THIS WEEK IN SACRAMENTO

Prepared by Norwood & Associates

September 10, 2003

 

SPECIAL WORKERS' COMPENSATION

INSURANCE REPORT

 

 

1.      Deal Reached on Workers' Compensation Insurance Reform

 

The four Democrats on the workers' compensation insurance conference committee inked their names to a conference report, AB 227 (Vargas) and SB 228 (Alarcon), as a Tuesday midnight deadline approached.  The two Republicans on the committee abstained, signaling the view of the Republican caucus and many in the business community the deal hashed out by various Democratic factions was a half-loaf and better than nothing.  The bill now goes before the Assembly and Senate for an up or down vote before the legislative session ends this Friday.  Governor Gray Davis announced today he would sign the bill if it reaches his desk.

 

  1. Summary of the Conference Committee Report

 

The highlights of the reform bill are as follows:

 

·        Establishes a fee schedule for outpatient surgery centers at 120% of Medi-Cal.

·        Reduces medical provider rates by 5% unless at or below Medi-Cal rates.

·        Pharmacy services limited to 100% of Medi-Cal.

·        Limits chiropractic and physical therapy visits to 24 visits per claim.

·        Replaces the existing vocational rehabilitation program which provided benefits ranging from $10,000-16,000 with and educational voucher worth $4,000-$10,000 depending on the level of disability and whether modified work is offered.  No more than 10% of the voucher can be used for vocational or return to work counseling.

·        Establishes utilization review, independent review and second opinion processes to reduce the cost and delay of medical care disputes.

·        Eliminates the treating physician's presumption for injuries which occurred between 1994 and 2003 (the presumption was eliminated for all future claims as part of last year's $3.5 billion benefit increase bill.)  The presumption still applies to pre-designated physicians, a significant loophole.

·        Requires employers, who funded 20% of the administration of the workers' compensation insurance system, to fund 100% of the system.  This is an additional $80 million employers will have to pay, but will allow implementation of administrative reforms that were stalled because of lack of funding.

 

·        Exempts CIGA from paying penalties assessed against insurers who later became insolvent.

·        Authorizes up to $1.5 billion in bonds to be issued on behalf of CIGA to resolve expected short-term cash flow problems due to the high number of insolvencies.

·        Exempts the State Compensation Insurance Fund from hiring freezes.

·        Limits litigation by allowing labor unions and management to agree on alternative dispute resolution procedures.

·        Reduces the time for insurers to pay medical bills from 60 days to 45 days and increases penalties for late payments.

·        Requires the Insurance Commissioner to take into account the bill's reforms when approving advisory pure premium rates and requires the WCIRB to determine the cost savings of the reforms.  Insurers would be required to certify their rates reflect those cost savings.

·        Requires CHSWC to study the feasibility of imposing a minimum rate law to be phased in over five years.

 

  1. Estimated Cost Savings

 

Depends who you talk to.  In a press conference this morning, Insurance Commissioner John Garamendi said he believed the bill, once fully implemented would achieve between $5-6 billion in annual savings and one time savings of $5.3 billion.  He said his actuaries were conservative in developing the estimates, and he believes the ultimate savings will be closer to $6 billion.

 

These numbers are about what Assembly Insurance Committee Chairman Juan Vargas all along said was his goal.  The savings are more than the $2-3 billion some liberal Democrats wanted, and far short of the $11 billion set by Republicans.

 

The Commissioner estimated the bill's reforms would eliminate the need for the proposed 12.7% increase in the advisory pure premium rate effective January 1, 2026.  He said he was "comfortable" the reforms would also roll back the 7% increase which was effective July 1, 2026, and held out hope for further cutbacks once the hard to "score" reforms such as utilization review and alternative dispute resolution kicked in.

 

The Commissioner said the one time savings of $5.3 billion would not be immediately reflected in premiums, but would shore up the health of insurers, especially the State Fund.  He did note, however, as insurers restored their health, that would have an impact on premiums.  It would also help bring stability to the marketplace and encourage other insurers to come to California.

 

Republicans, however, immediately questioned the numbers.  They have always cautioned that avoiding major changes would result in piece-meal reforms that were little more than window dressing.  They noted the WCIRB has only identified $2.5 billion of savings.  The WCIRB, however, said it cannot estimate savings for many of the proposals because specific language was only released before the hearing last night.  They are now working on updating their estimated cost savings.  They continue to caution, however, that many of the cost savings will be difficult, if not impossible, to score because their impact on utilization is unknown.

 

  1. Winners and Losers

 

The workers' compensation insurance crisis became one of the most hotly contested issues this year.  California's workers' compensation insurance system is the most expensive in the nation, and yet provides some of the lowest benefits, a clear indication lots of money is going to third parties.  These various interest groups spent enormous amounts of time and effort protecting their piece of the pie and trying to shift the focus of cost-cutting efforts to others.  Now the deal is done, it is possible to tally up this year's winners and losers in the game of workers' compensation insurance reform.

 

1.      Winners

 

·        Insurance Agents & Brokers: A proposal to cap insurance agent broker commissions was taken off the table.  Agents and brokers were the only major group that escaped a "haircut" in the bill.  Agents and brokers, however, argued they were the first group to take a haircut when the Commissioner ordered the State Fund to lower commission rates, with the rest of the market following in driving commissions down.

·        Insurers: Despite plenty of rhetoric, the committee ultimately rejected a statutory premium rollback, premium cap or rate regulation.

·        Labor: Preserved the $3.5 billion benefit increase they won last year by sponsoring the strict fee schedule on outpatient surgery centers that was ultimately adopted and is expected to save about $932 million annually.

·        CIGA:  Got the $1.5 billion bonding authority they needed to resolve their short-term cash flow problems caused by the latest rash of insolvencies without having to increase the 2% assessment.  Were also exempted from outrageous penalties for technical violations made by insurers that later became the responsibility of CIGA.  These penalties amount to millions of dollars.

·        Attorneys: Insurers are assessed late penalties on the entire benefit award even though only one payment is late.  A proposal to assess the penalty against just the late payment, and not the entire award, was changed at the last minute to apply only to CIGA, not all insurers.  These penalties amount to millions of dollars and are a huge profit center for attorneys.  Attorneys were also able to keep litigation alive and well in the system by keeping a loophole that provides a treating physician a presumption of correctness if the physician is predesignated.

·        Insurance Commissioner John Garamendi: As of only a couple of days ago, the conference committee appeared deadlocked.  By all accounts, the Insurance Commissioner was the one who kept legislators' feet to the fire and helped broker the final deal.  He reportedly was calling members as the deal was falling apart from a hospital hallway while attending to an ill family member.  He personally drafted language, and promised to put his credibility on the line by vouching for the $5-6 billion in savings.  In return, the committee nixed a proposal to transfer the DOI's workers' compensation insurance fraud money and staff to the Attorney General.

 

2.      Losers

 

·        Outpatient Surgery Centers: These centers are the only providers not subject to a fee schedule, and costs naturally have been going through the roof.  The original proposal was to establish a fee schedule at 120% of Medi-Cal, but everyone expected that was just an opening negotiating number.  The surgery centers were pushing for 165% of Medi-Cal, and it appeared a compromise was in the works to settle at 150%.  The surgery centers, however, over-played their hand by involving Assembly Speaker Herb Wesson.  In the end, he couldn't protect them, and they got stuck with 120%.

·        Speaker Herb Wesson: The Speaker is termed out next year, and has wanted to stay on as Speaker instead of allowing for a transition ahead of next year's elections.  There is a succession battle underway among the majority Democrats who have enough votes to elect the Speaker.  Many moderate Democrats, members of the Latino caucus, have been unhappy with the Speaker's leadership and are angling to replace him with one of their own.  When the Speaker tried to stop a drastic fee schedule from being imposed on the outpatient surgery centers, several members of the conference committee refused to go along and were willing to close down the conference committee without a reform bill.  The Speaker, faced with panicking members who would have faced angry voters, caved rather than be ousted by members of his caucus who wanted a reform bill at any cost.

·        Vocation Rehabilitation Providers: The vocational rehabilitation mandate has been eliminated in favor of providing $4,000-$10,000, depending on the level of disability, for education.  Counseling fees are limited to 10% of this amount.

·        SCIF:  While the State Fund received an exemption from the hiring freeze, they were unable to dump the Risk Based Capital standards imposed last year and weren't able to get out from under the Commissioner's regulatory thumb.

 

3.      Draw

 

·        Chiropractors:  An injured worker who is treated by a chiropractor receives an average of 34 treatments, more than twice the national average.  The original proposal was to cap visits at 15.  The deal caps visits at 24.  The cap, however, is not "hard."  A physician can approve additional visits.  In addition, there is a fear that chiropractors will now routinely increase the number of treatments to the cap of 24.  Thus, the ceiling could become the floor.  It could have been much worse for the chiros.

 

 

  1. 2004 Landscape

 

The old saw is that workers' compensation insurance "reform" only happens once a decade.  However, no one is crowing this reform package solves the crisis.  The most optimistic estimates have these reforms returning rates to the super-inflated levels of last summer, a still deplorable situation.  Even the bill's most ardent supporters indicated further reforms would be necessary in the year's to come.

 

Insurance Commissioner John Garamendi said it took many years of inattention to get to where we are today, and it will take many more years to get the system back in shape.  Assemblyman Juan Vargas said this bill was only a first, while significant, step.  He noted after the 1993 reforms, everyone let their guard down thinking they had fixed the system.

 

Senator Charles Poochigian, who did not vote for the conference report and did not attend the press conference announcing the deal, instead issued a list of reforms that still needed to be acted on:

 

·        Mandated objective medical findings to determine permanent disability.

·        Rationalize the permanent disability rating system by infusing fairness, consistency and objectivity.

·        Provide the employer the right to choose the medical provider for 365 days, rather than 30 days.

·        Correct the definition of what it means to "cure and relieve" injured employees so that it is evidence-based.

·        Suspend the COLA growth included in temporary disability, beginning in 2006.

·        Curtail the abuse of stress claims.

·        Eliminate non-work related injuries from the system (establish a predominate cause standard.)

·        Curb litigation costs.

·        Require apportionment when injury is to the same part of the body.

·        Prohibit prisoners from receiving workers' compensation.

 

In addition to further legislation, all eyes will be on how insurers respond to the reforms.  In the words of the Insurance Commissioner, a "bright light" will be focused on insurers next year.  While insurers escaped rate regulation and re-imposition of the minimum rate law, the Legislature is definitely headed that direction unless premiums start to fall.

 

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© Copyright 2003 by Norwood & Associates

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