnecessary charges to the County, and (2) to review the quality of legal defense services provided to the County.

Additional areas of concern identified by EEC and its consultants were the size of the approved defense panel (46 firms in 1992-93) and the method of case assignment to outside counsel. EEC recommended that the County Counsel be directed to review and report to the Board the maximum number of firms on the approved defense panel that can be monitored effectively.

County Action To-Date

In December 1993 the County issued a request for proposals for a combined legal defense and claims audit. The responses to the RFP were at cost levels unacceptable to the County and as a result no firm was engaged.

The Auditor-Controller, however, conducted its own audit of the legal defense activities of the County Counsel's Office. This audit, dated May 3, 1994, that concluded that County Counsel had established adequate procedures for monitoring and oversight of outside defense firms/attorneys, also contained four major and thirteen specific recommendations. The major recommendations were:

1. County Counsel needs to review auto/general liability case plans to further control litigation costs and ensure the reasonableness of the planned legal strategy;
   
2. County Counsel needs to ensure [that] outside defense counsel costs are compared to initial cost estimates;
   
3. County Counsel needs to establish criteria for selecting defense panel firms;
   
4. County Counsel needs to comprehensively evaluate defense firm's performance.

County Counsel's office responded to the issue of the number of defense firms on the approved panel. It supports the current number of firms on the basis that the large panel allows the County to include women and minority-owned firms. The panel of 46 firms, as of November 1993, includes firms with majority-ownership as follows:

County Counsel further notes that:

"The County's procedures, based as they are on a case-by-case accounting, give us a good basis for evaluating a law firm's effectiveness in handling County cases - both as to results and defense costs..... The larger panel permits us to use smaller firms, increases competition, assures us of representation by senior attorneys, and permits us to use minority and women-owned firms. We believe that changing the structure of the panel is not advisable."

Evaluation of Progress Made by County

It appears that the County has taken reasonable steps to evaluate and justify the composition of the current defense panel. The Auditor-Controller's office conducted a thorough review of practices within the County Counsel's office. We concur with the County's decision to not proceed with an outside audit of the legal defense firm(s) with the largest billing to the county.

Recommendations

9. The County Counsel should provide an accounting of the number of cases and billing amounts referred to the firms on the defense panel (1) in the ownership categories indicated above; and (2) for fiscal years 1991-92, 1992-93, and 1993-94. Such a report will indicate the usage of such minority and women-owned firms by the County to determine if the stated objective of County Counsel to use minority-owned firms is being met. The utilization of firms listed on the defense panel may vary significantly. Firms which are under-utilized should be evaluated to determine if their qualifications and experience warrant their continued inclusion. We are still of the opinion that a smaller defense panel would be easier for the County to monitor and evaluate.

10. The County Counsel and the CAO/RMO should explore the possibility of engaging a firm to provide training on legal defense cost control techniques to County Counsel, Auditor-Controller, contract adjusting firms, and CAO/RMO staff. It appears that a comprehensive audit of outside defense firms is too expensive at the present time, The proposed training would include methods for reviewing legal bills, case file management, and monitoring performance. There are several firms in California which perform such training. It is our understanding that CWC recently retained the services of one of these firms to perform training to its staff. CWC should be contacted to determine the effectiveness of such training.

EXPANSION OF LIABILITY LOSS CONTROL ACTIVITIES - REVIEW & EVALUATE RISK MANAGEMENT EFFORTS TO DEVELOP AN EFFECTIVE SAFETY PROGRAM

Objective of EEC Recommendations & Board Directives

The preceding sections of this report deal primarily with cost control measures for incidents which have occurred and County liability may exist. Of equal and perhaps greater importance, are measures which can be taken by the County to prevent liability-generating events. These measures are commonly referred to as safety or loss prevention programs.

The McGladrey report identifies a lack of County resources devoted to liability loss control. At the time of the report only five of RMO's 98.5 budgeted positions were assigned to the Property/Casualty Divisions. Of the five positions, none were dedicated solely to liability loss prevention. County Counsel's office had no personnel devoted to "pre-loss" activities. With countywide liability costs approaching $100 million a year, EEC's consultants conclude that additional resources should be allocated to liability loss prevention.

The McGladrey report recommended the following for consideration by the County:

"To partially address this service and funding deficiency (liability loss control), it is recommended that the County designate at least one new position within the proposed Liability Program Unit to oversee Countywide safety activities for the prevention of liability claims and lawsuits. The position would be responsible for providing technical assistance and training to County departments. County departments, particularly Sheriff and Public Works, should be encouraged to develop their own specialized loss control and risk management programs."

The Sheriff, Public Works and Health departments have the largest share of liability loss costs. Due to the shear size and complexity of these three departments, it was recognized that specialized loss control programs would be needed and would most likely be better developed and implemented by departmental staff. The success of such departmental program development, of course, is dependent upon sufficient staff size, financial and technical resources.

County Action To-Date

To identify County departmental liability loss control programs, needs and resources, CAO/RMO surveyed all departments for information and input. The Sheriff and Health departments responded with descriptions of their current and proposed risk management and loss control activities.

The CAO/RMO Countywide Plan for the Uniform Administration of Risk Management included a detailed breakdown of responsibilities and tasks (Chart B in the Plan). In addition, specific guidelines were provided in the Plan:

• Auto Liability Loss Prevention Guidelines;
  
• Driver Record Review Program;
  
• General and Medical Malpractice Liability Loss Prevention Guidelines;
  
• Incident Reporting and Accident Review Guidelines.

Evaluation of Progress Made by County

Progress has been made by CAO/RMO, Sheriff, and Health departments in identifying the importance of liability loss control and establishing a structure within which effective loss prevention programs can be developed. The many recommendations contained in the Sheriff's report are well-reasoned and intended to reduce the cost of liabilities arising out of the County's law enforcement activities.

The Risk Management Plan states that the CAO/RMO role is program oversight, leadership, and to establish standards/criteria in loss prevention. Departments have primary responsibility for loss prevention, including the development of a department loss prevention plan. It was noted that ISD, Sheriff, Health Services, and Public Works have developed loss prevention plans and have assigned staff to loss prevention activities.

Recommendations

11. The CAO/RMO should continue its efforts to promote and deliver liability loss control assistance and guidance to County departments. Consideration should be given to designating on full-time, professional-level position to liability loss control.

    The three major departments, (Sheriff, Health, and Public Works) should be encouraged to exercise their authority in this area and given the resources to develop their own specific loss control programs.

    The CAO has reported that departmental loss prevention efforts vary in mission, and in the size and qualifications of loss prevention staff. The departments of Public Works, Internal Services, Sheriff, Health Services, Beaches and Harbors, and the Coroner are in the process or have developed various loss prevention programs for their specific operations. The CAO reports that it provides technical support and guidance to all departments through risk management seminars and loss experience reports.

12. The CAO/RMO and the Auditor-Controller should consider the development of a system to provide financial incentives for liability loss control and cost reduction. Concern remains about the lack of staff and financial resources the County allocates to liability loss prevention. One method of supporting the loss control activities proposed by the Sheriff Department is to allow departments to retain subrogation recoveries and a portion of any savings generated in the Judgment and Damages budget line item. Such a system of providing financial incentives to successful loss prevention and cost containment activities will encourage departments to develop and implement new programs and keep loss control as a high priority.

13. Consideration should be given to the Sheriff Department's request for more active participation in claims investigation, defense counsel selection, defense counsel monitoring, and development of overall cost control increases, particularly loss control training.