THE CONSTRUCTION CARVE-OUT PROGRAM

A REPORT OF ACTIVITIES IN
CALENDAR YEAR 1999


RICHARD GANNON
Administrative Director

January, 2001

California Division of Workers' Compensation
P.O. Box 420603
San Francisco, CA 94142-0603

Summary

This report is from the Administrative Director of the Division of Workers' Compensation to the Legislature, as required by Labor Code Section 3201.5(i).

The report covers the 1999 calendar year of the program established by Labor Code Section 3201.5, commonly known as "the construction carve-out program". The program allows unions and employers engaged in construction to create alternatives to the traditional, state-supervised workers' compensation system. Most important, it allows collective bargaining agreements to establish exclusive lists of medical providers and examiners and to establish alternative dispute resolution systems that bypass the state workers' compensation administrative law judges.

All employers participating in the carve-out program are required by regulation to submit limited data to the state. This report is based on aggregated data from 442 California employers in 11 eligible programs. The reported figures provide a snapshot of the program at a point in time 3 months after the close of the reporting year; because the reporting comes so soon after the experience, it is, by definition, relatively immature data. Current regulations do not provide for receiving subsequent reports on the experience, which are necessary to see if the initial results reported stand up over time.

Together, these employers reported 24,789,752 person-hours of labor and $ 585,064,682 in wages to employees covered by Section 3201.5 during 1999. They reported 1,444 claims filed in the year. Aggregate incurred losses reported for these claims were $9,325,715. It is anticipated that both the number of claims reported and their aggregate incurred costs will rise over time.
 


An Overview of the Carve-out Program

Labor Code Section 3201.5 establishes a program in which unions and employers engaged in construction may bargain collectively to create alternatives to the traditional workers' compensation system:

3201.5. (a) . . . [T]he Department of Industrial Relations and the courts of this state shall recognize as valid and binding any provision in a collective bargaining agreement between a private employer or groups of employers engaged in construction, construction maintenance, or activities limited to rock, sand, gravel, cement and asphalt operations, heavy-duty mechanics, surveying, and construction inspection and a union that is the recognized or certified exclusive bargaining representative that establishes any of the following:
(1) An alternative dispute resolution system governing disputes between employees and employers or their insurers that supplements or replaces all or part of those dispute resolution processes contained in this division.
(2) The use of an agreed list of providers of medical treatment that may be the exclusive source of all medical treatment provided under this division.
(3) The use of an agreed, limited list of qualified medical evaluators and agreed medical evaluators that may be the exclusive source of qualified medical evaluators and agreed medical evaluators under this division.
(4) Joint labor management safety committees.
(5) A light-duty, modified job or return-to-work program.
(6) A vocational rehabilitation or retraining program utilizing an agreed list of providers of rehabilitation services that maybe the exclusive source of providers of rehabilitation services under this division.
The statute gives the parties leeway to establish the kind of alternative system they want ? but there are two important limits: (1) the agreement may not diminish injured workers' entitlement to compensation payments; and (2) the final step of the "alternative dispute resolution system"[ADR] is subject to review by the 7-member Workers' Compensation Appeals Board [WCAB].

Background and Program History

The Carve-Out program was first established in 1993 by SB 983, authored by Senator Leroy Greene. It was modeled on a similar experiment in Massachusetts, where Bechtel Corporation and the Pioneer Valley Building and Construction Trades Council had a collective bargaining agreement governing a single construction project. When SB 983 first went into effect, several promoters who were clearly outside the intended scope of the program attempted to get the Administrative Director's approval. The Administrative Director received "collective bargaining agreements" from "employers" with no employees and "labor organizations" with no members. One notable "agreement" appeared to be a scheme whereby employers were persuaded to pay money into a "health benefits trust" controlled by the promoter, instead of purchasing a workers' compensation insurance policy as required by law. This placed employers at risk for civil and criminal penalties. The common thread of these early "agreements" was that promoters would approach legitimate employers ? that is, real California companies engaged in real construction ? and persuade them to transfer their employees to the promoter. The promoter would become the nominal employer of the employees, while control over their actual work would remain with the original employer. Conveniently, the promoter would have already signed a collective bargaining agreement with a labor organization that "represented" all the promoter's employees. And, just as conveniently, the agreement would have a carve-out section that was favorable to the employer. The Administrative Director did not recognize any of these "agreements."

In 1994, Senator Greene introduced urgency legislation (SB 853) to amend Section 3201.5, tightening the qualifications of the parties. The term "employer engaged in construction" was more narrowly defined. The employees' bargaining representative was required to be a "union." Parties were now required to submit evidence of their eligibility and receive a "letter of eligibility" from the Administrative Director.

To be eligible, an employer must prove that it is engaged in construction and pays a workers' compensation insurance premium of at least $250,000 per year, or belongs to a multi-employer "safety group" which pays a premium of at least $2,000,000 a year. Self-insured employers are also eligible. To be eligible, a labor organization must prove that it is a bona fide union, free of employer domination or support, whose officers have been elected by secret ballot. The union must submit a copy of the latest LM-2 or LM-3 financial disclosure form that it filed with the United States Department of Labor. These forms give information about the unions' sources of income, expenditures, officers, election dates, and other pertinent matters.

Although the parties must establish that they are "eligible," they do not need the Administrative Director's approval of the collective bargaining agreement itself.

A copy of the current text of Labor Code Section 3201.5 may be found in Appendix 1. Regulations implementing section 3201.5 are at 8 California Code of Regulations, Section 10200 - 10204. They may be found in Appendix 2.

The Carve-Out Participants

Twelve programs have been certified as eligible and were active during 1999:

    1. Los Angeles Building and Construction Trades Council, AFL-CIO and Cherne Construction - ARCO.

    2. An agreement between the California Building & Construction Trades Council, AFL-CIO, and the Metropolitan Water District of Southern California. This is a project labor agreement covering all contractors and sub-contractors on a $2 billion, 5-year reservoir construction project in Hemet, California.

    3. An agreement between the Southern California District of Carpenters and its 19 local unions and six different multi-employer groups consisting of about 1000 contractors. Each individual contractor chooses whether to sign the master carve-out agreement.

    4. An agreement between the California Building & Construction Trades Council and the Metropolitan Water District of Southern California. This is a project labor agreement covering all contractors and sub-contractors on the $1.1 billion, multi-year Inland Feeder Project

    5. An agreement between the District Council of the International Brotherhood of Electrical Workers and its 20 local unions and a multi-employer group called the National Electrical Contractors Association (NECA), consisting of about 300 contractors. Each individual employer chooses whether to sign the master carve-out agreement.

    6. An agreement between the Southern California Pipe Trades District Council No. 16 and a multi-employer group called the Plumbing & Piping Industry Council, Inc. Each individual contractor chooses whether to sign the master carve-out agreement.

    7. An agreement between TIMEC Co., Inc., and TIMEC Southern California, Inc., and the International Union of Petroleum and Industrial Workers.

    8. An agreement between the Building & Construction Trades Council of Alameda County and Parsons Constructors, Inc. This is a project labor agreement covering all contractors and subcontractors on the $1.2 billion multi-year National Ignition Facility at Lawrence Livermore National Laboratory.

    9. An agreement between the District Council of Painters No. 36 and the Los Angeles County Painting and Decorating Contractors Association. Each individual contract chooses whether to sign the master carve-out agreement.

    10. An agreement between the Southern California District Council of Laborers and four different multi-employer groups: the Associated General Contractors of California, Inc., the Building Industry Association of Southern California, Inc., the Southern California Contractors' Association and the Engineering Contractors' Association. Each individual contractor chooses whether to sign the master carve-out agreement.

    11. An agreement between the Sheet Metal International Union, and the Sheet Metal and Air Conditioning Contractors National Association. This state-wide alternative dispute resolution program applies to all work related injuries occurring while the workers is employed by a signatory contractor. The ADR extends to project labor agreement owner controlled insurance projects (OCIPs) unless the OCIP has its own ADR program. This program was approved and began operating during 1999.

    12. An agreement between the Operating Engineers Local 12 and the Southern California Contractors Association was issued March 31, 1999. This program was set to begin during year 2000.
Number of Employees Covered

The eleven active and reporting carve-out programs in 1999 reported a total of 24,789,752 person-hours ? equivalent to 12,395 full-time employees figuring 2,000 person-hours for one employee-year.

The Data

Labor Code Sections 3201.5(i) and (j) require the Administrative Director to collect a variety of data from carve-out employers ? payroll, person hours worked, number of claims filed, average cost per claim, etc. ? and to make a report to the Legislature based on the aggregated data. To implement these sections, DWC promulgated 8 California Code of Regulations Section 10203, requiring employers to report information to the Administrative Director on a standard form by March 31 following the reporting year. Appendix 3 is a sample reporting form.

As noted above, there were eleven active carve-out programs that reported activity in 1999. DWC has received data from 442 employers participating in those programs. As shown in Table 1, they report a total of 24,789,752 person-hours in 1999, and a total payroll of $ 585,064,682, an increase of 33.7% in hours and 41.2% in payroll over amounts reported for 1998. The programs reported 1,444 claims filed in 1999, an increase of 183 claims from 1998, and incurred costs (i.e. all costs that are expected to be paid on the claim) of $9,325,715, a 1.7 percent increase over 1998. As seen in Table 1, most of the increase in total claims is from an increase in medical only claims, while claims involving indemnity actually rose slightly.

Table 1

Summary of Claims Data1

1999
1998
1997
1996
         
Number of Employers
442
683
550
277
Total Person hours
24,789,752
18,542,967
10,372,459
11,645,267
Total Payroll
585,064,682
$414,480,864
$242,577,215
$272,383,804
Total Claims
1,444
1,261
661
866
Subtotal: Medical Only Claims
935
782
353
570
Subtotal: Claims Involving Indemnity
509
479
308
296
Total Incurred Costs
$9,325,715
$9,172,279
$6,481,564
$6,102,437

Table 2 shows more detailed aggregate statistics on claim frequency and average claims costs among each of the carve-out programs.

Table 2

Claim Frequency and Average Costs Among Eleven California Carve-out Programs

1999

Program

(Each program is identified here by letter rather than name, to protect confidentiality.)

Number of Claims per 100 Employees2
Number of Claims per $1 Million Payroll
Average Incurred Cost per Claim
Number of Indemnity Claims3 per 100 Employees
Number of Indemnity Claims per $1 Million Payroll
Average Incurred Cost per Indemnity Claim
             
A
15.1
2.7
$11,420
7.2
1.3
$23,261.11
B
11.6
2.4
$5,635
3.6
0.7
$17,741.88
C
10.7
3.1
$9,738
5.9
1.7
$17,342.49
D
10.1
2.0
$5,019
5.4
1.1
$9,182.17
E
2.2
0.6
$4,120
1.6
0.4
$5,535.33
F
6.9
1.6
$8,035
2.9
0.7
$16,716.10
G
32.2
5.5
$5,056
10.9
1.8
$13,839.83
H
21.0
3.8
$4,278
3.1
0.6
$25,856.90
I
1.8
0.5
$570
0.4
0.1
$1,541.00
J
23.8
9.1
$2,391
0.7
0.3
$74,705.00
K
15.4
3.7
$4,593
4.5
1.1
$14,951.00
Average
11.6
2.5
$6,458
4.1
0.9
$17,735.49
             

Table 3 shows the components of paid and incurred losses4 for the 1,444 claims filed in 1999, compared to the 1,261 claims filed in 1998 and 661 filed in 1997. Both sets of figures are as reported to the DWC as of March 31 of the year following the injuries. For 1999, there were 935 medical-only claims and 509 indemnity claims reported:5

Table 3

Cost Components for Claims Filed in Calendar Year 1997, 1998 and 19996

 
1997
   
1998
   
1999
 
                   
Expense
# of 

Claims

Paid 

Amount

Incurred 

Amount

# of 

Claims

Paid 

Amount

Incurred 

Amount

# of 

Claims

Paid 

Amount

Incurred 

Amount

                   
MEDICAL ONLY 
353
$127,786
$212,762
782
$268,317
$294,377
935
$349,762
$298,350
INDEMNITY 
308
   
479
   
509
   
Temporary Disability  
$1,121,038
$1,881,075
 
$1,633,587
$2,599,027
 
$1,536,420
$2,362,060
Permanent Disability  
$144,206
$1,336,779
 
$142,368
$1,487,270
 
$768,844
$1,574,190
Life Pension  
0
0
 
$0
$0
 
$0
$0
Death Benefits  
$23,976
$130,000
 
$18,560
$311,000
 
$211,939
$211,939
Vocational Rehab.  
$31,456
$393,794
 
$58,324
$392,053
 
$47,598
$530,566
Medical  
$1,164,642
$2,439,572
 
$1,631,192
$4,003,602
 
$2,006,343
$4,239,909
Medical-legal  
$11,587
$87,582
 
$26,505
$84,950
 
$57,020
$108,701
Total Indemnity  
$2,496,905
$6,268,802
 
$3,510536
$8,877,902
 
$4,628,164
$9,027,365
GRAND TOTAL  
$2,624,691
$6,481,564
 
$3,778,853
$9,172,279
 
$4,977,926
$9,325,715

Table 3 does not include the claims administrators’ operating expenses nor does it include the costs of operating the ADR process itself ? the ombudsperson's fees and costs, mediator's fees, and so on. Under current programs, the ADR process is administered by, or under the supervision of, a joint labor-management committee or trust. The process is funded by the employers. Typically, employers pay a fee to the trust equal to a small percentage of the insurance premium, or several cents per person hour worked.7

It should also be noted that the 1,444 claims were all filed in 1999 and the data presented are current through March 31, 2000. Thus, these are all relatively young claims. As claims become older, incurred costs tend to rise, though it is impossible to estimate how much they will rise. An analysis of how incurred costs change over time is beyond the scope of this report, given current reporting guidelines.8
 
 

Analysis of the Claims Data

Were losses in the carve-out program lower or higher than losses experienced by other employers in the construction industry?

Table 4 compares incurred and "expected" losses of the carve-out employers.9

Table 4

Comparison of Incurred to Expected Losses Among eleven California Carve-out Programs, Calendar Year 1999

Payroll Reported

(1)

Incurred Losses reported

(2)

Expected total loss adjustment expenses (LAE) (per WCIRB figure of 18.5% of losses)

(3)

Losses +LAE

(4)

Incurred Losses per $100 payroll (w/o LAE) reported as of 3/31/00

(5)

Incurred Losses per $100 payroll (w/ LAE) reported as of 3/31/00

(6)

Expected losses and Loss Adjustment Expenses per $100 payroll

(7)

Ratio of actual to expected Pure premium

(8)

1
$3.03
$3.60
$8.00
44.9%
2
$1.36
$1.61
$4.77
33.8%
3
$3.01
$3.57
$12.92
27.6%
4
$1.01
$1.20
$5.04
23.8%
5
$0.23
$0.27
$9.50
2.9%
6
$1.29
$1.53
$7.77
19.6%
7
$2.76
$3.27
$9.35
35.0%
8
$1.64
$1.94
$7.67
25.3%
9
$0.03
$0.03
$8.11
0.4%
10
$1.07
$1.27
$9.22
13.8%
11
$1.70
$2.01
$8.16
24.6%
TOTAL
$581,077,319*
$9,325,715.
$1,725,257
$11,050,972
$1.60
$1.90
$6.63
28.7%

* Note: Some program payroll could not be included in this analysis due to misclassification.

On the 1,444 claims, there were incurred losses of $ 9,325,715. Table 4, Column 6, shows incurred losses per $100 in payroll for each of the eleven active carve-out programs. In aggregate, the eleven programs reported incurred costs of $1.90 of losses and loss adjustment expenses for every $100 in payroll. The amount of incurred costs is calculated based on experience evaluated as of March 31, 2000 for the year 1999 claims.

How does the figure of $1.90 compare to incurred losses of all employers engaged in construction? Table 4 provides "benchmarks" for each carve-out program, based on WCIRB "pure premium rates".

The Workers' Compensation Insurance Rating Bureau publishes "pure premium rates" for every job classification in the state.10 These rates reflect the losses predicted for every $100 in payroll, plus an amount for "loss adjustment expenses."11 Loss adjustment expenses (LAE) are estimated at 18.5% of losses in 1999. As an example, the 1999 pure premium rate for ironworkers on buildings over two stories (Classification #5040) is 13.79. A hypothetical average employer who hires ironworkers to erect a steel frame would expect to incur $13.79 in losses for every $100 in payroll, of which $11.64 would be incurred for benefits and $2.15 for loss adjustment expenses. Pure premium rates vary according to the hazards of the job. For instance, the advisory pure premium rate (losses plus LAE) for lath installers (#5443) is 8.63; the rate for elevator workers (#5160) is 2.81.

In Table 4, Column 7, we have calculated a benchmark for each of the eleven active carve-out programs. They are calculated by weighting the payroll in each job classification, multiplying by the pure premium for each classification, and subtracting loss adjustment expenses. For example, if a particular carve-out program had 60% of its payroll in Classification X with a pure premium rate of 3.00, and 40% of its payroll in Classification Y, with a pure premium rate of 10.00, the weighted average pure premium for that program would be (.60)(3.00) + (.40)(10.00) = 5.80.

The benchmark for that hypothetical carve-out program is $5.80. This is roughly what one might predict as incurred losses plus loss adjustment expenses for that carve-out program per $100 payroll. Of the $5.80, $4.90 is for incurred benefit costs plus 18.5% of that (.185*4.90)=$0.90 is for LAE. It is important to note, however, that this comparison does not take into account other factors that might affect individual employers, such as their own safety practices or claims history. Indeed, an employer's loss experience may be consistently much better or worse than the loss experience of all employers in the classification. As already noted, carve-out participants do not report their pre-program claims history to DWC.12

Table 4, Column 8, shows the ratio between the incurred losses for each carve-out program and the benchmark for each carve-out program. All eleven active carve-out programs incurred losses well below the benchmark. In aggregate, incurred losses at this early report were 28.7% of what the pure premium rates would predict, the lowest amount recorded in the past 5 years.

It appears that the first early report of losses in the carve-out program were lower than would be expected of other construction employers. However, it should again be noted that Table 4 is based on claims filed in 1999 that is, on data that is quite young. As claims age, incurred costs tend to rise. No data were submitted by carve-out programs in the latest reporting period allowing for subsequent evaluation of claims data after another year of maturity.

Were these apparently low losses due to a random fluctuation in the data?

This report is based on 24,789,752 person-hours, equivalent to only 12,395 full-time employees; while growing slowly but steadily, it is a pool that may be too small to provide reliable statistical data. If the number of carve-out employers increases in the future, the statistical pool will expand and the figures presented will be more reliable.

Despite the limitations of the data, note that losses were low in all eleven programs. If the loss figures were randomly distributed, one would expect to see some programs showing higher than expected losses and some showing less. Furthermore, the figures this year are roughly equivalent to the figures in prior reports.

Table 5

Cost and Claim Comparison 1997-1999

1997
1998
1999
       
No. of claims
661
1,261
1,444
Payroll
$242,577,215
$414,480,864
$581,077,319*
Incurred Cost (as reported 3/31/2000)
$6,481,564
$9,172,279
$9,325,715
Incurred Cost / $100 Payroll
$2.67
$2.21
$1.60
Incurred Losses and LAE/ $100 payroll
$3.24
$2.69
$1.90
Expected Losses / $100 Payroll
$5.87
$5.94
$6.63
Ratio of Incurred to Expected Losses
.551
.453
.287

* Note: Some payroll could not be assigned to a class code for this analysis.
 

The ratio of incurred to expected losses at the same point in time for each carve-out year has remained quite low. As seen in Table 5, for 1999 the ratio is considerably lower than for previous years.

Recent trends of loss development by the Workers’ Compensation Insurance Rating Bureau indicate that this may be an industry-wide trend. The Bureau has reported actuarial trends that indicate that time to case closure is increasing, that smaller percentages of claims are closed within 9 months of the end of the policy period, and that loss development is at a greater rate than in previous years; that is, that what appears to be low incurred costs early in the claim actually turns out to be higher than historical norms. (See for example, WCIRB Rate Filing for 2001, pages A:A-42 showing increasing percentages of claims remaining open at first and second report and A:A-50, showing decreased ratios of incurred losses to estimated ultimate losses, Section A, Appendix A, Attachment 10, Sheet 1.) These findings are tentative, but may explain some of the reason behind lower than typical ratios of incurred to expected losses at the reporting date of 3 months after close of calendar year.

Were low losses due to carve-out employers' history of low losses? In other words, are carve-out participants self-selected for safety?

We do not have the data necessary to answer this key question

Were low losses due to fewer claims being filed by carve-out employees?

Carve-out employees filed 1,444 claims in 1999, equivalent to 11.6 claims for every 100 employees. It is difficult to find an exact comparison for this figure among non-carve-out employees. The California Division of Labor Statistics and Research reports that in 1998 ? the last calendar year for which it has statistics ? there were 9.7 non-fatal occupational injuries and illnesses per 100 employees in the construction industry as a whole. These figures come from injuries and illnesses reported by employers on federal OSHA forms. They are not precisely equivalent to workers' compensation claims, since some injuries might be reported on the OSHA form but not give rise to a claim. Conversely, an employee might file a claim for an injury not reported to OSHA.

Nonetheless, there seems to be a rough equivalence between the number of injuries and illnesses that might be expected per 100 employees (9.7) and the number of claims being filed (11.6). Clearly, this is an imprecise match—the carveout employers do not necessarily constitute a random sample of all construction-related employers. From this limited data, it is impossible to determine whether the carve-out program achieves its initial savings through a decrease in claims.

Data Concerning ADR

Both labor and management indicate that one of their chief aims in participating in the carve-out program is to replace the state's dispute resolution system with one that they believe is simpler and faster. Of the eleven active and reporting carve-out programs in California, ten have alternative dispute resolution [ADR] systems. (One carve-out program consists only of an exclusive list of medical providers.) The ADR programs in California are similar, but have some differences. All start with an "ombudsperson" ? a neutral person who is available to all parties. The ombudsperson is supposed to resolve disputes at an early stage, or even before they arise. If the ombudsperson is unsuccessful in resolving the dispute, either party may move the matter to the next step, which is typically formal mediation by an outside neutral. Some programs use a joint labor-management committee at this point. If mediation is unsuccessful, the parties turn to an outside, neutral arbitrator ? typically a retired workers’ compensation judge. By statute, the decision of the arbitrator may be appealed to the 7-member Workers' Compensation Appeals Board (Labor Code Section 3201.5(a)(1)).

+ Of the 1,444 claims filed in 1999, 531 or 37% were reportedly resolved before mediation. They were resolved either because there was never any dispute at all between the injured worker and the insurer ? or because the ombudsperson successfully handled any issues. Thirty-three of these claims were resolved with a denial of compensability.
+ 50 claims in this year were resolved at the stage of mediation; two claims were resolved at or after arbitration. In 1999 one claim was resolved at or after a WCAB intervention.
Activity before the WCAB and the Courts

According to the reports filed by carve-out participants, ten employees subject to an ADR system filed applications for adjudication with the WCAB in 1996. For 1997, the reported number was up to 61 applications filed. In 1998, 44 applications for adjudication were filed at the WCAB. The number dropped back to 32 WCAB applications in 1999. Note that on July 17, 1997, in the case of Ramon Becerra v. Eastside Reservoir Project (No. AHM 51304), the WCAB ruled that the proper procedure is for workers' compensation referees to dismiss applications, rather than stay them, if the claim is subject to ADR.

In 1997, programs reported four cases of civil litigation concerning a carve-out claim or program. In 1998, only 1 such case was reported. In 1999, four civil actions were filed.

Has ADR Reduced the Amount of Formal Dispute over Claims?

In 1997, the 61 applications for adjudication represented nearly one in ten claims under the system. In 1998, the 44 claims represented only 3.5% of claims. For 1999, the 32 applications for adjudication account for approximately 2% of claims. This percentage is closer to that of early years of the program when the ratio was closer to one in 50 claims by the time of the employer report. It is notable that medical-legal expenses are still reported at a low level - $108,701 or 1.2% of incurred cost.

Data Concerning Vocational Rehabilitation and Light Duty Programs

While participation in vocational rehabilitation programs often comes later in the life of an industrial injury claim, there are some reports even in a report only 3 months after the end of the calendar year of injury. For 1999, employers reported17 employees in vocational rehabilitation programs and 24 participating in light duty programs. In 1998, employers reported 21 employees participating in vocational rehabilitation under the program, and 27 participating in a light duty program. In aggregate for 1997, employers reported 12 employees participating in vocational rehabilitation and 32 employees participating in light-duty programs. In 1996, four employees were in vocational rehabilitation and 65 participated in light-duty programs. No statistically valid conclusions can yet be reached from these figures.

Observations and Recommendations

The Division’s ability to evaluate the carve-out program is limited by the nature of the data collected. Current regulations require claims administrators to report information about cost and status of individual claims only for the year in which they are first filed. Many work-related injuries require extensive periods of medical care and disability compensation; treatment and compensation may be provided and disputes may enter a case months and even years after the injury occurs as determinations are made about the causation, responsible employer and extent of disability. Thus, for many claims, especially those of a more severe or complicated nature, the March 31 reporting date does not give a sufficient amount of time to see what the ultimate costs or complications will be. A more accurate view of the final disposition of any individual case unfolds over time, thus, it is necessary to review the status and outcome of a case as it moves toward ultimate closure. Ratemaking bodies in workers’ compensation (as well as other insurance lines) understand this phenomenon and require several annual updates to see the ultimate disposition of costs. (Currently, for example, the Workers’ Compensation Insurance Rating Bureau presents data at five yearly intervals.) An update on the types of mediation, arbitration and litigation that occur during the life of claims is also necessary to allow policymakers to evaluate the effectiveness and desirability of continuing and even expanding such an innovative program.

Anticipating this need, the current regulations include a "placeholder" for requesting additional data on prior year claims that have not yet been settled or finally adjudicated. (See 8 CCR 10203(b)(12)). In past years, DWC has made requests that claims administrators provide this information on a voluntary basis, but the response has been minimal. The DWC included the expansion of data reporting for getting updated information on past year’s claims in the proposed regulatory calendar for fiscal year 2000-2001. The Division may promulgate regulations to accomplish periodic updates to report resolution of claims filed in one calendar year but resolved in a later year for the next cycle of data collection.

The nature of the carve-out statute gives the Administrative Director little power to intervene in a program’s administration once it has been recognized as meeting the application standards. Other issues that have recently arisen show the necessity for close scrutiny of this program and of the need for intense oversight of the program operation by all parties to the agreements. The Division was requested to review program information pamphlets for one carve-out that points out some differences between program participants and other employees under statutory workers’ compensation situations. Questions have arisen as to whether carve-out participants are precluded from pre-designating a physician for workers’ compensation medical care. Other issues have arisen in which workers’ representatives allege that claims administrators have abused their authority. When the collective bargaining agreement states that disagreements be handled through an internal process rather than being subject to state oversight of the claim adjudication, it becomes increasingly clear that those considering participating in a construction carve-out must be vigilant. For legislators considering changes to or expansion of the program, the Division urges caution to assure that no party loses access to other rights. The carve-out program may offer mutually beneficial situations for those capable of exercising their rights through the collective bargaining process, but care must be taken to assure that the program does not expand into areas where such ability to maintain balance is nonexistent.

Conclusion

As the carve-out program works through its sixth year, it has grown considerably but still continues to be a program of limited size. Total aggregate incurred costs rose commensurate with increases in hours worked and total. The number of claims per 100 employees in the program decreased over the prior year.. The number of claims regarding the program filed with the WCAB also decreased, while numbers of cases going to mediation and arbitration stayed low.

There continues to be limitations on the ability to evaluate the program because required data comes in very early in the life of the claim, and is not updated. Therefore, the figures reported here should be used as a jumping-off point for further research. Future legislative and regulatory changes should consider the reporting of follow-up data for at least 2 years after the initial report to see if the apparent cost reductions hold up over time.
 
 

Appendix 1

Labor Code Section 3201.5
 

Appendix 2

Chapter 4.5. Division of Workers' Compensation
Subchapter 1.8. Collective Bargaining Agreements Under Labor Code Section 3201.5

§10200. Definitions.

§10201. Procedure for Determining Eligibility.

§10202. Effect of Letter of Eligibility.

§10203. Reporting Data.

§10204. Annual Reports.

Footnotes:

1. Based on eleven active carve-out programs reporting 1998 activity
2. 200,000 person hours = 100 full-time employees
3. In California, an indemnity claim involves lost time of 3 days or more. 4. Incurred loss = amount paid out plus any amount reserved to pay over the life of the claim
5. In California, an indemnity claim means a claim involving lost-time of at least three days.
6. Based on annual reports submitted by all eleven active and reporting carve-out programs
7. For instance, NECA employers enrolling in the carve-out program authorized the administering insurer to assess and transmit to the labor-management trust a fee of 2% of premium earned by the carrier. In the case of the Southern California Carpenters carve-out, the employer agreed to contribute to the trust a sum of seven cents per hour worked by employees performing work under the agreement.
8. A report analyzing longer term experience of the carve-out programs was done by UC-Berkeley and Stanford University for the Commission on Health and Safety and Workers' Compensation. Using data obtained from the Workers' Compensation Insurance Rating Bureau for a subset of carve-out programs, this report attempted to quantify the changes in incurred costs over time. (See report at http://www.dir.ca.gov/CHSWC/CarveOutReport/Carveoutcover.html
9. To protect the confidentiality of the programs, individual payroll and incurred losses for each program are not shown. The figures in the expected losses column (7) are based on the WCIRB pure premium rates published in the California Workers' Compensation Uniform Statistical Reporting Plan Š 1999- Pure Premium Rate Section effective January 1, 1999. Expected losses are calculated for each program by weighting the payroll in each job classification and multiplying by the pure premium. For example, if a particular carve-out program had 60%of its payroll in Classification X, with a WCIRB pure premium of 3.00,and 40% of its payroll in Classification Y, with a pure premium of 10.00,the weighted average for that program would be (.60)(3.00) + (.40)(10.00)= 5.80. WCIRB pure premium rates include "loss adjustment expenses" of 18.5% of losses for 1999 policies. (See Rate Filing for 2001, August 1, 2000, p. A-118. Deducting this 18.5% from the weighted average leaves a figure representing expected losses. The figure shows the expected incurred losses per $100 in payroll. In our hypothetical example, this would be (.815)(5.80)= 4.63. For every $100 in payroll in our example, one would expect $4.73 in incurred losses.
10. See California Workers' Compensation Uniform Statistical Reporting Plan - 1997.
11. Loss adjustment expenses = the insurer's average costs for handling a claim
12. This area is addressed in the CHSWC report.