The California Commission on Health and Safety and Workers’ Compensation (CHSWC) is pleased to present the eighth annual report of its activities to improve vital programs affecting nearly all Californians.

CHSWC, created by the 1993 workers' compensation reform legislation, is charged with overseeing the health and safety and workers' compensation systems in California and recommending administrative or legislative modifications to improve their operation. CHSWC was established to conduct a continuing examination of the workers' compensation system and of the state's activities to prevent industrial injuries and occupational diseases and to examine those programs in other states.

From its inception in 1994, CHSWC began the process of assessing the impact of the 1993 workers' compensation reform legislation -- a package of several bills that made widespread and significant changes to the California workers' compensation system.

CHSWC has engaged in several projects and studies to evaluate how certain areas of the California workers’ compensation system have been affected by the reform legislation and other influences, such as the economy. CHSWC has directed its efforts to identify and assess problems and to provide an empirical basis for recommendations and/or further investigations. CHSWC contracts with independent researchers to insure objectivity, incorporate a balance of viewpoints, and produce the highest quality analysis and evaluation.

CHSWC activities involve the whole community – employees and employers, labor organizations, insurers, attorneys, medical and rehabilitation providers, administrators, educators, government agencies and members of the public. These individuals and organizations have participated in CHSWC meetings, fact-finding hearings and have served on advisory committees to assist CHSWC and independent researchers on projects and studies. The common goal of all the parties in these efforts is to achieve a system that delivers the proper benefits to injured workers in a prompt and cost-effective manner.

These concerted efforts, combining rigorous analytical approaches with real world data and experience, have yielded insightful findings on important programs. CHSWC recommendations for system improvements are based upon the results of these activities.

In some instances, where recommended changes have widespread support and do not require legislative action, the Commission and the community have continued their work together by developing and implementing corrective actions. In addition, some project findings have formed the basis for community members to take action in the legislative arena.

Research Leads to Policy Changes

Assembly Bill 749, signed by Governor Gray Davis on February 15, 2002, is the first major workers' compensation legislation since the 1989 and 1993 reform acts.

Many of CHSWC recommendations for legislative changes were incorporated into AB 749 and become law effective January 1, 2003.

Workers’ Compensation Benefit Adequacy

CHSWC sponsored research to determine the extent to which the current workers’ compensation permanent disability system meets goals and objectives, to identify and evaluate changes that would help the PD system better achieve those goals, to provide quantitative and qualitative descriptions of the system and work with the workers’ compensation community to build consensus for reforms.

The first RAND study for CHSWC determined that there were significant and sustained earnings losses for workers injured at insured employers in 1991, with earnings 40% lower over 5 years after injury. The study found that on average only 40% of pretax losses were replaced by workers’ compensation benefits and for the lowest-rated claims only 10% of the loss was replaced. Follow-on studies addressed stakeholder concerns to include examining worker outcomes at self-insured employers and outcomes after the recession ended.

Findings from these studies suggest that benefits are inadequate and also emphasize poor return-to-work outcomes in California.

CHSWC findings and recommendations have led to legislative changes in the program. AB 749 provides increases in Total Temporary Disability (TTD) benefits, increases in Permanent Disability (PD) benefits, including increases for low-rated claims, and the adoption of innovative return-to-work programs.

CHSWC sponsored research to examine injured workers’ experiences in getting information and help with their workers’ compensation claims, design and test educational materials for injured workers, and explore methods for improving claim-specific benefit notices sent to injured workers. The research was conducted through focus groups and interviews.

These studies documented how injured workers experience significant difficulties in trying to understand and navigate the system, determined educational needs, developed fact sheets and a videotape in collaboration with many different organizations in California, and identified problematic laws and regulations that govern information for workers.

CHSWC findings and recommendations have led to legislative changes in the program. AB 749 requires that specific workers’ compensation information be made available for all workers through a poster in the workplace (Labor Code Section 3550) and that written information be provided for all new employees (Labor Code Section 3551). Information for injured workers is to be provided through a claim form and accompanying notice that describes potential eligibility for workers’ compensation benefits (Labor Code Sections 138.4 and 5401). In addition, CHSWC is mandated by AB 749 to conduct a study and make recommendations to improve and simplify benefit notices (Labor Code Sections 77 and 138.4)

CHSWC studies have found that workers’ compensation systems have high pharmaceutical reimbursement rates relative to other systems such as Medicaid and employer health benefits, and that within workers’ compensation systems California’s pharmaceutical reimbursement rates are near the highest among the various states reviewed.

AB 749 establishes new Labor Code Sections 4600.1 and 4600.2 that control the cost of pharmaceuticals. Effective January 1, 2003, pharmacies will dispense a generic drug equivalent unless the prescribing doctor states otherwise in writing while employers and insurers are authorized to contract with pharmacies or pharmacy benefit networks pursuant to standards adopted by the Administrative Director of the Division of Workers’ Compensation.

California currently does not have an outpatient surgery facility schedule. CHSWC studies have found that there was a lack of a stable method of paying for facility fees and that there was great variation of billed and paid amounts across the spectrum of services, resulting in an inability to predict costs. CHSWC projects recommended that an outpatient surgery facility fee schedule be established.

AB 749 directs the Administrative Director to establish an official pharmaceutical fee schedule establishing maximum fees for medicines and medical supplies provided to injured workers and an outpatient surgery facility fee schedule.

AB 749 also dealt with issues and recommendations raised by CHSWC studies and projects on:

• Return to work
• Workers’ compensation medical-legal costs
• Presumption of correctness on reports by primary treating physicians
• Workers’ compensation vocational rehabilitation benefit
• Audit process of the Division of Workers’ Compensation
• Penalty provisions of Labor Code Section 5814
• "Baseball Arbitration" Labor Code Section 4065
• Workers’ Compensation anti-fraud activities
• Employers illegally uninsured for workers’ compensation
• Workers’ compensation adjudication process
• "Carve outs" – Alternative workers’ compensation dispute resolution systems
• Liens on workers’ compensation cases
• Job safety and loss control

The following pages contain CHSWC’s recommendations for additional legislative or administrative changes and for new or continued studies and projects.

CHSWC looks forward to further cooperative endeavors with the community to improve the health, safety and workers’ compensation systems in California.

CHSWC RECOMMENDATIONS

In the previous annual reports, CHSWC has made specific recommendations to improve health, safety and workers’ compensation programs. Many of these recommendations were included in AB 749, as discussed in the "Special Report: 2002 Workers’ Compensation Reforms" section in this Annual Report.

This year CHSWC is making recommendations regarding

• Workers’ Compensation Insurance Industry in California
• Workers’ Compensation Medical Benefit Delivery
• Return to Work
• Timeliness of Workers’ Compensation Benefits
• Permanent Disability Rating Tool
• Occupational Health and Safety
• Special Populations of Workers
• California Occupational Research Agenda
• Workers’ Compensation Judicial Function
• Implementation and Impact of AB 749
• Vigilance Against Fraud

We look forward to continuing our work with the community in addressing these concerns and formulating approaches to solutions.

CHSWC and the community have expressed concerns regarding the current and future solvency of the California insurance industry. The viability of the insurance industry is vital to maintaining the health of the workers’ compensation system, which benefits both workers and employers.

CHSWC recommends that efforts be expended to:

• Stabilize the workers’ compensation insurance market as soon as possible.
• Identify the impact of the insurance industry’s current financial crisis on the employers and injured workers.
• Determine the consequences of market consolidation.
• Identify methods to reduce system costs and expedite benefit delivery.

Currently, the information with regard to the medical care received by industrially injured workers in California is limited, particularly with regard to:

• Quality and appropriateness of care
• Access to services
• Understanding costs and outcomes
• Comparability of the prices charged by providers for workers’ compensation in other states or to nonoccupational services
• Baseline data on these and other indicators
• Policy tools and effective models for medical benefit delivery

CHSWC, DIR, DWC and IMC are responding to these needs by preparing to host and coordinate a 2-day research colloquium focused on the medical benefit delivery system and return to work.

CHSWC invites the community to participate in the Colloquium, which will include a presentation of a series of papers and panel discussions addressing the delivery and policy issues raised and the need for and opportunities for future research.

The Official Medical Fee Schedule, used for payment of medical services required to treat work-related injuries and illnesses, has been subject to criticism by various members of the workers’ compensation community. In response to those concerns, CHSWC conducted a study and recommends the following:

• For the Inpatient Fee Schedule, a joint task force should be established to recommend a reimbursement methodology for high-technology hardware and/or instrumentation for spine surgery DRGs that will provide predictability, stability, efficiency, and access to care.
• A special task force should be established to research other data sources and propose a methodology for an outpatient surgery fee schedule to be considered by the DWC Administrative Director.
• A fee schedule which covers outpatient surgery facility fees should be implemented in the California workers’ compensation system and a fee schedule which covers emergency room facility fees should also be considered.

CHSWC research has demonstrated and the workers’ compensation community has expressed concern that significant numbers of injured workers in California do not return to work as early as feasible, nor do they return to work with appropriate work restrictions. In "OSHA Durations Report: Return to Work by State, Industry, Age", recently published by the Work Loss Data Institute, twenty-seven percent of 1999 days-away-from-work cases in California had 31 or more days-away-from-work, the third-worst record in the nation.

These workers experience unnecessary and often permanent losses in their functional capacity and their ability to work. Employers lose valuable employees and incur increased costs. CHSWC’s study comparing wage loss and return to work rates found that California has the lowest return to work rate of the five states studied.

CHSWC recommends

• Focusing on returning the injured worker to the same or alternate job with the same employer, and
• Considering increasing incentives for returning permanently disabled workers to jobs with the same employer.

CHSWC and the community are concerned about the timeliness of workers’ compensation benefit delivery. The DWC audits for the last five years found violations of timeliness requirements regarding the issuance of:

• First temporary disability payments
• Workers’ compensation benefit notices.
• Qualified Medical Examiner (QME) notices.
• Notices of vocational rehabilitation eligibility
• Payment or an objection to bills for medical treatment.
• Payment or an objection to medical-legal bills.

CHSWC urges the community to focus efforts on the timely delivery of proper benefits to injured workers, taking into account the new audit provisions of AB 749.

The permanent disability rating system is critical to the distribution of workers’ compensation benefits. However, it is widely viewed throughout the community as inconsistent and unreliable. CHSWC’s research by RAND has confirmed this.

The ongoing CHSWC Permanent Disability project by RAND is working on a detailed evaluation of the disability rating schedule in order to provide empirical findings that can guide a revision that will be consistent with the economic losses experienced by permanently disabled workers.

CHSWC recommends that the permanent disability rating tool be improved to enhance consistency and outcomes for injured workers.

California faces major challenges in occupational health and safety:

• In 2000, according to the Division of Labor Statistics and Research, there were an estimated 790,000 non-fatal occupational injuries and illnesses and 550 fatal occupational injuries in California.
• California’s workplaces are changing rapidly -- characterized by: shifts from manufacturing to services, shorter job tenures, reduced security and an increase in temporary and contract workers.
• California’s workforce is becoming more diverse in language and culture and is increasingly aging.
• There is limited funding for conducting research in occupational health and safety.
• There is not a systematic process for identifying priority areas that require occupational health research.

These changes present new challenges to protecting worker safety and health and reducing the impact of work injuries on workers, their families, and society. CHSWC is responding to the above challenges with projects that demonstrate its commitment to occupational health and safety. A very important component will be the Worker Occupational Safety and Health Training and Education Program mandated by AB 749.

CHSWC is pleased to participate with the community in several cooperative endeavors to enhance workplace health and safety and looks forward to developing the new training and education program in the same manner.

CHSWC recommends that the promotion of occupational health and safety be seen as an important goal and urges the workers’ compensation community to continue demonstrating a commitment to its furtherance.

The State of California has a very diverse population with 32% Hispanic, 48% White and 13% Asian. California also has a large immigrant population with one in four residents born abroad. Many immigrants work in dangerous occupations.

Previous CHSWC studies have demonstrated that workers often have trouble understanding, navigating, and obtaining prompt benefits from the complex health, safety and workers’ compensation systems. Special populations such as immigrant workers face particular impediments due to immigration status, lack of health insurance, cultural barriers and language difficulties.

Several upcoming and ongoing projects address this issue, including the analysis of barriers to low wage workers and the AB 749 mandates for a Workers’ Occupational Safety and Health Training Program and a study of the access to workers’ compensation funds by migrant and seasonal farmworkers.

CHSWC recommends that the workers’ compensation community support research and workplace efforts to enhance safety and health of special populations such as

• Young workers,
• Immigrant workers,
• Low-wage workers,
• Migrant and seasonal workers, and
• Workers with special needs.

Considerable progress has been made in improving workplace health and safety since the initiation of OSHA in 1970. This progress has largely been based on the science and knowledge generated by occupational safety and health research. However, resources for occupational safety and health research are extremely limited. There is thus a great need to focus and coordinate existing resources more systematically, and to seek expanded resources for occupational health research.

CHSWC recommends that a California Occupational Research Agenda be established to

• Identify and fund priority research areas in which new information is needed to guide interventions to prevent occupational injuries and related disability;
• Enhance tracking of occupational injury, illness, and hazards in order to help prioritize research and intervention efforts, and to evaluate the effectiveness of interventions;
• Ensure that research findings are disseminated and implemented.

CHSWC supports the implementation of CORA in the following manner:

• Stakeholders need to participate in CORA, through ongoing involvement in developing a research agenda that addresses the needs of both workers and employers.
• Research must be peer-reviewed to ensure its integrity and credibility.
• Research results need to be provided in an understandable way.
• Ongoing evaluation of research findings and project implementation is essential.

The Division of Workers’ Compensation/Workers’ Compensation Appeals Board (DWC/WCAB) judicial function has been the focus of criticism by all parties in the system. Lack of uniform policies and an inadequate infrastructure have led to serious system problems.

DIR and CHSWC agreed that an independent study and evaluation of the DWC judicial process would be very helpful in addressing problems. The Commission approved a study proposal to identify possible statutory changes to make the system work more efficiently and look at rules and practices of other jurisdictions that have addressed problems such as calendaring, casefile movement, proper staffing ratios, and other issues of concern. The goal of this effort is to assist in meeting the Constitutional mandate to "accomplish substantial justice in all cases expeditiously, inexpensively, and without incumbrance of any character…"

CHSWC sponsored research by RAND into the judicial functions of the WCAB inquired into the sources of excessive delay and unnecessary costs in resolving matters before the WCAB, of the non-uniform application of the law by individual WCAB offices and judges, of dissatisfaction with the process by litigants, attorneys, and staff, and of issues related to upper-level management and administration.

CHSWC recommends that consideration be given to implementing recommendations derived from this study.

CHSWC is developing plans to monitor and evaluate the implementation of AB 749 and its impact on the system and encourages that the community continue its cooperative participation in these endeavors.

CHSWC recommends that the community work together to develop and implement tools and systems and establish baseline measurements to evaluate the impact of the provisions of AB 749. With baseline and updated data, policy makers and the community would have better information on which to evaluate the outcomes for workers and employers of the AB 749 changes.

CHSWC and the workers’ compensation community recognize that fraud can occur at every stage and in every sector of the workers’ compensation system and that there is currently a need for more balance, focus and coordination with respect to anti-fraud activities.

CHSWC recommends that anti-fraud efforts be directed at all types of fraud and that the community continue efforts to identify and reduce fraudulent activities perpetrated by anyone and everyone in the system, including but not limited to employers, employees, insurers, and providers.

CHSWC recommends that the Division of Workers’ Compensation provide an information pamphlet for injured workers that has, among other things, complete information about the general types of workers’ compensation fraud, including how to avoid it, how to recognize it, and how to report it.

CHSWC recommends that the primary targets of fraud program budgets and resources be medical provider fraud and employer premium fraud due to their economic impact. The fraud program should also continue to remain vigilant in investigating claimant fraud and be more responsive to allegations of employer and insurer fraud in connection with the reporting and handling of injury claims.

CHSWC recommends that the Fraud Division and district attorneys take steps to publicize the methods for filing reports of suspected employer and insurer fraud and should publicly document the number and outcome of the reports.

CHSWC recommends that the Fraud Division work with insurance company Special Investigation Units (SIU), as well as self-insured employers and third party administrators, to insure that all cases involving suspected fraud within the organization itself are referred to law enforcement authorities for investigation.

CHSWC recommends that further review be conducted on the role of insurer special investigation units in reporting suspected workers’ compensation fraud.

CHSWC recommends that full restitution to the victims of workers’ compensation fraud be made a more important aspect of the anti-fraud program.

CHSWC recommends that private and public employees be encouraged to report suspected fraudulent activities and to cooperate in the investigation of those activities.

CHSWC recommends that, to the extent permitted by law and regulation, private and public agencies share information that may assist in the detection and investigation of suspected fraud.

CHSWC recommends that a roundtable be convened to determine the feasibility in California of providing a publicly accessible database of insurance coverage and suggested legislative language. California could make proof of workers’ compensation insurance coverage available to the public on its website, as do other states such as Texas, Florida, and Mississippi. Overall, these databases have been widely supported by the workers’ compensation stakeholders and throughout the community in those states.

THE COMMISSION ON HEALTH AND SAFETY AND WORKER'S COMPENSATION

The Commission on Health and Safety and Workers’ Compensation (CHSWC) was created by the workers' compensation reform legislation of 1993. The Commission is charged with overseeing the health and safety and workers' compensation systems in California and recommending administrative or legislative modifications to improve their operation. CHSWC was established to conduct a continuing examination of the workers' compensation system and of the state's activities to prevent industrial injuries and occupational diseases and to examine those programs in other states.

The Commission is composed of eight members appointed by the Governor, Senate, and Assembly to represent employers and labor.

Since its inception in 1994, the Commission has directed its efforts towards projects and studies designed to identify and assess problems and to provide an empirical basis for recommendations and/or further investigations. The Commission strives to ensure objectivity, incorporate a balance of viewpoints, and produce the highest quality analyses and evaluation. To assist in these objectives, it utilizes independent researchers with broad experience and highly respected qualifications to carry out its research.

CHSWC activities involve the whole community – employees and employers, labor organizations, insurers, attorneys, medical and rehabilitation providers, administrators, educators, government agencies and members of the public. These individuals and organizations have participated in CHSWC meetings, fact-finding hearings and have served on advisory committees to assist CHSWC and independent researchers on projects and studies.

CHSWC projects have dealt with several major areas, including informational services to injured workers, alternative workers’ compensation systems, employers that are illegally uninsured for workers’ compensation, the health and safety of young workers, and the impact of the reform legislation on the medical-legal process and the vocational rehabilitation program.

The most extensive and potentially far-reaching project undertaken by the Commission is the ongoing study of workers’ compensation permanent disability in California. Incorporating public fact-finding hearings and discussions with studies by RAND, the CHSWC project is dealing with major policy issues regarding the way that California workers are compensated for permanent disability incurred on the job.

In its oversight capacity, CHSWC focuses on various aspects of the workers’ compensation system in response to concerns raised. These include multi-jurisdictional areas such as anti-fraud activities as well as certain operations of the Division of Workers’ Compensation such as the lien case workload in DWC’s district offices. At the joint request of the Senate Industrial Relations Committee and the Assembly Insurance Committee, the Commission has undertaken a study of the operations and effectiveness of the DWC audit program.

These concerted efforts, combining rigorous analytical approaches with real world data and experience, have yielded insightful findings on important programs. The Commission’s recommendations for system improvements are based upon the results of these activities.

The common goal of all the parties in these efforts is to achieve a system that delivers the proper benefits to injured workers in a prompt and cost-effective manner.

ABOUT CHSWC....

Jill Dulich is Regional Director responsible for management of workers' compensation and general liability for Marriott International, Inc., operations in California and Hawaii. She also serves in high-level positions with several organizations, including the California Self-Insurers Association, the Alliance of Workers' Comp Professionals, the Californians for Compensation Reform, the Self-Insurers Security Fund, and the Easter Seals Society of Southern California. Jill Dulich received her law degree from Western State University, College of Law in Fullerton, California. Ms. Dulich also received a Bachelor of Science Degree and Masters Degree in Education from California Polytechnic State University in San Luis Obispo, California.

Kristen Schwenkmeyer
Appointed by: Senate Rules Committee

Kristen Schwenkmeyer is Secretary-Treasurer of Gordon & Schwenkmeyer, a telemarketing firm she started with Mike Gordon in March of 1985. Her primary responsibilities include overall administration of operations, budgeting and personnel for a staff of over 700. Prior to her current position, she was Political Director of the California Democratic Party from 1983-1985. Previously, she has served as staff aide to Supervisory Ralph Clark of the Orange County Board of Supervisors and Senator John Glenn in Washington DC. Kristen Schwenkmeyer received a Bachelor of Arts in Political Science from the University of California, Santa Barbara.

Robert B. Steinberg
Appointed by: Speaker of the Assembly

Robert B. Steinberg is a partner in the law offices of Rose, Klein & Marias and specializes in employee injury, third Party Civil Damage Construction, Product Liability, Asbestos and Toxic Exposure litigation. He is a fellow of the American College of Trial Lawyers (ACTL), a member of the Board of Governors Association of Trial Lawyers of America (ATLA), an advocate of the American Board of Trial Advocates (ABOTA), and trustee of the Asbestos Litigation Group (ALG). He is a Past President of the California Trial Lawyers (CTLA) (1985) and Past Trustee of the Los Angeles County Bar Association (1987). He is a member of the Manville, UNR, 48 Insulation, Raymark and Eagle Picher Industries Chapter 11 Creditors' Committees and a member of the Trustee Advisory committee to the Manville, UNR and the National Gypsum Asbestos Disease Victims Trusts. Mr. Steinberg received his law degree and Bachelor of Science Degree from University of California, Los Angeles.

John C. Wilson
2001 CHSWC Chair
Appointed by:  Governor

John C. Wilson is the Executive Director of the Schools Excess Liability Fund (SELF), a statewide Joint Powers Authority with over 1,100 California educational agencies as members. Mr. Wilson held positions with several organizations, including the California Chamber of Commerce, Californians for Compensation Reform, California Self-Insurers Security Fund, California Institute for Public Risk Analysis, Northern California Council of Self-Insurers, and gubernatorial appointment to the Fraud Assessment Commission.  Previously, Mr. Wilson was Assistant Treasurer and Risk Manager for DiGiorgio Corporation in San Francisco.  He was also an Industrial Hygiene, Safety Representative and Administrator for Rockwell International, Space Division of the self- funded Workers' Compensation Program covering 30,000 employees involved in the Apollo and Saturn ll space programs.  Mr. Wilson received his Bachelor of Science Degree in Personnel Management and Industrial Relations from UCLA.

Allen Davenport
Appointed by:  Speaker of the Assembly

Allen Davenport is the Director of Government Relations for the Service Employees International Union California State Council.  A union member since 1971, Allen also was for seven years the chief consultant on employment security programs—unemployment insurance, disability insurance, and job training—on the staff of the state Senate Industrial Relations Committee. Allen serves on the Advisory Committee for the Workers’ Compensation Information System and was a member of the Governing Board of the Workers’ Compensation Insurance Rating Bureau.  He is a former Peace Corps volunteer and a graduate of San Francisco State University.

Leonard McLeod
Appointed by: Governor

Leonard McLeod is a Lieutenant at the California Correctional Training Facility at Soledad and has worked for the Department of Corrections since 1981. He also serves as the Early Intervention State Coordinator/State Finance Chairman with the California Correctional Peace Officers Association. Previously, he was police officer with the Watsonville Police Department and a U.S. Army military police sergeant from 1974 to 1978. Mr. McLeod was a member of the Governor's Task force on Workers' Compensation in 1993. He also is a member of the  Correctional Peace Officer Foundation, and Corrections USA. He is currently a member of the governing board of the Workers' Compensation Insurance Rating Bureau. His community activities include serving as a member of the City of Salinas Police Community Advisory Committee, supporting Salinas Police Activities League, and raising funds for prenatal and health care related issues.

Tom Rankin
2002 CHSWC Chair
Appointed by: Senate Rules Committee

Tom Rankin is the President of the California Labor Federation, the state AFL-CIO federation. For many years, Mr. Rankin also served as the labor member on the Governing Committee of the Workers' Compensation Insurance Rating Bureau, which recommends policy premium rates to the state insurance commissioner. Mr. Rankin's previous employment was as a union representative and organizer. Mr. Rankin received his law degree from Boalt Hall School of Law at the University of California, Berkeley.

Darrel “Shorty” Thacker
Appointed by: Governor

Darrel “Shorty” Thacker is the Central District Manager for the Northern California Carpenters’ Regional Council. Mr. Thacker also served as the Director of field support operations for the Bay Counties District Council of Carpenters and as the Senior Business Representative of Local 22, Carpenters.

State of California
Health and Safety and Workers' Compensation Functions

The California Commission on Health and Safety and Workers’ Compensation (pdf 59kb)

For Information about CHSWC and its Activities

Write:

            California Commission on Health and Safety and Workers’ Compensation
            455 Golden Gate Avenue, 10^th Floor
            San Francisco, California 94102

           Check out www.dir.ca.gov/chswc for

• Reports of CHSWC studies and projects
• Information bulletins
• Meeting notices
• Workers’ Compensation Fact Sheets
• Workers’ Compensation Video

CHSWC Publications

    CHSWC Annual Reports
            1994-95 through 2000-01

    Assembly Bill 749 Analysis
            "CHSWC and AB 749" (2002

    Audit Program
            "CHSWC Report on the Workers’ Compensation Audit Function" (1998)
            "Executive Summary-CHSWC Study of the Division of Workers’ Compensation Audit Function" (1998)

    Baseball Arbitration
            "Preliminary Evidence on the Implementation of 'Baseball Arbitration' in Workers' Compensation" (1999)

    Carve-Outs
         "Carve-outs" in Workers' Compensation: An Analysis of Experience in the California Construction Industry" (1999)

    Costs and Benefits
            "CHSWC Report on Costs and Benefits After the Implementation of Reform Legislation" (1999) (This is also in the CHSWC 1998-99 Annual Report)
            Workers’ Compensation Benefit Simulation Model (CHSWC Distribution CD, 2001)
            "Executive Summary Impact of the 1993 Reforms on Payments of Temporary and Permanent Disability" (1999)
            "Summary: Estimating the Workers’ Compensation Reform Impact on Employer Costs and Employee Benefits" (1999)

    Fraud
            "Workers’ Compensation Anti-Fraud Activities - Report on CHSWC Public Fact-Finding Hearing" (1997)
            "Report on the Campaign Against Workers’ Compensation Fraud" (2000)
            "Report on the Workers’ Compensation Anti-Fraud Program" (2001)

    Health and Safety
            "Report on the Proceedings of the California Forum for Workplace Health and Safety" (Publication pending)

    Illegally Uninsured Employers
            "Issue Paper-Employers Illegally Uninsured for Workers’ Compensation" (1997)
            "CHSWC Recommendations to Identify Illegally Uninsured Employers and Bring Them Into Compliance" (1998)
            "Illegally Uninsured Employers Project-Report of Legislative Roundtable Meeting" (1999)

    Injured Workers
            "Navigating the California Workers’ Compensation System: The Injured Workers’ Experience" (1996)
            "Recommendations: Information for Injured Workers" (2000)
            "Project to Improve Laws and Regulations Governing Information for Workers" (December 2000)
            "Project to Augment, Evaluate, and Encourage Distribution of the Prototype Educational Materials for Workers" (December 2000)

    Insurance Industry
            "State of the Workers’ Compensation Insurance Industry in California" (April 2002)

    Inpatient Hospital Fee Schedule and Outpatient Surgery Study
            "CHSWC Summary – Findings and Recommendations to the Inpatient Hospital Fee Schedule and Outpatient Surgery Study, Report Approved February 8, 2002"
            "Inpatient Hospital Fee Schedule and Outpatient Surgery Study, Report Released February 8, 2002"

    Judicial Study
            "Improving The Courts: Candidate Recommendations For The Adjudication of Claims Before The California Workers’ Compensation Appeals Board" (September 6, 2001)

    Labor Code Section 5814 Issue
            "Issue Paper on Labor Code Section 5814" (2000)
            "Background Paper on Labor Code Section 5814" (1999)

    Medical-Legal
            "Evaluating the Reforms of the Medical-Legal Process Using the WCIRB Permanent Disability Survey" (1997) and "Executive Summary" (1997)

    Permanent Disability Study Report (RAND)
            RAND Report: "Compensating Permanent Workplace Injuries – A Study of the California System" (1998)
            RAND Executive Summary: "Findings and Recommendations on California’s Permanent Partial Disability System" (1997)
            RAND Report: "Permanent Disability, Private Self-Insured – A Study of Earnings Loss, Replacement, and Return-to-Work for Workers’ Compensation Claimants" (2000)
            RAND Report: "Impact of Economic Conditions on Wage Loss for Disabling Workplace Injuries in California: The Role of Economic Conditions (2001)

    Pharmaceutical Costs Study
            "Study of the Cost of Pharmaceuticals in Workers’ Compensation" (2000)
            "Executive Summary of the Study of the Cost of Pharmaceuticals in Workers’ Compensation" (2000)

    Return to Work
            "Return-to-Work in California: Listening to Stakeholders’ Voices" (2001)
            "Does Modified Work Facilitate Return to Work for Temporarily or Permanently Disabled Workers? Review of the Literature and Annotated Bibliography" (1997)
            "Determinants of Return-to-Work and Duration of Disabling after Work Related Injury or Illness: Developing a Research Agenda"

    Treating Physician Report
            "Report on the Quality of Treating Physician Reports and Cost-Benefit of Presumption in Favor of the Treating Physician" (1999)

    Vocational Rehabilitation Interim Report
            "Interim Report - Vocational Rehabilitation Benefit: An Analysis of Costs, Characteristics, and the Impact of 1993 Reforms" (1997)
            "Vocational Rehabilitation Reform Evaluation" (2000)

    Young Worker Report
            "Protecting and Educating California's Young Workers: Report and Recommendations of the California Study Group on Young Workers' Health and Safety" (1998)

    Workers’ Compensation and the California Economy
            "Workers’ Compensation and the California Economy" (April 2000)
            "Update Workers’ Compensation and the California Economy" (December 2000)

CHSWC Informational Materials
       
    CHSWC Brochure (containing information about the CHSWC members and staff, mission, purpose, activities, projects, publications, web site)

        CHSWC Fact Sheets (English and Spanish) (1998)
           What Every Worker Should Know
            After You Get Hurt on the Job
            Temporary Disability Benefits
            Permanent Disability Benefits
            For More Information
            Working After a Job Injury
            Hurt on the Job? Information Alert for Teens
            Facts for Employer: Safer Jobs for Teens (English only)
             Are You a Working Teen?
            Are You a Teen Working in Agriculture?

CHSWC Video
      "Introduction to Workers' Compensation" (1998)

Workers’ Compensation Benefit Simulation Model
      A CD with the ‘Workers’ Compensation Benefit Simulation Model’ and instructions for its use is available for purchase from CHSWC.

SPECIAL REPORT:  2002 WORKERS' COMPENSATION REFORMS

PLEASE NOTE that the following provisions are in the February 19, 2002 chaptered version of AB 749, and may be further modified in a subsequent 'clean-up' bill.

BENEFITS – PRE 2002 REFORMS

Temporary Disability Benefits

• The temporary disability benefits are adjusted systematically and periodically in most states to address the effects of inflation, but not in California.
• The maximum temporary disability weekly benefit in California was last increased in 1996 to $490.

Permanent Disability Benefits

• The pre-reform benefits (as of 2002) for various percentages of permanent disability are shown in the following chart:

• Permanent disability benefit payment levels have been adjusted several times. However, the impact of the increases since 1991 for the majority of PD recipients have been more than offset by the effect of inflation on the value of the benefit.
• As shown in the chart below, the value of the permanent partial disability benefit has lost over a quarter of its value in the last 17 years. This has been most seriously felt by the over 40% of permanent disability participants who receive ratings under 15%. For this group of lower rated claims, the inflation-adjusted value of the benefit is 57% of what was paid in 1984.

Also, CHSWC studies by RAND examined pre-2002 reform benefits at insured and self-insured firms in California. These studies showed that Injured workers were not compensated well for their losses. In particular:

• In California firms, PPD claimants experienced large and sustained earnings losses over the five years following injury. For those who suffer from permanent partial disabilities, the replacement of lost wages over a 10-year period remains below one-half of earnings lost.
• Workers with the highest rated indemnity claims at insured and self-insured firms had large uncompensated wage losses over the first five years after injury.
• Economic conditions partially determine long-term outcomes for injured workers. In the 1991-1995, the effect of changing economic conditions was greatest for the least severely disabled claimants. The fact that employers recognized they could control the costs of workers' compensation by increasing their use of "return to work" policies and rehiring more disabled workers also played a significant role in improving outcomes for injured workers.
• Although injured workers in the aggregate fared better in the mid-1990s, workers injured today are likely to be worse off than workers injured in the mid-1990s. Benefits have remained fixed in nominal terms since 1996, and have actually declined in real terms due to inflation.

AB 749 provided increases in the temporary disability, permanent disability, and death benefits. The weekly payment was increased for temporary and permanent disability, and the lower-rated permanent disabilities received an increase in the number of weeks that the PD benefit is paid.

These changes are illustrated in the following chart:

Calculations by UC Berkeley

Source: WCIRB, Department of Finance and UC Berkeley

Source: WCIRB, Department of Finance and UC Berkeley

Background

There has been an ongoing debate in workers’ compensation over the operation of the judicial process. The Department of Industrial Relations (DIR), the Division of Workers’ Compensation (DWC) and the Commission believed that an independent study and evaluation of the DWC judicial process would be very helpful in addressing problems such as: delay in resolving cases and inconsistent policies and procedures.

At the urging of DWC and others in the workers’ compensation community, CHSWC voted to engage in a major study and evaluation of the DWC judicial function. The RAND Institute for Civil Justice was chosen to perform this research by a competitive proposal and bidding process and began the project in October 2000.

Phase 2

Conducted case studies of six representative courts (Los Angeles, Pomona, Sacramento, San Bernardino, Stockton, and Van Nuys). The case studies involved:

• Performing a Judicial time study: Researchers tracked judges’ entire time spent in carrying out their duties in order to understand what judges’ do and in what types of cases.
• Conducting site visits which included interviews with judges, attorneys, support staff and members of the workers’ compensation community
• Sampling of 900 typical cases

Throughout the process stakeholder input was solicited through:

• Talking to injured worker advocacy groups, applicant’s attorneys, defense attorneys, state bar, insurers, employers, lien holders
• Placing requests for public contributions in all local offices
• Establishing external website

• Circulating candidate recommendations for comment
• Holding public roundtables in Southern (Van Nuys) and Northern (San Francisco) California

The following is a summary of some of the key findings from the study:

Delays

• As depicted in the following chart, problems of delays remain serious although there has been some improvement over the last years
• The most important cause of delay from request to conference is the shortage of clerks. The shortage of clerks and other support staff results in significant backlog at calendar clerk’s desk and in the processing of incoming mail.
• Other causes of delay include:

Inconsistencies

Absence of clear criteria for judicial decisions outside trial is a key source of inconsistencies.

• Decision-making at trial has many safe guards not found in traditional civil courts. But outside the trial, criteria to be used by judges are not clearly articulated, particularly for:

• Multiple sources of authority (Labor Code, Board Rules, Administrative Director Rules, Policy & Procedural Manual, official forms) sometimes fail to address this problem and sometimes confuses the situation even more

Administrative Costs

Cost of litigation are increased by failure to prepare for a initial conference

• Parties arrive at the initial conference (Mandatory Settlement Conference) to review case for the first time
• Often ask for and receive continuance or off-calendar order on problem "discovered" at the conference

Recommendations

• Give Highest Priority to Hiring and Keeping Clerks

• Clerks carry on the core business of the DWC’s Claims Adjudication Unit
• Their salaries should reflect the level of their responsibilities

• Improve Judicial Training and Monitoring.

• Training should focus on efficient case management, not case law.
• Presiding judges should reduce their own caseload in order to manage other judges, audit case files, "walk the corridors"

• Improve Trial Management Practices

• Improve Trial Scheduling Practices

• When there are routine problems in completing scheduled trials in a timely manner: shift to morning-start only trial calendars,
• Reassess current practice of estimating length of trial

• Reduce Frequency of Repeat Continuances

• Every continuance or order taking off-calendar should be seen as an opportunity for effective case management
• No such order should be granted without recording reasons and specifying: date of return, tasks to be accomplished

• Unify Standards Across Sources of Authority To Improve Consistency

In May 2002, DWC reported that the following actions have been taken pursuant to the DWC judicial system study recommendations.

A committee was formed and held about 15 meetings to discuss proposed changes to the Board’s Rules of Practice and Procedure. The committee is now in the process of getting everything ready to submit to the Office of Administrative Law (OAL) with the intention of having a public hearing in August 2002.

Proposed rule changes based upon RAND’s recommendations include:

• Allowing reassignment of cases on the day of trial,
• Requiring that different judges handle the MSC and trial,
• Establishing uniform walk-through procedures, and
• Establishing lien procedures including a requirement that lien claimants be available by telephone at the time of conferences.

Details of the proposed changes to the regulations and comments from the workers’ compensation community and the public may be viewed on the online DWC/WCAB Forum at www.dir.ca.gov/WCJudicial.htm.

The Division is also working on a Clerical Training Manual, a job audit for potential reclassifications, and an analysis to determine an appropriate judge to clerk ratio. DWC has commenced the development of training manuals for Office Services Supervisors and Senior Legal Typists.

SPECIAL REPORT:   THE CALIFORNIA
WORKERS' COMPENSATION INSURANCE INDUSTRY

Advisory Workers' Compensation Pure Premium Rates

Combined Loss and Expense Ratios

The accident year combined loss and expense ratio, which measures workers’ compensation claims payments and administrative expenses against earned premium has been increasing greatly since 1993. In accident year 2001, insurers’ claim costs and expenses amounted to $1.32 for every dollar of premium they collected – and that was an improvement over the record high of $1.74 noted in 1999. However, the ratios seen in the past several years (as shown in the graph below) are the highest ever recorded by the industry since WCIRB began collecting data.

The loss ratio for 2001 represents the lowest accident-year loss ratio since 1995, the first year since the repeal of the minimum rate law went into effect in California. According to WCIRB, this improvement in the loss ratio since the previous year is a function of higher insurance premium rates, rather than an improvement in loss experience.

Furthermore, a serious under-reserving of claims was noted. As of December 31, 2000, the WCIRB estimated that the amount of statewide reported reserves were $7.1 billion below the estimated ultimate cost of incurred claims.

According to many, these unprecedented results are explained, at least in part, by inadequate pricing due to an extremely competitive insurance market. According to WCIRB, for most of the second-half of the 1990’s insurers were, on average, pricing their policies well below the pure premium rate level. (Pure premium rates provide only for losses and loss adjustment expenses and include no provision for other insurer expenses.)

At the same time that premiums and claim frequency were declining, the total amount insurers paid on indemnity claims jumped sharply due to increases in the average cost of an indemnity claim, which rose dramatically during the late 1990s. According to the WCIRB, both average indemnity and medical claim costs have shown increases over the last several years, as shown on the following graph.

The WCIRB predicts that the average cost of a 2001 indemnity claim will be $43,317, which is up 11% since 2000 and 101% since 1995.

Please note that the WCIRB’s estimates of average indemnity claim costs have not been indexed to take into account wage increase and medical inflation.

A number of California insurers left the market or reduced their writings as a result of the decrease in profitability, contributing to a major redistribution of market share among insurers since 1993, as shown in the following chart.

Source: Workers’ Compensation Insurance Rating Bureau of California

Currently, several insurance companies are experiencing problems with payment of claims. According to WCIRB, fifteen independent insurer/insurer groups, which collectively wrote over one-quarter of the total California market in 1994, are under regulatory action by the Department of Insurance.

As indicated in the following listing, Superior National and other insurance companies have been liquidated while some insurance companies have been placed under regulatory supervision by the Department of Insurance:

1. Superior National Group (in California liquidation), including

• California Compensation Insurance Company
• Combined Benefits Insurance Company
• Superior National Insurance Company
• Superior Pacific Casualty Company

2. HIH Insurance Ltd. (under California liquidation)

• HIH America Compensation and Liability Company
• Great States Insurance Company

3. Fremont Compensation Insurance Group (under California regulatory supervision)

• Fremont Compensation Insurance Company
• Fremont Industrial Indemnity Company

4. Credit General Group (under Ohio liquidation)

• Credit General Indemnity Company
• Credit General Insurance Company

5. Reliance National Indemnity Company group (under Pennsylvania liquidation), including

• Reliance Insurance Company
• United Pacific Insurance Company
• Reliance National Insurance Company
• Reliance National Indemnity Company

6. Sable Insurance Company (under California liquidation)
   Sable is a wholly owned subsidiary of Sable Insurance Holding Company, which in turn is owned by Reliance National Indemnity Company

7. Frontier Pacific Insurance Company (under California liquidation)
   Frontier Pacific Insurance Company is part of the Frontier Pacific Group whose stock ceased trading due to big losses.

8. PHICO Insurance Company (under Pennsylvania liquidation)

9. Legion and Villanova Insurance Companies (under Pennsylvania rehabilitation)
   The companies are part of the Legion Insurance Group

10. PAULA Insurance Company (under California conservation)
     The company is part of the PAULA Insurance Group

11. Highlands Insurance Group (under Texas regulatory supervision)
      Some companies doing business in California are part of the Highlands Insurance Group

Prevention of Financial Insolvency

The American Insurance Association cited several mechanisms already in place (listed below) that give the Insurance Commissioner some tools to protect the solvency of the insurance system. However, there are differing opinions as to the applicability and effectiveness of these statutory and regulatory provisions relating to the Department of Insurance:

1. Authority over the adequacy of the aggregate reserves of an insurer (Insurance Code §§ 923.5 and 11558) and regulations that provide, in part, "The minimum reserve requirements prescribed in Section 11558 shall be increased whenever the Commissioner determines that the computations set forth in Section 11558 are inadequate as provided by Section 11557."
2. Authority to require insurers to increase reserves whenever reserves "seem inadequate." (Insurance Code § 11557)
3. Authority to require insurers to provide additional accounting or actuarial information regarding its financial condition whenever the insurer appears to require immediate regulatory attention. The additional accounting or actuarial supplementary information may be at such intervals as the Commissioner may require and must come from such accountants or actuaries as are satisfactory to the Commissioner. (Insurance Code § 925)
4. Authority to require an insurer to stop any conduct that would render the company insolvent. (Insurance Code § 1065.1)
5. Insurance Code §§ 739 et seq. provides an oversight mechanism, Risk-Based Capital (RBC). RBC is a tool that allows the Department to review a number of critical components of an insurers operations to determine whether its financial condition warrants regulatory intervention.
6. Insurance Code §11732 provides that: "(r)ates shall not, if continued in use, tend to impair or threaten the solvency of an insurer or tend to create a monopoly in the market." Some conclude that this only allows intervention in the rates of an insurer when the insurer is faced with impending (if not actual) insolvency. Others believe that the CDI does have significant authority within the overall solvency regulation scheme in the Insurance Code to allow early intervention in an insurer's rate making when its other financial indicators, such as loss ratios, reserve adequacy, and loss development, are adequately reviewed and analyzed.

After a company is determined to be financially distressed, the California Department of Insurance conserves, rehabilitates or liquidates those licensed California insurance companies under appointment by the courts. If the company is experiencing financial difficulties, the California Department of Insurance can place the company under:

• Regulatory Supervision – The Insurance Commissioner issues an order to place the company under oversight which involves a person from CDI monitoring the company’s distribution of assets. At this stage the company is still operating itself.

• Conservation - The Commissioner applies to the Superior Court of California for a conservation order to place a financially troubled company in conservatorship. Under conservation, the Commissioner takes possession of all of the company’s books, records, property, and assets, and conducts, as conservator, the business of that company as the commissioner sees appropriate. According to Norris Clark, Chief of the Financial Surveillance Branch of the California Department of Insurance, the standard for conservation includes failure to provide the books and records for examination, operating in financially hazardous conditions or being found to be insolvent (when a company’s minimum capital requirement is impaired).

• Liquidation - If it appears at the conservation stage or at a later time that the company cannot be saved, then the Insurance Commissioner applies for a court order to liquidate the company. When a liquidation order is issued, the insurance company is closed and the process of selling the company’s remaining assets begins. The goal of liquidation is to use the money acquired from selling the company’s assets and from reinsurance and other collections to pay off the company’s debts and outstanding insurance claims.

The California Insurance Guarantee Association (CIGA) was established in 1969, in part, to meet the obligations of insolvent workers’ compensation insurers by administering and disbursing covered claims. Each insurer, in order to conduct business in the state, is required to participate in CIGA, a fund from which insureds and claimants could obtain financial and legal assistance in the event insurers became insolvent.

When an insurer is declared insolvent, CIGA assures payments of claim liabilities. Unlike other claims covered by CIGA, the insurance guarantee association pays 100 percent of benefits on workers’ compensation claims. The valuation of each proof of claim is determined in accordance with policy provisions and statutory requirements.

CIGA derives the funds to pay claim liabilities through assessments levied against member companies, through distributions from the estates of the insolvent insurers and investment income. The insurers are then permitted to recoup their CIGA assessments by surcharging their policyholders.

Between 1969 and 2000, CIGA reports that it paid out an average of $51 million per year. Prior to September 2000, CIGA had a surplus of $290 million in its workers’ compensation account.

In its "Current Situation Report" issued June 4, 2002, CIGA reports that it has been in "precarious financial condition" since the Superior National Companies were liquidated in September 2000. Since that time CIGA has paid out almost $741 million on claims for those companies alone, and since October 2001, CIGA has paid out $72 million to cover the insolvency of the Reliance Insurance Company. This "has nearly exhausted CIGA’s available cash to pay workers’ compensation claims."

According to CIGA, there are currently over 10 workers’ compensation insurance companies have been liquidated since September 2000. CIGA's total cash drain from all current insolvencies has grown to about $76.4 million per month, of which over $54 million is for workers’ compensation.

In September 2001,California Governor Gray Davis signed into law Assembly Bill 1183, which allowed CIGA to raise the assessment on workers’ compensation insurers through September 12, 2002 from not more than 1 percent to not more than 2 percent of net direct premiums written.

However, according to CIGA, the short-term 2% assessment may not be enough to cover all claim liabilities. At the current pay out rate, CIGA estimates that it will run out of funds for workers’ compensation payments in April 2002.

In February 2002, Assembly Bill 2007 (Calderon) was introduced which would establish the assessment permanently at not more than 2% of net direct premiums written. AB 2007 passed the Assembly and a hearing was scheduled for June 19, 2002 before the Senate Insurance Committee.

Until additional funding can be obtained, as of May 31, 2002 CIGA has negotiated a line of credit and has begun borrowing $33.5 million in order to continue paying workers’ compensation benefits.

CHSWC Informal Hearing on the State of the Workers’ Compensation Insurance Industry in California

The situations described above and at the urging of the community, CHSWC held an informal hearing on the state of the workers’ compensation insurance industry as part of its February 8, 2002 meeting in San Francisco. Several representatives from throughout the workers’ compensation community participated and shared their views, including

Summaries of their testimony are included in the CHSWC background paper entitled "State of the California Workers’ Compensation Insurance Industry" available at http://www.dir.ca.gov/CHSWC/allreports.html.

CHSWC and the community have expressed concerns regarding the current and future solvency of the California insurance industry. The viability of the insurance industry is vital to maintaining the health of the workers’ compensation system, which benefits both workers and employers.

CHSWC recommends that efforts be expended to:

• Stabilize the workers’ compensation insurance market as soon as possible.
• Identify the impact of the insurance industry’s current financial crisis on the employers and employees.
• Determine the consequences of loss of competitiveness.

Further areas of study may include, but are limited to, the following:

Possible Research Areas

1. Review and assess the effectiveness of current regulations regarding the prevention of and recovery from insurer insolvencies so that injured workers are assured timely and proper benefits.
2. Explore whether the California Department of Insurance (CDI) should move towards a "rate adequacy" standard and whether this standard would be effective in preventing insurance companies’ insolvencies.
3. Assess the problems that the insurance industry is currently faced with and their impact on timeliness of payments to injured workers.
4. Analyze other states' approaches to improving competition through other methods such as dispersal of information or verifying insurance coverage, and their applicability to California.
5. Review the recommendations of the Workers' Compensation Rate Study Commission and determine their relevancy today.
6. Review the literature on open rating and exclusive state funds.
7. Identify key indicators to be utilized to conduct an ongoing evaluation of the insurance industry to prevent future insolvencies and sustain the viability of a healthy insurance market.

CHSWC is beginning to establish the framework for understanding the workers’ compensation medical benefit delivery system.

Recent estimates indicate that the system wide medical payments are approximately $4.4 billion [1] which are broken down in the chart below.

• Medical payments to physicians were the largest from the categories indicated in the chart below, totaling $2.6 billion. Next were payments to hospitals, to patients directly and to pharmacies, totaling $1.1 billion, $320.6 million, and $311.8 million respectively.

• The Workers’ Compensation Insurance Rating Bureau of California (WCIRB) reports that the total 2001 Medical Costs for insured employers is $3.2 billion, representing approximately 48% of the total indemnity and medical payments for that year.

• Workers’ Compensation Reform Legislation 1989 and 1993

• Costs of medical benefits were 157% of national average in 1989-90.
• Reforms passed in 1989 and 1993 were designed to address a system which had high frequency of claims and high costs for employers, including medical and medical-legal costs

• Workers’ Compensation Medical Care

• In California, injured workers are entitled to receive all medical care reasonably required to cure or relieve the effects of the injury, with no deductible or co-payments by the injured worker.
• Generally, the employer controls the medical treatment for the first 30 days after the injury is reported, and the employee is then free to select any treating physician or facility. However, if the employee has notified the employer prior to the injury that he or she has a "personal physician" -- a physician or surgeon who has previously treated the employee -- the employee may be treated by that physician from the date of injury. Choice of treating physician differs, however, if the employer and employee have opted for a managed care program.
• In California, the Health Care Organization (HCO) program, established by the 1993 Workers’ Compensation reform package, expanded the use of managed care techniques in the workers’ compensation system. This was viewed as a means of reducing medical costs and facilitating better management of workers’ compensation cases.

Evidence of Higher Cost for Workers’ Compensation Medical Treatment in California

Estimates are that medical treatment costs are 50% to 100% higher in workers’ compensation than treatment within the employment-based, health benefit arena. This impacts labor in the form of lower wages and reduced employment and employers in the form of lower revenue and reduced profits.

CHSWC studies of the California system have found that

• Workers’ compensation, on average, reimbursed 50% more than Medi-Cal pharmaceuticals.
• Workers’ compensation paid 40-45% more than employer health plan benefits for the same drugs, even ignoring the 5-30% rebates that large health plans receive from pharmaceutical manufacturers.
• Across all diagnostic related groups (DRG), charged amounts for workers’ compensation hospital admissions were 4% higher ($26,072) compared with charges for group health admissions ($25,047). However, paid amounts averaged 30% higher ($9,637) for workers’ compensation in-patient admissions than for group health admissions ($7,428).
• After the adoption of the Inpatient Hospital Fee Schedule (IHFS) by the Division of Workers’ Compensation, paid amounts averaged 50% higher ($12,459) for workers’ compensation spine-related admissions compared with for group health spine-related admissions ($8,280).
• In spite of equivalent charges and lower resource intensity, reimbursement for workers’ compensation hospital admissions was significantly higher than for Medicare admissions.
• There is currently no fee schedule for outpatient ambulatory surgical facility fees. The CHSWC Inpatient Hospital Fee Schedule and Outpatient Surgery Study analyzed 14,017 outpatient surgical procedures. The researchers found that charges are highly variable for outpatient facility fees for a given procedure. According to the study, if the workers’ compensation outpatient facility fees were re-priced using Medicare’s ASCs (Ambulatory Surgical Centers) Fee Schedule, it would result in an 88% reduction off the original billed amount.
  

California and other states have adopted various strategies to contain medical costs in their workers’ compensation system, including mandated bill review, institution of fee schedules, and establishment of managed care. Some states have adopted more stringent requirements for use of these strategies (e.g.,’ mandating’ as opposed to ‘regulating’ managed care).

Some of the cost-containment strategies in California are managed care, fee schedules, utilization review, and treatment guidelines.

Managed Care

• Managed care in California is regulated, which means that payers can provide health care to injured workers under managed care arrangements, but those arrangements must conform to the rules governing managed care. Employees in California have the choice of enrolling in the managed care plan or pre-designating their own provider.
• In California, Health Care Organizations (HCOs) provide medical care to employees with job-related injuries or illnesses in a managed care setting. Insurance carriers and self-insured employers may contract with a certified HCO. An employer in an HCO gains additional medical control over the care of the injured employee, ranging between 90 days (if no group health insurance coverage is offered) to 365 days (if the employee’s provider of non-occupational healthcare is also in the HCO network). As of January 1, 2003, the range of medical control will be from 90 to 180 days.

Fee Schedules

• Currently, California has an Official Medical Fee Schedule (OMFS), which establishes reasonable maximum reimbursement levels for medical services and includes services for health care facilities and pharmaceuticals.
• Fee schedules set fees based on relative values, combined with state-defined conversion factors.
• AB 749, which becomes effective January 1, 2003, enables the Administrative Director of the California DWC to develop an Outpatient Surgical Facility Fee Schedule and revise the current Pharmaceutical Fee Schedule (in the OMFS).

According to the Division of Workers’ Compensation’s study of utilization review,

• UR was formally introduced into the California workers’ compensation system in 1993, with the adoption of legislation that mandated the administrative director to "adopt model utilization protocols in order to provide utilization review standards", and required all insurers to comply with this protocol.
• California law requires that employers pay for all medical care that is "reasonably required to cure or relieve from the effects of the injury." UR is intended to provide a structured process for making determinations regarding whether or not particular medical services meet the statutory definitions of care for which the employer is liable.
• In California, managed care organizations are required to perform utilization reviews.

Treatment Guidelines

• In California, Treatment Guidelines were developed by the Industrial Medical Council (IMC) as parameters to assist physicians, injured workers, and members of the workers' compensation community in making decisions about appropriate health care for the most common industrial injuries.
• The initial guidelines were "evidence-based" and produced through contract with researchers at the University of California San Francisco Medical School and were modified during the state’s public hearing process. There are treatment guidelines for Asthma,Dermatitis, Elbow, Hand and Wrist, Knee, Neck, Low Back, Post Traumatic Stress Disorder, and Shoulder.

Currently, the information with regard to the medical care received by industrially injured workers in California is limited, particularly with regard to:

1. Quality and appropriateness of care
2. Access to services
3. Understanding costs
4. Comparability of the prices charged by providers to other states or to nonoccupational services
5. Baseline data on these and other indicators
6. Policy tools and effective models for medical benefit delivery

CHSWC, DIR, DWC and IMC are responding to these needs by proposing to host and coordinate a research colloquium focused on the medical benefit delivery system and return to work. The Colloquium will include a presentation of a series of papers that would inform the public and the workers’ compensation community. In addition, it is envisioned that there will be panel discussions addressing issues raised.

In the Spring of 2002, Colloquium planning meetings will be held to determine topics and identify speakers.

Possible topics to be presented at the Colloquium may include, but are not necessarily limited to:

• Medical care trends in California’s Workers’ Compensation health care which would include an overview of data on medical cost trends, service types, and provider patterns
• Evidence on effectiveness of policy levers such as:

• Fee Schedules
• Utilization review
• Networks
• Control/choice of provider

• Methods for improving/measuring quality of care including:

• Making the business case for employer/insurer purchasing high quality care
• Ensuring accountability of providers, plans
• Performance measurements needed to evaluate quality such as provider report cards

• Access to Treatment including:

• Access to initial treatment and specialists
• Access by special populations

• Medical Care and Return to Work including

• The role of the physician in return to work and injury prevention
• Impact of medical care on return to work.

• Patient Satisfaction

In 2003, CHSWC, DIR, DWC and IMC plan to host a 2-day Colloquium of researchers and other key policy stakeholders to discuss the papers developed for this purpose and methods for improving the workers’ compensation medical delivery and return to work in California. CHSWC and DIR will disseminate research findings, indicators and recommendations from the Colloquium.

AB 749 directed CHSWC to provide ongoing advice on workers’ compensation medical care. The DWC administrative director, in consultation with CHSWC and others, must conduct a study of medical treatment provided to injured workers covering the rising costs and utilization of medical treatment, case management, ways to attain early and sustained return to work, physician utilization, quality of care, outcome measurement, and patient satisfaction.

Labor Code Section 4612 established three-year pilot programs of 24-hour health care in California to test the administrative efficiencies, cost control potential, and service capabilities of having a single system provide health care for occupational and non-occupational injuries and illnesses. Implemented in 1994 with the participation of five employers in San Diego County, the pilot once included over 65 employers in four counties.

The 24-hour health care pilot project was terminated as of December 31, 1997. DWC issued an interim report in March 1997, which stated that a final report would include analyses of claims filings and costs, patient outcomes and satisfaction, and employer satisfaction. In December 2000, DWC issued a report entitled "Injured Worker Satisfaction with Care in a 24-Hour Program". This study demonstrated no significant differences in patient satisfaction with care or emotional or functional outcomes in injured workers receiving usual care versus 24 hour care.

For further information...
      DWC’s reports may be viewed at www.dir.ca.gov. Select ‘workers’ compensation’, then ‘Division of Workers’ Compensation’, then ‘Medical/HCO’ (under ‘DWC/WCAB Organization and Offices’).

The Health Care Organization (HCO) program, established by the 1993 Workers’ Compensation reform package, expanded the use of managed care techniques in the workers’ compensation system. This was viewed as a means of reducing medical costs and facilitating better management of workers’ compensation cases.

HCOs provide medical care to employees with job-related injuries or illnesses in a managed care setting. Insurance carriers and self-insured employers may contract with a certified HCO as a way of reducing workers’ compensation costs while at the same time helping to ensure that injured workers receive quality medical care for their injuries.

Under the initial program, an employer in an HCO gains additional medical control over the care of the injured employee, ranging between 90 days (if no group health insurance coverage is offered) to 365 days (if the employee’s provider of non-occupational healthcare is also in the HCO network).

Fee Schedules

The Official Medical Fee Schedule in use in 1993 was criticized as outdated because it did not cover many common procedures and did not apply to pharmaceutical or hospital charges. The reform legislation directed DWC to update the schedule to address those concerns. Labor Code §5307.1 requires the Administrative Director to adopt and revise a medical fee schedule every two years.

The Division of Workers’ Compensation last updated the Official Medical Fee Schedule (OMFS) by adopting changes to the schedule effective April 1, 1999. The In-Patient Fee Schedule and changes to the Medical Legal Fee Schedule were adopted and implemented as part of the overall package of medical regulations. These fee schedules are for services provided on or after April 1, 1999.

DWC is planning to propose an RBRVS-based Official Medical Fee Schedule. DWC believes that adoption of an RBRVS-based OMFS will achieve two very important goals. First, it will create a fee schedule that is more grounded in the work that medical providers actually do, using relative values that are determined in a process which allows considerable input from the provider community. Second, it will allow DWC to utilize the work of others in revisions of the OMFS, thus increasing the efficiency and timeliness of the revision process.

While the RBRVS-based changes are being developed, DWC recommended an interim revision of the OMFS. This ‘clean-up’, technical revision of the OMFS was submitted to the Office of Administrative Law in April 2002.

The Industrial Medical Council continues its support of the restructuring of the OMFS. Building on a study conducted with the UCLA Center for Health Policy Research, the IMC sponsored a series of studies with the Lewin Group to evaluate issues surrounding adoption of the federal Resource-Based Relative Value Scale (RBRVS).

The first study undertaken by the Lewin Group provides an analysis of the impact of a budget neutral conversion to the RBRVS on medical specialties and medical service categories. It examines options for implementing the RBRVS and for adopting geographic adjustment factors and indexing the conversion factor to an appropriate economic indicator. Two related but separate studies will provide the data to determine whether to modify the RBRVS for use in the workers’ compensation setting. The first study will examine the difference between physician work for Evaluation and Management codes in the workers’ compensation and non-workers’ compensation settings. A second study would examine the difference in practice expenses for these codes. In addition, the IMC is working with the DWC to update the OMFS ground rules for this major biennial revision of the fee schedule.

The Official Medical Fee Schedule was updated effective April 1, 1999 and included an Inpatient Hospital Fee Schedule, or IHFS.

The IHFS takes into account cost and service differentials for various types of facilities based on the federal Medicare Fee Schedule. As in Medicare, reimbursement for each hospital differs depending on a number of factors that have an impact on the hospital’s costs and services. Since the implementation of the IHFS, the Division of Workers’ Compensation has received several letters from hospitals and physicians expressing their dissatisfaction with the current IHFS.

Two changes made to the hospital fee schedule, both of which were adopted on June 29, 2001 and were to sunset on December 31, 2001, have been extended until a new fee schedule is adopted. The first allows for the costs of surgical implantables for DRGs 496-500 to be paid for separately from the DRG overall rate. DWC adopted a "Rule 100" change that extended the sunset date for the implantable hardware payment supplement. The second change revises payments for outlier cases in certain high cost procedures in which the hospital's true costs are significantly above the norm for that specific procedure at that hospital.

For further information…
      See the CHSWC Project Section of this Annual Report:  ‘Inpatient Hospital Fee Schedule and Outpatient Surgery Study’
        The latest information on fee schedules may be obtained at www.dir.ca.gov. Select ‘workers’ compensation’, then ‘Division of Workers’ Compensation’, then ‘Medical/HCO’
        Check out www.dir.ca.gov/chswc for CHSWC reports and the latest information.

For further information…
    See the CHSWC Project Section of this Annual Report: ‘Inpatient Hospital Fee Schedule and Outpatient Surgery Study’
     The latest information on fee schedules may be obtained at www.dir.ca.gov. Select ‘workers’ compensation’, then ‘Division of Workers’ Compensation’, then ‘Medical/HCO’.Check out www.dir.ca.gov/chswc for CHSWC reports and the latest information.

Utilization Review Regulations

For further information…
      The latest information on the utilization review standards may be obtained at www.dir.ca.gov. Select ‘workers’ compensation’, then ‘Division of Workers’ Compensation’, then ‘Medical/HCO’ (under the heading ‘DWC/WCAB Organization and Offices’).
        DWC Report: ‘Utilization Review in California’s Workers’ Compensation System: A Preliminary Assessment’ (2001) [Available at www.dir.ca.gov/DWC]

Medical-Legal Evaluations

For further information…
      CHSWC Report: ‘Preliminary Evidence on the Implementation of Baseball Arbitration’ (1999) [Available at www.dir.ca.gov/chswc]

Treating Physician Presumption

For further information…
     See the project synopsis in this section of this Annual Report.  Update on Treating Physician Study
       CHSWC Report: "Report on the Quality of the Treating Physician Reports and the Cost-Benefit of Presumption in Favor of the Treating Physician" (1999) [Available at www.dir.ca.gov/chswc]

Reforms instituted in 1993 that advanced the role of the treating physician in the medical-legal process and granted the opinions of the treating physician a presumption of correctness were expected to reduce the average number of reports even more. Earlier CHSWC reports evaluating the treating physician did not find that these reforms had significant affect on the average number of reports per claim.

Source: Workers’ Compensation Insurance Rating Bureau of California, PD Survey

Source: Workers’ Compensation Insurance Rating Bureau of California

Average Cost per Medical-Legal Exam

There are two reasons why the average cost per exam has declined by 27% since its peak in 1990. First, substantial changes were made to the structure of the Medical-Legal Fee Schedule that reduced the rates at which exams are reimbursed. These restrictions were introduced in early 1993 and enforced after the start of August 1993.

Second, during this period, the average cost of exams was also being affected by the frequency of psychiatric exams. On average, psychiatric exams are the most expensive exam by specialty of provider. The relative portion of all exams that are psychiatric exams has declined since hitting a high in 1990-91, leading to a substantial improvement in the overall average cost/exam.

Since the mid-1990s, the cost of the average medical legal report has increased by 20% even though the reimbursement under the Official Medical-Legal Fee Schedule has remained unchanged since 1993. The revised WCIRB PD Survey includes additional questions that allow us to explore some of the potential causes of this increase in costs. The changes allow us to examine various types of Fee Schedule classifications as well as geography. However, we cannot examine these issues for injury years before 1997.

The survey data show that, on average, reports done in Southern California have always been substantially more expensive. In addition, the average cost has been rising in the south while the cost in the other regions has been flat. Cost increases in the average cost are being driven by claims in Southern California.

Further analysis indicates that it is not that the cost driver for the Southern California trend is not the price paid for specific types of exams. Rather, the mix of codes under which the reports are billed has changed to include a higher percentage of the most complex and expensive exams and fewer of the least expensive type. The following table shows the cost and description from the Medical-Legal Fee Schedule.

Another possible explanation for the differing trends in average cost per report and the increasing frequency of the most complex exams in Southern California is that psychiatric evaluations are more common in Southern California. In addition, while percent of PPD claims with psychiatric evaluations has declined in the other two regions between 1997 and 1999, this was not true in the south. Psychiatric exams are nearly always billed under the ML-104 code which is the most expensive.

During the 1990’s the cost of medical legal exams has seen dramatic improvement. For the insured community, the total cost of medical-legal exams performed on PPD claims by 40 months after the beginning of the accident year has declined from a high of $418 million in 1990 to an estimated $42 million for injuries occurring in 1998. This is an 89% decline since the beginning of the decade.

Sources of Improvement in Medical-Legal Costs

The decline in total medical-legal costs for insurers reflects improvements in all components of the cost structure during the 1990s.

As discussed in the previous sections, this substantial decline in total medical-legal costs for insurers results from significant decreases in all of the components of the cost structure.

The following chart shows how the cost savings break down by component since the beginning of the decade.

• Over half (54%) of the cost savings is due to improvements in the medical-legal process that reduced the number of exams performed per claim.
• Sixteen percent of the improvement is due to changes to the medical-legal fee schedule and treatment of psychiatric claims that reduced the average cost of exams per claim.
• Thirty percent of the improvement is a result of the overall decline in the frequency of reported PPD claims.

Source: Workers’ Compensation Insurance Rating Bureau of California

WORKPLACE SAFETY AND HEALTH

The 1993 reforms of the California workers compensation system required Cal/OSHA to focus its consultative and compliance resources on "employers in high hazardous industries with the highest incidence of preventable occupational injuries and illnesses and workers compensation losses".

The High Hazard Employer Program (HHEP) is designed to:

• Identify employers in hazardous industries with the highest incidence of preventable occupational injuries and illnesses and workers compensation losses;
• Offer and provide consultative assistance to these employers to eliminate preventable injuries and illnesses and workers compensation losses;
• Inspect those employers on a random basis to verify that they have made appropriate changes in their health and safety programs;
• Develop appropriate educational materials and model programs to aid employers in maintaining a safe and healthful workplace.

In 1999, the passage of AB 1655 gave DIR the statutory authority to levy and collect assessments from employers to support the Targeted Inspection and Consultation Programs on an annual basis without "sunset".

DOSH reports that in 2001, 663 employers were provided on-site high hazard consultative assistance. During consultation with these employers, 4,336 Title 8 violations were observed and corrected as a result of the provision of consultative assistance. Since 1994, 5,100 employers have been provided direct on-site consultative assistance, and 24,401 Title 8 violations have been observed and corrected.

Beginning in 2000, the efficacy of high hazard consultative assistance is assessed through measurement of a high hazard employer's Lost Work Day Case Incidence Rate (LWDI) and an employer's Experience Modification Rating (ExMOD).

For employers who were provided high hazard consultative assistance in 1999 and surveyed in 2001 (n=393), 114 employers responded with detailed information from their Log 200 Record of Occupational Injuries and Illnesses to calculate their Lost Work Day Incidence Rate (LWDI) for the three years prior to the consultative assistance intervention and for the year following the intervention. The average LWDI for this 1999 cohort, the average LWDI decreased by 22% (from 6.82 to 5.33). For the same cohort, the 2001 experience modification rating (ExMOD) of 114 employers was obtained from the Workers' Compensation Rating Bureau (WCIRB) and compared to the ExMOD for the year prior to the consultative assistance intervention. The average ExMOD for this 1998 cohort decreased from decreased by 25% (from 216 to 162).

High Hazard Enforcement Program

DOSH reports that in 2001, 401 employers underwent a high hazard enforcement inspection. During these inspections, 1,650 violations were observed and cited. Since 1994, 3,296 employers have undergone a high hazard enforcement inspection, and 16,002 violations have been observed and cited. Of these violations, 41.12% were classified as "serious."

The Division of Occupational Safety and Health reports that for a series of six cohorts of employers who underwent high hazard enforcement inspections during the years 1994 through 1999, detailed information from their Log 200 Record of Occupational Injuries and Illnesses was used to calculate their Lost Work Day Incidence Rate (LWDI) for the year in which the enforcement inspection took place (baseline), and for each subsequent year up to and including 2000 (except for the 1994 cohort). The cumulative percent change in the LWDI for each of the six cohorts (except the 1995 cohort) indicates that inspected employers' LWDI decreased by anywhere from 20% (for 1999 cohort) to 68% (for 1996 cohort) and by a total of 32% for all cohorts.

For further information…
       The latest information may be obtained at http://www.dir.ca.gov/DOSH/EnforcementPage.htmselect ‘Targeted Inspection/Consultation Programs - 2002 Report’ under "Enforcement Reports".

The 1993 reform legislation required insurers to provide certified loss control consultation services to help high-hazard employers reduce their incidence of industrial injury. The Loss Control Certification Unit (LCCU) was established in the Division of Occupational Safety and Health (DOSH) to certify the loss control capabilities of insurers.

For further information…
      See the CHSWC Projects section in this Annual Report:   Workers Occupational Safety and Health Training and Education Program

Ergonomics Standard

For further information…
      The latest information may be obtained at www.dir.ca.gov. Select ‘Occupational Safety & Health, then ‘Occupational Safety & Health Standards Board’.

For further information…
         DWC Report: "2001 Audits – A Report to the California Legislature on Claims Handling Practices of Workers’ Compensation Administrators" (2002)
         CHSWC Report on the Division of Workers’ Compensation Audit Function (1998) - available at www.dir.ca.gov/chswc

For further information…
         The latest information on carve outs may be obtained at www.dir.ca.gov. Select ‘workers’ compensation’, then ‘Division of Workers’ Compensation’, then ‘Construction Industry Carve-Out Programs’ (under ‘DWC/WCAB Organization and Offices’).
        CHSWC Report: "Carve-Outs" in Workers’ Compensation: An Analysis of Experience in the California Construction Industry (1999) [Available at www.dir.ca.gov/CHSWC/chswc.html]