CITIES OF NEWPORT BEACH AND COSTA MESA

					                              Attachment D

                             PROPOSAL
                                TO PROVIDE

         WORKERS’ COMPENSATION CLAIMS

                 ADMINISTRATION SERVICE

                                     FOR


 Cities of Newport Beach and Costa Mesa
                     Proposal For Third Party Administrator For
Cities of Newport Beach and Costa Mesa Self-Insured Workers’ Compensation Program




Arlene Hazelrigg
President
HRMS
14275 Pipeline Avenue
Chino, CA 91710
(909) 993-0343



                               November 18, 2005




                                       1
 CITIES OF NEWPORT BEACH AND COSTA MESA
         Workers’ Compensation Claims Administration Services

                               Table of Contents

                                                        Page

(I) Company Information

        Question 1-4                                    2

        Question 5-10                                   3

        Question 11                                     5

        Question 12-13                                  6

        Question 14-15                                  7


(II)    Scope of Work                                   8

(III)   Insurance                                       45

(IV)    Provide Sample Contract                         45

(V)     Fees                                            45

(VI)    Authorized Signature                            51

        Appendix I- Resumes

        Appendix II. Sample Contract




                                       2
Company Information

(1)    Name of company and year of inception.

We are pleased with the opportunity to provide information about Hazelrigg Risk
Management Services, Inc. (“HRMS”). Our accomplishments, background and philosophy
make us the pre-eminent California public entity workers’ compensation third party
administrator (TPA). Our expertise involves not only public and private employers, but
also both fully insured and self-insured programs. HRMS is confident that the Cities of
Newport Beach and Costa Mesa will find our superior approach to claims administration to
be of considerable benefit. The following is a synopsis of the service and claims
management philosophy of HRMS.

HRMS is a successful California Corporation specializing in Workers’ Compensation
Program Administration. Owned solely by Arlene Hazelrigg, she incorporated the company
in 1991. HRMS has enjoyed controlled and steady growth over the years and now provides
claims adjusting services to more than one hundred employers. We handle more than
10,000 claims annually.

HRMS employs over 175 employees. Our technical staff is comprised of claims
managers, claims auditor, claims supervisors, claims examiners and M.I.S. directors. Our
claims examiners average over twelve years experience. All supervisors and examiners
are required to be State certified.

(2)   What is the form of the firm’s organization (corporation, partnership, sole
proprietorship)?

HRMS is a successful California Corporation.

(3)   List the principal owners, partners or officers, and include their business
address and telephone numbers.

Arlene Hazelrigg solely owns HRMS. Ms. Hazelrigg’s business address and telephone
numbers are as follows:
                                    Arlene Hazelrigg
                        14275 Pipeline Avenue, Chino, CA 90710
                                  Tel: (909) 993-0343
                                 Fax: (909) 627 – 9262
                             ahazelrigg@hrmsyourtpa.com

(4)     Provide any other names your company has operated under, and the date(s)
of the name changes.

Offeror initially founded another TPA, SCRMA, and managed that operation from
January 1988 through December 1990. HRMS has been providing claims administration
services for 14 years under the present name.


                                           3
(5)   Provide the names of companies owned by your organization or owned by
your parent organization and describe the nature of the business.

Ms. Hazelrigg currently owns Medical Auditing Services, Inc. This is an in-house bill
review company.

Ms. Hazelrigg also owns and manages Comp Care, Inc. This is a peer review and medical
management service company.

(6)    How many California clients purchased services from you during calendar
years 2000 through 2005?

Twenty-five new California clients have purchased services from HRMS during calendar
years 2000 through 2005, approximately 4 new clients per year. HRMS during calendar
years 2000 through 2005 have 98 clients that purchase service from HRMS.

(7)    How many California clients discontinued services with you in calendar
years 2000 through 2005? Provide names of the companies, and the names, titles
and telephone numbers of the contacts.

        National Express Corporation
        Ms. Ronnie Palmer;
        9011 Mountain Ridge Drive Ste 200
        Austin, TX 78759
        (512) 343-6292
This is a national account, which was carving out a California program, however decided
to go with a national carrier.

(8)     Is there any pending litigation against your firm? Is so, please provide
details.

There is no pending litigation against HRMS.

(9)    Does your firm anticipate selling or merging with any other firms in the next
three years? If yes, provide details.

HRMS does not anticipate any major changes during the next three years.

(10) Location of headquarters and number of other office locations. For the
primary location to service the Cities, please indicate full address, main telephone
number, number of employees, and the most senior management representative.
Please also indicate company-wide total employee count.

HRMS employs over 175 employees. Our technical staff is comprised of claims
managers, claims auditor, claims supervisors, claims examiners and M.I.S. directors. Our
claims examiners average over twelve years experience. All supervisors and examiners
are required to be State certified. The President and CEO are the most senior
management representatives found at our Chino location.

                                           4
HRMS’ home office is in Chino with full service offices in Sacramento, San Diego and
Oxnard. HRMS also provides in-house staffing for the Metropolitan Transportation
Authority’s claim administration program. HRMS is currently providing Workers’
Compensation claims administration services to the Cities of Newport Beach and Costa
Mesa in our Chino office.

                            Chino Office (Home Office)
                            14275 Pipeline Avenue
                            Chino, CA 91710

                            Telephone (Voice):    (909) 993-0340
                            Toll Free:            (800) 723-2997
                            Fax:                  (909) 627-9262

                            Office Manager: Alan Schiller

            Normal Hours: 8:00 AM – 5:00 PM – Monday through Friday


                            Sacramento Office
                             8880 Cal Center Drive, Suite 430
                             Sacramento, CA 95826

                            Telephone (Voice): (916) 273-1050
                            Fax:                (916) 362-7609
                            Toll Free:           (866) 849-4344
                            Office Manager: Diane Ogden

              Normal Hours: 8:00 AM – 5:00 PM – Monday through Friday


                             San Diego Office

                             8787 Complex Drive, 3rd Floor
                             San Diego, CA 92108

                             Telephone (Voice): (858) 300-2500
                             Toll Free:         (800) 757-7100
                             Fax:               (858) 300-2560

                            Office Manager: Monroe McBride

              Normal Hours: 8:00 AM – 5:00 PM – Monday through Friday




                                          5
                              Oxnard Office

                               500 Esplanade, Suite 660
                               Oxnard, CA 93030

                               Telephone (Voice): (805) 604-4120
                               Fax:               (805) 604-4125

                              Office Manager: Sherry Edwards

               Normal Hours: 8:00 AM – 5:00 PM – Monday through Friday

(11) Senior management, their titles, number of years at firm, and number of
years specifically in the Workers’ Compensation claims administration industry and
an organizational chart for your company and one for the office where this account
will be handled.

Claims Manager

The Claims Manager, Alan Schiller, will oversee the Cities entire claims administration
program and ensure adherence to our high claims handling standards, state mandated
regulations and all other administrative issues. Mr. Schiller will be involved in and
maintain diaries on all complex files over $100,000 reserves. The claims manager will be
available to the Cities of Newport Beach and Costa Mesa to set up training programs or
presentations to the Cities and work to resolve any issues that may arise.

The claims manager will be charged with oversight of all of the open and closed Cities
workers’ compensation claims. He will also manage the claims supervisor, The manager
will also be charged with approval on all denials within the program.

The claims manager will be available to meet with risk management personnel, the Cities
representatives, the Cities counsel, injured workers, rehabilitation providers, physicians,
medical groups, and make WCAB court appearances. Like the claims supervisor, this
individual has a working knowledge of ADA, FMLA, Employment Law and Section 504
of the Rehabilitation Act.

The claims manager will assist to coordinate and participate in training programs,
presentations regarding current case law, statute law, reporting procedures, medical case
management, and provide all other relevant information or services necessary to further
the Cities self-insurance program.

Please see Appendix I for Resumes.




                                             6
                       Organization Chart for the Company:

                            Arlene Hazelrigg – President
                         Jim Gregg - CEO, General Counsel
                           Alan Schiller - Claims Manager

           Organization Chart of the Chino office for the Cities account:

                            Arlene Hazelrigg – President
                         Jim Gregg - CEO, General Counsel
                           Alan Schiller - Claims Manager
                         Kristin Wilson -Claims Supervisor
                    Leah Velez -Claims Examiner Newport Beach
                   Nancy Calcagnini -Claims Examiner Costa Mesa
                     Catherine Davenport -Claims Assistant

(12) Current number of clients. Please provide a list of five (5) of your largest
public agency clients.

HRMS currently has 98 clients.
San Diego and Imperial County Schools Risk Management Joint Powers Authority
San Diego, CA. 92111-7399

Los Angeles County Office of Education
Contact Person: Ms. Janice Whittle, Risk Management Department
(562) 803-8353

COUNTY OF IMPERIAL
Contact Person: Dan DeVoy- Director Human Resources (760) 482-4488

CITY OF PASADENA
Pasadena, CA 91105
Contact Person: Shari Thomas, Deputy Director of Finance (626) 744-4412

SAN DIEGO TRANSIT & TROLLEY CORPORTATION
Contact Person: Mr. Langley Powell- President
(619) 238-0100 ext. 400 Carmen Naranjo (619) 238-0100, ext. 481
Contact Person: Mary Jane Greenland- Director of Human Resources
(619) 595-4910 Julieta Gomez (619) 238-0100, ext. 486

(13) Describe any and all-financial affiliations your organization has with its
managed care service providers (medical bill review, preferred provider networks,
and case management service providers).

Arlene Hazelrigg, the sole owner of HRMS, also owns Medical Auditing Services, Inc.
(MAS) and Comp Care, Inc. MAS provides bill review services and Comp Care provides


                                          7
utilization review, medical provider network set-up and administration, and medical
management services.

(14) Names and titles of principal staff that will be assigned to the Cities account.
Indicate the office location, telephone, email address, and related account
experience for each member of staff assigned to the Cities.

                            Alan Schiller - Claims Manager
                          Kristin Wilson -Claims Supervisor
                     Leah Velez -Claims Examiner Newport Beach
                    Nancy Calcagnini -Claims Examiner Costa Mesa
                      Catherine Davenport -Claims Assistant


                             Chino Office
                            14275 Pipeline Avenue
                            Chino, CA 91710
                            Telephone (Voice): (909) 993-0340
                            Toll Free:          (800) 723-2997
                            Fax:                (909) 627-9262
                            Office Manager: Alan Schiller
                      Normal Hours: 8:00 AM – 5:00 PM – Monday through Friday

Please see Appendix I for Resumes.

(15) How do you measure customer satisfaction? Please include any surveys or
customer satisfaction data. Please give two examples each of how you responded to
positive and negative feedback.

HRMS provides the Cities of Newport Beach and Costa Mesa with quarterly file reviews
regarding open indemnity claims. Our file reviews consist of narrative description of the
selected claims; a reserve analysis and recommended plan of action. The narrative
meetings can include involvement of the department heads, should the City desire.
Feedback, whether negative or positive is encouraged during these meetings.

We have developed a customer service satisfaction survey in recent months and are in the
implementation stage of garnering feedback. We look to have this be a source of both
positive and negative feedback. Positive feedback will be communicated in training
sessions to encourage similar behaviors. Negative feedback will be used in the same
training to dissuade certain behaviors.

We also receive constructive criticism from the numerous audits conducted annually at
our locations. Audit results are round-tabled by our managers and used as the basis for
developing company-wide policies. This is an on-going and interactive process.




                                            8
Positive feedback is also received occasionally from the injured workers themselves, or
department heads. When it is received, it is shared with all HRMS personnel within the
unit to encourage continued superior service.

Negative feedback is review on a case-by-case basis. If the feedback is based on an
isolated situation, measures will be taken to correct and address the situation. If negative
feedback involves HRMS procedure, we will evaluate that to determine if better service
or efficiency can be provided to our client.

(II) Scope of Work
(1)   A restatement of the scope of work to be performed, including your
understanding of the tasks required by the Cities and any additional services that
would be provided under the flat fee.

Please address, in detail, how your company will provide the services listed
in all sections of the Scope of Work: Dedicated Claims Unit; Assigned
Personnel; Caseloads; Program Administration; Claims Administration;
Medical Service and Expenditures; Consultation; Litigation Management;
Information Management and Reports; and Financial Management.

Qualifications

Hazelrigg Risk Management Services, Inc. (HRMS) is a Disadvantage Business Entity
(DBE) that specializes in the handling of private sector and public entity workers’
compensation claims. We currently service over a hundred accounts comprised of cities,
counties, school districts, transit agencies, and commercial accounts.

Because of our familiarity with Public Agencies, we are not only confident we can satisfy
the Cities of Newport Beach and Costa Mesa unique needs, but also provide you with
unrivaled claims administration services. Our program encompasses vocational
rehabilitation, medical and litigation management, subrogation coordination, and
communication with the Cities of Newport Beach and Costa Mesa employees, risk
management program analysis, as well as preparation of executive and state mandated
reports.

HRMS’ state-of-the-art data processing system allows the Cities of Newport Beach and
Costa Mesa to benefit from on-line direct access to the workers’ compensation data, and
also provides the types of reports needed to monitor achievement of program goals. We
think that this additional resource further adds to potential program savings. Our unique
expertise also includes careful litigation management and monitoring of defense theories,
with a view toward finding final resolutions and closure of cases. Our assessment of
potential settlements is made by carefully considering the cost/benefit ratios of continuing
aggressive litigation techniques where warranted as compared to the cost of effecting
Compromise and Release resolutions.



                                             9
It is our belief that the need for well-educated, experienced, and competent claims
examiners has never been greater. Opportunities to achieve case resolution that might have
been previously overlooked by prior examiners are often identified during our initial file
reviews upon commencement of administration. For this reason, we encourage all
employers to require that their claims be handled by State certified claims adjusters with
appropriate public entity experience.

R.M.I.S.

Software Design
HRMS currently utilizes the new state-of-the-art Windows based Valley Oaks System
Portal software to capture claims information for its clients. This system allows reports to
be generated in a variety of formats using a custom “Report Writer” module. This
innovative software brings many new features to workers’ compensation data capture and
runs on Windows 2000 Server. Connectivity is affected through Microsoft Terminal
Services, and we use a secure Web Site for enhanced EDI.

Diary and Notes
This software provides for an automatic diary system requiring review of files on a 30, 60,
and 90-day basis. Warnings are programmed into the system to alert adjusters to the need
for diary review. Automatic diaries are in place QRR referrals at 70 days of lost time.
Supervision overview diaries automatically posted on every file.

Diary updates and reviews are a significant part of our internal audit process. The system
also provides for Examiner notes. These entries are confidential to the actual claim file, but
Cities of Newport Beach and Costa Mesa files would be available for “real time” read-only
review through accessing the Internet and thereby the secure Web Site.

DWC Notices and Correspondence
Our system integrates all of the state mandatory DWC letters. The examiner easily accesses
these pre-formatted letters or assistant through the RMIS system itself, which retrieves all
system data related material in the required fields.      HRMS currently has over 300
correspondence documents (letters) in the database. In addition, HRMS has full capability
to integrate new letters. Through an approval process new letters are continually being
input on an as needed basis. This saves our technical and clerical personnel considerable
time which we use for more productive tasks such as case analysis and claimant contact.

Reports
a.     Reporting Capability

Our RMIS system identifies injuries by various criteria and can be sorted in over 100
ways on existing converted Cities of Newport Beach and Costa Mesa claim files and new


                                             10
losses. Some of the basic criterions by which the claims can be sorted include the
following:


        * Type                                               * Injured Worker Name
        * Examiner                                           * Delay/Denied
        * Status (open and closed)                           * Fiscal Year
        * Location                                           * Incident Date
        * Body Part                                          * Report date
        * Cause                                              * Nature of Injury
        * Policy Year                                        * Department
        * Claim Number                                       * Subrogation

b.      Loss Runs

Loss Runs will be provided on a monthly basis. At a minimum, the Loss Runs include
the following information:

        * Type of claim                                      * Future & paid medical
        * Cause of loss                                      * Future & paid T.D.
        * Status (open and closed)                           * Future & paid P.D.
        * Litigation status                                  * Future & paid voc. rehab
        * Specific Cities site and division                  * Allocated loss adjustment
        * Vocational rehabilitation status (if applicable)   * Total incurred
        * Date                                               * Subrogation recovery
        * Time of Day                                        * Excess insurance payment
        * Body part, identifying injured side                * Investigation services
        * Object/substance involved                          * Legal services

These reports are available in various time formats and history periods, including “as of”
and actual time. The Cities of Newport Beach and Costa Mesa Risk Manager can expect
to receive, no later than the 10th of each month, standard reports which include:

•    Open and closed claims summary report – all years, date of injury, employee
     department, employee job class, claim number, employee name, cause of injury, nature
     of injury, body part.

•    Open claims summary report – all years.



                                               11
•   Check register by check number.

•   Trust account activity register.

•   Summary of losses by year.

•   Log of Occupational Injuries and Illnesses – Annual OSHA log.

•   Annual list of all claims having a total incurred over $25,000.

•   The public sectors self-insurer’s annual report as required by the Department of
    Industrial Relations Office of Self-Insurance Plans, and submits it to the Cities of
    Newport Beach and Costa Mesa no later than 30 days prior to the due date.

•   Maintain a list of all claims referred to case management, including the date of referral,
    the name of the case manager, the recommendations of the case manager, including
    savings, and the date the case management issue is closed.

Other Reports
In addition to these computer-generated reports, the Cities of Newport Beach and Costa
Mesa can also receive the following monthly reports from the office manager:

•   Manager’s Monthly Report: Summarizing results for the Cities of Newport Beach
    and Costa Mesa in closing ratios, claimant contact, set up time etc.
HRMS will develop and provide to the Cities of Newport Beach and Costa Mesa, as
requested, specialized reports and statistical summaries to assist in the evaluation and
management of the Cities of Newport Beach and Costa Mesa workers’ compensation
program. Such reports and summaries, except those, which are unusually complex, shall be
delivered to the Cities of Newport Beach and Costa Mesa usually within 14 calendar days
of request. Should such reports require an additional charge, authorization will be obtained
from the Cities of Newport Beach and Costa Mesa Risk Manager prior to producing those
reports.
Our system also accommodates the entry of supplemental pay information. This data is
identifiable and can be included or excluded in reports depending on the needs of the
Cities of Newport Beach and Costa Mesa. Specific payroll information could be gathered
through the Employer’s Report of Occupational Injury. Our system is also capable of
providing the information necessary for Cal OSHA reporting requirements.
In addition, RMIS allows us to prepare custom tailored reporting to suit our clients’
needs. The new syllabus will include Report Writer software that will facilitate custom
reports. On a monthly basis, HRMS will provide the Cities of Newport Beach and Costa
Mesa with a loss run report. This analysis will contain a summary of OSHA recordable
days by employee, (we will train designated the Cities of Newport Beach and Costa Mesa
personnel if necessary) and an alphabetical listing of all open and closed claims. We will



                                             12
provide any specialized reports or statistical data necessary to support the Cities of
Newport Beach and Costa Mesa risk management program.

Electronic Data Interface
We can export and import data via Internet in a wide range of formats, including
ASCII and Microsoft Excel. The Portal system includes interconnectivity through a
secure Web Site. This capability allows us to securely export and import each client’s
data to that client (but no client’s data is accessible by any other client) without
corruption concerns. We also have the ability to download our client’s Unit Stat data with
this system.

On-Line / Remote Claims Reporting

HRMS has designed and operates a program allowing our clients to report all new injuries
“on line” with our computer system. When they are done entering the data on the
computerized 5020 form, they simply save the document. By doing this, an actual pending
claim is created within our system. The employer can then print the 5020 for their records
and note the claim number. HRMS then receives a message of receipt of this pending claim
instantaneously. Upon notification we immediately begin to process the claim.

Documents, Records and Files
All documents, records, files and computer information relating to an injured worker’s
file (except for software) will remain the exclusive property of the Cities of Newport
Beach and Costa Mesa. We maintain these records on behalf of the client for the period
required by the California Labor Code. Such maintenance will continue for the duration
of our service as Claims Administrator.

On-Line RMIS Access
HRMS has available on-line “read only” access to the database. This allows the client to
look at the entire file, including the adjuster’s daily notes. The Portal system is
configured to include E-Mail capabilities for leaving messages for the adjuster, and
remote report writing and printing at the client’s facility, in this package. The client may
access these features after providing hardware and software at its facility capable of
Internet access with sufficient RAM to handle downloading of Windows based data. The
Portal system will require an annual license fee for this optional remote use.

Staffing & Claims Unit Organization
Staffing

We propose that the administration of Cities of Newport Beach and Costa Mesa’s files,
take place in our Chino office. The Chino office provides a dedicated unit including a
supervisor, two examiners, and a claims assistant to service the Cities of Newport Beach


                                              13
and Costa Mesa’s needs for claims administration, medical management, loss control,
safety and training.

Examiners

Currently, Leah Velez is the dedicated claims examiner for Newport Beach and Nancy
Calcagnini is dedicated to the Costa Mesa claims. Kristin Wilson, whom the cities
helped to select, supervises these two talented examiners. Ms. Wilson reports directly to
our claims manager, Alan Schiller.

The examiners currently handling the Cities of Newport Beach and Costa Mesa’s files
maintain low caseloads as their supervisor handles a partial caseload in the unit allowing
each person to apply their many years of experience in a concentrated fashion to lower
costs for the cities.

Claims Manager, Alan Schiller, will work together with Kristin Wilson, Claims
Supervisor to handle all managerial issues.

Assistant

Catherine Davenport is the current claims assistant whose function is to assist the unit.
Like the claims examiner, the assistant will be under the direction of the unit supervisor.
The assistant will also handle up to 100 medical only claims within the module. Their
duties will include but not be limited to indemnity payments; clerical instruction sheets
and medical only file handling. They will enter the manual bills for their respective units.
They will not have the authority to add or delete vendors.

In addition to the assistant’s technical support responsibilities, HRMS requires that they
attend, and successfully complete, the 6 courses Insurance Education Association (IEA)
workers’ compensation training curriculum.

Supervisor

Kristin Wilson is the current Unit Supervisor assigned to Cities of Newport Beach and
Costa Mesa account. She monitors the examiner workloads, quality control, and will be
one of the primary contacts for Cities of Newport Beach and Costa Mesa’s files managed
within the unit.

Ms. Wilson will approve all reserve changes and maintain a supervisory diary on all
claims over $25,000 incurred. They will also be charged with approval of all settlements
as well as all denials within her assigned unit. They will review all indemnity files at least
every 3 months, along with the manager, and make written recommendations in the claim
files.

The supervisor will be available to meet with Cities of Newport Beach and Costa Mesa’s
risk management personnel, representatives, counsel, injured workers, rehabilitation
providers, physicians, medical groups, and make WCAB court appearances.


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The supervisor has a working knowledge of the ADA, FMLA, salary integration and
supplemental pay, and industrial retirement plans.

Claims Manager

The Claims Manager, Alan Schiller, will continue to oversee the Cities of Newport Beach
and Costa Mesa’s entire claims administration program and ensure adherence to our high
claims handling standards, state mandated regulations and all other administrative issues.
Alan Schiller will be involved in and maintain diaries on all complex files over $100,000
reserves. The claims manager will be available to Cities of Newport Beach and Costa
Mesa to set up training programs or presentations to Cities of Newport Beach and Costa
Mesa and work to resolve any issues that may arise.

The claims manager will be charged with oversight of all of the open and closed, Cities
workers’ compensation claims. He will also manage the supervisor assigned to the Cities
of Newport Beach and Costa Mesa. The manager will also be charged with approval on
all denials within the program.

The claims manager will be available to meet with risk management personnel, the Cities
of Newport Beach and Costa Mesa representatives, the Cities counsel, injured workers,
rehabilitation providers, physicians, medical groups, and make WCAB court
appearances. Like the claims supervisor, this individual has a working knowledge of
ADA, FMLA, Employment Law and Section 504 of the Rehabilitation Act.

The claims manager will assist to coordinate and participate in training programs,
presentations regarding current case law, statute law, reporting procedures, medical case
management, and provide all other relevant information or services necessary to further
the Cities of Newport Beach and Costa Mesa’s self-insurance program.


Customer Service

Our philosophy is that customer service always comes first. It is our goal to provide the
Cities of Newport Beach and Costa Mesa the highest level of service through experienced
claims professionals, with an emphasis on personalized attention to their particular
needs. We believe that the “cookie cutter” approach to claims administration is
ineffective, costly and inappropriate. Our emphasis on attention to each individual
client’s needs leads to our better understanding of their injured workers and work
culture/environment. Such highly individualized service returns dividends to our clients
in the form of better employee relations, shorter claim life spans, and ultimately lower
claim costs.

Our philosophy of service has always been that the employer is our primary customer. In
recognition of this fact, we see ourselves as an extension of the Cities of Newport Beach
and Costa Mesa program. We represent your philosophy, style and procedures. Ultimately,
we see ourselves as experts in claims administration to provide guidance and management


                                           15
to ensure compliance with state requirements and regulations. However, we always
recognize that the client is in control of its self-insured program.

The Cities of Newport Beach and Costa Mesa injured workers, whom we service, are also
considered very important customers. As an extension of the Cities of Newport Beach
and Costa Mesa, we make every effort to treat your employees with respect and care to
ensure that they are well informed and receive their benefits timely. It is our belief that by
doing such we can positively impact the claims costs through medical control and lower
litigation rates. Nevertheless, we also believe that it is our job to mitigate abuse and
fraud, and will not hesitate to take the proper steps to curtail these issues when necessary
and/or requested.

Providers
Service Providers: Investigators, Legal/Subrogation, Vocational Rehabilitation & Medical
Cost Containment

               a.      Financial Independence

HRMS is dedicated to cost containment, professionalism, communication and
cooperation as the foundation for continually providing the highest quality claims
administration. HRMS maintains its independence from service providers associated
with the workers’ compensation industry in order to offer completely objective assistance
to injured workers, as well as the employer. Unlike other firms, unless specifically
requested by the client, HRMS has no in-house requirement to choose pre-designated
investigators, rehabilitation vendors or attorneys. This autonomy avoids favoritism and
eliminates the tendency found in many larger TPA’s to provide ancillary services through
subsidiary corporations of the parent administrator. Rather, HRMS is free to select the
provider with the best reputation for quality and service at the most cost-effective price to
the Cities of Newport Beach and Costa Mesa.

The above being said, we do have a panel of providers that we are currently working with
in our Chino office. We feel that maintaining a panel of qualified providers gives an
incentive for the providers to live up to our company standards and expectations.
However, in recognition of the fact that new clients have relationships with various
providers, we recommend an initial meeting with all new clients to tailor a provider list
around their respective programs.


               b.      Investigators

With complete financial independence from all investigators on the panel, care is taken to
eliminate the overuse of investigations expense. It is our experience that HRMS’ claims
professionals can resolve many non-delayed AOE/COE issues during the three-point
contact process.

Sub-rosa investigations are usually reserved for those cases where we expect a high cost


                                             16
benefit ratio of return for our clients. The impetus of a sub rosa referral is usually brought
about from evidence which surfaces that clearly contradicts the extent and nature of an
applicant’s claim. We will discuss all sub rosa assignments with the Cities of Newport
Beach and Costa Mesa and obtain approval prior to referral. Any request by the Cities of
Newport Beach and Costa Mesa for sub rosa will be honored.

Indicators, such as the period of employment, length of time off work, chronic failure to
attend medical appointments, indirect or subsequent information provided by fellow
employees or supervisors, are used as guidelines for determining the need for additional
investigation. All investigations will be completed within 30 days upon notice of claim.
No assignments will be made without the expressed consent of the Cities of Newport
Beach and Costa Mesa.

HRMS, in collaboration with the Cities of Newport Beach and Costa Mesa, will select a
panel of investigation agencies, not to exceed three firms, with the best reputation for
quality, timeliness and assignment fulfillment, at the most reasonable cost to the Cities of
Newport Beach and Costa Mesa.

                c.      Legal

Legal referrals are also closely monitored for need and effectiveness. Specific attorneys,
rather than firms, have generally been found to provide the most effective representation.
HRMS will work closely with counsel in evaluating and making recommendations for case
management. Presently we are accustomed to working in partnership with various
reputable law firms.

If so desired we will work closely with the Cities of Newport Beach and Costa Mesa in
evaluating legal counsel and make recommendations regarding suitable panel attorneys.
We can also use existing attorneys if preferred.

Legal assignments or recommendations are made after review of such factors as, the
complexity of the case, the presence of opposing counsel or degree of litigation expected,
the need for a particular defense strategy, and the existence of appealable issues. At
transition, HRMS will review the entire inventory of litigated claims to ascertain that the
files are being handled properly. We will prepare an analysis of all legal cases, outlining
exposures and evaluating possible defense options. We will handle all non-complex legal
claims in-house whenever possible. Before referring any file to outside counsel, HRMS
will prepare a recommendation for such action, and forward it to the Cities of Newport
Beach and Costa Mesa for approval.

           d.        Vocational Rehabilitation / Supplemental Job Displacement Benefit

Unlike other firms that supplement service fees through the use of in-house rehabilitation
counselors, we maintain our independence from all vocational rehabilitation firms.
HRMS recommends utilization of at least two qualified independent firms with certified
vocational rehabilitation counselors on staff to serve our clients professionally and at
reasonable rates. Selected firms will also furnish job analyses and work feasibility studies


                                             17
in order to facilitate an injured worker’s timely return to duty.

HRMS will provide notice of entitlement to vocational retraining services to injured
workers when legally required, and will monitor these services for compliance with the
Department of Industrial Relations Rehabilitation Unit. HRMS provides full vocational
rehabilitation services and benefits as defined by Labor Code Section 4637 for pre-2004
dates of injury, and Labor Code Section 4658.6 for post-2004 dates of injury. This is
done at no extra charge to the file. With the new legislation, some guidelines have been
revised and or removed.

            e.    Medical Cost Containment Providers

Currently we are contracted with the following organizations:

Medical Auditing Services (M.A.S.):

This is an in house bill review program, which is solely owned and managed by HRMS.
MAS charges a percentage rate of savings as fees.

Comp Care:

Comp Care is a peer review and medical management service company. The nurse works
exclusively on our files and with our adjusters and is very familiar with our clientele and
business. We only refer cases to her that would derive a positive cost/benefit ratio. These
cases generally involve surgeries or other complex medical matters.

HRMS’on-going training agenda reinforces our ability to assess self-procured and
medical/legal treatment plans very effectively. This training has been instrumental in
helping us develop a high degree of proficiency in the evaluation of potentially
adversarial medical reports. From this practice, we can determine an appropriate reserve
estimate to establish temporary disability or make an estimate of the potential residual
permanent disability expenditures.

Transition Plan
HRMS is currently the Workers’ Compensation claims administrator for the Cities of
Newport Beach and Costa Mesa. Therefore, there will be no down time in administering
claims.

Practices and Procedures

       A.        Claimant Contact

   Claimant Contact at Inception of the Claim:




                                             18
Some of the major cost-drivers of workers’ compensation severity are the lack of an early
investigation and litigation. Early communication and file investigation keeps severity
down through prompt rapport building with the injured worker. Such a rapport decreases
litigation ratios. Early communication with the injured worker also serves to lay the
foundation of facts so as to determine compensability of the file or curb potential future
abuses.

At HRMS, we take the philosophy that much of the litigation is a result of confusion on
behalf of the injured worker as to their benefits that they are to receive under the labor
code. As such, we believe that a significant portion of litigation can be eliminated
through effective and frequent communication with the injured workers. At HRMS,
documented communication with the injured worker should take place within the first 24-
48 hours of receipt of the claim.

Every new loss is audited at month-end of the month to determine the overall compliance
to the standard of 3-point contact, documentation and set up time. When communicating
with the injured worker the Examiner will accurately advise the injured workers of their
workers’ compensation benefits and answer any of the questions that they may have.
During this exchange the examiner will inquire about and document a factual description
of the incident, past medical conditions and injuries, and a relation of all of the medical
treatment.

This audit report is drafted by an internal auditor and provided to the manager of the
program.

Currently our compliance levels in our office are about 95% for all new losses.

   Subsequent Contacts at Critical Events:

It is our experience that there are various “critical events” that necessitate effective
communication with the injured worker. These are at time of:

           1.   Return to Work:
           2.   Temporary Disability Designation
           3.   Permanent and Stationary
           4.   Designation of Qualified Injured Worker status:

At HRMS, we require a documented claimant contact with all injured workers at these
critical times to ensure that the injured worker understands the workers compensation
process and procedures as it relates to what they may be experiencing at the time.

Claimant Contact Letter

If for some reason the examiner is not able to reach the injured worker after two
documented attempts, they send a claimant contact letter.




                                            19
       B.     Temporary Disability

     Timeliness of Initial and Continuous Payments:

All HRMS Claims Examiners are required to be state certified. As such, their expertise in
determining the appropriateness and timeliness of the temporary disability payment is
noteworthy. At HRMS all first disability payments are made within 14 days of the initial
disability. Each active indemnity claim is put on a 14-day revolving payment systemic
diary. All Claims Assistants also have temporary disability payment cards for each active
indemnity file to ensure that all payments are signed off by the Examiner.

To ensure the accuracy of the payments, all HRMS Examiners review all wage
statements and establish the overall Average Weekly Wage. Once this is established, the
HRMS system calculates the rates for all species of benefits.

The Claims Assistant or Claims Examiner will call the provider prior to every release. In
cases where injured workers are released to modified duties, we will inquire of the Cities
of Newport Beach and Costa Mesa what modified positions are available and relay that
information from the onset to the treating physician.

We will continue to work with the Cities of Newport Beach and Costa Mesa and the
physician during our disability phone calls until the employee reaches a level where
he/she can return to modified and/or full duties.

     Temporary Disability Processing Procedures:

HRMS has policies and procedures in place that ensure against the potential for duplicate
or inaccurate temporary disability payments. These involve the following:

a. All payments are justified in the claims notes:

A claims note that documents a call to the provider and/or the employer justifies all
temporary disability payments. If there are any changes in a work restriction, HRMS will
call the employer to determine if accommodations can be made in order to return the
injured worker to work.

b. The Examiner signs off on every temporary disability release:

The Examiner reviews all temporary disability payments. The payment is not released
until the Examiner signs off on the payment. The Examiner reviews each payment to
ensure that adequate documentation of the release to in the file to justify the payment. If
the payment is deemed as justified then the payment is released. If the payment is not
justified, the payment is cancelled.
c.   Systemic flags of duplicate payments:
Prior to any check processing, the claims system will flag any indemnity payment with an



                                            20
overlapping service date as a duplicate. In those rare instances, these are brought to the
attention of the supervisor to either override or disapprove the payment. The system will
not generate a duplicate service date without the appropriate level of approval.

d.   Unit trial posting review:

All checks that are to print for a particular claims unit are review by the unit supervisor
prior to the printing. This supervisor reviews a pre-print trial posting of the checks. He
will check for any and all potential irregularities prior to printing. If there are any
irregular or unjustified checks, these will be put into question for the Examiner to either
justify or cancel.

e.   Managerial Check Audit:

After printing, the Manager reviews all checks along with the check register to ensure
accuracy. Any irregularities will be brought into question.

At HRMS, we take the printing of our client’s checks very seriously. These policies and
procedures, although thorough, are a good reminder to the processor and Examiner to
justify every payment, which enhances the security and accuracy of our client’s
payments.

       C.     Permanent Disability

a.   Timeliness of Initial and Continuous Payments:

As State Certified Examiners all HRMS adjusters are experts in determining the
appropriateness and timeliness of the permanent disability payment. Per California
regulatory guidelines, all initial permanent disability payments must be made within 14
days of the date that the injured worker returned to work. If the Examiner cannot
determine if permanent disability is due based on the lack of medical support, then a
delay of permanent disability is sent.

Each active indemnity claim is put on a 14-day revolving payment systemic diary to pay
out until all estimated permanent disability is paid. All Claims Assistants also have
permanent disability payment cards for each active file with permanent disability to
ensure that the Examiner signs off all payments.

b.   Accuracy of Payments:

To ensure the accuracy of the permanent payments, all HRMS Examiners review all
wage statements and establish the overall Average Weekly Wage. Once this is
established, the HRMS system calculates the rates for all species of benefits, including
permanent disability.

Permanent disability benefits are to be addressed when the injured worker ceases to
receive temporary disability. The Examiner must start, deny or delay permanent disability


                                            21
at this time. One common mistake in the industry is to not address permanent disability
upon return to work. This can exposes the employer administrator to unnecessary
penalties and lead up to large lump sum payments of permanent disability.

HRMS Examiners average over 5 years of experience in the industry. This experience
helps them identify permanent disability exposure early on. Our experienced Examiners
will know which cases they can expect there to be permanent disability. HRMS
Examiners will also assess an accurate conservative estimate of permanent disability,
which limits the exposure to potential overpayment and/or penalties.

Once the Examiner establishes the permanent disability rating, specific instructions are
given to the Claims Assistant to initiate the permanent disability payments. The
appropriate Division of Workers’ Compensation (DWC) notice accompanies all initial
and final permanent disability payments.

c.    Permanent Disability Processing Procedures:

We will continue to work with the Cities of Newport Beach and Costa Mesa and the
physician during our disability phone calls until the employee reaches a level where
he/she can return to modified and/or full duties.

On those cases where permanent disability is expected, upon notification of return to
work or permanent and stationary, the HRMS adjuster enacts the following procedures:

     1) The Examiner will determine the overall estimated portion of permanent disability
        through a rating of the report. In those cases where permanent disability is
        eminent yet, the permanent & stationary report has not arrived; the Examiner will
        rate out their best conservative estimate.

     2) The Examiner will send instructions to their Claims Assistant to pay up to 85% of
        the estimated amount on represented files. On un-represented files, the Examiner
        will instruct to pay 100% of the estimated permanent disability.
     3) Once the permanent disability amount is set, the reserves are changed to reflect
        the exact estimate.

     4) A claims note justifies all permanent disability payments. If there are any changes
        in the overall permanent disability assessment, HRMS will document that change
        and set the reserves accordingly.

     5) The Examiner signs off on every permanent disability release. The Examiner
        reviews all permanent disability payments. The payment is not released until the
        Examiner signs off on the payment. The Examiner reviews each payment to ensure
        that adequate documentation of the release to in the file to justify the payment. If
        the payment is deemed as justified then the payment is released. If the payment is
        not justified, the payment is cancelled.




                                             22
     6) Prior to any check processing, the claims system will flag any indemnity payment
        with an overlapping service date as a duplicate. In those rare instances, these are
        brought to the attention of the supervisor to either override or disapprove the
        payment. The system will not generate a duplicate service date without the
        appropriate level of approval.

     7) All checks that are to print for a particular claims unit are review by the unit
        supervisor prior to the printing. This supervisor reviews a pre-print trial posting of
        the checks. She will check for any and all potential irregularities prior to printing. If
        there are any irregular or unjustified checks, these will be put into question for the
        Examiner to either justify or cancel.

     8) After printing, the Manager reviews all checks along with the check register to
        ensure accuracy. Any irregularities will be brought into question.

     D. Vocational Rehabilitation Supplemental Job Displacement Benefit

a.      Timeliness of Notification

Delays in the administration of Vocational Rehabilitation and the newly enacted Voucher
system can be very costly. If notices are sent out late, Vocational Rehabilitation
Maintenance Allowance (VRMA) may potentially be paid outside of the cap at the
temporary disability rate. With the new legislation, the penalty will result in a higher
permanent disability payment. This could equate to thousands of dollars of unnecessary
payments on files.

HRMS Examiners undergo regular and consistent training in the field of Rehabilitation.
With the knowledge of the potential punitive measures of poor vocational rehabilitation
administration, HRMS Examiners take the role of administering Vocational
Rehabilitation / Supplemental Job Displacement Benefit very seriously.

Upon notice of a Qualified Injured Worker (QIW) designation, HRMS Examiners
immediately contact the employer to determine if modified/alternate work is available.
With the advent of SB899 and Labor Code 132(a), we strongly encourage a face-to-face
interactive process with the employee prior to making this determination. Often times,
this necessitates the sending of a Delay of Potential Eligibility Notice. These notices are
sent always within ten days of our knowledge of QIW.

If the employer determines that they are not able to accommodate a Permanent Modified
or Alternate Position, HRMS will promptly send the appropriate notice and await the
injured worker’s reply regarding their desire to participate in Vocational Rehabilitation. If
there is no response within 45 days, HRMS will send a reminder notice. If there is no
response after 90 days, we will send a Vocational Rehabilitation denial.

If the employee demands Vocational Rehabilitation services, HRMS will promptly send
the injured worker to a Vocational Rehabilitation consultant. If the case is represented,
we will seek agreement on a counselor with the applicant’s attorney.


                                               23
Post 2004 dates of injury; time frames mandate notices to injured workers begin 10 days
after the last payment of temporary disability, and or within 10 days of permanent
disability payment. As with injuries prior to 2004, working with the Cities of Newport
Beach and Costa Mesa and exploring whether or not there will be modified or alternative
work available will be very important.

All of these steps are very time sensitive and require a knowledgeable administrator to
reduce the Cities of Newport Beach and Costa Mesa liability. As our clients will attest,
HRMS has a strong track record of administering the notices and benefits timely.

       E.    Settlement Procedures

Upon receipt of appropriate medical documentation, HRMS will rate all reports and
calculate the remaining exposures on the file. Although greater weight is usually given to
the treating physician’s report, HRMS adjusters are trained to take various other factors
into consideration when weighing reports. Often times, this may involve input from the
Cities of Newport Beach and Costa Mesa.

Generally speaking, if the injured worker continues to work for the Cities of Newport
Beach and Costa Mesa, we most likely will recommend a stipulation. However, if the
injured worker no longer works for the Cities of Newport Beach and Costa Mesa, we will
provide the Cities of Newport Beach and Costa Mesa with a recommendation for a future
medical buy out through a compromise and release, in addition to the stipulation
recommendation.
HRMS will conduct settlement negotiations on behalf of the Cities of Newport Beach and
Costa Mesa with the opposing attorney. We are confident in our examiners’ skill in
resolving cases prior to trial. We attempt to establish and maintain a good working
relationship with applicant counsel in order to reach final settlements quickly, fairly and at
the lowest possible price.
Prior to recommending a settlement, we will provide the Cities of Newport Beach and
Costa Mesa with an in-depth analysis of our options including an evaluation of potential
costs in terms of time and money. Concluding our analysis will be a suggested direction
for action we can take. HRMS will always contact the Cities of Newport Beach and Costa
Mesa to obtain authorization before entering any settlement agreements. With many of our
current clientele, we are accustomed to obtaining written settlement authority on all
settlements. If such is the level of involvement required by the Cities of Newport Beach
and Costa Mesa, we are eager to oblige. Nevertheless, we also recognize and honor your
time constraints. Therefore, if the Cities of Newport Beach and Costa Mesa desires not to
get involved in low exposure settlements, we honor that request as well. We recommend an
initial meeting to discuss comfort levels on settlement and reserve authorities.
HRMS adjusters prepare Compromise and Release Agreements and Stipulations with
Request for Awards in specific cases on our claims systems. As indicated above the unit
Supervisor will maintain first tier approval before the examiner makes settlement
recommendations to the Cities of Newport Beach and Costa Mesa.


                                             24
       F.       Reserving Practices and Philosophy

Our reserving practice procedures allows us a 90%+ confidence level. All initial reserves
are reviewed and approved by claims supervisors. Subsequent reserve increases will
require supervisor intervention on aggregate losses of over $25,000 incurred. Manager
intervention occurs on aggregate incurred reserve levels of $100,000.

Immediately upon knowledge of a claim from any source, HRMS’ adjusters prepare a
comprehensive reserve worksheet to determine the amount of the expected loss. The
worksheet requires that the claims examiner document the reasoning behind the
forecasted expenditure. Reserves are reviewed in all cases on a 30, 60, and 90-day basis,
or at any time when circumstances dictate re-evaluation. There are numerous details
considered in establishing reserves. Those factors include the nature and extent of the
injury, whether or not the case involves lost time, the amount of investigation required, if
the case is being litigated, and if there exists any possibility of having to provide
vocational rehabilitation benefits.

All reserves changes of over $5,000 gross incurred will be reported to the Cities of
Newport Beach and Costa Mesa through a letter outlining the factors affecting the reserve
amount, facts of the accident, nature and extent of the injuries and any other pertinent
investigation details.

Because our claims examiners are fully trained in rating medical reports, their expertise
in accurately assessing the extent of possible, or probable, temporary or permanent
disability is noteworthy. This skill, coupled with the requirement to document the
rationale behind the incurred loss, leads to the setting of actuarially responsible reserves.

HRMS’ supervisors review and approve all reserve changes within the module. The
claim manager has to approve all reserve increases over $100,00. As another step in this
process, HRMS’ internal auditors will randomly review files for reserve adequacy.


       G.      Subrogation Procedure

During the initial audit of the Cities of Newport Beach and Costa Mesa’s existing files,
HRMS will analyze each claim for this possible third party liability. In addition, as new
claims arrive, possible third party liability will be taken into account during our initial file
review. The original set-up of a claim in our Risk Management Information System
(RMIS) requires documentation that a decision has been made with respect to potential
recovery.

Once identified, all subrogation case assignments are referred to the claims manager for
specialized handling. However, before initiating subrogation recovery, we will obtain
specific direction from the Cities of Newport Beach and Costa Mesa. If the Cities of
Newport Beach and Costa Mesa agrees that we should pursue its third party interests, we


                                              25
will do so aggressively. The claims manager will then review the progress of our recovery
effort no less often than every 90 days.

In those instances where third party liability is evident, HRMS’ claims manager will put
the responsible parties on notice and continually monitor the file for recovery no later
than every 90 days. Subrogation reports will be provided to the Cities of Newport Beach
and Costa Mesa on a semi-annual basis, or more frequently if desired. The HRMS RMIS
report provides for separate analysis and tracking of all third party cases.

Whenever possible, our claims manager will attempt to settle the subrogation matter
without the use of attorneys. This further increases the potential reimbursement to the
Cities of Newport Beach and Costa Mesa. In addition to limiting the amount of time an
attorney is needed; HRMS will provide a determined in–house subrogation effort. We
will only assign counsel as a last resort to recover financial loss incurred by the Cities of
Newport Beach and Costa Mesa as a result of employee injuries and property damage.

We will identify and process all claims eligible for reimbursement from the California
Subsequent Injuries Fund. HRMS will prepare the necessary documentation to submit to
the State for reimbursement to the Cities of Newport Beach and Costa Mesa.

       H.      Pursuit of Fraud

At HRMS we take the pursuit of fraud very seriously. Over the past years we have had
remarkable success at reporting workers’ compensation fraud, which has resulted in
several successful prosecutions.

Our claims manager has a strong background in fraud investigation. As our internal SIU
program overseer, HRMS has successfully investigated several claims to successful
prosecution. He has an in depth knowledge of the Insurance Codes 1871.4, 1875 and
1877 as well as Labor Code 139.3 and Criminal Codes 418, 487, and 550.

HRMS fights fraudulent activity through an aggressive internal SIU program. Our
procedure is to report any suspected fraudulent activity to the supervisor and claims
manager immediately upon suspicion. Our examiners are afforded a fraud checklist to
assist them in the identification process. Generally speaking, they report all suspected
fraudulent claims immediately upon suspicion.

Our examiners have undergone and continue to receive extensive fraud training twice a
year. From this they have developed and acute awareness of the four types of fraud that
can impact a self-insured workers’ compensation program. These are: 1) Claimant Fraud
2) Provider Fraud 3) Employer Fraud and 4) Forgery. They also have a solid
understanding of the number of insurance and criminal code statutes that apply to the
arena of workers’ compensation.

The supervisor and manager will maintain an active “SIU” diary on all identified fraud
cases. The examiner and supervisor will jointly prepare a case synopsis. Once this is
done, the manager will review the case and formulate an investigative plan of action.


                                             26
Once the evidence is obtained to report the claim, the manager will prepare a case
synopsis to the corresponding Cities of Newport Beach and Costa Mesa Attorney’s office
along with the appropriate Fraud Department forms.

The examiner assigned to the Cities of Newport Beach and Costa Mesa program has
received extensive fraud training from in house personnel as well as outside training. The
examiner is trained on the checklist procedure for fraud identification and will follow the
office procedures for reporting and investigating such.

All fraud referrals will be formulated in a monthly report to the corresponding the Cities
of Newport Beach and Costa Mesa representatives. This report will include the number of
claim denials, Cities of Newport Beach and Costa Mesa Attorney referrals, arrests and
convictions. A savings report will be presented showing withdrawn liens, reserve savings
and fraud investigation expenses.

       I.     Investigations

A preliminary determination of compensability in accordance with the California Labor
Code is made following a review of the Employer's Report of Injury or Doctor's First
Report of Injury. If a question arises regarding compensability, we will contact the Cities
of Newport Beach and Costa Mesa representative to gather more data. Based upon the
information obtained, HRMS will suggest an appropriate course of action. This
recommendation may include a delay or denial of the claim. Final determination of
compensability, however, will generally rest with the Cities of Newport Beach and Costa
Mesa. The initial decision to either accept or deny a claim will be made within time
frames mandated by the State.

HRMS is dedicated to cost containment, professionalism, communication and
cooperation as the foundation for continually providing the highest quality claims
administration. HRMS maintains its independence from service providers associated with
the workers’ compensation industry in order to offer completely objective, unbiased,
assistance to its clients. Unlike other firms, HRMS has no in-house requirement to choose
pre-designated investigators, rehabilitation vendors or attorneys, unless specifically
requested by the employer. This autonomy eliminates the tendency found in many firms
to quote low administration and other service fees and then in addition charge their
clients for hidden or excessive ancillary services performed by affiliates or subsidiaries of
the parent administrator. Rather, HRMS is free to select the provider with the best
reputation for quality and service at the most cost-effective price. HRMS shall not hire
investigation firms without the approval of the Cities of Newport Beach and Costa Mesa
on matters involving their claims.

At HRMS, every claim is investigated. However, care is taken to eliminate overuse of
outside investigators. In many cases, HRMS’ claims professionals can resolve AOE/COE
issues during our three-point contact process.




                                             27
Communication as soon as possible after an injury has occurred has been proven to be a
key element in the potential scope of the claim. For this reason, we use the “48 hour-
three-point contact” approach. We make every effort to contact the injured worker, the
employer, and the treating doctor within 48 hours of our knowledge of a work-related
injury. This allows us to retain more medical control, evaluate the circumstances giving
rise to the industrial accident, take necessary action to prevent possible expansion of the
claim and establish a rapport with the injured worker.

However, in cases where the employer has serious questions concerning the legitimacy of
a claim, we find it cost effective to refer such matters out for investigative services to
support a potential denial. By having a concrete statement in hand, we are able to solidify
the facts early on so that they do not change in the future.

We also recommend investigation referrals on subrogation cases where the potential
recovery may significantly exceed the costs of the investigation report. On such cases, we
will refer out to a provider to take pictures, determine the fault ratios and identify the
third parties.

Matters in which we may employ the use of an investigator include:

                     A)   Factual AOE/COE disputes
                     B)   Subrogation: where recovery potential exceeds $1,000.
                     C)   Labor Code 3600 (a)(10) “post termination” claims
                     D)   Psychological claims
                     E)   Questionable Cumulative Traumas

All investigation assignments are to be completed within 30 days of assignment.

       J.      Index Bureau
Part of our commitment to investigate all claims, includes our pledge to index all the
Cities of Newport Beach and Costa Mesa claims. In conjunction with Cities of Newport
Beach and Costa Mesa current policy, and as a subscriber, HRMS reports all new claims
to the Index System. Subsequently, thereafter every six months on open indemnity files.
Consistent with our current policy HRMS will send all the Cities of Newport Beach and
Costa Mesa claims to the Index Bureau and will copy all such reports to the Cities of
Newport Beach and Costa Mesa’s Safety and Risk Manager.

       K.      Surveillance

As with all investigation referrals, it is our practice to discuss any sub rosa activities with
the Cities of Newport Beach and Costa Mesa contact prior to the assignment. We
recommend only referring out for such services where there is a reasonable suspicion that
there is malingering on behalf of the injured worker. Before such a referral, an Examiner
does a cost/benefit analysis to determine if the sub rosa has the potential to derive the
savings necessary to employ the expense.



                                              28
Matters in which we may engage in sub rosa include:

a)    We have reason to believe that the injured worker is working while collecting
temporary disability or salary continuation.

b)      We have reason to believe that the injured worker is engaging in activities outside
of their restrictions.

c)      The injured worker’s permanent disability is grossly inconsistent with reported
activities or the objective findings.

We do not recommend sub rosa assignments on files with very little potential exposure.
Usually sub rosa investigations are reserved for those cases where we expect a high cost
benefit ratio of return for our clients. We will discuss all sub rosa assignments with the
Cities of Newport Beach and Costa Mesa and obtain their approval prior to referral. Any
request by the Cities of Newport Beach and Costa Mesa for sub rosa will be honored.
HRMS has a provider list for sub rosa investigators, but will certainly honor any vendor
selection by the Cities of Newport Beach and Costa Mesa for case referrals. As with all
investigations, sub rosa assignments are to be completed and submitted within 30 days.

      L.       Communication/File Review

At HRMS, we conform to the style and needs of our clients. In order to understand the
needs of our clients, good effective communication between the administrator and the
Cities of Newport Beach and Costa Mesa should occur.

The Cities of Newport Beach and Costa Mesa can always expect to hear a “live voice”
instantly when calling through the Supervisor, Examiner, Manager or Assistant. Voice
mail from the Cities of Newport Beach and Costa Mesa representatives will be returned
within one day.

The Cities of Newport Beach and Costa Mesa can also expect communication on every
new loss, confirmation of lost time and/or modified duties before issuing a temporary
disability payment. Written contact is also made for authority, prior to settling a file.

HRMS provide the Cities of Newport Beach and Costa Mesa with quarterly or monthly
file reviews of all of their open claims. Our file reviews contain narratives of the selected
claims along with a reserve analysis.

The Cities of Newport Beach and Costa Mesa can also expect monthly visitations to meet
with department heads to review selected files, meet with safety committee personnel,
conduct on site visitations with injured workers and educational seminar sponsorships.

      M.       Training and Safety Programs

In addition to our own internal and industry sponsored staff training programs, HRMS
also conducts periodic seminars for our clients at whom we review new developments


                                             29
in workers’ compensation laws and regulations. For example, one of our recent seminars
dealt with methods for compliance to SB899. These “workshop style” conferences allow
us to share our experiences with those of our clients, and provide clear, step-by-step
advice about claims management and reporting procedures.

HRMS has developed a comprehensive Claims Manual for its clients. This reference
material will be updated to include the specific guidelines required by the Cities of
Newport Beach and Costa Mesa for administration of workers’ compensation claims in
accordance with its overall philosophical framework. We also provide a comprehensive
employee booklet explaining the Workers’ Compensation system, with appropriate caveats
about misuse of the system, for distribution by the Cities of Newport Beach and Costa
Mesa to its current and future employees.

HRMS has had considerable experience assisting clients in identifying the need for, and
implementing, safety and loss control practices in the workplace. This includes
introduction of respected safety consultants to the Cities of Newport Beach and Costa
Mesa for the purpose of controlling accident frequency. These professionals are able to
develop and carry out specific recommendations and procedures to address loss
exposures that may have been identified.

We also work closely with the designated safety personnel for insurers, as we firmly
believe that prevention of work related injuries is the best-cost containment device
available.

        N.     Re-Insurance
When reserves exceed a reserve threshold for reporting to the re-insurance carrier, if
desired by the Cities of Newport Beach and Costa Mesa, HRMS employees will draft the
appropriate documentation to forward to the re-insurer. Our RMIS system is capable of
alerting us to such retention levels. Further, we have the capability to report these cases
on line, if the re-insurer is so inclined to receive notification in electronic format.

We will report to the re-insurer at the required intervals will calculate the reimbursement
level and request such.

Upon receipt of a reimbursement check, we will record the amount into our system and
forward the monies immediately to the appropriate the Cities of Newport Beach and Costa
Mesa representative. These recoveries will not affect the incurred or paid reserves, but their
receipt will be recorded so as to ensure that future reimbursements are accurate.

       O.      On-Line Reporting
HRMS has designed and operates a program allowing our clients to report all new
injuries “on line” with our computer system. When they are done entering the data on the
computerized 5020 form, they simply save the document. By doing this, an actual
pending claim is created within our system. The employer can then print the 5020 for
their records and note the claim number. HRMS then receives a message of receipt of this




                                             30
pending claim instantaneously. Upon notification we immediately begin to process the
claim.

       P.      Accounting Controls

HRMS will maintain a checking trust account funded by the Cities of Newport Beach
and Costa Mesa to be used for payment of all legitimate, authorized, expenses associated
with handling the Cities of Newport Beach and Costa Mesa claims. This includes, but is
not limited to, medical bills, TD payments, PD payments, legal fees, investigation costs,
rehabilitation expenses and other allocated loss expenses.

Checks are prepared on a daily basis with the amount needed to fund the warrants
forwarded to the Cities of Newport Beach and Costa Mesa for transfer into the trust
account. It is HRMS' policy to pay all bills within fourteen days of receipt to avoid double
payments and potential penalties. Upon receipt of the funds, checks will be released. A
daily transmittal report and weekly check register will be provided listing all items of
cost in numerical order. Specific authorization levels will be pre-approved by the Cities of
Newport Beach and Costa Mesa.

HRMS will process all legitimate workers’ compensation costs in full accordance with
the Cities of Newport Beach and Costa Mesa guidelines.

Procedures for maintaining the checking account will include:

       -       A complete separation of the following duties by assigned personnel:

                      * Original authorization of the payment.
                      * Confirmation of authorization for payment and original
                      support documentation matching.
                      * Preparation of the check.
                      * Signing of the check by facsimile signature machine.
                      * Release of checks to payee.
                      * Bank statement reconciliation.

       -       Cancellation of the original support documentation upon signing of the
               check.

       -       Use of the original support documentation when preparing the check.

       -       Retention of voided checks; prohibition against checks made payable to
               cash or signed in advance.




                                            31
       -      Checks shall be issued and maintained in sequential order, in a locked room
              with a separate security system. Only upper management will have access to
              the check stock.

       -       Copies of checks will be sent to the Cities of Newport Beach and Costa
               Mesa on a monthly basis directly from the bank with appropriate identifying
               information.

       -       Reconciliation of bank statements by the Cities of Newport Beach and
               Costa Mesa personnel will provide an additional safeguard to the Cities of
               Newport Beach and Costa Mesa.

       -       Checks will be voided if not cashed within six months.

       -       A receipt log will be maintained and all funds received on behalf of the
               Cities of Newport Beach and Costa Mesa will be forwarded in a timely
               manner.

HRMS maintains internal control procedures including a division of responsibilities.
Our policy dictates that bills are to be paid within two weeks of receipt. This policy
significantly reduces the chances for payment duplication errors, and the assessment of
state-mandated penalties for late remittals. All payment requests must include information
regarding date of service, vendor name, and type of service prior to acceptance by our
computer system. The system automatically audits to ensure that the bill has not previously
been paid, and will print checks only to pre-approved vendors.

HRMS is willing to service the banking needs of the account by providing check registers
to the Cities of Newport Beach and Costa Mesa twice per month ensuring adequate funding
of the trust account balances. Should the Cities of Newport Beach and Costa Mesa want us
to initiate the banking services, we will attempt to place the Cities of Newport Beach and
Costa Mesa funds in an interest bearing checking account with all proceeds returning to the
account. All reconciliation documents will be forwarded to the Cities of Newport Beach
and Costa Mesa directly by the bank.

The check register will list all checks and vouchers in numerical sequence. The actual
check or voucher will include the following information:

               - Claim Number                - Date of Service
              - Service Date                 - Description of Service
               - Payee Charges               - Account Numbers

        Q.     Audits
HRMS has an experienced claims manger on staff whose primary responsibility is to
conduct random in-house audits of the open claims inventory. This function serves to
assure adherence to the Labor Code Rules of Practice and Procedure and with HRMS’
internal claims management policy. This system of frequent, incisive audits also helps the


                                            32
adjusting staff meet the contracted procedures established by the individual client. This is
another reason why independent audits of HRMS conducted by Self-Insurance Plans
and the Department of Industrial Relations Audit Unit, (formerly OBAE) have been
scored at consistently high levels. We take a lot of pride in the quality of our work
product, and openly encourage our clients to conduct periodic independent audits. In
addition to HRMS’ strict adherence to Department of Workers’ Compensation (DWD)
standards, we are familiar with risk management audit policies and will require our staff
to conform to the Cities of Newport Beach and Costa Mesa criteria through exacting
internal procedures.

Independent audits are not only openly welcome but also encouraged at HRMS. We take
a lot of pride in the quality of our work product and believe that audits are necessary in
that they provide assurance to the client that the administration is not only in compliance
with the state requirements, but is cost effective and meets the contract guidelines.

If an audit is scheduled, the auditor is provided with working space and access to all
claims files, remarks, notes and payment history. We work closely with the auditor and
provide all information that is requested.

HRMS is responsible for fines that the Audit Unit determines are directly related to
HRMS’ own actions and the employer is responsible for fines that the Audit Unit
determines are directly related to the employer’s actions.

Standards and Performance Measurements

                     Commitment and Philosophy

At Hazelrigg Risk Management, we realize that we are, first and foremost, a service
organization. In fact, we attribute our strong, steady growth rate, and our high account
retention, to our commitment to excellence in service. Our exceptional service and
reputation have allowed us to grow steadily in a very competitive market, in spite of a
limited marketing endeavor.

When it comes to excellence in service, we do not believe that we can over-emphasize
the importance of compliance to standard operations procedures and high standards. Our
ability to achieve these high standards is made possible through our exceptionally low
caseloads. Caseloads are kept below State mandated maximum levels, allowing our staff
the time to pro-actively manage their files, rather than just reacting to events. Such highly
individualized service returns dividends in the form of better employee relations, lessens
the life of the claim, and ultimately results in lower claim costs. Currently, our average
indemnity caseload is less than 150 files.

                       Standards
We take great care in identifying key standards that we believe will ultimately affect the
bottom line costs of our clients. Our standards are as follows:



                                             33
      24-48 Hour Claimant Contact: 90% or better is Satisfactory

      Average Set up Time: Average of 7 days from knowledge to complete the entire
      set up including 3 point contact, initial investigation, plan of action,
      documentation, reserve setting and payment of indemnity benefits.

      Percentage of timely Set Ups: 80%

      Closing Ratio: 95% or better monthly

      Mail and Bills Processing Time: 2 Days

      Clerical Instruction Sheet: All done within 7 days

      Diaries: 95% current within all times

      File Documentation: 98% on files

      Compliance measurements

These standards are measured and accomplished through the following reports and
procedures.

         End of the Week Report: Every Monday morning each unit supervisor is
         charged with reporting a weekly assessment of their unit’s compliance to the
         Manager in selected areas for their unit. This is done to minimize backlogs.

         Claimant Contact and Set up Report: All new set ups are audited
         internally on a weekly and monthly basis for compliance on ‘claimant contact’
         and ‘set up time. The auditor reports this to the manager. The results are
         addressed in the weekly supervisor meeting.

         Departmental Monthly Report: All monthly closings and new incurrals are
         audited on a monthly basis to determine compliance levels with regards to
         claimant contact, set up time, DWC notices etc.

      The manager compiles a financial and procedural compliance analysis in a
      monthly report. These tracks our inventory status, closing ratio, salvage
      percentage, mail processing, claimant contact, set up time, subrogation and other
      financial data.

         Internal Audits: We have audit forms that are filled out on randomly selected
         files. We strive to complete four per Examiner per week. These are used to
         identify compliance in claims handling procedures i.e. Timeliness of
         payments, DWC notices, set up, claimant contact and documentation as well
         as to identify areas for growth in claims handling efficiency. These are to be




                                          34
           used constructively to help the examiner continually improvement their claims
           handling skills.

           Over diaries: The manager and supervisors have over-diaries on their
           examiner’s caseloads to ensure quality claims handling and follow up. Issues
           of concern are addressed immediately.

           Claim Closure Techniques

At HRMS we are pleased to report a consistent track record of 100% + annual closing
ratios of our office aggregate inventory. Such a continuous track record helps keep your
examiner’s inventories low, which beneficially impacts their ability to spend more
analytical time strategizing cost effective resolution to your files.

Consistent high closing ratios are usually reflective of two practices which (as explained
above) are monitored and tracked heavily at HRMS:

            Early file intervention: Early communication and file investigation keeps
            severity down through prompt rapport building with the injured worker. Such
            a rapport decreases litigation ratios. Lower litigation rates lower the
            likelihood of permanent disability. Files with no permanent disability have a
            much shorter life span.

            Diary compliance: HRMS examiners review all files every 30-45 days.
            These reviews include a synopsis of what transpired during the last period
            and a plan of action to bring the file to closure. This brings constant direction
            to file to a resolution state.

In compliance with State regulations, injured workers with no permanent disability are
sent a permanent disability denial letter along with panel qualified medical examiner
information. If there is no response in 30 days, we close out the file.

As a guideline all files with permanent disability are forwarded to the DEU for a rating.
Nevertheless, our Examiners do perform an initial rating of the report to commence
disability advances.

As a guideline, we close out the matured future medical maintenance files when there is
sufficient evidence to suggest that the injured worker has discontinued treatment on a
permanent basis. This is usually evident when the injured worker has abandoned
treatment from 6 months to a year. We close out executed compromise and release files
upon the payment of the award.




                                            35
Cost Containment

A.     Early Intervention

We believe that effective cost containment goes far beyond just our medical contracts.
Solid cost containment starts with the examiner, who should always be cognizant of the
bottom line. This is why we take great care to hire very proactive, experienced and
technically strong examiners that are familiar with the requirements of the Labor Code
and the potential abuses that can take place in the system.
We take a strong philosophical approach toward early and effective intervention on all of
our new losses. We believe that through early file intervention, successful
communication between the examiner and the injured worker can take place. By
establishing a good rapport early on, we know that we can lower the probability of
unnecessary litigation.

At HRMS all of the new losses are set up within five working days upon receipt from our
office. This “set up” process includes a documented three-point contact, claims narrative
and plan of action.

The three-point contact includes the content of the communication with the employer,
injured worker and provider. The claims narrative includes a description of the injury,
place of treatment, treating physician, diagnosis, prognosis and treatment plan. The plan
of action documents what our plan is with regard to authorization, treatment and claims
adjustment to bring the file to cost effective closure within a reasonable time frame.

Further, by intervening early, the examiner can direct the injured worker’s medical needs
to a contracted clinic or physician that specializes in workers’ compensation related
injuries who is aware of the desires of the employer with regard to medical cost
containment and return to work.

At Hazelrigg Risk Management, every new loss is audited in compliance with our
standards in set-up time, documentation and claimant contact. Every closure is also
audited as month end to ensure that all benefits and notices were delivered timely. The
compliance to these standards is built into an examiner’s review so that the examiner has
an incentive to perform up to par in these areas.

We believe that the fruits from early file intervention such as lower litigation rates and
shorter claim lives will lead to significant cost reductions on the Cities of Newport Beach
and Costa Mesa’s aggregate inventory.




                                            36
B.     Medical Control Plus

The current wave of reforms commencing with Senate Bill 749 and culminating with
Senate Bill 899 have provided the employer with opportunities to take control of costly
benefits that continue to escalate. The ability to control claim costs is dependent on, the
employer becoming proactive in implementing a strategy to achieve the promised
outcomes. History has shown that prior reforms promised sweeping changes in the
workers’ compensation system never materialized. The workers’ compensation
environment has increased in complexity and now demands a new approach; essentially,
a paradigm shift from benefits administration to resource management. The shift comes
with a new set of conditions, potential pitfalls, and responsibilities for both employer and
administrator.

The current wave of legislative reforms provides the self-insured employer the tools
necessary to attain meaningful medical control. Specifically, there are four areas of
legislation that allow this control to take place:

       1.   Legislated Evidence Based Medicine (Utilization Review)
       2.   Availability of an employer medical provider network
       3.   Revamping the Official Medical Fee Schedule
       4.   Improved rules for pre-designation of a treating physician
       5.   Elimination of the treating physician presumption
       6.   New guidelines for apportionment

Hazelrigg Risk Management Services believes that the current round of reforms gives
the self-insured employer a unique potential and that the mission of Hazelrigg Risk
Management Services is to provide the tools necessary to convert the potential of
promised medical control into realized savings while maintaining an effective claims
administration function. The mindset necessary to accomplish this task requires a focus
on the management of resources, specifically the medical resources, concurrent with the
administration of benefits. To this end, Hazelrigg Risk Management Services made a
significant investment early on to study the reforms, observe what other organizations
were planning, review the needs of the employer, and determine the most effective course
of action. The outcome of this study provided the following framework:

                   Establish a continuum of care management organization
                   Include a Medical Provider Network as central to the organization
                   Include Utilization Review in the continuum of care
                   Include medical provider compliance management
                   Include return-to-work management
                   Manage the organization with claims administration expertise


How will this framework be implemented?



                                            37
The Solution

HRMS has developed a plan of action and an implementation strategy with the objective
of providing the self-insured employer the maximum benefit available from the current
reforms. HRMS is focusing on effective management strategies in three primary areas:

       Compliance Management
       Continuum of Care Management
       Return-to-Work Management

Compliance Management focuses on the reform mandate that medical treatment be
carried out in accord with Evidence Based Medicine. The reforms require that treatment
guidelines be adopted and pending the adoption of those guidelines that the protocols of
the American College of Environmental and Occupational Medicine guidelines be
implemented. Attaching a presumption of correctness to the treatment guidelines
provides increased enforcement. Compliance Management incorporates Utilization
Review as the vehicle to ensure that medical services are conforming to the guidelines of
Evidence Based Medicine. Compliance Management also addresses billing compliance
with the reform fee schedule, provider compliance in meeting deadlines, providing
appropriate services, analysis of settlements to evaluate the need for Medicare Set Asides,
and patient satisfaction.

Continuum of Care Management addresses the Medical Provider Network. Both in-
network and out-of-network services are managed to ensure continuity of care. Medical
case management is both a coordination and management function. The shock that will
arise from the implementation of the Medical Provider Network and the transition of
injured employees from an unmanaged environment to a managed environment needs
careful analysis and direction to minimize adverse outcomes and to mitigate employer
liability. Education of medical providers becomes an ongoing process as to meeting
network requirements and the needs of injured workers. A team of network medical
service coordinators is employed to oversee the transition into the new environment and
to interface with injured workers. The network medical service coordinators will issue
the mandatory notices to injured employees, monitor inured employee satisfaction and
provide the injured employees with the regulatory requirements regarding procedures to
raise objections to in-network treatment and diagnoses.

Return-to-work Management directs its attention primarily to the administration of the
Supplemental Job Displacement Benefit and return-to-work programs. Up until the
current reforms, Vocational Rehabilitation was the primary delivery vehicle to assist an
injured employee not able to return to work as a result of an industrial injury. Vocational
Rehabilitation was repealed with the current reform for all injuries on/after January 1,
2004. Supplemental Job Displacement Benefit became effective for all injuries January
1, 2004. This new benefit provides funds in the form of a non-transferable voucher that
can only be used for retraining and related expenses at a state approved school. As a new
benefit, there are some areas of concern regarding potential employer liability and
administration of the benefit. In order to better control outcomes and mitigate employer




                                            38
liability, this benefit will be administered separate and independent from the primary
claim. This will also allow for the development of expertise in administering the benefit.

The current reforms provide direct financial incentives to the self-insured employer in the
form of reduced permanent disability payments when an injured employee is offered
regular, modified, or alternative work. With the adoption of new permanent disability
rating guidelines in 2005, the employer will be able to achieve a reduction of 15% from
each permanent disability payment for a legitimate offer of work. Failure to offer work
will result in an increase of 15% in the permanent disability payments. The savings are
available to employers with more than 50 employees.

HRMS believes that focusing administrative awareness on the advantage of establishing
early return-to-work programs is necessary to achieve the potential savings. We assist
human resource personnel in developing useful procedures with which they can structure
temporary light duty and modified work positions. HRMS’ staff is proficient in creating
approaches to encourage a quick return to duty. This helps management avoid the hazards
inherent under ADA and FMLA regulations. The pitfalls in these federal mandates are
often seen by employers as a reason not to adopt early return-to-work policies.
Coordination between the HRMS adjuster and the various Cities of Newport Beach and
Costa Mesa personnel departments has been shown to be very effective in this regard.

From a personnel standpoint, when modified work positions are identified in advance of
need, an early return to work assignment for an injured employee does not become a
management scheduling hardship. The employee acquires a sense of usefulness and
acceptance in the workgroup, which has been proven to be a positive factor in the
recovery process.

During our three-point contact, we will inquire of the employer what modified positions
are available and relay that information from the onset to the treating physician. We will
continue to work with the employer and the physician during our disability phone calls
until the employee reaches a level where they can return to modified duty.

HRMS has determined that in order to achieve the highest level of effectiveness from the
latest reforms the functions of Compliance Management, Continuum-of-Care
Management, and Return-to-Work Management mentioned herein need to be directed in
an environment independent from the claims administration environment and at the same
time sensitive to the needs of that environment. HRMS has also determined that medical
services need to be employer specific and that global structured medical networks do not
work well for all employers. We have concluded that employer specific networks
meeting the needs of the employer, the experience of their claims, coupled with the
geographical and demographical environment are more likely to produce the desired
results. To accomplish this, HRMS has structured a separate entity, Comp Care, Inc. that
brings together claims administration expertise with resource management skills. This
allows application of the tools provided by the current reform to be implemented in
structured and organized way necessary to obtain the promised objective, cost savings
and improved medical treatment. Working with the employer, Comp Care, Inc.
structures a Medical Provider Network specific to the needs of the employer, attaches the


                                            39
Utilization Review discipline resulting in managed medical services in a controlled
environment. The key to savings is an effective and efficiently managed environment
providing the needs of the injured employee and meeting the objectives of the employer.

C.     Medical Management Procedures
HRMS believes that efficacious monitoring of a treatment protocol comes through open
communication with the employer, injured worker and provider (in that order). Current
legislation requires that medical treatment be provided within 24-hours of the
presentation of a claim form, not exceed $10,000 pending acceptance of the claim, and
treatment must be in accord with the regulated treatment guidelines. Once we have
established the initial communication from the employer and the employee we can
determine what body parts are injured and authorize accordingly. The employer’s
medical provider network is notified for appropriate follow-up.

Every treatment procedure requires our express verbal or written authorization. We will
not approve treatment to unrelated body parts or disorders. Treatment protocols are
subject to treatment guidelines and disputes are submitted to the Utilization Review
process Corresponding bills that are not approved will be objected to therewith.

D.     Nurse Case Management Procedures
If treatment extends beyond 90 days without a clear discharge date or permanent and
stationary date, our Examiners will intervene at that point to see that the proper specialist
is in place through a phone call or letter to the provider. If the provider is still unclear,
then the Examiner has the option to refer the case to Nurse Case Management or establish
a Labor Code 4050 consult evaluation. We find that a lot can be accomplished through
phone calls to either the treating physician or the injured worker.

We take a practical approach to the utilization of Nurse Case and Field Case
Management. We do not believe that we should use a nurse on every case. We believe
that to do such would unnecessarily burden the file with superfluous charges. We judge
the criteria for nurse case management on a case-by-case basis where there is a positive
cost benefit derivative. We believe that when good medical protocols are in place, a
seasoned examiner can manage the medical aspects of an “average” less complicated file
more efficiently than a nurse case manager can.

In all, we estimate that just less than 10% of our Indemnity files require a Nurse Case
Management referral. Our experienced Claims Examiners use their discretion on when
these services are necessary through the following guidelines:

               a)      Surgical Cases:

When surgery or hospitalization is requested, the Examiners will refer the case to our
Nurse Case Manager (NCM). This in-house NCM can provide same day service on
authorization if necessary. The assigned nurse will thoroughly review the file for the



                                             40
treatment appropriateness to guidelines and will authorize reasonable treatment and fees
consistent with their pre-negotiated rates. In the event that treatment is found to not be
appropriate, the nurse will proceed with Utilization Review.

       Surgical cases that are generally referred to Nurse Case Management include:

       i). Questionable surgical procedure necessitating Utilization Review.

       ii). Complicated post-operative needs (i.e.: home health vs. prolonged hospital
       stay, confusing DME needs).

       iii). Any In-patient procedures.

       iv) Any claimant that needs special attention.

       v). Need for Medical Reserves Estimate.

               b)     Non-Surgical Cases:

       i) Any case that is complicated and needs special attention for which the
       Nurse Case Manager should attend the medical appointments.

       ii) Old files that need file review/case analysis and medical direction.

       iii) Confusing files with questionable treatment requiring further medical opinion
       or utilization Review.

       iv) Disability beyond 90 days.

E. Coordination with Medical Provider Network

We have a very strong repertoire of providers that supply our clients with significant
savings. We recommend an initial meeting to compare rates and fees with cost
containment providers so as to ensure that the Cities of Newport Beach and Costa Mesa
are maximizing its potential. Once these providers have been identified and agreed upon,
they will be included in the employer’s medical provider network. The examiner will
authorize treatment within the network and pay bills accordingly.
We take great care to assure maximum network usage by requiring contractual
relationships with the assigned facilities. These relationships require treatment adherence
to the regulated treatment protocols for each category of industrial illness, i.e. Foreign
bodies, lacerations, soft tissue injuries etc. The employer’s medical provider network will
also include treatment specialist for referral and subsequent treatment. We will do this by
submitting a list of medical network subsequent treatment. We will do this by submitting
a list of medical network providers and ancillary medical service providers to the injured
employee and the industrial clinic.


                                            41
On the rare occasions when, due to factors outside of our control, treatment is channeled
to an out of network provider, we still aggressively require that treatment levels conform
with the regulated treatment guidelines and strict adherence to the official medical fee
schedule. The employer’s medical provider network has a number of tools at their
disposal to assist in the out of network management process and ensure a continuity of
care.

F. Bill Review and Cost Containment Contracts
Our medical cost containment program is among the most effective in the industry.
Through our contacts, we have established contracts and relationships with various bill
review organizations and providers to ensure that our clients are maximizing their
medical savings potential.

Currently we are contracted with the following organizations:

a)      Medical Auditing Services (M.A.S.): This is an in-house bill review program,
which is solely owned and managed by HRMS. MAS charges a percentage rate of
savings as fees for medical bill review and percentage rate of savings for hospital bill
review.

b)      Comp Care:
Comp Care is a peer review and medical management service company. We provide the
office space so that the nurse can work directly with our adjusters in-house. This nurse
works exclusively on our files and with our adjusters and is very familiar with our
clientele and business. The rates are $85 per hour for in-house Nurse Case Management
and $85 per hour for field management.


Litigation Management
           A. Initial Legal Analysis
HRMS does not employ staff hearing representatives.               Legal assignments or
recommendations are made after review of such factors as the complexity of the case, the
presence of opposing counsel or degree of litigation expected, the need for a particular
defense strategy, and the existence of appeal able issues. We will handle all non-complex
legal claims in-house whenever possible. Before referring any file to outside counsel,
HRMS will prepare a recommendation for such action, and forward it to the Cities of
Newport Beach and Costa Mesa for approval.




                                            42
           B. Legal Firms
If we are awarded the contract, we recommend meeting with the Cities of Newport Beach
and Costa Mesa prior to the commencement of services to discuss which attorneys the
Cities of Newport Beach and Costa Mesa is amenable to using. As we have no monetary
affiliations with any provider, we have no financial incentive to recommend any firm
over another. In fact, we believe that specific attorneys, rather than firms, have generally
been found to provide the most effective representation. HRMS will work closely with
counsel in evaluating and making recommendations for case management.

If so desired we will work closely with the Cities of Newport Beach and Costa Mesa in
evaluating legal counsel and make recommendations regarding suitable panel attorneys.
We can also use existing attorneys if preferred.

           C. Referral Criteria
Legal assignments or recommendations are made after review of such factors as, the
complexity of the case, the presence of opposing counsel or degree of litigation expected,
the need for a particular defense strategy, and the existence of appealable issues.

At HRMS we recognize the below issues or characteristics of files that may be indicators to
make a legal assignment:

       Case is set for hearing or trial

       Case is represented and delayed: Need deposition

       Represented case with potential of appreciable apportionment: Need deposition.

       Complex contribution issues with need to seek order-joining co-defendants.

       132(a) and S&W allegations

       A need to depose a treating physician or panel QME.

       Discovery order compelling

       Other complex factors where there is a positive cost benefit ratio benefit.

           D.     Legal Handling Protocols
When a legal referral is appropriate, the scope of services and defense issues are
identified. HRMS maintains litigation control by providing specific authorization to
attorneys to conduct clearly defined and agreed upon tasks. This authority is set forth in
writing. HRMS will monitor all legal activity throughout the life of the claim. Changes in
our defense posture, or approach, will not be accepted unless by our agreement. The


                                            43
Cities of Newport Beach and Costa Mesa consensus is also required. We will ensure that
all obligations imposed by the courts relating to cases under our charge will be met,
including those involving subpoenas, depositions, and timely filing of necessary legal
documents.

           E.     Legal Monitoring
Litigation monitoring is achieved through provision of regular status reports, which are to
be served to HRMS and the Cities of Newport Beach and Costa Mesa. An initial progress
report is due from the attorney within thirty days of receipt of the case. Follow-up reports
are required a minimum of every 90 days, or whenever significant events occur. These
periodic reports must be pertinent updates of case status and prognosis, with a realistic
time-line and strategy, not just a recitation of prior reports.

           F.      Settlement Recommendations

Prior to recommending a settlement, we will provide the Cities of Newport Beach and
Costa Mesa with an in depth analysis of our options including an evaluation of potential
costs in terms of time and money. Concluding our analysis will be a suggested direction
for action we can take. HRMS will always contact the Cities of Newport Beach and Costa
Mesa to obtain authorization before entering any settlement agreements. Our
recommendations will always be focused on final case closure. Claims of injured workers
no longer employed with the Cities of Newport Beach and Costa Mesa will have fully
considered the possibility of Compromise and Releases. Claims of injured workers still
employed with the Cities of Newport Beach and Costa Mesa are likely to be resolved by
Stipulations with Request for Award.

HRMS adjusters prepare Compromise and Release Agreements and Stipulations with
Request for Awards in specific cases. The unit supervisor will maintain responsibility for
discussing settlement strategies and making settlement recommendations to the Cities of
Newport Beach and Costa Mesa. The inclusion of consideration of future settlement
strategies during evolution of claims has resulted in high closure rates with positive
financial results.

Notification to the Cities of Newport Beach and Costa Mesa

HRMS will prepare a legal calendar and submit to the appropriate the Cities of Newport
Beach and Costa Mesa contact notifying of upcoming hearings on a weekly basis. As
noted above, all legal referrals will receive prior approval through the Cities of Newport
Beach and Costa Mesa prior to assignment. Our recommendation will include a complete
case analysis and litigation plan with recommended assignment to the attorney to bring
the case to a cost effective conclusion. HRMS will also prepare a monthly subrogation
report outlining all existing cases. This report will also show recoveries and the
percentages thereof from the total.




                                            44
Subrogation
Should the Cities of Newport Beach and Costa Mesa become liable for a workers’
compensation claim, and the injury is a result of the negligence of a third party, the Cities
of Newport Beach and Costa Mesa has the right to subrogate against the negligent third
party. HRMS’ policy requires that all reported claims be reviewed for possible restitution
through subrogation recovery.

During the initial audit of the Cities of Newport Beach and Costa Mesa’s existing files,
HRMS will analyze each claim for this potential. In addition, as new claims arrive, possible
third party liability will be taken into account during our initial file review. The original
set-up of a claim in our Risk Management Information System (RMIS) requires
documentation that a decision has been made with respect to potential recovery. Once
identified, all subrogation case assignments are logged by the claims manager and returned
to the appropriate unit for follow-up.

However, before initiating subrogation recovery, we will obtain specific direction from
the Cities of Newport Beach and Costa Mesa. If the Cities of Newport Beach and Costa
Mesa agrees that we should pursue its third party interests, we will do so aggressively.
The claims manager will then review the progress of our recovery effort no less often than
every 90 days.

In those instances where third party liability is evident, HRMS will advise the Cities of
Newport Beach and Costa Mesa and obtain said authorization to pursue recovery against
the third party. Upon receiving approval, HRMS’ staff will aggressively pursue all
opportunities for reparation to the Cities of Newport Beach and Costa Mesa.

Subrogation reports will be provided to the Cities of Newport Beach and Costa Mesa on a
monthly basis with running annual totals.

Whenever possible, our adjusters will attempt to settle the subrogation matter without the
use of attorneys. This further increases the potential reimbursement to the Cities of
Newport Beach and Costa Mesa. In addition to limiting the amount of time an attorney is
needed HRMS will provide a determined in–house subrogation effort. We will only
assign counsel as a last resort to recover financial loss incurred by the Cities of Newport
Beach and Costa Mesa as a result of employee injuries and property damage.




                                             45
(Ill) Insurance
Provide the names of the insurance carriers and limits of liability for the following
coverages:

(1)    Workers’ Compensation and Employer’s Liability-State Fund Insurance Fund
(2)    Comprehensive General Liability-Hartford Insurance
(3)    Automobile Liability- Hartford Insurance
(4)    Professional Liability/ Errors and Omissions-National Union Fire
(5)    Fidelity Bond-St Paul/Travelers

HRMS maintains in force insurance coverage, in the policy amounts, as follows:

           General Liability                                   $2,000,000
           Automobile Liability                                $2,000,000
          Workers’ Compensation                              Statutory Limits
           Fidelity Bond                                       $1,000,000
           Claims Adjusting E & O                              $5,000,000

The Cities of Newport Beach and Costa Mesa is currently named as an "additional
insured" under the general liability policy and as a "loss payee" under the fidelity
coverage. A thirty-day notice of termination clause will be provided to the Cities of
Newport Beach and Costa Mesa.

(IV) Provide Sample Contract

Please see Appendix II.

(V)    Fees

Respondent is encouraged to submit proposals in as many different ways as
possible. All proposals are understood to be for the first year of the contract.

All fees for service must be clearly identified in the response to this proposal. For
each item listed that is not included in the base price, provide the annual charge (if
applicable) and the basis of the fee.

(1)    Base Price. Specify how the base price is computed, for example: flat fee or
price per claim. Include any minimums and maximums, and special services
included in the base price.




                                          46
Year One — Rates

Cost Allocation/Billing

With each of the proposed options presented below, HRMS can bill in accordance with
the mutual preference of the cities of Costa Mesa and Newport Beach. Possible options
include percentage sharing based upon mutual agreement, average number of open claims
for the prior year, number of open indemnity for the prior quarter, etc.

Option One - Dedicated Unit (Current and Recommended Format)
We propose a dedicated unit made up of the following individuals who sole responsibility
will be to ensure the highest quality claims administration services for the cities. The unit
will consist of the following individuals:

                           Kristin Wilson -Claims Supervisor
                      Leah Velez -Claims Examiner Newport Beach
                     Nancy Calcagnini -Claims Examiner Costa Mesa
                         Catherine Davenport -Claims Assistant

Collectively, this unit has 77 years of experience in handling workers compensation
claims and 16 specific years handling this accounts claims.

The rates for a dedicated unit consisting of a supervisor, two claims examiners, and a
claims assistant to handle the collective claims of both the cities of Newport Beach and
Costa Mesa are as follows:

Year One. For Administration of all open, re-opened, and new claims from January 1,
2006 through December 31, 2006, and thereafter for the life of the contract, the sum of
Four Hundred Seventy-six Thousand Dollars ($476,000), payable quarterly in
advance.

Option Two - Two Dedicated Examiners -
The rate for a non-dedicated supervisor with two dedicated examiners would be as
follows:

Year One. For Administration of all open, re-opened, and new claims from January 1,
2006 through December 31, 2006, and thereafter for the life of the contract, the sum of
Three Hundred Fifty Thousand Dollars ($350,000), payable quarterly in advance.

Option Three – Two Non-Dedicated Examiners with 150 Caseloads -
The rate for non-dedicated Examiners with caseloads not to exceed 150 would be as
follows:




                                             47
 Year One. For Administration of all open, re-opened, and new claims from January 1,
2006 through December 31, 2006, and thereafter for the life of the contract, the sum of
Three Hundred Twenty-five Thousand Dollars ($325,000), payable quarterly in
advance.

Option Four - Two Non-Dedicated Examiners with 175 Caseloads-
The rate for non-dedicated Examiners with caseloads not to exceed 175 would be as
follows:

Year One. For Administration of all open, re-opened, and new claims from January 1,
2006 through December 31, 2006, and thereafter for the life of the contract, the sum of
Three Hundred Thousand Dollars ($300,000), payable quarterly in advance.


(2)    Adjustments to base price or optional services. Include any one-time cost, if
any, for additional services, including data transfer.

Does the cost of the program include a Medical Provider Network? If not, what
would the cost be to provide the City with a Medical Provider Network?

MPN
HRMS’ sister company, Comp Care, Inc., will develop and administer a medical provider
network for each of the city at no cost. Collecting PPO fees from the service providers in
the network will pay for the cost of set-up and administration.

(3)    Services considered to be allocated expenses and not covered under the base
price.

Allocated expenses shall include all costs and expenses that are chargeable to the
investigation, adjustment, settlement, or defense of a Claim for benefits or damages in
connection with a claim. Such expenses shall include, but are not limited to attorneys’
fees and disbursements; medical examination costs and expenses directly attributable to
the determination of liability, including diagnostic examinations and services, laboratory,
x-ray, and reasonable and necessary transportation expenses for claimants; reports from
attending physicians; court reporter services and transcripts; stenographic services and
transcripts; fees for service of process; costs of photocopying public records; witness
fees; court costs; appeal bonds; printing costs related to trials and appeals; testimony,
opinions, appraisals, reports, surveys, and analyses of professionals and experts;
automobile and property appraisals; trial and hearing attendance fees; reports from
government agencies branches; credit bureau reports; index bureau reports; private
investigators; photographs, including photographer fees and expenses; medical cost
containment services, such as utilization review, preadmission authorization, hospital bill
audit, provider bill audit, and medical case management, prejudgment interest; statutory
penalties; and any other similar cost, fee, or expense for services reasonably related to the
investigation and defense of a claim or the protection and collection of the subrogation



                                             48
rights. Allocated expenses shall also include other expenses charged to the file as agreed
to between the Client and HRMS.

(4)    Frequency of payments/installments.

Service fees are payable quarterly, in advance.

(5)    Price increases in subsequent years.

Base Price:

Year Two — Rates

Option One - Dedicated Unit
The rates for a dedicated unit consisting of a supervisor, two claims examiners, and a
claims assistant to handle the collective claims of both the cities of Newport Beach and
Costa Mesa are as follows:

Year Two. For Administration of all open, re-opened, and new claims from January 1,
2007 through December 31, 2007, and thereafter for the life of the contract, the sum of
Five Hundred Thousand Dollars ($500,000), payable quarterly in advance.

Option Two - Two Dedicated Examiners -
The rate for a non-dedicated supervisor with two dedicated examiners would be as
follows:

Year Two. For Administration of all open, re-opened, and new claims from January 1,
2007 through December 31, 2007, and thereafter for the life of the contract, the sum of
Three Hundred Sixty-seven Thousand Five Hundred Dollars ($367,500), payable
quarterly in advance.

Option Three – Two Non-Dedicated Examiners with 150 Caseloads -
The rate for non-dedicated Examiners with caseloads not to exceed 150 would be as
follows:

Year Two. For Administration of all open, re-opened, and new claims from January 1,
2007 through December 31, 2007, and thereafter for the life of the contract, the sum of
Three Hundred Forty-one Thousand Dollars ($341,000), payable quarterly in advance.

Option Four - Two Non-Dedicated Examiners with 175 Caseloads-
The rate for non-dedicated Examiners with caseloads not to exceed 175 would be as
follows:




                                            49
Year Two. For Administration of all open, re-opened, and new claims from January 1,
2007 through December 31, 2007, and thereafter for the life of the contract, the sum of
Three Hundred Fifteen Thousand Dollars ($315,000), payable quarterly in advance.

Year Three — Rates
Option One - Dedicated Unit
The rates for a dedicated unit consisting of a supervisor, two claims examiners, and a
claims assistant to handle the collective claims of both the cities of Newport Beach and
Costa Mesa are as follows:

Year Three. For Administration of all open, re-opened, and new claims from January
1, 2008 through December 31, 2008, and thereafter for the life of the contract, the sum of
Five Hundred Twenty-five Thousand Dollars ($525,000), payable quarterly in
advance.

Option Two - Two Dedicated Examiners -
The rate for a non-dedicated supervisor with two dedicated examiners would be as
follows:

Year Three. For Administration of all open, re-opened, and new claims from January
1, 2008 through December 31, 2008, and thereafter for the life of the contract, the sum of
Three Hundred Eighty-six Thousand Dollars ($386,000), payable quarterly in
advance.

Option Three – Two Non-Dedicated Examiners with 150 Caseloads -

The rate for non-dedicated Examiners with caseloads not to exceed 150 would be as
follows:

Year Three. For Administration of all open, re-opened, and new claims from January
1, 2008 through December 31, 2008, and thereafter for the life of the contract, the sum of
Three Hundred Fifty-eight Thousand Dollars ($358,000), payable quarterly in
advance.

Option Four - Two Non-Dedicated Examiners with 175 Caseloads-
The rate for non-dedicated Examiners with caseloads not to exceed 175 would be as
follows:

Year Three. For Administration of all open, re-opened, and new claims from January
1, 2008 through December 31, 2008, and thereafter for the life of the contract, the sum of
Three Hundred Thirty-one Thousand Dollars ($331,000), payable quarterly in
advance.



                                            50
(6)    Program implementation. Include one time cost, if any, for administration of
existing claims (runoff of old claims).

(7)    Data conversion.

No cost.

(8)    Customization of reports.

Generally, HRMS does not charge for custom reports. In the event that a particular
request requires extensive staff time to develop, we would advise the client and come to a
mutually agreeable price.

(9)    On-site computer terminal access.

Should the Client elect to access Client’s Workers’ Compensation data “on-line”, HRMS
will make such access available via secure Internet access. An annual fee of One
Thousand Five Hundred Dollars ($1,500) per licensed site is billed at the beginning of
each contract year.

(10)   Special Reports

Generally, HRMS does not charge for special reports. In the event that a particular
request requires extensive staff time to develop, we would advise the client and come to a
mutually agreeable price.

(11)   Preparation of 1099’s.

HRMS charges three dollars for each 1099 processed and sent to the IRS.

(12)   Storage of claims.

There is an annual two-dollar per file charge for all closed claims stored.

(13)   Itemize all other costs not listed above.

HRMS charges six dollars for each indexing of a claimant. This charges is considered an
allocated cost and charged directly to the file.




                                             51
(VI) Authorized Signature
(1)    The proposal must be signed and dated by the person authorized to bind
your firm and should state the number of days your offer will remain firm after
date of signature, and the person to be appointed as the City’s representative.

The Cities of Newport Beach and Cost Mesa’s contact during the RFP Process:

Ms. Arlene Hazelrigg; President
Hazelrigg Risk Management Services, Inc.
PO Box 669
Chino, CA 91708
ahazelrigg@hrmsyourtpa.com
Office: (909) 993-0343
Fax : (909) 627-9262

Hazelrigg Risk Management Services, Inc., agrees to be bound by our proposal for 90
days.
Ms. Arlene Hazelrigg, President of HRMS has authority to bind the proposal during the
period in which the Cities are evaluating the proposal.




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