Pinnacol's Performance Audit Finds Significant Problems

June 09, 2010

If you are an employer, employee or taxpayer in Colorado, you are impacted.  Pinnacol is Colorado's quasi-governmental  workers compensation carrier of last resort. 

Because they hold nearly 60% of the market they impact practices for employers and employees throughout the state, either directly or indirectly. They are taxpayer subsidized in a few significant ways:  they pay no federal corporate income tax, no state corporate income tax, no premium tax, no state court fees, no property or sales and use tax and their employees participate in PERA (the public employee's retirement).

The performance audit was triggered by SB 281 and the results of that audit were presented June 7, 2010.  Key findings in the audit were:

• Bonuses significantly high
  
  • Setting bonus goals for execs artificially low to ensure executives received maximum bonuses from 2002-2008
  • Pinnacol paid more than $1.9 million in bonuses from 2007 – 2009, which if divided by their 611 employees is almost $88,000 in bonuses per employee.
  • Pinnacol cannot adequately document their rationale
  • Bonuses were awarded on duplicative and unclear criteria
  • Gainsharing targets too low, lack rationale
  • Reward programs do not consider any component about injured workers experience or satisfaction.
• Golden Parachute Agreements for executives if change of control
  • Salary, benefits, bonuses for up to 2 years
  • If terminated without cause Pinnacol’s exposure would be more than $4.3 million
  • The agreements are "very unusual" for state WC funds
  • This limits the Board's ability to fire the CEO even if doing a poor job
• Pinnacol Rates excessive and unfairly discriminatory as follows:
  
  • Pinnacol Loss Cost Multiplyers (LCMs) may unfairly discriminate among employers,
    
  • Overcharge employers with policies in Standard and Non-Standard tiers relative to employers in Preferred or Superior tiers.
    
  • Used inaccurate information, unsubstantiated assumptions to calculate LCMs
    
  • Lack of adequate controls over rate-setting process
    
  • Pinnacol’s method of determining employer’s eligibility for Schedule Rating may not be fair to all employers.
    
  • Pinnacol used rating factors from 2006 – 2010 that was not filed with the Division of Insurance which violates CO law
• Pinnacol Insurance has no insurance actuary on staff
  
  • This is highly unusual and likely to impact accuracy of rates
    
• Pinnacol surplus continues to exceed range established by Board
  • Surplus continues to exceed levels recommendd by Board
  • Level of surplus is adequate to cover claims
• Claims Handling Problems
  • 8% of sample not in compliance with statutes and rules
    
  • Does not use injured worker satisfaction surveys as component of exec performance plan or gainsharing program, but does use policyholder satisfaction.
    
• Travel and Entertainment that "borders on abuse"
  
  • Pinnacol paid $1.5 million in travel and entertainment in 2009
    
  • Weaknesses in Pinnacol’s policies and controls over travel & entertainment expenses
    
  • Weaknesses in controls over 3rd party payments made on behalf of Pinnacol personnel and Board members
    
  • 45 out of 60 travel & entertainment expenses did not comply with Pinnacol’s own policy.
    
  • Routine reimbursement of expenses that violate its own policies renders those policies virtually meaningless as controls on spending for travel & entertainment
  • Pinnacol had subordinates approving supervisors expenses
  • Found potential for conflicts of interest
  • Pinnacol has failed to set limits on lodging and non-business meals

There were 14 audit recommendations.  indicated they agreed and would comply by December 31, 2010, but will be brought back before the audit committee in September to ensure they are making actual progress.

Pinnacol has been in the press lately and over the last year for resisting the Interim Committee to review their performance and status, for resisting the performance audit (above), for seeking to eliminate state oversight through privatization, for tying defeat of Pinnacol reform legislation to a several hundred million dollar proposal for privatization,  for a highly publicized luxury trip to Pebble Beach Resort and for trying to claim they are not subject to Colorado's Open Records Act.

Injured workers in the interim committee reported significant problems with denial of appropriate claims, inability to get timely access to appropriate medical treatment, harassment through surveillance in unwarranted circumstances, going into bankruptcy and foreclosure for non-payment of benefits from Pinnacol and expressed great frustration at having to fight for everything in a system that is not supposed to require litigation or hiring of legal counsel.

To their credit, in the audit committee Pinnacol agreed with the audit findings to fix problems they were defending just days before.

You can download a full copy of the audit by going to the State Auditor's website.

 

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