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.
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.
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.
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.