Tag Archives: ogilvie

The New Year Is Upon Us

January 1 is going to be a day like none other in recent memory for the California workers’ compensation system. Most of the provisions of Senate Bill 863 (De León) will be operative. A flurry of regulatory initiatives near the end of this year will allow implementation of many of these provisions. There will be considerable confusion and costs associated with these new laws and procedures as they come on line. The goal and hope of virtually all in the system will be that in time the objectives of this major legislation will be met, and we will have a system that is more efficient and better aligned than what resulted from the last major reforms in 2003 and 2004.

Those in charge of implementing this legislation — largely in the Department of Industrial Relations and Division of Workers’ Compensation — have done an admirable job dealing with the intent and inherent conflicts in this new law. Their outreach through various forums — though maddening from a timing standpoint — has greatly assisted the community in its understanding of all the various nuances of SB 863 and its interaction with a voluminous body of regulations and court decisions already existing and in many cases left unaffected by this legislation. There are limits to what the Division can do, and those limits are largely set forth in the Labor Code as it will exist on January 1. Those who think that the regulatory process is a second bite at the apple to deal with issues inartfully drafted or largely ignored in the legislative process are going to be disappointed.

There is a debate as to whether SB 863 will reduce costs in 2013 and by how much. The benefit increases are hard dollar increases, while the various reforms intended to produce savings and offsets require both effective implementation and accurate analysis. They also take time. This dynamic is at the core of Commissioner Jones’ November 30th pure premium order. The Commissioner’s decision clearly showed, as did the actuarial analyses presented to him, that the reforms are mitigating the increased costs in the system from day one. It is equally clear that until there is experience under the reforms and the reforms are fully implemented, the full measure of savings cannot be completely or accurately estimated.

Prior reforms, specifically Assembly Bill 227 (Vargas) and Senate Bill 228 (Alarcon), combined system changes, such as mandatory utilization review, with well-defined elimination or reduction of benefits. These 2003 measures eliminated vocational rehabilitation and capped chiropractic treatments — changes that were easily quantifiable the moment the ink dried on then Governor Gray Davis’ signature. The next year, Senate Bill 899 (Poochigian) added reforms to medical control and permanent disability rating that quickly manifested additional considerable savings in medical and indemnity losses, but also resulted in higher loss adjustment and medical cost containment expenses. And, as we saw with the Almaraz, Guzman, and Ogilvie decisions, reforms of the permanent disability system eroded significantly once reshaped by the Courts.

SB 863 is an investment both in our injured workers and California’s businesses. It is a long-term investment. Measuring the return on that investment by new and renewal quotes for January 1, 2013 insurance policies is simply a mistake. This legislation was never intended to provide significant immediate cost savings. It is intended, however, to provide savings to more than offset the two years of benefit increases the Legislature adopted and Governor Brown signed into law once the most significant reforms are fully operational. The workers’ compensation community is served best by understanding what the new laws do — and don’t do — on January 1, and on July 1, and in 2014 and, ultimately, 2015. If we don’t do that, then this effort will just be the latest in a series of well-intentioned, but ultimately futile, efforts to return this system to its original promise. If we do, however, SB 863 might be the elusive long-term reform generations of employers and workers have wanted for so many decades.

Changes In California Workers' Compensation

Out of the Frying Pan And Into The Fire — Jumping Into SB 863

As we look toward 2013, one thing is certain — it will be a year of change for California workers’ compensation. With the passing of the hotly debated reform legislation, SB 863, which takes effect on January 1, 2013, proponents are hopeful that the changes will have a positive impact on the current state of California’s workers’ compensation system. While SB 863 was drafted to reform the workers’ compensation system, its intent is different than that of SB 899, legislation passed in 2004. SB 899 revamped and reduced workers’ compensation benefits. SB 863 increases benefits to the injured employees while decreasing system costs by improving efficiency and eliminating “waste” in the form of excessive medical and legal costs.

There is no question that SB 863 addresses key issues that have been on the forefront of debate following the implementation of SB 899, many of which are positive for both employers and injured employees. While most agree that reform was needed, the net effect that the SB 863 changes will have on California insurance rates is also hotly debated because of other factors that need to be considered including carrier loss ratios and economic factors. While the regulations are still being drafted, the following summarizes some of the highlights, possible challenges and the potential impact on California workers’ compensation rates.

Indemnity Benefits
While successfully addressing a number of failings in the workers’ compensation system, it is widely accepted that one of the failings that SB 863 will address is one of the unintended results of the implementation of SB 899 in 2004 — that permanent disability rates provided inadequate compensation to some injured employees. The SB 863 legislation:

  • Increases permanent disability payouts over a 2-year period with annual adjustments
  • Eliminates “add-ons” to permanent disability, including sleep disorder and sexual dysfunction, though psych will be allowed for catastrophic injury or violent workplace incident
  • Addresses Diminished Future Earnings Capacity (DFEC) via a standard multiplier to the permanent disability rating formula
  • Creates a Return to Work Program for those injured employees whose permanent disability is disproportionately low for their loss of earnings capacity
  • Caps the Supplemental Job Displacement Benefit (SJDB) at $6,000 — currently at $10,000

The increases in permanent disability benefits are expected to cost $310M next year and almost double in 2014. However, the elimination of some of the add-ons to permanent disability and changes to the impact of diminished future earnings capacity under the Ogilvie case are expected to save $210M per year. The Return to Work Program will be funded through employer assessments at a cost of $120M per year.

The Independent Medical Review (IMR) Process
SB 863 places California on the burner with what many consider a radical approach to addressing medical treatment disputes. The new Independent Medical Review Process contemplates the following:

  • The Workers’ Compensation Appeals Board will no longer have jurisdiction to hear medical disputes directed to Independent Medical Review.
  • The Independent Medical Review process is binding on all parties with only limited appeal.
  • Employers shall fund the Independent Medical Review process, based on a fee schedule to be established by the Administrative Director of the Division of Workers’ Compensation.
  • Implementation will be staggered, beginning January 1, 2013 and being completed by July 1, 2013 and will apply to all Utilization Review decisions.

The Independent Medical Review process is expected to eliminate excessive costs and delays in litigating medical disputes. However, the savings attributable to the implementation and the costs to employers have not yet been quantified, as the process is still being defined. The California Applicants’ Attorneys’ Association is questioning whether the Independent Medical Review process meets due process requirements and it is likely that it will be challenged in court.

Liens
Historically, liens have been one of the biggest cost drivers in the workers’ compensation system, creating bottlenecks in litigation and an administrative burden on carriers and administrators. Following are some changes to the lien process under SB 863:

  • Firm time limits for filing liens
  • $150 lien filing fee — recoverable if the lien provider prevails
  • If not correctly filed, liens are null and void
  • Bundling of liens is prohibited
  • Prevents filing if lien is subject to the Independent Medical Review process

This aspect of SB 863 is applauded by most as defining a clear process for addressing liens while virtually eliminating unnecessary litigation and frivolous liens. A preliminary analysis by the Workers’ Compensation Insurance Rating Bureau states that these changes should result in a $450M annual savings to the industry.

Summary
Although many of the changes arising from SB 863 are positive for the future of California’s workers’ compensation system, there are still potential challenges and uncertainty. It is likely that the constitutionality of the Independent Medical Review process will be challenged in court. While the effect of Ogilvie has essentially been eliminated, Guzman is still active case law. Add-ons could become an issue again, depending on how “catastrophic injury” and “violent workplace incident” are defined. Further, carriers and administrators have new processes to implement by January 1, 2013, some of which have not yet been defined and will require specialized staffing.

The passing of SB 863 holds the promise of lower claims costs, improved efficiency and ultimately rate relief for California employers. Initial reports from the Workers’ Compensation Insurance Rating Bureau estimated savings at $1B the first year and $270M annually thereafter. However, these savings figures have been recently reduced in their latest report. The Workers’ Compensation Insurance Rating Bureau also reports a 0% increase to pure premium rates effective January 1, 2013, but there are other market factors that need to be considered when looking at the overall impact. Many carriers still have loss ratios around 130%, which along with medical inflation, was contributing to about an 18% rate increase without SB 863. With claim development still an issue and the potential increased cost of implementing some of the processes and benefits set forth in SB 863, it is likely that California will not see the immediate reduction in rates that it experienced following SB 899. Instead, there is hope that the provisions of the new reform will quell the burning increases in rates and bring some relief to employers in the form of stabilization and predictability.

InterWest Insurance Services is on the forefront of this legislation and has had representatives attend many of political hearings regarding SB 863. In early 2013, as part of the InterWest Employer’s School, we will hold several seminars on the SB 863 reform laws for our clients and prospective clients, focusing on its impact on California businesses and the insurance market.

Jennifer Weathersbee collaborated with Chuck Coppage in writing this article. Chuck Coppage manages the Alternative Markets Division for InterWest Insurance Services where he assists in identifying clients who would benefit from insurance solutions involving risk transfer as part of their overall financial management strategy.

Great Expectations

The overwhelming passage of Senate Bill 863 (De La Torre) in the waning moments of the end of the California legislative session set the workers’ compensation community abuzz with the thoughts that this major overhaul will reduce insurance rates, put more money into the pockets of injured workers, and make the system work more efficiently and effectively for labor and employers.

While it should be noted that workers’ compensation reform always has these goals in mind, the breadth of the changes in this legislation, addressing key issues that have been on the forefront of commentary for several years, should be roundly commended. There were clearly defined problems in the system that this legislation addresses head on. For that, the proponents, and the Governor and legislative leadership, deserve much credit.

The response to these changes from the Workers’ Compensation Insurance Rating Bureau (WCIRB), regarded as tepid by many commentators, should be looked at in the context of what the Bureau can and cannot do when evaluating legislation — especially on legislation that hasn’t even become effective.

Benefit increases are called “hard dollar” costs. Their impact can be reasonably and immediately calculated and added to the mix when determining the pure premium rates for the coming year. Similarly, several of the changes to workers’ compensation medical fee schedules can be priced with reasonable certainty. Schedules for interpreters and for copying services, however, cannot be priced prospectively because there is no reference point upon which to base savings or cost increases that may arise from how these fee schedules are developed.

Three major reforms: changes to permanent disability, creation of independent medical review (IMR), and the many changes in the area of liens have each had a degree of cost savings assigned to them as well. When all elements in this bill are combined, the cost of the $700M plus in benefit increases is offset by system improvements.

All in all, this is set up to be a bill that should benefit employers, insurers, and workers. The fact that not every change that could result in savings has been assigned savings today underscores the difficulty in evaluating reforms that are dependent on regulatory implementation or upon everyone in the system affected by the reforms behaving as expected by those who advanced the reforms.

Recent history shows us that expectations run high upon enactment of reform legislation and usually are diminished if not dashed within three years thereafter. Whether that will be the case this time remains to be seen. This is in no way a criticism of the bill that Governor Brown signed. It is, however, a cautionary note that there is more than one of these reforms that will be shaped by the courts. For each opportunity for savings and creating efficiency in SB 863 there is also a trap that litigation may or may not spring open. No one involved with the last major reforms would have expected Almaraz/Guzman or Ogilvie. While litigation is inevitable when major reforms occur, it can also be fairly said that SB 863 invites it in several key areas.

All of us in the system are tasked to make our best efforts to assure the original bargain between labor and employers is protected. SB 863 is the latest iteration of that effort. As it becomes operative, and the various regulatory agencies adopt necessary rules to implement its provisions, and as disputes arise that the Courts are asked to resolve, let us all remember that reforms, and the expectations they generate, require constant scrutiny and protection. Without it, we’ll be back in Sacramento sooner than expected.

Ogilvie: The Good, The Bad & The Ugly

The First District Court of Appeal’s opinion muddies the waters and inspires litigation. Applicants have no clear path for rebutting the scheduled diminished future earning capacity, but this case — by giving applicants three vague methods — certainly should inspire the California Applicants’ Attorneys Association to believe a rebuttal can be accomplished. The defense, on the other hand, is not left without weapons and defenses — but California’s employers are rightly more interested in consistency, uniformity and objectivity than expensive trial tactics.

Rosa Moran was sworn-in as the Administrative Director of the Division of Workers’ Compensation on July 25th. The entire industry should wish Ms. Moran good luck and God’s speed as she takes on the task creating a new and improved Permanent Disability Rating Schedule that stops the permanent disability litigation craze called Ogilvie.