THIS WEEK IN
Prepared by Norwood & Associates
Workers'
Compensation Insurance Conference Committee Frames Issues
The workers' compensation insurance conference committee met for three days this week to hear testimony from all the interested parties in the system. The testimony helped shape the parameters of the debate. The grassroots effort of employers and insurance agents and brokers has clearly had an impact on members of the conference committee. Each member acknowledged a crisis exists, which is in itself significant progress from last year when certain members suggested employers and insurers were simply "crying wolf."
Thus, the question to be resolved by the conference committee boiled down to how much reform needed to be enacted. Senator Charles Poochigian enunciated the Republican position that extreme measures needed to be taken. He concluded the conference committee would fail if it enacted anything less than $11 billion in system savings annually. Senator Poochigian said enacting just the "easy" reforms upon which there was consensus would be window dressing that at best would slow the rate of future increases instead of forcing rates down.
Some Democrats, however, suggested the Republicans were being partisan, and $11 billion in system savings would be impossible to achieve. They suggested $2-3 billion would be a more realistic number. Some of the moderate Democrats, however, said they hoped to achieve at least $5 billion in savings.
Insurance Commissioner John Garamendi was a forceful voice for significant changes. He advocated for a strict medical fee schedule and a basic package of reforms. This package, for which there is agreement on most components, would save in direct costs to reserves about $7 billion annually according to the Commissioner. The Commissioner admitted that the basic package would probably only stabilize rates and at best reduce them somewhat.
Garamendi also sought to put to rest some controversial issues. He flatly said he did not intend to "take over" the State Fund, and seemed to take a slightly more conciliatory approach to pending litigation, saying he was working with the State Fund to shore up its position given the circumstances of the current market crisis. The Commissioner, through a representative, also said they were now supporting a California Insurance Guaranty Association (CIGA) proposal to obtain bonding authority to carry the cash-strapped agency through what is expected to be the peak of workers' compensation insurance insolvencies.
Beyond the basic consensus package of reforms, the main point of disagreement appears to be removing the subjectivity for disability ratings, tightening eligibility for entering the system and the amount of compensation for minor injuries. Republicans argued these items should be on the table, but Democrats flatly said they would not go there.
The basic consensus package may even unravel with outpatient surgical centers placing enormous political pressure on the Speaker of the Assembly and conference committee members to water down the medical fee schedule. Similarly, providers such as chiropractors and rehabilitation providers are trying to deflect restrictions on their services and work to squeeze savings from other groups.
Finally, it appears Democrats have named their price for reform. Senator John Burton and Senator Richard Alarcón said they would not support any reforms unless insurers "guaranteed" any savings in the system would flow directly to employers. They said they would rather go home than allow insurers to "profiteer" by keeping any savings for themselves. They discounted arguments that savings estimates for various reforms were notoriously inaccurate and some insurers on the brink of insolvency would need to rebuild their capital position. The Senators flatly stated if savings from reforms did not flow immediately to employers, they would just shut down the committee.
When the question was put to the Insurance Commissioner, he responded "balance" was needed. This drew an angry response from Senator Burton, who said it was too late for balance, and any legislative action had to result in immediate premium savings. The Commissioner said he would accept whatever rate authority the conference committee gave him, and he would use this authority to force rates down. Thus, it appears the conference committee report will contain some rollback or limitation on open rating.
It is unclear when the committee will meet again. With just two weeks left in the legislative session, interested parties are starting to complain they don't have any specific language to react to, just oral testimony. The conference committee members and staff will now most likely draft a conference report and release it just days before the session ends on September 12.
Workers'
Compensation Insurance Broker Fee Cap Proposal Challenged
The six members of the workers' compensation insurance conference committee are clearly feeling the pressure to cut costs in the system. This has set off a round of interest groups trying to protect their turf and characterize others in the system as having plenty of fat to cut. For example, an estimated 1,000 chiropractors descended on the Capitol to try and stop a proposal to limit chiropractor visits to 15 unless another physician concludes further treatments are necessary.
Various interest groups were also distributing a chart this week showing agent and broker fees at 11.9% of the total costs in the workers' compensation insurance system. This prompted some conference committee members to suggest insurance agents and brokers needed to take a "haircut" just like everybody else in the system. They proposed capping broker fees to bring premium costs down.
The Agents & Brokers Legislative Council (ABL) quickly discredited the misinformation that broker fees are 11.9% in the workers' compensation insurance system. Upon further investigation, it was discovered that the source of the chart, the California Workers' Compensation Institute (CWCI), erred by lumping "Other Acquisition Expenses" of 3.4% in the "Agent & Broker Fees" category when these "Other Acquisition Expenses" are insurer marketing and sales expenses. They are not paid to agents or brokers. Upon notification of the error, CWCI immediately issued a corrected chart showing "Agent & Broker Fees" representing 8.5% instead of 11.9%.
ABL, however, pointed out to conference committee members even the revised CWCI chart substantially overstated "Agent & Broker Fees." The CWCI did not include categories of data from the Workers' Compensation Insurance Rating Bureau (WCIRB). Including this data further reduced the commission level to 7.1% of 2002 earned premium. Additionally, when commissions are more appropriately placed in the context of what insurers actually paid out in losses and expenses in 2002, which was 121.6% of premium, the WCIRB concluded that "Agent & Broker Fees" represented 5.8%.
The conference committee members were also told “Agent & Broker Fees” have dropped well below 5.8% this year. The State Compensation Insurance Fund, which writes 50-60% of the market, according to the Insurance Commissioner, has reduced commissions to a scale with a maximum of 5.5% that drops to 0% (zero) for 78 employer classifications with the highest premiums. Private insurers are similarly driving commission rates down.
Thus, ABL argued the proposal to cap commissions will provide only illusory savings since the market has already driven commission rates below a fair level of compensation for the value that brokers and agents provide their clients and insurers. ABL again pointed out that agents and brokers provide services for insurers and employers that save hundreds of millions in losses and help employees return to work more quickly and productively. These services include risk assessment, underwriting, risk control, claims management, loss prevention and loss control, and mediating disputes involving payroll, classifications and audits.
The issue came up publicly when Senator Alarcón, the Co-Chair of the Conference Committee, asked a representative of the State Fund if it was possible to save $120 million by eliminating broker commissions. State Fund defended the commissions by saying brokers provide better business and provide services they could not replace at current staffing levels. Thus, State Fund concluded eliminating brokers commissions would not result in any meaningful savings.
Employer Health
Insurance Mandate Bill Proposed
The health insurance conference committee took a more "in your face" approach to making law than the approach taken by the workers' compensation insurance conference committee. Instead of holding hearings to let all the interested parties make their case, and then fashioning a bill based on the testimony, the conference committee instead released a draft of a bill prior to the commencement of hearings. The conference committee is expected to hold its first, and perhaps only, hearing on Tuesday.
The bill is based on previous versions of the "pay or play" mandate bills previously released. It would require almost all employers to either provide health insurance coverage to their employees and dependents or pay a fee to a state insurance pool.
The conference committee's aggressive approach is based on the politics surrounding the issue. In the case of workers' compensation insurance, there is consensus on the need to reform the system and agreement on a package of relatively noncontroversial fixes. The only question is how far to go.
This is not the case with a health insurance mandate, with labor and consumer groups miles apart from employers. Accordingly, supporters of a health insurance mandate have concluded holding lengthy hearings and trying to negotiate a compromise would be a waste of time. Instead, their tactic appears to be to use an overwhelming Democratic majority in the Assembly and the Senate to squash any dissent and send the bill to the Governor. The bill's supporters appear confident that the once moderate Governor will tack left and sign the bill to shore up his base in the face of the recall election. The same tactic worked last year when the Governor, facing an unexpectedly difficult reelection campaign, signed a $3.5 billion workers' compensation insurance benefit increase bill after three previous vetoes.
The bill would require employers
with more than 20 or more employees to provide coverage for hospital, surgical,
medical care and prescription drugs to employees and their dependents or pay a
fee into the State Health Purchasing Fund.
The Fund would then pay for coverage for the uninsured employees. The bill would become operative on
The Fund would be administered by the Managed Risk Medical Insurance Board (MRMIB), which currently manages the Healthy Families Program which provides low-cost health insurance to the children of the working poor. MRMIB would establish the fee to be paid by employers who do not provide health insurance coverage. It would also negotiate with health insurers and health plans on the coverage to be provided, the cost of coverage, and the amount of co-payments, deductibles and co-insurance. Employers must pay 80% of any fees. For employees who make less than 200% of the federal poverty level, their co-pay would be capped at 5%.
The Employee Development Department (EDD) would collect the fee in the same manner it collects payroll taxes. An employee will still be covered under the program even if an employer fails to pay the fee. Employers who fail to pay the fee or pay late will be assessed double the amount of the fee.
The fee is waived for employers who provide evidence to EDD they have provided health insurance coverage to their employees. Proof of coverage is acceptable from health plans and insurers that meet the requirements of existing law, multiple employer welfare arrangements and ERISA plans.
Employers are prohibited from designating employees as independent contractors to avoid the requirements of the law. Employees eligible for other federally subsidized state programs such as Medi-Cal and Health Families may continue to stay in those programs. However, the State's "share of cost" would be funded out of the employer fee account.
Negotiations
Underway to Resolve Conflict in Privacy Bills
Governor Gray Davis this week signed SB 1 (Speir), which comprehensively regulates the sharing of personal information by financial institutions, into law. Last week, the Assembly temporarily stalled a competing privacy bill, SB 27 (Figueroa). Senator Liz Figueroa said this week she would meet with interested parties next week to see if their concerns could be addressed. Both authors are candidates for Lieutenant Governor, and have made privacy a high profile issue.
SB 27 would require a business which discloses a customer's personal information to a third party for direct marketing purposes to provide the customer, within 30 days after the customer's request, the names and addresses of the recipients of that information and specified details regarding the information disclosed. Unlike SB 1, the bill provides for a private cause of action and liquidated damages.
The heart of the conflict involves
the definition of "personal information" in SB 27. It conflicts with the definition in the
federal Gramm-Leach-Bliley Act and the definition in SB 1, thus subjecting
financial institutions to two separate standards. Unless SB 27 is amended to be consistent with
the definitions used in SB 1 and federal law, a single transaction will be
subject to two different regulatory systems.
Court Throws Out
CDI Regulations on Underwriting Standards
Insurance Commissioner John Garamendi vowed to appeal a court decision this week throwing out regulations limiting the ability of insurers to use claims history for underwriting homeowners' insurance. The Commissioner also stepped up pressure on insurers by beginning market conduct examinations to look at individual files and see if he could come up with a pattern of wrongdoing.
The Commissioner has also changed his argument somewhat. He first argued insurers should be required to follow up on claims in insurance industry databases to find out if the claims continue to represent a substantial risk of future loss. With the court concluding he had no authority in this area, the Commissioner is now arguing the claim records in the databases themselves are incorrect, and called the databases "seriously flawed."
Industry databases that contain claims data are regulated by federal law, the Fair Credit Reporting Act (FCRA). Under the FCRA, insurers ordering reports from industry claims databases must inform applicants when any adverse action they take on an application is due to information supplied by the database provider and how to obtain a copy of the report. The FCRA provides for a dispute procedure if a consumer questions the accuracy of a report that may result in the record being changed or deleted. In addition, a consumer may request a statement of dispute be added to the claim record.
A-PLUS, one of the major industry claims database providers, reported this week that in an average month, the number of claim updates, claim deletions or consumer disputes statements added to the A-PLUS database total less than one/one hundredth of one percent of the total transactions for that month (0.0072%). Consumers, when reviewing the claims data, are challenging very few records as being inaccurate.
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© Copyright 2003 by Norwood & Associates