Tag Archives: wcirb

Work Comp Outlook for California in 2015

The California Workers’ Compensation & Risk Conference in Dana Point opened with a session featuring employers and stakeholders in the industry weighing in on the current state of California workers’ compensation and the outlook for 2015. Panelists were: moderator Mark Walls, vice president of communications and strategic analysis at Safety National; William Zachry, vice president of risk management at Safeway; Tim East, director of risk management at Walt Disney; Bill Mudge, president and CEO at WCIRB California; Kurt Leisure, vice president of risk services/asset protection at Cheesecake Factory; Seeta Ambati , a defense attorney who is a partner at Laughlin, Falbo, Levy & Moresi; and James Butler, a plaintiff attorney with Butler Viadro.

The panel began with a look at where California workers’ compensation is today:

• California holds a quarter of the nation’s workers’ compensation business.
• To date, 80 new carriers have entered the California market since 2004.
• California is among the top three states in terms of average medical costs per claim.
• California has experienced double-digit increases in premiums over the last two years.

Cost drivers to the California workers’ compensation system include:

• A high frequency of claims handling in the state relative to payroll, with Los Angeles County having the most claims in the region.
• A multitude of expensive permanent disability claims that include attorney involvement.
• Opioid prescriptions, which have doubled in frequency.

SB 863 is California’s answer to addressing these costs, but it is too early to provide tangible data on whether the reform has been successful. Some early data shows that costs related to liens are down, but costs related to independent medical reviews (IMR) are significantly higher than expected.

Panelists were split. Some say that, although it is too soon to judge, they are seeing the following indications that SB 863 is working:

• Generally, rate increases have been cut in half because costs are showing a downward trend.
• The highest costs are coming from old medical claims rather than recent claims.
• Because this is the first time that California has experienced cost decline in quite some time, panelists thought that the cost cuts may make the state appear more employer-friendly, which will encourage companies to return.

Panelists said there are still some kinks to work out in the reform. One stated that the IMR process, which has been designed to take non-medical professionals out of the medical decision-making process, is working well. On the other hand, the opioid decision-making process in place is not currently solving the costly opioid problem. Overall, people are still learning the new process, but panelists said they think that outcomes will be positive over time. They think that the measures are in place to help get the injured worker healthy and back to work. Most on the panel felt that peer-to-peer review is the right approach and that the system is better than it was.

The California Applicants Attorney Association (CAAA) strongly disagrees, however, and views the reform as a failure that is harming citizens. A representative said that the CAAA saw more employees returning to work before the reform and that the system is averaging 4.3 medical denials per patient. The CAAA cites the cost of administering workers’ comp as one of the largest costs that a business can endure. In addition, the CAAA believes that peer-to-peer review is not working efficiently. CAAA thinks that legislative efforts to reform workers’ compensation are aiming at the worst-case scenarios, rather than the majority and, therefore, have not provided the best solutions for most companies.

Panelists were asked what changes they would make to the California workers’ compensation system if they were governor for the day. Ideas included:

• Take a fresh look at the 101-year old system, which is overloaded with rules, legislation, audits and controls. It is time to simplify a system that has layers of new rules on top of old rules and, as a result, enormous costs related to it all.
• Do away with cumulative trauma, which is a major cost driver that creates complexity. Some states have already done this.
• Make use of alternative dispute resolution. California has gone from incentives and positive reinforcement for providing prompt payments and benefits to a system focused on penalties. It needs a system that rewards promptness and minimizes disability.
• Address the opioid abuse and CURE system to make every effort to avoid addiction.
• Look at the system through the eyes of the injured worker and simplify accordingly. Employees can’t understand the current complex system, which is why they seek legal representation.

The session served as a great kickoff for the conference, providing both an overview of the current workers’ compensation cost drivers and offering suggestions for improving the system.

It’s Time to Revisit Payroll Calculations Used in Work Comp

For as long as anyone can remember, the basic method for calculating workers’ compensation premiums is RATE x PAYROLL x EXPERIENCE MOD. Rates vary based on job classification codes (which is much more complicated than it sounds), and the experience mod is based on prior losses. This is how premiums have been calculated for years.

This method inevitably leads to a payroll audit at the end of the policy term to determine whether any audit premium is owed. This issue can lead to conflict between the carrier and the policyholder.

One reason there is so much conflict is because of how “payroll” is defined by the rating agencies (NCCI, WCIRB, etc.). Actual wages paid to your employees are easy to define. But “payroll” goes beyond wages. There is some variation by state but, for the most part, “payroll” used to calculate workers’ compensation premiums includes things like vacation pay, holiday pay, bonuses (including stock), sick pay, auto allowances and commissions. The list is very extensive.

An area of much contention right now relates to the inclusion of bonuses. Bonuses in the form of cash or stock are both treated as payroll. But I have frequently heard complaints from employers who were upset because they received a large premium audit bill because of these bonuses. Employers argue that these bonuses usually do not increase carriers’ claim exposures.

Each state has a maximum indemnity benefit rate, with the highest being around $1,000 a week. That means that, if an employee earned wages of more than $80,000 a year, there is no impact on his benefit rate if he has a workers’ compensation claim. So a bonus would have no material impact on the claims exposure for a carrier.

The problem arises because the payroll rules are outdated based on the reality of the U.S. workforce today. It used to be that only the top executives in companies received substantial bonuses. The payroll rules in every state include caps for the directors and officers of companies for this very reason: the recognition that their higher wages did not increase the carrier’s exposures.

However, we are no longer a country where the majority of our workforce is in the manufacturing industry. A significant percentage of the workforce is now in highly skilled “white collar” jobs. More and more companies are using bonuses to assist in retaining their skilled workforce. Companies are making these benefits available to a wide segment of their workforce, far beyond the directors and officers who were considered in the rules for calculating workers’ compensation premium based on payroll.

The solution to this is relatively simple – extend to all employees the director/officer payroll caps used in calculating premiums. Nevada has done this for several years. Implementing this change would not be overly complex, as these payroll caps and the methods for calculating them are already in place.

This issue is currently being discussed by the NCCI Underwriting Committee. If NCCI were to recommend such a change, I would expect it would be quickly adopted by both NCCI states and the independent bureau states.

Would these changes result in lower premiums for employees? Perhaps for some employers, it could. But other employers could see higher premiums as carriers adjust their rates to ensure adequate premiums are being collected. The workers’ compensation industry’s combined ratios have been more than 100% for a number of years. Because of this, carriers have to be cognizant of the impact any changes in premiums would have on their surplus.

As workers’ compensation continues to evolve, we must constantly review the rules and regulations governing the industry to ensure they are still appropriate. Perhaps it is time to review one of the most basic issues, the method of calculating premiums.

Workers’ Comp: How We Got Here

The workers’ compensation insurance marketplace in California may at times seem like the Wild West. From the employer standpoint, it involves a dazzling array of choices and options. It is driven by a value proposition that can perilously tilt to price rather than long-term service and protection.

For insurers, it all begins at the Department of Insurance, with what is called the pure premium (claims cost benchmark). As can be expected in this complex system, the pure premium rate-setting process can appear to be as chaotic as any other aspect of this system. There is, however, a method to this madness.

Well before federal antitrust laws came into effect, the U.S. Supreme Court determined that insurance was not a part of interstate commerce. Thus, when antitrust laws were enacted, they did not apply to insurance. Insurers were free to share their market data with each other without fear of government prosecution.

That all changed in the 1940s when the Supreme Court changed its position and determined that insurance was now part of interstate commerce. Overnight, much of what the industry was doing in terms of sharing data and making rates was illegal.

Congress stepped in, and by the early 1950s what we now know as the Workers’ Compensation Insurance Rating Bureau (WCIRB) was licensed by the California Department of Insurance and was doing its business under “active state supervision” – which, under the law, allowed insurers to continue to share information.

During most of the history of California workers’ compensation insurance, fully developed rates (losses, loss adjustment expenses, and general expenses) were set by the WCIRB and approved by the commissioner. No insurer could charge a lower rate (with some exceptions), leading to the name “minimum rate law.” No multi-line or interstate combinations of experience were allowed. In other words, workers’ compensation insurance rates had to be standalone adequate.

By 1993, employers were experiencing the pain of high insurance costs and a dysfunctional system. Major reforms were enacted, including the repeal of the minimum rate law. Effective Jan. 1, 1995, a new “competitive” rate law was adopted. The WCIRB was to develop an advisory “pure premium” – losses and loss adjustment expenses only – and insurers did not have to use it. Insurers had to file their own rates and rating plans and load their own expenses. And multi-state, multi-line experience was now allowed when determining whether premiums were adequate.

Within about five years, the wheels had pretty much come off the insurance marketplace in California. There were insolvencies and impairments; capital was leaving the state; and there was an undeniable crisis that affected the system well beyond the borders of the Golden State. The causes were many and varied, and while the legislature made some changes to the rate law, its primary focus in 2003, 2004 and most recently in 2012 was to rein in the costs of the system and try to bring some stability to the marketplace.

But the pure premium rate-setting process has pretty much stayed the same since its enactment more than 20 years ago.

The WCIRB does more, much more, than collect the data necessary to develop pure premiums. It develops and administers the statistical plan for data reporting, the uniform classification system and the uniform experience rating plan, for example. Each of these requires the approval of the commissioner, and each is a regulation of the Department of Insurance. As such, they fall under the procedures of the Administrative Procedures Act (APA).

For many years, this APA notice and hearing process was used for both the regulatory and rate-setting filings of the WCIRB.

Since 2013, however, the two processes have been split up. There’s a good reason for this. The first is that the APA, housed in the Government Code, doesn’t apply to rate-making proceedings. It is the Insurance Code that requires a hearing on pure premiums but also requires that the commissioner issue an order within 30 days of the hearing. The fact is that the department and the WCIRB work very closely together throughout the year, and the intended procedure for the adoption of the pure premium rates acknowledges this. The regulations that fall under the procedural requirements of the Government Code (APA) are not as time-sensitive as the adoption of the pure premium – the latter requiring some sense of certainty not just before Jan. (or July) 1, but with sufficient time to make rate filings and, if necessary, send out notices of nonrenewal depending on the size of the rate increase. The new process developed by the department allows for that.

The WCIRB makes available copious amounts of data regarding the performance of the system. These can be found on the bureau’s website: www.wcirb.org. Everyone who is affected by the system would benefit by spending some time looking at these and understanding why we are where we are today, and the still very long journey to get to where we ought to be.

The State Of Workers' Compensation

There are three major concerns and opportunities that must be considered. First, is the impact of SB 863, the major reform legislation bill passed late in this year’s session of the legislature. Second is the continued increase in loss cost on prior years’ claims. Lastly, will the weak economy improve enough to start bringing new workers into the workplace and what impact will that have on Workers’ Compensation costs?

SB 863 holds the promise of lower claims costs, improved efficiency in claims processing procedures, and ultimately rate relief for California employers. At issue is the time frame for writing new regulations that will implement the new law. They are scheduled to take effect on January 1, 2013 which may lead to rushed procedures and unintended consequences. Also major parts of the law will be challenged in court. The Independent Medical Review procedures raise the issue of right to appeal. The injured employee attorneys have already indicated they will challenge this portion on constitutional grounds. Time will tell what the ultimate impact of the new legislation will be on the system, but immediate reduced costs are not expected.

Unfortunately, increasing premiums and rates will almost certainly continue into 2013. The Workers’ Compensation carriers are spending 138 cents for every dollar of premium. The overly competitive marketplace coupled with medical cost inflation has led to large developments in claims settlements beyond case reserves. The collapse of the economy has also led to decreased premiums, while claims have increased.

It will take at least 24 months for this cost bubble to work its way through the system. The most recent actuarial review of past years’ claims cost indicates that rates are over 9% lower than they should be. While the Workers’ Compensation Insurance Rating Bureau governing board, in a purely political move, decided to recommend no increase in rates to the Department Of Insurance, underlying costs continue to increase.

Finally, as the economy slowly recovers and payrolls increase, we will see hiring pick up. While it seems like this would lead to lower loss ratios as premiums go up, just the opposite is true. As you add employees in general, they will be less skilled, need more training and will be less able to work safely immediately. Increasing workforces will lead to increased accident rates and increased loss ratios.

The carriers will always compete for very clean, well-managed and low loss ratio accounts, so now is the time to redouble efforts with safety programs, training and claims management.

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.