Section II

California's Workers' Compensation System

The Commission on Health and Safety and Workers' Compensation is charged with reporting on the state of the workers' compensation system in California.

As measured by employers' premium costs or by insurers' loss ratios, this system could be considered to be healthier today than it was prior to the reforms of 1989 and 1993. For most employers, workers' compensation insurance premiums have fallen significantly since 1993. Vigorous new efforts to prosecute workers' compensation fraud have driven many "mills" generating false claims out of business. And, a significant benefit increase took effect July 1, 1994, with more benefit increases set to occur in 1995 and 1996.

Workers' Compensation in California - Dramatic Changes

In the late 1980s and early 1990s, California's workers' compensation system required employers to pay some of the highest premium costs in the nation. A 1990 study in John Burton's Workers' Compensation Monitor found that California had the second-highest workers' compensation costs among 47 states ranked for 1988. A study of policy year 1989-90 data provided by the National Council on Compensation Insurance (NCCI) concluded that the cost of medical benefits per 100,000 workers in California was 157 percent of the national average and the cost of total (cash and medical) benefits was 130 percent of the national average. For total benefits, California ranked seventh out of 31 states examined.

Meanwhile, California's maximum indemnity benefits for temporary and permanent disability were among the lowest in the nation. As of January 1, 1993, 38 states had higher maximum temporary total disability benefits and nearly every other state had higher maximum weekly permanent partial disability benefits. Data from the NCCI's 1994 Annual Statistical Bulletin show that in 1990 California's average cost for temporary disability payments per workers' compensation claim was $998, which ranked the state 45th out of 46 jurisdictions studied. For permanent partial disability payments, California's average cost per claim was $16,373, which ranked it 39th out of 46 jurisdictions.

However, claim frequency was much higher than average in California. NCCI data indicate that California ranked first in claim frequency for permanent partial disability benefits at 2,159 per 100,000 workers in 1990, far above the national average. The state ranked twelfth in the frequency of temporary total disability claims. Thus, despite the low statutory maximums, the fact that workers in California were more apt to file claims resulted in higher than average costs for employers in the state.

Today, however, California's workers' compensation system shows some signs of improvement. According to the California Workers' Compensation Institute (CWCI), the number of claims per $1 million of adjusted earned premium has dropped from a high of 141.7 in 1990 to 103.5 in 1994, a 27 percent decrease. Claim frequency in the fourth quarter of 1994 fell to a new low of 90.2 claims per $1 million of premium, a rate ten percent below that for the fourth quarter of 1993. California's work injury and illness rate is down as well: according to the Division of Labor Statistics and Research, the number of nonfatal work injuries and illnesses per 100 full-time workers fell from 9.8 in 1992 to 9.0 in 1993.

Another sign of improvement is the continuing decline of workers' compensation insurance premium levels. The 1993 reform legislation mandated a seven-percent rate reduction for employers. The Insurance Commissioner ordered further minimum rate reductions of 12.7 percent on January 1, 1994 and 16 percent on October 1, 1994. Some observers believe that rates in the open-competition environment that began January 1, 1995 could fall fifteen percent or more below rates in effect at the end of 1994.

These rate reductions are producing a corresponding decrease in total workers' compensation premium written in California. From a high of almost $9 billion in 1993, written premium fell to about $7.5 billion in 1994 with almost every insurer experiencing a decline in premium. Some industry analysts estimate that total written premium in 1995 could be less than $6 billion.

The reduced premium costs have improved California's standing compared to other states when ranked based on workers' compensation premium costs. A recent study by the Oregon Department of Business and Consumer Services indicated that California employers paid, on average, the 15th-highest workers' compensation premium rates in the nation in 1994; in 1992 California's rates ranked eighth in the nation. If rates continue to decline in 1995, it is possible that California's ranking versus other states will improve even more.

Improvement Began in 1992

Some recent evidence shows that the turnaround in workers' compensation experience began in earnest in 1992. For example, the ratio of incurred losses to earned premium, as measured by the Workers' Compensation Insurance Rating Bureau (WCIRB) at the time of first report, plunged to 42.8 percent for policy year 1992, a 30 percent decline from the 60.3 percent loss ratio for 1991 policies at the same development point. Likewise, the amount of incurred losses at first report fell 24 percent, from $5.1 billion for policy year 1991 to $3.9 billion for policy year 1992. Incurred indemnity costs declined from $2.5 billion in 1991 to $1.9 billion in 1992 and incurred medical costs fell from $2.6 billion in 1991 to $2 billion in 1992.

In addition, a recent study examining pre-1993 trends, the WCIRB's 1989 Reform Act - Cost Monitoring Report, shows that claims frequency jumped in 1990 and 1991 but dropped sharply in 1992. After two years of significant increases in the frequency of individual case report claims for temporary disability benefits (up by 21.3 percent in 1990 and 16.5 percent in 1991), claim frequency fell 18.4 percent in 1992. Similarly, the frequency of claims for permanent disability benefits went up 17.6 percent in 1990 and 20.6 percent in 1991, but declined 24.4 percent in 1992.

Workers' Compensation - Improving Results Nationwide

California is not the only state in which the workers' compensation system seems to be improving. Many states are also experiencing declining workers' compensation rates: Colorado, Connecticut, Florida, Maine, Massachusetts, Texas and Oregon, among others, enjoyed cuts in 1994, and further cuts are taking place in 1995 for Colorado, Massachusetts, New Hampshire, Oregon, South Carolina, Texas and Utah.

A recent analysis of the profitability of workers' compensation insurance nationwide in Best's Review indicates that in 1994 the industry had its best year since 1970, as the combined ratio for workers' compensation insurers improved from 122.6 in 1991 to an estimated 99.0 in 1994 (a 19 percent reduction in overall costs).[1]

Similarly, an analysis of insurer performance conducted in 1994 by the National Association of Insurance Commissioners shows improving results overall for workers' compensation insurers: incurred losses dropped from 85.9 percent of direct premiums earned in 1991 to 73 percent of direct premiums earned in 1993. Insurer performance in California was better than the national average: incurred losses here reached a high of only 79.1 percent of direct premiums earned in 1992 before dropping to 65.1 percent in 1993.

THE WORKERS' COMPENSATION REFORM LEGISLATION OF 1993

On July 16, 1993, Governor Pete Wilson signed a package of bills that enacted major reform of California's workers' compensation system. These bills, AB 110 (Peace), AB 119 (Brulte), AB 1300 (W. Brown), SB 30 (Johnston), SB 484 (Johnston), SB 983 (Greene) and SB 1005 (Lockyer), together with cleanup legislation enacted later that year (SB 223, Lockyer), produced a sweeping reform of the system.

This legislation was designed to rein in the cost of a workers' compensation system that many believed to be out of control, causing too much to be spent on litigation, medical and medical-legal costs and causing too little to reach the pockets of injured workers.

The primary purposes of the law were to reduce insurance costs by deregulating workers' compensation insurance rates and eliminating the minimum rate law; decrease the cost of medical care by tightening the medical fee schedule and increasing the use of managed care for workers' compensation cases; cut the cost of medical-legal evaluations and reduce the number of evaluations obtained in disputed cases; decrease overall compensation costs by requiring a greater emphasis on workplace safety, especially among high-hazard employers; limit the cost of vocational rehabilitation by capping the benefit at $16,000; streamline adjudication procedures; reduce the compensability of psychiatric and post-termination claims; and increase penalties for workers' compensation fraud.

These changes were estimated by the Legislature to produce at least $1.5 billion in annual savings for California employers. Half of these savings (about $750 million) were to be returned to injured workers in the form of higher temporary and permanent disability benefits phased in over three years.

The provisions of the 1993 reform legislation are summarized as follows:

Insurance

* Repealed California's 80-year-old minimum rate law as of January 1, 1995, and replaced it with an open-competition system of rate regulation in which insurers set their own rates based on advisory loss costs developed by the Workers' Compensation Insurance Rating Bureau.

* Reduced workers' compensation insurance rates by seven percent effective July 16, 1993.

* Requires insurers to file proposed rates 30 days before they take effect. Rates may not tend to impair or threaten the solvency of an insurer or tend to create a monopoly. All insurers must adhere to a uniform experience rating plan and must use a uniform classification system that is the same as, or is consistent with, the uniform statistical plan developed by the Workers' Compensation Insurance Rating Bureau.

* Limits the grounds for cancellation of a workers' compensation insurance policy; requires insurers to provide employers with certain information about claims, loss experience and rates; creates the position of policyholder ombudsman to help employers obtain policy information; requires employers to notify insurers of information that may help disprove claims; and requires insurers to provide employers with information regarding claims, reserves and offers to settle claims.

* Permits employers to insure themselves for workers' compensation obligations through a group self-insurance mechanism.

Fraud

* Makes it a felony to offer any kind of compensation to an insurance adjuster for the referral or settlement of a claim. Also makes it a felony to misrepresent willfully any fact in order to obtain workers' compensation insurance at less than the proper rate for that insurance. Authorizes the Attorney General, local district attorneys or other interested persons to bring civil actions against persons employing runners, cappers or others for the purpose of obtaining clients seeking workers' compensation benefits. Persons convicted of workers' compensation fraud are prohibited from collecting benefits associated with a fraudulent claim.

Psychiatric and Post-termination Claims

* Limits the compensability of a psychiatric claim by requiring that it be predominantly caused by work in order to be compensable, unless the claim results from a violent act (in which case the injury must be substantially caused by the workplace). Precludes compensation for a psychiatric injury if substantially caused by a lawful, nondiscriminatory, good faith personnel action.

* Disallows claims filed after notice of termination unless the employee demonstrates existence of the injury prior to termination. Psychiatric claims so filed would be compensable only if existence of the injury prior to termination was demonstrated, the injury was caused by a sudden and extraordinary event, or the injury resulted from sexual or racial harassment.

Medical Care

* Requires the administrative director of the Division of Workers' Compensation (DWC) to set a new medical treatment fee schedule that establishes maximum fees payable in workers' compensation cases. The administrative director must also adopt a fee schedule by January 1, 1996 that includes charges by hospitals as well as drug and pharmacy services.

* Permits HMOs, health insurers and other entities licensed as workers' compensation health care provider organizations (such as workers' compensation insurers and third-party administrators) to provide health care for injured workers using managed care techniques.

* Allows employers to control the health care of injured workers for 90 days if the employer does not offer nonoccupational health coverage but offers at least two managed care organizations for workers' compensation health care, for 180 days if the employer offers nonoccupational health coverage and more than one managed care organization of workplace injuries, or 365 days if, in addition, the employee's personal physician or chiropractor is participating in at least one of the health organizations attending to the employee for workers' compensation health care. Workers' compensation health care organizations must meet certain certification requirements.

* Limits reimbursement for medical services to the amount that would have been paid by five of the largest preferred provider organizations in the same geographic area in cases where the employer's health care organization does not provide nonoccupational health coverage to the employee.

* Prohibits a physician in most instances from referring injured workers to medical facilities owned by the physician for certain goods and services, such as diagnostic nuclear medicine, diagnostic imaging and physical therapy.

* Requires the Industrial Medical Council (IMC) to study the feasibility of requiring objective medical findings for soft-tissue injuries. The IMC must also adopt guidelines for the treatment of industrial injuries that outline appropriate and inappropriate diagnostic techniques, treatment modalities, length of treatment and appropriate specialty referrals.

Medical-legal Evaluations

* Provides that no medical-legal evaluations may be obtained prior to 60 days after the employer is notified of a claim. Encourages the treating physician to perform the medical-legal report, which shall be presumed to be correct unless rebutted by the evidence; provides that in disputed cases an employee or employer may obtain only one additional medical-legal report; and provides that the workers' compensation referee shall be limited to approving the permanent disability rating proposed by one side or the other ("baseball arbitration").

* Established, pursuant to legislation enacted earlier in 1993 (SB 31, Johnston), a new, lower fee schedule for medical-legal evaluations, and instituted a more restrictive definition of what constitutes a compensable medical-legal evaluation.

* Requires a physician to pass an examination on industrial medical evaluation in order to be appointed as a qualified medical evaluator (QME). Medical-legal reports issued by a QME must meet certain quality standards, and QMEs must meet continuing-education requirements in order to be reappointed.

Vocational Rehabilitation

* Limits injured workers in most circumstances to one vocational rehabilitation plan with an overall benefit cap of $16,000 and a subsidiary cap of $4,500 on counselor fees. Also limits maintenance allowance payments to 52 weeks (except that periods in which there is employer delay or a dispute over medical eligibility), provides that plans agreed to by an employer and a represented employee do not need DWC approval, and eliminates an employer's liability for rehabilitation when the employee accepts or rejects an offer of alternative or modified work that meets certain criteria.

* Prohibits a vocational rehabilitation provider's referral of an employee to a treatment facility in which the provider has a financial interest.

Alternative Benefit Delivery Systems

* Permits employers and employees in the construction industry to agree, through collective bargaining, to an alternative occupational disability benefit program so long as this program does not diminish the entitlement of an employee to compensation.

Benefits

* Provides benefit increases estimated to amount to $750 million over three years. The maximum temporary and permanent total disability award increased from $336 per week to $406 per week on July 1, 1994, and will rise to $448 per week on July 1, 1995 and $490 per week on July 1, 1996. The maximum weekly permanent partial disability award increases as follows:

Maximum Weekly Permanent Partial Disability Award

  Disability Rating     Pre-reform     7/1/94     7/1/95     7/1/96

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Below 5% $140 $140 $140 $140 From 15 to 24.75 % $140 $148 $154 $160 From 25 to 69.75 % $148 $158 $164 $170 From 70 to 99.75 % $148 $168 $198 $230

Injury Prevention

* Requires insurers to provide certified loss control consultation services to help high-hazard employers reduce their incidence of industrial injury. Requires the Division of Occupational Safety and Health to establish an inspection program for high-hazard employers that targets employers with poor safety records and must expand the activities of the consultation unit to target such employers.

* Finances the targeted inspection and consultation programs through a surcharge levied on the insurance premium of employers with an experience modification of 1.25 or greater.

* Directs the Occupational Safety and Health Standards Board to adopt an ergonomics standard by January 1, 1995.

Disability Evaluation

* Requires the administrative director of the DWC to revise the permanent disability rating schedule by January 1, 1995. The standard rating and occupational tables must be updated to reflect the current labor market, with the approval of the Commission on Health and Safety and Workers' Compensation.

Claims Adjudication

* Provides for dismissal of a claim form if there has been no activity for 180 days.

* Specifies that a Declaration of Readiness to Proceed may not be filed unless a medical evaluation by a treating physician, an agreed medical evaluator or a qualified medical evaluator has first taken place.

* Requires parties to file pretrial statements noting issues in dispute if the claim is not resolved at a mandatory settlement conference.

* Permits the appeals board to order a party to pay reasonable expenses, including attorney's fees, resulting from the party's bad-faith actions, frivolous tactics or actions designed to cause unnecessary delay.

Information Systems

* Directs the administrative director of the DWC to develop a workers' compensation information system to help manage the workers' compensation system more effectively.

Commission on Health and Safety and Workers' Compensation

* Established the Commission on Health and Safety and Workers' Compensation.

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RECENT TRENDS IN WORKERS' COMPENSATION

This section will discuss recent developments in California's workers' compensation system. In particular, it will focus on the impact that the 1993 reforms have had on different aspects of the workers' compensation system.

INSURANCE

The past two years have brought unprecedented change to the state's workers' compensation insurers. As noted above, workers' compensation insurance rates for California employers have fallen significantly since mid-1993: first a seven-percent reduction on July 16, 1993, then a 12.7 percent cut effective January 1, 1994 and another 16 percent cut on October 1, 1994.

In 1994, rapidly declining loss ratios and the impending repeal of the minimum rate law led some insurers to engage in illegal rebating of premium to policyholders. In response, the Department of Insurance ordered the WCIRB to issue a bulletin advising insurers against rebating.

The repeal of the minimum rate law took effect on January 1, 1995. The transition to open rating has intensified competition among insurers and so far appears to be driving rates down even further. Reports in the trade press indicate that insurers are competing fiercely for market share by offering very low quotes to many prospective policyholders. For example, recent issues of the Workers' Compensation Executive have described instances where an employer's premium dropped from $228,000 in 1994 to $54,000 in 1995, and from $500,000 in 1994 to $150,000 in 1995. Open rating encourages competition by permitting insurers to use a variety of rating programs in order to write business: large-employer premium discounts, schedule rating, large and small deductible programs, group program discounts, surcharge plans and retrospective rating plans.

Some observers question how long insurers can maintain such low rates before concerns about profitability push rates up again. Industry analysts also worry that in order to offer competitive rates, insurers are feeling pressure to cut expenses in areas that help contain workers' compensation costs, such as loss control services, fraud investigation and claims adjustment. Already some district attorneys have reported that insurers are curtailing funding for fraud investigation by special investigative units (SIUs). In response, Insurance Commissioner Chuck Quackenbush has begun an SIU enforcement plan to ensure insurer compliance with state law that requires every insurer to maintain an SIU.

In addition, two current legal proceedings may affect insurers and insured employers. In one case, three policyholders of the State Compensation Insurance Fund (SCIF) filed a complaint with the WCIRB alleging that from 1983 to 1992 SCIF misreported medical-legal expenses. Instead of reporting a medical-legal cost as part of an incurred indemnity, incurred medical or defense cost (depending on the circumstances) as required by Bureau practice, SCIF reported all medical-legal costs as incurred medical expenses. Because incurred indemnity and incurred medical expenses, but not defense costs, are used to calculate an employer's experience modification, SCIF's reporting method increased the experience modification of policyholders above what it would otherwise have been. These three policyholders argue that SCIF should lower their past experience modifications by removing medical-legal costs that should have been properly characterized as defense costs. In August 1994 the Rating Bureau decided the complaint in favor of the policyholders. SCIF has appealed the decision to the Insurance Commissioner. If it loses, SCIF may have to refund millions of dollars of premium to policyholders to compensate for the misreported expenses.

In the second case, Tricor California, Inc. v. State Compensation Insurance Fund (30 Cal. App. 4th 230), a Court of Appeal overturned a lower court's dismissal of claims filed by another disgruntled SCIF policyholder that the State Fund had engaged in bad faith claims handling, which caused the policyholder to pay unjustifiably high premiums and be wrongly denied dividends. The appellate court held that Tricor could properly present evidence of negligent claims handling as evidence of bad faith and breach of contract by SCIF, that SCIF is not immune from punitive damages awards, and that Tricor did not fail to exhaust its administrative remedies. It is anticipated that this matter could go to trial later this year. If Tricor wins at trial, it is feared that insurers may delay benefit payments to injured workers in order to avoid lawsuits about claims handling from employer policyholders.

FRAUD

California began making a major effort to combat workers' compensation fraud in 1991 with the passage of SB 1218 (Presley). This legislation stiffened penalties for workers' compensation fraud and established an assessment on insured employers and self-insured employers of $3 million annually to pay for fraud investigation and prosecution by district attorneys and the Department of Insurance. The bill also set up a Fraud Assessment Commission to help determine the appropriate amount and distribution of the assessment. The Commission is comprised of five members appointed by the Governor: two representatives of self-insured employers, one each from insured employers and workers' compensation insurers, and the President of the State Compensation Insurance Fund.

The rapid expansion of workers' compensation fraud in 1991 and 1992, especially in southern California, and the proliferation of "mills" that encouraged the filing of fraudulent workers' compensation claims soon demonstrated that more resources were needed to prosecute fraud. As a result, the amount of the fraud investigation assessment increased to $10 million in fiscal year 1992-93 and $25 million in 1993-94 and thereafter. Of this $25 million, about $12 million is awarded through a grant application process to district attorneys across the state; about $600,000 is held as a reserve; and the remainder supports fraud investigation efforts by the Department of Insurance.

Because of this new focus on anti-fraud efforts, insurers began referring more suspected cases of fraud to the Department of Insurance and to district attorneys: from literally a handful per year prior to 1991, the number of referrals shot up to 8,342 in fiscal year 1992-93. Prosecutions, too, have increased, from 125 arrests and 54 convictions in 1992 and the first half of 1993 to 285 arrests and 184 convictions in fiscal year 1993-94.

The fraud prosecutions funded by this new program, as well as a renewed determination on the part of workers' compensation insurers to fight fraud, have driven many of the most egregious practitioners out of business and have helped reduce the number of workers' compensation claims. One sign that the number of fraudulent claims is declining is that the proportion of litigated claims in which a notice of attorney representation is the employer's first knowledge of an injury fell from 36 percent in 1993 to 21 percent in 1994. Another sign lies in the continuing decline in the number of fraud referrals made by insurers. A recent CWCI report states that the number of fraud referrals is expected to fall from 7,284 in fiscal year 1993-94 to about 4,000 referrals in 1994-95.

PSYCHIATRIC AND POST-TERMINATION CLAIMS

The 1993 reform legislation limited the ability of persons to file psychiatric "stress" and post-termination claims because it was widely believed that many were fraudulent and in a great many instances were in retaliation for a lay-off resulting from a reduction in the work force. Many observers credited a rapid increase in the these types of claims with substantially increasing compensation costs for employers in southern California in the late 1980s and early 1990s. Some evidence for this increase can be found in the injury data compiled by the Division of Labor Statistics and Research, which indicates that the number of psychiatric stress claims reported to the state rose nearly tenfold between 1981 and 1991, with a sharp 50 percent increase in 1991 alone.

Results from the WCIRB's 1989 Reform Act - Cost Monitoring Report also illustrate the growth of psychiatric injury claims: the frequency of these claims per 1,000 workers rose 41 percent from accident year 1989 to accident year 1990, and another eight percent from accident year 1990 to accident year 1991. Much of this growth came from rising numbers of "mental-physical" claims, although the most prevalent type of psychiatric injury claim was the "physical-mental" claim.

Since the passage of the reform legislation, the number of stress claims filed has decreased markedly. In its October 1994 report, Meaningful Reform of Workers' Compensation in California: The Progress Continues, the DWC reported that the number of applications for adjudication filed involving a psychiatric injury fell 26 percent by mid-1994. In Los Angeles and Orange counties these types of claims were down 35 percent. Many insurers and employers are also noting a steep decline in the number of stress claims filed against them.

MEDICAL CARE

Revision of Medical Fee Schedule

Many employers and insurers criticized the medical fee schedule in use in 1993 as outdated because it did not cover many common procedures and did not apply to pharmaceutical or hospital charges. The reform legislation directed the DWC to update the fee schedule to address these concerns. Consequently, the DWC comprehensively revised the schedule, effective April 1, 1994. The new schedule is based on the American Medical Association's Current Procedural Terminology codes, which adds many new procedures, outpatient hospital charges and drug charges. The DWC is currently in the process of adding to the schedule charges for inpatient hospital procedures. Charges for ambulatory surgical center care and medical supplies may be added to the schedule later this year.

24-Hour Care Pilot Project

With the passage of AB 3757 (Bronzan) in 1992, California established a pilot project to test the feasibility of merging occupational and nonoccupational medical care into one insurance product offering "24-hour" coverage. The pilot project will show whether a single 24-hour health coverage plan can reduce employers' overall health care costs by reducing duplicative administrative costs for separate occupational and group health care coverage and by dampening incentives for litigation to determine which insurer is liable for treating an employee's injury.

The first pilot project, Kaiser-on-the-Job by Kaiser Permanente, began in June 1994 for employers in San Diego. The DWC approved three more pilot projects in January 1995: another Kaiser-on-the-Job in Santa Clara and Sacramento counties, Maxicare Life and Health Insurance Company in Los Angeles and the "24-Hour Care Alliance" between Sharp HealthCare and TIG Insurance Company for employers in San Diego. The pilot projects are currently authorized to operate until the end of 1997.

Industrial Medical Council

The reform legislation charged the Industrial Medical Council (IMC) with several new responsibilities:

* Medical treatment guidelines: The IMC contracted with the University of California - San Francisco Division of Occupational and Environmental Medicine and the University of California - San Diego to develop guidelines for medical treatment of eleven common industrial injuries (occupational asthma, occupational dermatitis, and various injuries to the hand, wrist, arm, back, neck, knee and shoulder). The guidelines for asthma and dermatitis are currently in the process of being adopted as regulations. The other nine guidelines are undergoing further review by the IMC and the medical community.

* Soft tissue injuries: The reform legislation required the IMC to study the feasibility of requiring objective medical findings for soft tissue injuries. The IMC contracted for the study with the University of California - San Diego, which completed its report in December 1994. The IMC is reviewing the study.

* Disability evaluation: The IMC has adopted protocols governing the evaluation of pulmonary, immunologic, cardiac and psychiatric disabilities. It is in the process of holding hearings on proposed neuromusculoskeletal disability evaluation protocols.

* Causation guidelines: The University of California - Los Angeles School of Medicine recently developed and submitted to the IMC guidelines for physicians to use in evaluating and determining causation of occupational injuries and illnesses. These guidelines are also currently under review by the council.

* Treating physician form: The IMC has developed a form for treating physicians to use when reporting on medical issues necessary to determine compensability. This form is awaiting final regulatory approval and promulgation.

* QME exams: The reform legislation required the IMC to develop and administer an examination that health care providers must pass in order to be certified as a qualified medical evaluator (QME). In June 1994 the first QME examination was administered to 4,456 physicians, of whom 93 percent passed. A second general QME exam was taken by 1,208 physicians in September 1994, with a passing rate of 81 percent. Another 392 physicians took the third general exam in April 1995, of whom 68 percent passed. Special QME examinations for acupuncturists were also given in October and November 1994 and April 1995.

The HCO Program

The reform legislation of 1993 enacted a complex scheme to permit various entities to become certified as health care organizations (HCOs). HCOs are medical care systems that offer managed care services for work-related injuries and illnesses. Ideally, HCOs should offer quality medical care with occupational medicine expertise; lower medical costs for employers through the use of managed care techniques such as provider networks, utilization management and case management; and coordination of medical treatment with workplace health and safety measures and return-to-work services.

Employers that contract with HCOs may control the medical care of injured employees for longer than the current 30-day period after date of injury, as follows:

* If the employer offers two HCOs for coverage of workplace injuries but the employee is not receiving or is not eligible to receive health care coverage for non-occupational injuries, then the employer may control medical care for 90 days after date of injury.

* If the employer offers two HCOs for coverage of workplace injuries and the employee does have employer-provided health coverage for non-occupational injuries, then the employer gets 180 days of medical control.

* If the employer offers two HCOs and coverage for non-occupational injuries, and the employee's physician is participating in the employee's chosen HCO, then the employer may have 365 days of medical control.

At least one of the HCOs must offer a fee-for-service option. Employees may still predesignate any physician as their primary treating physician and thereby avoid having any period of employer control over medical care for work-related injuries.

Health insurers, HMOs and other entities authorized as workers' compensation health care providers (such as workers' compensation insurers and third-party administrators) may apply to become certified as HCOs. Health insurers and HMOs that are properly licensed by the Department of Insurance or the Department of Corporations, respectively, may apply to the administrative director of the Division of Workers' Compensation for HCO certification. Other entities must first become authorized by the Department of Corporations as a workers' compensation health care provider organization (WCHCPO) before applying to the administrative director to become a certified HCO.

Implementation of the HCO program has been slow. To date the DWC has received 11 applications, of which four have been certified as HCOs. About 20 WCHCPO applications are pending authorization by the Department of Corporations.

Employers, insurers and health care providers are critical of both the structure of the HCO statute and the manner in which the DWC is implementing the law. Employers argue that the law gives the employee too many opportunities to opt out of treatment by the HCO, that the program is too complex and too cumbersome to administer, that it is duplicative and burdensome to require HCO applicants to obtain certification from two different state agencies, that the DWC requires too much data to be reported by HCOs, and that it is duplicative to require HCOs to offer health and safety consultations already available from the Department of Industrial Relations and workers' compensation insurers.

On the other hand, some observers believe that it is important to retain the various opportunities for injured employees to opt out of treatment from the HCO if they grow dissatisfied with their medical care. They also believe that it is important to retain the requirement for HCOs to offer health and safety consultation services since there are reports that some workers' compensation insurers are cutting back on the level of such services offered.

MEDICAL-LEGAL EVALUATIONS

Senate Bill 31 (Johnston), enacted in 1993, repealed the previous method of calculating medical-legal charges that required evaluations to be paid at the 73rd percentile of the charges paid for similar evaluations in the previous year. By pegging the fee level to the amounts billed, rather than actually paid, in the prior year, the previous method contained a built-in incentive for medical-legal cost inflation as evaluators were encouraged to bill at higher rates in order to increase payments the following year. As a result, by 1993 the average cost of an evaluation had reached $1,099.

SB 31 authorized the administrative director of the DWC to promulgate a schedule specifying the level of reasonable fees for medical-legal evaluations. On August 3, 1993 the administrative director adopted a fee schedule that set the fee at $500 for a basic comprehensive medical-legal evaluation, $750 for a complex comprehensive medical-legal evaluation and $200 per hour for an evaluation of extraordinary complexity. A recent CWCI report found that, as a result, the average cost of an initial evaluation dropped to $707 in 1994, 36 percent below the previous year's cost. CWCI also reported that 52 percent of evaluations were paid at the basic rate, 24 percent paid as complex and twelve percent paid as extraordinary (the remaining twelve percent were follow-up evaluations). In one-fifth of the cases an agreed medical evaluator prepared the medical-legal report.

The CWCI report did not analyze whether the frequency of medical-legal evaluations per claim has also decreased since the passage of the 1993 reforms. A recent study examining pre-1993 trends, the WCIRB's 1989 Reform Act - Cost Monitoring Report, indicates that the number of evaluations per permanent disability claim began to decline starting with accident year 1991: the average number fell from 2.4 per permanent disability claim in accident year 1990 to 2.2 per claim for accident year 1991, an eight percent drop. About 80 percent of permanent disability claims involved medical-legal evaluations.

ALTERNATIVE BENEFIT DELIVERY SYSTEMS

The 1993 reform legislation for the first time authorized parties to agree through collective bargaining to alternative methods for resolving workers' compensation disputes. This legislation allows unions and employers to negotiate an agreement spelling out the terms of alternative dispute resolution mechanisms for workers' compensation cases, the use of an exclusive panel of medical providers and evaluators, the use of agreed rehabilitation providers, the character of a return-to-work program and the use of joint labor-management safety committees. At first limited to the construction industry, in 1994 SB 853 (Greene) expanded the range of eligible employers to include businesses in rock, sand, gravel, cement and asphalt operations; heavy duty mechanics; surveying; and construction inspection.

To date four such agreements have been made: ARB, Inc., the project contractor for construction of the Domenigoni Reservoir near Hemet and the State Building and Construction Trades Council of California; the Southern California Conference of Carpenters and six multi-employer groups; the Southern California Pipe Trades District Council 16 and the Piping and Plumbing Industry Council; and the 9th District Council of the International Brotherhood of Electrical Workers and District 9 of the Electrical Contractors Association.

VOCATIONAL REHABILITATION

As with indemnity claims, it appears that the number of vocational rehabilitation claims began to drop prior to passage of the 1993 reform legislation. According to the WCIRB, the number of vocational rehabilitation claims on insurer first reports fell from 64,997 for policy year 1991 to 52,093 for policy year 1992, a 19.9 percent drop. Rehabilitation costs also decreased by 20 percent, falling from slightly over $500 million for policy year 1991 to just over $400 million for policy year 1992.

Moreover, according to the DWC's Rehabilitation Unit, the number of new rehabilitation case filings has continued trending downward from 51,803 in 1993 to 46,995 in 1994. Because vocational rehabilitation often comes a year or more after date of injury, it is likely that most of the 1994 filings were for injuries that occurred prior to the effective date of the reform legislation. Thus, this downward trend reflects a decline in rehabilitation cases for pre-reform injuries.

Because of the long time lag in entering rehabilitation, it is still unclear what effect the changes in the 1993 reform law will have on the use of vocational rehabilitation for workplace injuries. Rehabilitation Unit staff believe that few rehabilitation cases have yet hit the $16,000 cap for services imposed in 1993. The Commission has funded a study by the University of California Survey Research Center to analyze vocational rehabilitation data in order to understand the impact of the reform legislation.

INJURY PREVENTION

Loss Control Certification

The reform legislation required workers' compensation insurers to maintain occupational safety and health loss control services to help high-hazard employers reduce their incidence of industrial accidents and illnesses. Insurers must provide (or contract with others to provide) loss control consultation services to all targeted employers. These services must include evaluation of the employer's operations, identification of factors most related to the losses experienced by the employers, formulation of recommended loss control measures, a written report documenting the consultation and ongoing evaluation of the employer to determine the effectiveness of the consultation. Insurers may not charge the employer any fee in addition to the insurance premium for these services.

The Division of Occupational Safety and Health (DOSH) within DIR must certify the loss control capabilities of insurers. To qualify for certification, the insurer must develop an annual loss control plan and must demonstrate that it can deliver effective loss control services. In 1994 DOSH gave a short-term provisional certification to insurers that submitted an initial loss control plan. In 1995 the division has revised its requirements for plans and has begun to certify insurers for one-year periods. Plans must detail the insurer's program for delivering loss control consultation services to insureds selected as targeted employers. Each plan must include a budget for these services, the method used to target employers, one-year and three-year loss reduction goals for targeted employers, the identity of targeted employers and a description of loss control services provided these employers in the previous year. Later in 1995 DOSH plans to begin auditing insurers to determine how effectively they are providing loss control services to high hazard employers.

High-hazard Consultation and Inspection Program

The reform legislation directs DOSH to begin a program targeting especially hazardous employers for consultations and inspections, to be funded by assessments upon employers with higher than average workers' compensation costs. In early 1995 DOSH began notifying employers that they have been identified as high hazard places of employment. About 400 high hazard employers received the notification because of a high score on a frequency-based formula based on their experience modification (for insured employers) or a severity-based formula for self-insured employers. DOSH offered consultation services to the employers to help them address the occupational safety and health issues that cause them to be high hazard.

The reform legislation specifies that the targeted inspection assessment is to be levied on insured employers with experience modifications of 1.25 or more and private self-insured employers with an equivalent experience rating of 1.25 or more. In August 1994, DIR required insurers to advance assessment funds to the department on behalf of affected policyholders and then to collect this assessment at the time of policy renewal. The Association of California Insurance Companies and eight insurers subsequently sued the state to block DIR from requiring them to collect the assessment. A Sacramento Superior Court judge initially granted a fifteen-day temporary injunction preventing DIR from collecting the funds from these insurers, but upon expiration refused to extend the order into a preliminary injunction. The department and the workers' compensation community are currently negotiating a new approach to collecting the assessment.

Senate Bill 996 has been proposed to resolve the problem until a better methodology can be developed. Among other provisions, SB 996 requires that the department submit a report to the legislature by January 1, 1998, addressing one or more alternative methods of funding the Cal-OSHA targeted inspection and consultation programs. The report shall also propose and evaluate one or more alternatives to the use of workers' compensation insurance experience modification ratings for the identification of employers subject assessment, and alternative methods for determining assessment amounts and collecting the assessments.

Ergonomics

A provision of the 1993 reform bills required the Occupational Safety and Health Standards Board to adopt workplace ergonomics standards by January 1, 1995, in order to minimize repetitive motion injuries.

By a unanimous vote in November 1994, the board rejected a proposed ergonomics standard, citing the standard's potential cost and a lack of consensus among the regulated public as two key factors leading to its defeat.

In response, the California Labor Federation, AFL-CIO, sued to compel the board to adopt the standard. On May 26, 1995, a Sacramento superior court ruled that the OSH Standards Board must adopt an ergonomics standard within 18 months. The board will have six months to develop a proposal and twelve months to get it through the rule-making process.

DISABILITY EVALUATION

The Permanent Disability Rating Schedule

The 1993 reform legislation directs the administrative director of the DWC to revise the schedule for the determination of permanent disabilities. This revision must update the standard disability ratings and occupations to reflect the current labor market. When complete, the revision must be approved by the Commission on Health and Safety and Workers' Compensation before the DWC may officially adopt it. The reform legislation required the administrative director to submit the proposed revision to the Commission by July 1, 1994 and to complete the revision by January 1, 1995.

The administrative director has yet to submit a final proposal for a revised permanent disability rating schedule to the Commission. At present the Disability Evaluation Unit (DEU) within the DWC is testing a proposed schedule by rating a sample of claims. It is anticipated that the administrative director will submit a revised schedule to the Commission later this year.

Backlogs of Disability Ratings

The DWC continues to be plagued by a huge backlog of requests for permanent disability ratings. The backlog resulted from a provision of the Workers' Compensation Reform Act of 1989 that required all claims in which the injured worker was unrepresented to obtain a permanent disability rating from the DEU in the DWC. The number of requests soon outstripped the ability of the unit to perform ratings. The reform legislation eliminated the requirement that new cases be rated, but the DEU still must rate all of the backlogged cases. As of late 1994, the DWC had a backlog of 20,000 requests for summary ratings and a 2,000-case backlog of rating reconsideration requests.

In order to address this problem, the DWC issued a bulletin in November 1994 to encourage claims administrators to reach settlements with injured workers. In addition, in January, February and March of 1995 the DEU closed one week each month to enable evaluators to focus on the backlogged requests. The DEU estimates that so far this procedure has eliminated about one-third of the backlog.

CLAIMS ADJUDICATION

One of the most persistent administrative problems facing the DWC in recent years has been the development of a backlog of lien claims at some appeals board offices. Lien claims at some appeals board offices in Los Angeles and Orange counties, for example, are backlogged as much as 18 months. In response, the DWC has established a lien unit of five referees in Santa Ana to resolve some of the backlogged liens. In July another lien unit of four referees will open in Van Nuys.

It is feared that the 1994 appellate court decision in Beverly Hills Multispecialty Group v. WCAB (26 Cal. App. 4th 789) may complicate efforts to speed up the resolution of lien claims. This case derived from claims for cumulative industrial injuries filed by ten laid-off employees of International Rectifier Corp. Beverly Hills Multispecialty Group (BHMG) filed a lien claim for $158,000 in medical services provided to these employees. The appeals board referee dismissed the claim of the ten employees, accusing them, their lawyers and BHMG of conspiring to commit insurance fraud. BHMG appealed on the grounds that it was denied due process because its attorney was not permitted to cross-examine witnesses or make objections, it was not provided notice that allegations of fraud against BHMG would be an issue at trial, and it had no opportunity to conduct discovery before trial. Ultimately the Court of Appeal held that BHMG had been denied due process and the right to a fair trial. The court held that a medical or medical-legal lien claimant has a right to participate in a workers' compensation hearing in the worker's case-in-chief, that the board must serve or cause lien claimants to be served with notice of all hearings, and that due process requires that a lien claimant be informed of the scope and purpose of a hearing that may affect its rights or liabilities.

In response, Workers' Compensation Appeals Board Chair Diana Marshall and Administrative Director Casey L. Young issued new guidelines in February 1995 directing workers' compensation referees to resolve medical-legal and medical treatment liens without resorting to separate proceedings whenever possible. The guidelines also require that proper notice be given lien claimants. The DWC hopes that these guidelines will address the issues raised in Beverly Hills Multispecialty Group and will encourage lien claims to be resolved at the same time as other issues in a case. This may prevent any new lien claims from joining the backlog.

In addition, many participants complain about delays in the entire workers' compensation adjudication process. The administrative director has formed a task force to study ways to streamline the system.

INFORMATION SYSTEM

The reform legislation directs the Division of Workers' Compensation to develop a workers' compensation information system compatible with the International Association of Industrial Accident Boards and Commissions Electronic Data Interchange (EDI) system. The legislation requires the system to help the Department of Industrial Relations to manage the workers' compensation system more effectively, to help evaluate the efficiency of the benefit delivery system, to help measure how adequately injured workers are indemnified and to provide statistical data for research.

The DWC has contracted with the Survey Research Center at the University of California-Berkeley to help design this system. The DWC and the Survey Research Center are currently meeting with employers, insurers and third-party administrators to determine the type of information that will be part of the system. Early proposals from the DWC have created concern among employers and payers that it could be very costly to retool their information systems to conform to the planned state system. Claims administrators are also concerned about the confidentiality of data transmitted to the state through the EDI system. The DWC intends to issue a progress report on the development of the system by July 1, 1995.


Footnotes:

[1] The combined ratio is the combination of the loss ratio and the expense ratio. It indicates whether insurers are earning a profit on the policies they write, without taking investment income into account.


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