Bill to Implement Federal Financial Services Reform

THIS WEEK IN SACRAMENTO

Prepared by Norwood & Associates

November 21, 2003

Governor's Workers' Compensation Insurance Reform Bill

The much anticipated special session on workers' compensation insurance reform (to be technical, the "Fourth Extraordinary Session") began this week after Governor Arnold Schwarzenegger was sworn in. The benefit of a special session is the normal procedural rules do not apply, thus allowing for the expedited passage of important policy initiatives. Bills introduced in the special session do not have to wait 30 days to be heard and votes can be taken immediately in recognition of the crisis at hand. The decision to set the bills for a hearing is a decision of the Legislature. Governor Schwarzenegger has called on the Legislature to expedite the hearing process.

The Governor introduced a single comprehensive bill to reform the workers' compensation insurance system. The bill, 134 pages long, was introduced in the Assembly as ABX4 1 by Assemblyman Abel Maldonado (R-Santa Maria) and in the Senate by Senator Chuck Poochigian (R-Fresno) as SBX4 3. Both bills are identical and have numerous Republican co-authors.

The Assembly Insurance Committee was the first committee to meet in the special session and met on Wednesday to hear the ABX4 1. The bill's author, Assemblyman Abel Maldonado, summarized the bill's provisions, but cautioned the Committee he had only received the Governor's language the night before and could not comment in detail. Assemblyman Maldonado said the Governor had consulted with over 50 stakeholders before deciding what to put in the bill. He characterized the bill as a major overhaul of the system, and not business as usual.

Assemblyman Maldonado also said the goal of the legislation was to bring California's premium costs in line with what other states are paying. California employers pay on average $5.85 in workers' compensation insurance premiums per $100 in payroll, compared to the national average is $2.46. In addition to the approximately $5-6 billion in savings from AB 227 and SB 228, this year's reform package, another $11 billion will have to be taken out of the system to meet this goal. Assemblyman Maldonado said, however, that none of the reforms in the bill had been "costed out" yet, and that the $11 billion in savings was a goal, not an estimate of actual savings.

Republican legislators were ready to immediately vote for the bill. However, Democratic legislators were openly skeptical of taking another $11 billion out of the system without harming injured workers. While they voiced their general support for the Governor's proposals and desire to work with him, they said there were many unanswered questions that would take time to sort out.

Insurance Commissioner John Garamendi also testified at the hearing. He stated that he generally supported the Governor's proposals, but had only seen the bill that morning. Thus, he urged a two-step approach. He recommended the Legislature immediately pass a bill to correct technical errors in AB 227/SB 228. He said without the technical clean up, the cost savings which he based his 14.9 percent pure premium advisory rate cut would not be realized.

As far as the Governor's proposal, however, he urged a "go slow" approach. He said the measure was so comprehensive it would be better to move slowly and get it right rather than to move quickly and make errors. He said the strategy should not be "ready, fire, aim." The Republican committee members promptly rejected the Commissioner's recommendation. They argued that most of the provisions in the Governor's proposal had were not new concepts and had already received a hearing in the form of other bills, and that it was completely appropriate to vote on the bills before Christmas.

In a confirmation of the labor/applicant attorney strategy, labor and applicant attorney representatives said there wasn't a workers' compensation insurance crisis, but an insurer crisis. They pointed out the repeal of the minimum rate law and the creation of the treating physician presumption at the request of employers and some insurers in 1993 are now credited as one of the reasons for today's problems. Thus, they argued that the current legislation should not be rushed so similar mistakes aren't made. They also argued that rates should be regulated to ensure insurers pass on savings to employers.

The Governor's proposal contains the following provisions, along with the justification for those provisions:

Protecting Injured Workers:

· Bringing Permanently Disabled Worker Benefits Up To the National Average. Under existing law, California’s benefits will increase over the next three years as a result of the passage of AB 749 (2002). The legislation will fully fund those increases without premium increases. Additionally, this proposal goes one step further. If the California workers’ compensation system costs are brought down to the national average, then an additional benefit increase will go into effect for the most severely injured.

· Ensure that Injured Workers Receive the Treatment Mandated by Professional Guidelines. Last year’s legislation established a system that attempted to provide injured workers treatment according to established medical guidelines. However, real savings could be illusory as a result of ambiguities. This measure will address those flaws.

· Mandated Objective Medical Findings. This concept requires awards to be based on objective medical findings which will ensure that workers receive benefits appropriate to their injury.

· Make the System Fair. Today’s system is too arbitrary and subjective - meaning workers with similar injuries may have vastly different awards. This proposal mandates the use of nationally recognized guidelines for physical impairment, like the American Medical Association guidelines, to assure reasonableness and improve consistency of awards.

· Resolve Claims Quickly. This bill will define "permanent and stationary" conditions of injuries so that claims cannot continue unresolved.

Expand Use of Existing Cost Saving Techniques:

· Expand Use of Dispute Resolution. Allow all employees and employers to utilize the cost-effective Alternative Dispute Resolution (ADR) program currently available to the construction trades.

· Clarify the "Cure and Relieve" Standard. In some instances, the "cure and relieve" standard has been used to justify questionable treatment protocols. This bill would clarify that the "cure and relieve" standard requires medically necessary treatment. This definition of "cure and relieve" is currently being used by some employers involving represented workers to reduce workers’ compensation costs.

· Option for Consolidation. This proposal would allow employers that choose to provide health coverage to utilize that system, with its accompanying protocols, to treat injured workers. This optional program could reduce the cost of running two concurrent medical healthcare systems.

Bringing Common Sense Back to the System:

· End the Ability of Workers to Receive More than 100% Benefit. Bring rationality to the disability award system so that a worker cannot receive multiple disability payments totaling more than 100%.

· Limit System to Work-Related Injuries. Ensure that cumulative injuries are work-related by applying the "predominant cause" standard to cumulative injuries. For other specific injuries, apply a 10% standard.

· Ensure that Determinations are Medically Sound. Require a physician to make a permanent disability determination and limit the use of doctors who are mutually agreed upon for 1 year after injury.

· Reduce Excessive Penalties. Limit penalty awards to that portion of the late payment in question and require penalty claims (Labor Code 5814 claims) to be filed in a timely manner.

· Prison Reform. Prohibit prisoners from receiving workers’ compensation.

True to his word, Senator John Burton, President Pro Tem of the Senate, introduced SB4X 1 to repeal AB 227/SB 228. Senator Burton had previously argued that since employers said the bills didn't do anything, and insurers said it wasn't enough to reduce premiums immediately, he would simply repeal the bills. Assemblyman Maldonado said, however, that the Governor's bill was intended to build on AB 227/SB 228, and not replace it. Commissioner Garamendi also said he didn't take Senator Burton's threat seriously. Senator Burton has also threatened an initiative to increase benefits to the national average if the Governor decides to take his reform efforts to the ballot.

Senator Jackie Speier also introduced SB4X 4, a spot bill, to address workers' compensation insurance reforms. Her bill does not contain substantive provisions, but contains legislative finding on most of the topics in the Governor's bill, and may end up being the Democratic alternative the Governor's bill when it is amended with substantive provisions.

Finally, Senator Ross Johnson introduced SBX4 4 to provide eligibility for benefits only where employment is the predominant cause of the injury compared to all other causes combined. The bill would also prohibit benefits where the employee's injury was caused during a criminal act for which he or she was convicted. The bill may also be a spot bill since it addresses issues already contained in the Governor's proposal.

Hearing Held on Workers' Compensation Insurance Rate Reduction

The Senate Labor and Industrial Relations Committee held a hearing today on the Insurance Commissioner's pure premium advisory rate reduction of 14.9 percent and the progress being made in implementing the rate reduction. The hearing had an aggressive tone to it, with the Committee's Chair, Senator Richard Alarcon, taking the unusual step of putting Dave Belussci from the Workers' Compensation Insurance Rating Bureau (WCIRB) under oath.

The Chairman's line of questioning indicated an effort to discredit the WCIRB, which recommended a pure premium advisory rate cut that was much less than the Commissioner's 14.9 percent. Senator Alarcon frequently referred to the "insurance industry funded WCIRB." Senator Alarcon questioned how the WCIRB could consider and advisory rate without considering insurer profits. Despite even Insurance Commissioner John Garamendi's explanation that the WCIRB only considers loss costs, not company profits, the Chairman expressed his believe that rates should be regulated to ensure company's don't keep all the profits from the recent workers' compensation insurance reforms.

Several Democrats asked Commissioner Garamendi if he would like to have the authority to regulate workers' compensation insurance rates. The Commissioner stood by his previous position that it would not be good for the marketplace to give the Commissioner authority over rates. He said the market was in such chaos after September 11 and the workers' compensation crisis of the last few years that anything that caused companies to leave or give them pause before bring more capacity into the state would hurt the market. He did, however, leave himself an out. He said the market dislocation was a short-term problem, and that rate authority may be warranted in the future once State Fund stabilized and the market stabilized. However, he did reiterate that imposing a Proposition 103 style system on workers' compensation rates would simply "screw-up" the market further.

Senator Alarcon at one point said it appeared the Insurance Commissioner "trusts insurance companies more than I do." Senator Alarcon said he would introduce a bill that would establish "maximum rates." Senator Joe Dunn, who trial lawyers have previously tried to recruit as a candidate for insurance commissioner, said he though that while rate regulation might not be appropriate at the moment, legislation was warranted to prevent excessive rates.

The Insurance Commissioner also commented on the State Fund's litigation regarding his regulatory authority over the Fund. The Commissioner prefaced his comments by saying he believed the State Fund would survive, and that he believe the State was on the threshold of seeing a revival of the workers' compensation insurance market. He said that while he was not ready to act at the moment, he might come back to the Legislature and ask them to "one way or the other" determine his regulatory authority over the State Fund. He said the current litigation was not positive and was not what the parties should be spending their time on. For its part, the State Fund said it was too early to disclose whether it would be passing on the Commissioner's recommended 14.9 percent rate cut.

Senator Poochigian is expected to present the Governor's proposal to the Committee next week. It does not appear, however, that either the Senate or the Assembly will move as quickly as the Governor would like. The Senate has scheduled additional hearings on Monday, Tuesday and Wednesday of next week and the Assembly has not as yet scheduled any additional hearings.

It is likely that the Legislature's final order of business will be to consider cleanup legislation to AB 227/SB 228 being urged by the Insurance Commissioner, business groups and insurers. Although tagged "clean up," there are substantive issues that will be strongly opposed by labor and applicant's attorneys. Thereafter, further discussion and hearings will take place on the Governor's reform bills.

Given the major policy issues regarding medical control and permanent disability reform, it is questionable whether such a bill has any chance in the Legislature. The Governor is already preparing a back-up strategy to put workers' compensation insurance reform on the ballot, and is said to be raising a $30 million initiative war chest for workers' compensation and other issues.

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