THIS WEEK IN
Prepared by Norwood & Mattoch
It’s Finally Over!
Both Houses of the California
Legislature have passed Governor Arnold Schwarzenegger’s comprehensive workers’
compensation reform proposal today, sending SB 899 (Poochigian)
to the Governor for his signature. The
bill will be effective upon his signature. The vote was 47-32 in the Assembly
and 33-3 in the Senate.
The bubble has finally
burst. Workers’ compensation has been in
the eye of political debate now for some 4 years. Former Governor Gray Davis vetoed 3 workers’
compensation bills prior to signing what amounted to a massive benefit increase
bill AB 749 (Chapter 6, 2002). Last year
the Legislature passed AB 227/SB 228 which contained a number of workers’
compensation reforms, but was flawed by several inconsistencies and mistakes
and needed significant legislative clean-up, which never materialized.
Governor Schwarzenegger made
workers’ compensation reform one of the key elements of his election platform
and followed it up by calling a special legislative session on workers’
compensation and authorizing a workers’ compensation initiative. With the enactment of SB 899, history
suggests that workers’ compensation may disappear from the political agenda for
several years, except with regard to insurance rate regulation and perhaps the
role of the producer in the workers’ compensation system.
The debate over workers’
compensation rate regulation and restricting commissions or requiring the
disclosure of commissions has been vicious and unrelenting. The industry dodged a huge bullet in the
reform bill by avoiding any caps on agent commissions or any rate
regulation. That being said, there is a
provision in the bill that will require a study of whether insurers are
adequately passing savings from AB 227/SB 288 and SB 899 through to
employers. That study is two years
away.
However, a separate rate
regulation bill, ABx4 16 (Levine), was passed out of the Assembly Insurance
Committee yesterday and passed the Assembly today immediately after the vote on
SB 899. The vote was 42-37. Both bills could be sent to the Governor for
his signature, however, the Governor’s strong opposition to any rate regulation
would indicate that ABx4 16 will likely be vetoed if it reaches the Governor’s
desk. Clearly, the separate bill
strategy was a way to vent labor and liberal democratic member’s frustrations
with not being able to negotiate such a provision in SB 899. However, it should also serve as a signal to
the industry of what may come later.
The industry’s reaction to SB
899 in the marketplace regarding July 1 policies and in the upcoming Workers’
Compensation Insurance Rating Bureau’s hearings on pure premiums will have a
major effect in the Capitol. Simply put,
if workers’ compensation insurer’s premiums are not significantly reduced,
there will be another workers’ compensation rate regulation bill this session
or early next year and the pressure will be immense on Republicans to vote for
such a bill and the Governor to sign.
Certainly, the good will of the insurance industry is on the line with
the business community, Legislators and the Governor himself.
What’s In The Bill?
Key points of the workers’
compensation reform package include:
- Authorizing insurers or employers to establish a
medical provider network for the provision of medical treatment; allows
injured employee to select a physician from the provider network. Permits
an employee to obtain second and third opinions regarding treatment from
physicians in the network; and establishes an independent medical review
process to resolve disputes as to whether the treatment is “medically
necessary.”
- The standard to be used for independent medical
review is identical to that established in ACOEM guidelines or the
utilization schedule established by the Administrative Director.
- Except under allowed contracts, limits the
amounts paid for medical services to the reasonable maximum amounts in the
official medical fee schedule in effect on the date of service. Medical providers would submit an
itemization of medical services provided and payment would be made
accordingly.
- Eliminates the rebuttable
presumption of correctness for a comprehensive medical evaluation by a predesignated personal physician.
- The term “liberal
construction” shall now be interpreted in an impartial and balanced manner
in order that all parties are considered equal before the law.
- Reduces scope of IIPP program adopted in AB
227/SB 228 of last year. The requirement that every workers’ compensation
insurer conduct a review of the injury and illness prevention program of
each of its insureds within four months of the
initial insurance policy term is restricted to those employers with an
experience modification factor of 2.0 or greater and extended to within
six months of the policy term. The
review may be done by a licensed
- Restores “user funding” of Division of Workers’
Compensation.
- Funds the Workers’ Compensation Return-to-Work
Fund through increased fraud penalties.
Of particular note are new administrative penalties and fines up to
$400,000 for conduct that constitutes a “general business practice.”
- Changes the penalty structure in Labor Code
Section 5814 to be 25% of a particular payment is unreasonably delayed or
refused or $10,000 whichever is less.
The penalty would be 10% of the amount withheld if the insurer
self-corrects.
- Reinstates Labor Code Section 5814.5 and allows
recovery of attorney’s fees.
- Provides that employer is only liable for portion
of disability directly caused by injury.
Any prior PD awards to employee are conclusively presumed to exist
at time of subsequent injury.
Accumulation of all permanent disability for any region of the body
shall not exceed 100% over employee’s lifetime except if injury or illness
is deemed to be total in character per Labor Code 4662. Body regions include: hearing; vision;
mental disorders; spine; upper extremities; lower extremities; head, face,
cardiovascular, respiratory and all other systems. No single injury may accumulate more
than 100% disability.
- Establishes objective medical findings in PD
through the AMA guidelines. Provides that in determining percentages of
permanent disability, account shall be taken of nature of physical injury,
age and occupation of injured employee, consideration being given to the
employee’s diminished future earnings capacity. Nature of physical injury or
disfigurement shall incorporate descriptions of physical impairments and
corresponding percentages of impairment published in American Medical
Association Guides to the Evaluation of Permanent Impairment, 5th
edition. Diminished future earnings
capacity based on empirical data and findings. The Administrative Director shall
formulate the adjusted rating schedule based on data and findings from
- Provides that if, within 60 days of disability
becoming permanent and stationary, an employer does not offer injured
employee regular, modified or alternative work for a period of at least 12
months, disability payments increase by 15%, and if such an offer is made,
they are reduced 15%. Provision
applies to workers of employers employing 50 or more employees.
- Caps temporary disability to two year, with
periods beginning on the date of first payment rather than the date of
injury. There are nine exceptions to two year caps. Increases number of weeks of permanent
disability compensation for disabilities with ratings above 70 percent,
and decreases number of weeks for those rated 15 percent or below.
- Provides that when the last payment of temporary
disability has been made, and regardless of whether the extent of
permanent disability can be determined at that time, the employer shall
begin payment of reasonable estimates of permanent disability.
- Provides that for single injuries occurring after
effective date of bill, that aggregate temporary disability benefits shall
not extend more than 104 compensable weeks within a period of two years
from the date of commencement of temporary disability payments. This would not apply for specified
conditions for which temporary disability benefit would be capped at 240
weeks within period of five years.
Such list includes: acute and chronic hepatitis B and C;
amputations; severe burns; HIV; high-velocity eye injuries; chemical burns
to the eyes; pulmonary fibrosis; and chronic lung disease.
- Requires administrative director, after
consultation with Insurance Commissioner, to contract with qualified
organization to study workers’ compensation insurance market and the
effect of 2003 and 2004 reform legislation on workers’ compensation
insurance premium rates. Cost of
study up to $1 million paid by insurers, based on proportionate share of
market.
- Provides that SB 796, the private right of action
for enforcement of labor code violations, does not apply to Division 1 and
Division 4. (Labor Code 2699)
- Gives immunity to entities that appropriately
report suspected fraudulent activity.
- Expands carve-outs for collectively bargaining
contracts.
For the complete analyses of
SB 899 (Poochigian), please visit:
http://info.sen.ca.gov/cgi-bin/postquery?bill_number=sb_899&sess=CUR&house=B&site=sen
Anything on the State Fund?
The debate over the application
of Risk Based Capital, the California Department of Insurance and State Fund
lawsuit and the proposed expanded number of board members continues. All aspects of the State Fund’s role in the
workers’ compensation market, how they should be regulated, State Fund’s
financial condition and SCIF’s effect on the
California Insurance Guaranty Fund were repeatedly discussed over the months of
negotiations on workers’ compensation reform.
Representatives of the State
Fund met with the Governor’s workers’ compensation policy staff and key
political staff on the issue as well. In
the end, the Governor’s office decided to punt in the big workers’ compensation
reform bill on issues relative to the State Fund and address the topic in a
separate bill later this session.
Clearly, the Governor’s
office seems to recognize that the State Fund should not be a political
football. On one hand, they understand
that the State Fund is part of their administration and should ultimately be
the responsibility of the Administration, not another arm of state government
controlled by an elected Commissioner from another party. On the other hand, they recognize that how
the State Fund is regulated is a key issue to the decision making process of
private insurers regarding whether they want to risk additional capital in
Reportedly, the Governor’s
office was considering a compromise wherein the Risk Based Capital requirement
would remain applicable to the State Fund and the State Fund would continue to
be regulated by the Department of Insurance like any other insurer, including
financial review; however, the Commissioner would be prohibited from taking
control of the State Fund. Under this scenario, the Insurance Commissioner
would be required to annually report on the condition of the State Fund to the
Governor and the Legislature and indicate whether their rates were
adequate. If there was a dispute
relative to this issue, the responsibility to deal with the situation would be
directly on the administration. In addition,
reportedly there were proposals to add 2 new policyholder positions to the
State Fund Board and to provide 5 civil service exempt positions to provide the
State Fund with additional expertise.
Time will tell what
ultimately will be contained in separate legislation. Senator Jackie Speier,
chairwoman of the Senate Insurance Committee, has attempted to negotiate an end
to the lawsuit between the State Fund and the Department of Insurance. The Senator has now indicated that she and
Vice-Chair Ross Johnson will hold a hearing to investigate the various issues
with the State Fund and those raised with the Department of Insurance’s
treatment of the State Fund.
Bill Actions
The following bills were
heard in the Assembly Aging & Long Term Care Committee this week:
AB 2474 (Wolk) would require any person who provides financial
services, including insurance agents, title insurance company officers and
investment officers, who observe an incident that appears to be elder financial
abuse to report the suspected incident to adult protective services or the
local law enforcement agency.
Vote: 3-2. To Assembly Public Safety Committee.
AB 2611 (Simitian) proposes to impose a mandatory duty on financial
institutions to report to specified governmental entities any reasonable
suspicion of elder financial abuse and suspected physical abuse, abandonment,
abduction, isolation or neglect.
Vote: 3-2. To Assembly Public Safety
Committee.
The following bills were
heard in the Assembly Appropriations Committee this week.
AB 1953 (Vargas): Increases penalties for unlicensed public insurance adjusters,
specifies language for disclosure terms in contracts and requires prior
approval of contracts by the Insurance Commission
Vote: 19-0. To Assembly Floor.
AB 1962 (Cox): Allows
an underwritten title company to be either a corporation or a limited liability company
(LLC).
Vote: Referred
to the Suspense file due to estimated costs in excess of $150,000.
AB 2129 (Chavez): Current law, scheduled to sunset on
Vote: 19-0. To Assembly Floor.
AB 2639 (Cox): This
bill authorizes the Insurance Commissioner (IC) to restrict, rather than
suspend or revoke, an underwritten title company's license or certificate of
authority.
Vote: 19-0. To Assembly Floor.
The following bills were
heard in the Assembly Insurance Committee this week:
AB 2316 (Chan): Establishes the “Senior
Protection Fund” by assessing up to $1 per each annuity or life insurance
product sold in California. The fund
would be used for the Department of Insurance and local district attorney fraud
investigation and education activities.
Vote: 9-5. To Assembly Appropriations
Committee.
AB 2384 (Nakano): Allows the Department of Insurance to penalize insurance companies who
don’t pay credit life and disability policy death benefits within 30 days of
the date of death. Requires
all life insurance policy and annuity contract forms to be filed with the
Department prior to issuance.
Vote: 16-0. To Assembly Appropriations
Committee.
AB 2557 (Koretz): Increases
penalties for individuals who transact insurance without a valid license and
allows the Insurance Commissioner to enforce providers of continuing
education who fail to achieve the IC's
standards.
Vote: 16-0. To Assembly Appropriations Committee.
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