THE CONSTRUCTION CARVE-OUT PROGRAM

A REPORT OF ACTIVITIES IN
CALENDAR YEAR 1995

CASEY L. YOUNG
Administrative Director
Division of Workers' Compensation

July 1996

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

TABLE OF CONTENTS

Summary

An Overview of the Carve-Out Program

The Carve-Out Participants

Number of Employees Covered

The Data

Analysis of the Claims Data

Data Concerning ADR

Data Concerning Vocational Rehabilitation and Light Duty Programs

Data Concerning Safety History

Commentary

Appendices (not included in this online edition of the report)

Summary

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

The report covers the first full calendar year -- 1995 -- of the program established by Labor Code Section 3201.5, commonly known as "the carve-out". The program allows unions and employers engaged in construction to create alternatives to the traditional, state-supervised workers' compensation system. Most important, it allows collective bargaining agreements to establish exclusive lists of medical providers and examiners and to establish alternative dispute resolution systems that bypass the state workers' compensation referees.

This report is based on aggregated data from 242 California employers. Together, these employers reported 6,885,221 personhours of labor and $157,599,775 in wages to employees covered by Section 3201.5. They reported 543 claims filed in 1995. Aggregate incurred losses for these claims were $3,634,952.

Although the program is young and there is not yet much data, it appears that the carve-out agreements are promising.

In future reports, after substantially more experience is gained, we should be able to offer more a definitive analysis of the issues posed about the effect of this new program on participants.

An Overview of the Carve-out Program

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

The statute gives the parties leeway to establish the kind of alternative system they want -- but there are two important limits: (1) the agreement may not diminish injured workers' entitlement to compensation payments, and (2) the final step of the "alternative dispute resolution system" [ADR] must be appeal to the 7-member Workers' Compensation Appeals Board [WCAB].

The carve-out program was first established in 1993 by SB 983, authored by Senator Leroy Greene. It was modeled on a similar experiment in Massachusetts, where Bechtel and the Pioneer Valley Building and Construction Trades Council had a collective bargaining agreement governing a single construction project.(1)

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

Established employers and unions in the construction industry did not at first join the carve-out program.

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

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

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

A copy of the current text of Labor Code Section 3201.5 may be found in Appendix 1.

Regulations implementing section 3201.5 are at 8 California Code of Regulations, Section 10200 - 10204. They may be found in Appendix 2.

The Carve-Out Participants

Through the end of 1995, DWC received nine applications for letters of eligibility. Seven were granted. One application, from an out-of-state promoter, was never completed. One application was still pending at the end of the year.

The seven approved programs(2) are:

Number of Employees Covered

Project Labor Agreements (4) The Hemet Reservoir and Los Vaqueros agreements cover all construction employees, regardless of the employer, who work at any time on the covered project. The projects will use different workers -- and different numbers of workers -- during different phases of the construction. It is therefore difficult to state the number of employers or employees covered at any one time. One project will use approximately 1500 workers during the entire construction. The other project will use somewhere between 750 and 1000 workers at various times.

Single Employer Agreements The Cherne and TIMEC agreements are between a single union and a single contractor. The Cherne agreements cover two particular projects. The TIMEC agreement covers TIMEC employees on whatever project they might be working on. Approximately 2000 employees are potentially covered by each agreement.

Multi-employer Agreements The Electrical Workers, Carpenters and Pipe Trades agreements are between groups of unions and multi-employer bargaining groups. In a multi-employer bargaining group, each member/employer is bound by the underlying collective bargaining agreement concerning wages, hours, job categories, etc. There is a separate carve-out agreement. Signing this separate carve-out agreement is optional: each employer decides whether or not to join the carve-out program.(5) In 1995, 216 employers were covered by one of these three multi-employer carve-out agreements. Since many of these employers are quite small, and since their work forces fluctuate greatly during the year, it is virtually impossible to state how many employees were covered by the agreements. These three carve-outs reported 5,529,761 personhours in 1995.

One of the seven agreements has no ADR component, but consists only of an exclusive list of medical providers and evaluators.

Another of the seven carve-out programs has received a letter of eligibility, but has not yet implemented their program. The data on which this report is based comes only from the six active carve-out programs.

The Data

Labor Code Sections 3201.5(i) and (j) require the administrative director to collect a variety of data from carve-out employers -- payroll, personhours worked, number of claims filed, average cost per claim, etc. -- and to make a report to the Legislature based on the aggregated data. To implement these sections, DWC promulgated 8 Cal.Code Regs. Section 10203, requiring employers to report information to the administrative director on a standard form. Appendix 3 is a sample reporting form.

There are six active carve-out programs. DWC has received data from all 242 employers participating in those programs. As shown in Table 1, they report a total of 6,885,221 personhours in 1995, and a total payroll of $157,599,775. They report 543 claims filed in 1995 and incurred costs of $3,634,952.

To supplement the data, DWC staff conducted informal interviews with insurers, administrators, and unions participating in the program.

Table 1

Summary of Claims Data(6)

Number of Employers 242
Total Personhours6,885,221
Total Payroll$157,599,775
Total Claims543
Total Incurred Costs$3,634,952

Table 2

Claim Frequency and Average Costs Among Six California Carve-out Programs (1995)

Program
(Each program is
identified here by letter, rather than name, to protect confidentiality)
Number of Claims per 100 Employees*Number of Claims per $1 Million Payroll Average Incurred Cost per ClaimNumber of Indemnity Claims per 100 Employees Number of Indemnity Claims** per $1 Million Payroll Average Incurred Cost per Indemnity Claim
A25.954.70$1,831 2.83 0.51$14,683
B15.384.05$1,4761.81 0.48$7,757
C16.453.31$5,9605.29 1.06$17,408
D 15.723.38$6,4995.13 1.10$19,267
E16.625.01$11,27011.08 3.34$16,710
F8.121.92$19,2397.11 1.68 $21,938
TOTAL15.773.47$6,694 5.401.19$18,904

Table 3 shows the components of paid and incurred(7) losses for the 543 claims filed in 1995. There were 357 medical-only claims and 186 claims for indemnity:(8)

Table 3

Cost Components for Claims Filed in Calendar Year 1995(9)

ExpensePaid Amount Incurred Amount Number of Claims
Medical Only $115,716 $ 118,728 357
Indemnity 186
Temporary Disability 353,204 523,875
Permanent Disability 62,371 626,476
Life Pension0 0
Death Benefits 29,632 629,384
Vocational Rehab. 12,841 160,399
Medical559,834 1,550,931
Medical-legal6,666 25,159
Total Indemnity1,024,548 3,516,224
GRAND TOTAL 1,140,264 3,634,952 543

Table 3 does not include the insurers' operating expenses. Anecdotally, one insurer told us that its operating expenses were approximately 2/3 lower in the carve-out program than in its usual workers' compensation business. The insurer attributed this, in part, to the almost complete absence of defense attorney costs.

Table 3 also does not include the costs of operating the ADR process itself -- the ombudsperson's fees and costs, mediator's fees, and so on. Under current programs, the ADR process is administered by, or under the supervision of, a joint labor-management committee or trust. The process is funded by the employers. Employers pay a fee to the trust equal to 1&1/2 or 2% of the insurance premium, or several cents per personhour worked.

It should also be noted that the 543 claims were all filed in 1995. They are all relatively young claims. As claims become older, incurred costs tend to rise, though it is impossible to estimate how much they will rise.

Table 4

Comparison of Incurred to Expected Losses Among Six California Carve-out Programs (1995)

ProgramPayroll Incurred Losses* Incurred Losses per $100 of PayrollExpected Losses** Ratio of Incurred to Expected Losses
A$0.86 $6.90 0.12
B$0.56$3.79 0.15
C$1.97 $5.71 0.34
D$2.20 $3.20 0.69
E$5.36$8.970.60
F$3.73$8.640.43
Total$157,599,775$3,634,952$2.31 $3.92 ***0.59

Analysis of the Claims Data

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

To answer this question, we compiled Table 4, which compares incurred and "expected" losses of the carve-out employers.

On the 543 claims, there were incurred losses of $3,634,952. Table 4, Column 4, shows incurred losses per $100 in payroll for each of the six active carve-out programs. In aggregate, the six programs incurred $2.31 for every $100 in payroll. (This included three very large claims that together accounted for approximately $1,000,000 in incurred losses.)

How does the figure of $2.31 compare to incurred losses of all employers engaged in construction? Table 4 provides "benchmarks" for each carve-out program, based on WCIRB "pure premium rates".

Each year WCIRB publishes "pure premium rates" for every job classification in the state.(10)) These rates reflect the losses predicted for every $100 in payroll, plus an amount for "loss adjustment expenses".(11) Loss adjustment expenses constituted 20.1% of the pure premium rate in 1995. For instance, the pure premium rate for ironworkers on buildings over two stories (Classification #5040) is 14.40. A hypothetical employer who hires ironworkers to erect a steel frame would expect to incur $14.40 in losses for every $100 in payroll, of which $11.52 would be incurred for benefits and $2.88 for loss adjustment expenses. Pure premium rates vary according to the hazards of the job. For instance, the rate for lath installers (#5443) is 8.08; the rate for elevator workers (#5160) is 3.09.

In Table 4, Column 5, we have calculated a benchmark for each of the six active carve-out programs. They are calculated by weighting the payroll in each job classification, multiplying by the pure premium for each classification, and subtracting loss adjustment expenses. For example, if a particular carve-out program had 60% of its payroll in Classification X, with a pure premium rate of 3.00, and 40% of its payroll in Classification Y, with a pure premium rate of 10.00, the weighted average pure premium for that program would be (.60)(3.00) + (.40)(10.00) = 5.80. Of the 5.80, 20.1% is for loss adjustment expenses (1.16) and 79.9% is for incurred benefit costs (4.63). The benchmark for that hypothetical carve-out program is $4.63. This is roughly what one might predict as incurred losses for that carve-out program per $100 payroll. It is important to note, however, that this does not take into account other factors that might affect individual employers, such as their own safety practices or claims history. Indeed, an employer's loss experience may be consistently much better or worse than the loss experience of all employers in the classification.

Table 4, Column 6, shows the ratio between the incurred losses for each carve-out program and the benchmark for each carve-out program. All six active carve-out programs incurred losses well below the benchmark. In aggregate, incurred losses were 59% of what the pure premium rates would predict.

In other words, it appears that losses in the carve-out program were lower than would be expected of other construction employers.

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

This report is based on only 6,885,221 personhours. That is equivalent to only 3442 full-time employees -- a pool that may be too small to provide reliable statistical data. Furthermore, there were two deaths among these employees and one catastrophic injury. These three incidents alone accounted for approximately $1,000,000 in incurred costs, perhaps skewing the figures presented here. As the number of carve-out employers increases in the future, the statistical pool will expand and the figures presented will be more reliable.

Despite the limitations of the data, we are inclined to think that the low figures are not mere happenstance. Note that losses were low in all six programs. If the loss figures were randomly distributed, one would expect to see some programs showing higher than expected losses and some showing less.

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

This question could in theory be answered in a number of ways. One way would be to examine the loss history of each carve-out employer. Was the ratio of incurred to expected losses higher, lower, or the same when one compares experience in the carve-out with earlier, pre-carve-out years? Unfortunately, this comparison is not easy to make. First of all, some important carve-out employers have no loss history: some agreements relate only to particular projects rather than ongoing business in the construction trade. Secondly, the data here is reported by calendar year. Previous experience is reported by employers to the WCIRB by policy year, making comparisons difficult. Furthermore, in the carve-out program, employers have one insurance policy for carve-out employees and another for non-carve-out employees; but in previous years, a single policy covered all employees. Comparison is possible, but would require lengthy and expensive manipulation of data.

Despite these difficulties, we hope in future reports to make these comparisons, at least on a sample basis. For the present, we cannot say whether carve-out employers were already experiencing low losses.

Were low losses due to carve-out employers discouraging the filing of claims?

Carve-out employees filed 543 claims in 1995, equivalent to 15.77 claims for every 100 employees. It is difficult to find an exact comparison for this figure among non-carve-out employees. The California Division of Labor Statistics and Research reports that in 1994 -- the last calendar year for which it has statistics -- there were 12.0 non-fatal occupational injuries and illnesses per 100 employees in the construction industry as a whole. These figures come from injuries and illnesses reported by employers on federal OSHA forms. They are not precisely equivalent to workers' compensation claims, since some injuries might be reported on the OSHA form but not give rise to a claim. Conversely, an employee might file a claim for an injury not reported to OSHA. Nonetheless, there seems to be a rough equivalence between the number of injuries and illnesses that might be expected per 100 employees (12.0) and the number of claims being filed (15.77).

It appears that the carve-out program does not achieve its savings by discouraging the filing of claims.

This tentative conclusion is reinforced by the informal comments we have heard from carve-out participants. Carve-out administrators and insurers have told us that when the carve-out programs were set up, they made an effort to inform employees of the new system. There was an educational outreach effort, which made employees more aware of their rights. Further, with an ombudsperson readily available, workers were quickly and reliably informed about how to file a claim. The result (we are told informally) was that carve-out employees tended to file somewhat more claims than usual.

Data Concerning ADR

Both labor and management indicate that one of their chief aims in participating in the carve-out program is to replace the state's cumbersome and lengthy dispute resolution system with one that is simpler and faster. Of the six active carve-out programs in California, five have alternative dispute resolution [ADR] systems.

The five ADR programs in California are similar, but have some differences. All five start with an "ombudsperson" -- a neutral person who is available to all parties. The ombudsperson is supposed to resolve disputes at an early stage, or even before they arise. If the ombudsperson is unsuccessful in resolving the dispute, either party may move the matter to the next step, which is typically formal mediation by an outside neutral. Some programs use a joint labor-management committee at this point. If mediation is unsuccessful, the parties turn to an outside, neutral arbitrator -- typically a retired workers' compensation referee. By statute, the decision of the arbitrator may be appealed to the 7-member Workers' Compensation Appeals Board (Labor Code Section 3201.5(a)(1)). For the five active carve-out programs with ADR, there were 519 claims filed in 1995. 386 of these claims were "resolved" in 1995. The remainder were "unresolved" at the end of the year. Unfortunately, there was considerable confusion among the parties about the meaning of "resolved" and "unresolved."(12) Despite the confusion, however, several facts are clear:

According to the administrators and insurers reporting these figures, a very large majority of these were "unresolved" only in the sense that the case was still open on December 31. None had reached even as far as mediation during 1995.

Only three employees subject to an ADR system filed applications for adjudication with the WCAB in 1995. Of these, one application was dismissed for lack of jurisdiction because of the carve-out. Two others are still pending but are inactive. There was no litigation in the courts concerning any carve-out claim or program.

It appears that the carve-out program has, at least initially, been successful in reducing formal dispute over claims.

Data Concerning Vocational Rehabilitation and Light Duty Programs

In aggregate, employers reported 11 employees participating in vocational rehabilitation and 17 employees participating in light-duty programs. No statistically valid conclusions can yet be reached from these early figures.

Section 3201.5 permits the parties to establish "a vocational rehabilitation or retraining program utilizing an agreed list of providers of rehabilitation services that may be the exclusive source of providers of rehabilitation services under this division." All carve-out programs utilize exclusive lists of rehabilitation providers; but none has yet established a rehabilitation or retraining program beyond the use of agreed providers.

Data Concerning Safety History

Statistics on safety history proved difficult to obtain. Regulations require employers to report to DWC "the number of injuries and illnesses reported on the United States Department of Labor OSHA Form No. 200 for those employees covered by the 3201.5 provision." (8 CCR 10203(b)(15).) Since Form 200 itself does not distinguish between those employees covered by the carve-out and those who are not, each employer had to re-count all injuries and illnesses. This was difficult to do -- and in fact many employers did not make the required report to DWC. In preparation for future reports to the Legislature, we will work more closely with employers to collect information on safety history.

Commentary

Because of the newness of the program and the scantiness of the data collected in the first year, we conducted informal interviews with many of the ombudspersons, unions, and insurers involved. (We did not interview employers or injured workers, but hope to do so in the future.) These informal interviews provided information that is merely anecdotal, but perhaps of some value and interest. The commentaries that follow are based on this information.

Medical Programs

Section 3201.5 permits the parties to establish exclusive lists of medical providers and evaluators. All seven programs establish such lists. In six of the seven programs, the injured worker may select a provider from the exclusive list. In one of the programs, the employer selects the provider. Several carve-out programs began with the use of broad medical lists, including the workers' general health care providers.

Three unions told us that, in their opinion, the exclusive lists of medical providers in their respective programs were at least initially skewed toward the defense. One union indicated it had no experience in choosing doctors for the treatment of industrial injuries, and so it trusted the insurer to create a panel. The union plans to expand the medical list in the next round of negotiations. Another union has already negotiated for a new and greatly expanded list.

The Role of the Ombudsperson

All the ADR agreements make use of an ombudsperson. The ombudsperson is always the first step in the ADR process -- the first person who might resolve conflicts or potential conflicts. The ombudsperson's role is that of a neutral who represents no party or interest and has no stake in any case. Ombudspersons, insurers and unions all indicated to us that disputes were avoided chiefly through the effective use of an ombudsperson. The essential ingredient of the program, they said, was a neutral, knowledgeable and trusted person who was available at an early stage.

There is variety in the kind of person used as an ombudsperson. One agreement uses a nurse with experience as a claims administrator; another uses a retired workers' compensation referee. Two agreements use a former union official, now an employee of a joint employer-union trust fund. Another uses a law firm that specializes in the representation of applicants.(13) The ombudsperson is supposed to be a source of information for injured workers and something of an advocate for the worker. In interviews with DWC, participants emphasized that an effective ombudsperson needs to be trusted by all parties. Injured workers especially need to feel that the ombudsperson is a fair and neutral person who will give reliable information and advice.

Another point of difference between the programs is the function of the ombudsperson. In some agreements, the ombudsperson is made aware of every single workplace injury, and communicates directly with the worker, the insurer, the employer (including both the claims administrator and the on-site supervisor), and even the medical provider. The ombudsperson helps arrange for medical care and sees to it that appropriate forms are filed. The ombudsperson sometimes participates in safety committee meetings, linking the injury to actual safety practices in the field. The ombudsperson sometimes actively seeks light or modified duty for the worker. This model of the highly involved, pro-active ombudsperson is used in project labor agreements, where a full-time, on-site ombudsperson is economically feasible.

In other agreements, the ombudsperson is relatively passive. The ombudsperson is not actively involved in every claim -- and may not even be aware of all claims. Rather, the ombudsperson is available to provide information if asked, and to resolve disputes when they arise.

The Role of Attorneys

Most agreements exclude attorneys from the ADR process until arbitration. One agreement permits attorneys at any point in the process. Other agreements permit attorneys to advise parties, but not to represent them, until arbitration. It is too early in the carve-out program to tell how the absence of attorneys affects the process.

The Role of Unions

In the original carve-out program -- the Pioneer Valley project in Massachusetts -- business agents actively replaced applicant attorneys, directly representing injured employees in the ADR process. But in California unions are not participating on a daily basis, case-by-case. When an injured worker approaches the union with a question about workers' compensation, the business agent gives the worker the phone number of the ombudsperson.

All the ADR programs in California operate under the joint oversight of labor and management. In informal discussions, the unions indicated they are monitoring the programs carefully. In one instance, a union was dissatisfied with one aspect of the program. Using the procedures of the collective bargaining agreement, the union saw to it that the problem was corrected. The union saw the incident not as a failure, but a success: when the program was not working as well as it should, the union took prompt action to correct the problem, and now the program was on track.

Most of the unions we spoke with were enthusiastic about the carve-out program. They spoke of how quickly and harmoniously claims were settled. As noted above, however, some unions were not so enthusiastic about the limited medical provider lists.

The Role of Insurers

The insurers now involved in the carve-out program have trained a small handful of claims adjusters who deal with all carve-out claims. These adjusters have reportedly established good rapport with the ombudspersons, who have quick access to them. Part of the program's initial success may perhaps be attributed to the special care given by insurers to carve-out clients.

In their rating plans, insurers have been offering employers a discount of approximately 5% to 10% for participating in a carve-out program. Appendix 6 to this report contains selections from the actual rate filings sent to the Commissioner of Insurance by some carve-out insurers.

NOTE: The appendices listed in the Table of Contents and referenced in footnotes are not contained in this online edition of the report.