THE CONSTRUCTION CARVE-OUT PROGRAM

A REPORT OF ACTIVITIES IN
CALENDAR YEAR 1998


RICHARD GANNON
Administrative Director

PEGGY SUGARMAN
Chief Deputy Administrative Director

June 30, 1999

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

Summary

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

The report covers the four1998 calendar year of the program established by Labor Code Section 3201.5, commonly known as "the construction carve-out program". The program allows unions and employers engaged in construction to create alternatives to the traditional, state-supervised workers' compensation system. Most important, it allows collective bargaining agreements to establish exclusive lists of medical providers and examiners and to establish alternative dispute resolution systems that bypass the state workers' compensation administrative law judges.

All employers participating in the carve-out program are required by regulation to submit limited data to the state. This report is based on aggregated data from 683 California employers in 12 eligible programs. The reported figures provide a snapshot of the program at a point in time 3 months after the close of the reporting year; because the reporting comes so soon after the experience, it is, by definition, relatively immature data. Current regulations do not provide for receiving subsequent reports on the experience, which are necessary to see if the initial results reported stand up over time.

Together, these employers reported 18,542,967 person-hours of labor and $ 414,480,864 in wages to employees covered by Section 3201.5 during 1998. They reported 1,261 claims filed in the year. Aggregate incurred losses reported for these claims were $ 9,172,279. It is anticipated that both the number of claims reported and their aggregate incurred costs will rise over time.
.

An Overview of the Carve-out Program

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

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

Background and Program History

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

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

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

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

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

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

The Carve-Out Participants

Twelve programs have been certified as eligible and were active during 1998:

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

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

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

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

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

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

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

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

I.  An agreement between the Contra Costa Building & Construction Trades Council, AFL-CIO, and the Contra Costa Water District. This is a series of three project labor agreements covering all contractors and sub-contractors on a $200 million, two and one half year dam project called the Los Vaqueros Project.

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

K.  An agreement between the United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry, Local Union No. 342 and Cherne Contracting Corporation for the construction of an oil refinery.

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

Number of Employees Covered

The twelve active and reporting carve-out programs in 1998 reported a total of 18,542,967 person-hours ? equivalent to 9,271 full-time employees figuring 2,000 person-hours for one employee-year.

The Data

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

As noted above, there are twelve active carve-out programs that reported activity in 1998. DWC has received data from 683 employers participating in those programs. As shown in Table 1, they report a total of 18,542,967 person-hours in 1998, and a total payroll of $414,480,864. They reported 1,261 claims filed in 1998, an increase of 600 claims from 1997, and incurred costs of $ 9,172,279, a 41.5 percent increase. As seen in Table 1, most of the increase in total claims is from an increase in medical only claims, while claims involving indemnity actually rose slightly.

Table 1

Summary of Claims Data1
1998
1997
1996
       
Number of Employers
683
550
277
Total Person hours
18,542,967
10,372,459
11,645,267
Total Payroll
$414,480,864
$242,577,215
$272,383,804
Total Claims
1,261
661
866
Subtotal: Medical Only Claims
782
353
570
Subtotal: Claims Involving Indemnity
479
308
296
Total Incurred Costs
$9,172,279
$6,481,564
$6,102,437

Table 2 shows more detailed aggregate statistics on claim frequency and average claims costs among each of the carve-out programs. While the table appears to indicate large differences in cost and frequency between individual programs, this may be misleading since some of the programs are quite small. Care must be taken in evaluating the differences. For instance, carve-outs #11 and #12 have fewer than 50 full time equivalent (FTE) workers for the year. Carve-out number s 6 in the table had such a small amount of payroll in the project during 1998 that claims and cost ratios are too unstable to report. The differences may be due to chance variation or slight differences in the criteria for reporting minor claims. At the other extreme, carve-out programs 1, 2, 3, 4, 5, and 7 involve at least 500,000 work hours each; with the larger exposure base, frequency rates and per claim costs are less subject to chance variation.

Table 2

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

1998
Program

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

Number of Claims per 100 Employees2
Number of Claims per $1 Million Payroll
Average Incurred Cost per Claim
Number of Indemnity Claims3 per 100 Employees
Number of Indemnity Claims per $1 Million Payroll
Average Incurred Cost per Indemnity Claim
             
1
15
2.9
$9,950
6
1
$23,596
2
13
3.0
$6,551
5
1
$18,867
3
17
4.8
$6,356
6
2
$16,974
4
14
3.5
$3,756
6
1
$9,765
5
3
0.8
$8,765
2
0
$14,301
6*
*
*
*
*
*
*
7
15
4.1
$12,483
0
2
$26,051
8
28
5.0
$10,074
11
2
$26,697
9
25
4.6
$2,454
7
1
$9,203
10
8
1.0
$2,730
4
1
$5,461
11**
9
1.5
$2,605
2
0
$10,421
12**
33
6.6
$2,406
4
1
$21,653
Average
14
3.0
$ 7,274
5
1
$19,149

Notes:
* Projects involved fewer than 10 FTEs, and payroll below $1 million for year. Results too volatile to report due to size of project.
** Project involved fewer than 50 FTEs and payroll below $5 million for year.

Table 3 shows the components of paid and incurred losses4 for the 1,261 claims filed in 1998, compared to the 661 claims filed in 1997. Both sets of figures are as reported to the DWC as of March 31 of the year following the injuries. For 1998, there were 782 medical-only claims and 479 indemnity claims reported:5
 
 

Table 3

Cost Components for Claims Filed in Calendar Year 1996, 1997, 19986
 
1996
   
1997
   
1998
 
                   
Expense
# of Claims
Paid Amount
Incurred 
Amount
# of 
Claims
Paid 
Amount
Incurred 
Amount
# of 
Claims
Paid 
Amount
Incurred 
Amount
                 
MEDICAL ONLY 
570
$195,980
$241,318
353
$127,786
$212,762
782
$268,317
$294,377
INDEMNITY 
296
   
308
   
479
$3,510,536
$8,877,902
Temporary Disability  
$1,092,346
$1,556,944
 
$1,121,038
$1,881,075
 
$1,633,587
$2,599,027
Permanent Disability  
$130,549
$1,007,456
 
$144,206
$1,336,779
 
$142,368
$1,487,270
Life Pension  
0
0
 
0
0
 
$0
$0
Death Benefits  
$285,440
$291,329
 
$23,976
$130,000
 
$18,560
$311,000
Vocational Rehab.  
$45,590
$523,953
 
$31,456
$393,794
 
$58,324
$392,053
Medical  
$1,976,491
$2,450,071
 
$1,164,642
$2,439,572
 
$1,631,192
$4,003,602
Medical-legal  
$8,569
$31,366
 
$11,587
$87,582
 
$26,505
$84,950
Total Indemnity  
$3,538,985
$5,861,119
 
$2,496,905
$6,268,802
 
$3,510536
$8,877,902
GRAND TOTAL  
$3,734,965
$6,102,437
 
$2,624,691
$6,481,564
 
$3,778,853
$9,172,279

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

It should also be noted that the 1,261 claims were all filed in 1998. 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. An analysis of how incurred costs change over time is beyond the scope of this report, given current reporting guidelines.8
 


Analysis of the Claims Data

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

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

Table 4

Comparison of Incurred to Expected Losses Among twelve California Carve-out Programs
Payroll Reported

(1)

Incurred Losses reportedg

(2)

Expected total loss adjustment expenses (LAE) (per WCIRB figure of 21.7% of losses)

(3)

Losses +LAE

(4)

Incurred Losses per $100 payroll (w/o LAE) reported as of 3/31/98

(5)

Incurred Losses per $100 payroll (w/ LAE) reported as of 3/31/98

(6)

Expected losses and Loss Adjustment Expenses per $100 payroll

(7)

Ratio of actual to expected Pure premium

(8)

1
$2.86 
$3.48 
$8.75 
39.80%
2
$1.94 
$2.37 
$4.34 
54.52%
3
$3.04 
$3.70 
$8.84 
41.87%
4
$1.32 
$1.61 
$4.58 
35.17%
5
$0.67 
$0.82 
$8.81 
9.29%
6*
7
$5.13 
$6.25 
$8.61 
72.57%
8
$5.05 
$6.15 
$7.81 
78.74%
9
$1.13 
$1.37 
$7.90 
17.36%
10
$0.28 
$0.34 
$6.59 
5.21%
11
$0.39 
$0.48 
$8.81 
5.45%
12
$1.58 
$1.92 
$10.34 
18.56%
TOTAL
$ 414,480,864
$9,172,279
$1,990,383
$11,162,662
$2.21 
$2.69 
$5.94 
45.34%

*inactive program

On the 1,261 claims, there were incurred losses of $ 9,172,279. Table 4, Column 6, shows incurred losses per $100 in payroll for each of the eleven active carve-out programs. In aggregate, the six programs incurred $3.24 of losses and loss adjustment expenses for every $100 in payroll.

How does the figure of $3.24 compare to incurred losses of all employers engaged in construction? Table 4 provides "benchmarks" for each carve-out program, based on WCIRB "pure premium rates".

The Workers' Compensation Insurance Rating Bureau publishes "pure premium rates" for every job classification in the state.10 These rates reflect the losses predicted for every $100 in payroll, plus an amount for "loss adjustment expenses."11 Loss adjustment expenses (LAE) constituted 21.7% of the pure premium rate in 1998. As an example, the 1998 pure premium rate for ironworkers on buildings over two stories (Classification #5040) is 13.65. A hypothetical average employer who hires ironworkers to erect a steel frame would expect to incur $13.65 in losses for every $100 in payroll, of which $11.26 would be incurred for benefits and $2.39 for loss adjustment expenses. Pure premium rates vary according to the hazards of the job. For instance, the advisory pure premium rate (losses plus LAE) for lath installers (#5443) is 8.70; the rate for elevator workers (#5160) is 2.99.

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

The benchmark for that hypothetical carve-out program is $5.80. This is roughly what one might predict as incurred losses plus loss adjustment expenses for that carve-out program per $100 payroll. Of the $5.80, $4.77 is for incurred benefit costs plus 21.7% of that (.217*4.77)=$1.03 is for LAE. It is important to note, however, that this comparison does not take into account other factors that might affect individual employers, such as their own safety practices or claims history. Indeed, an employer's loss experience may be consistently much better or worse than the loss experience of all employers in the classification. Carve-out participants do not report their claims history to DWC.12

Table 4, Column 8, shows the ratio between the incurred losses for each carve-out program and the benchmark for each carve-out program. All eleven active carve-out programs incurred losses well below the benchmark. In aggregate, incurred losses at this early report were 45.3% of what the pure premium rates would predict.

It appears that the first early report of losses in the carve-out program were lower than would be expected of other construction employers. However, it should again be noted that Table 4 is based on claims filed in 1998 that is, on data that is quite young. As claims age, incurred costs tend to rise. No data were submitted by carve-out programs in the latest reporting period allowing for subsequent evaluation of claims data after another year of maturity.

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

This report is based on 18,542,967 person-hours. That is equivalent to only 9,271 full-time employees - a pool that may be too small to provide reliable statistical data. If the number of carve-out employers increases in the future, the statistical pool will expand and the figures presented will be more reliable.

Despite the limitations of the data, note that losses were low in all eleven programs. If the loss figures were randomly distributed, one would expect to see some programs showing higher than expected losses and some showing less. Furthermore, the figures this year are roughly equivalent to the figures in our 1995 and 1996 reports.

Table 5

Cost Comparison between 1995 , 1996, 1997 and 1998
1995
1996
1997
1998
         
No. of claims
543
866
661
1,261
Payroll
$157,599,755
$272,383,804
$242,577,215
$414,480,864
Incurred Cost
$3,634,952
$6,102,437
$6,481,564
$9,172,279
Incurred Cost / $100 Payroll
$2.31
$2.24
$2.67
$2.69
Expected Losses / $100 Payroll
$3.92
$4.31
$5.87
$5.94
Ratio of Incurred to Expected Losses
.59
.52
.455
.453

The ratio of incurred to expected losses at the same point in time for each carve-out year has remained quite low.

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

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

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

Carve-out employees filed 1,261 claims in 1998, equivalent to 13.6 claims for every 100 employees. It is difficult to find an exact comparison for this figure among non-carve-out employees. The California Division of Labor Statistics and Research reports that in 1996 ? the last calendar year for which it has statistics ? there were 10.3 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 (10.3) and the number of claims being filed (13.6).

From this limited data, it appears that the carve-out program does not achieve its savings through a decrease in claims.

Data Concerning ADR

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

+ Of the 1,261 claims filed in 1998, approximately one half (628) were reportedly resolved before mediation. They were resolved either because there was never any dispute at all between the injured worker and the insurer ? or because the ombudsperson successfully handled any issues. Twenty-eight ( 28) of these claims were resolved with a denial of compensation.
+ No claims in this year were resolved at the stage of mediation; three claims were resolved at or after arbitration. In 1998 two claims were resolved at or after a WCAB intervention.
In four years of carve-out activity, there have been a total of 3,278 claims that were subject to ADR (519 filed in 1995, 837 filed in 1996, 661 in 1997 and 1,261 in 1998). At the time of reporting (three months after end of calendar year for prior year), there have been only 8 mediations and 5 arbitrations. A very large majority of these claims were somehow resolved without any formal dispute.
Activity before the WCAB and the Courts

According to the reports filed by carve-out participants, ten employees subject to an ADR system filed applications for adjudication with the WCAB in 1996. For 1997, the reported number was up to 61 applications filed. In 1998, 44 applications for adjudication were filed at the WCAB.

In 1997, programs reported four cases of civil litigation concerning a carve-out claim or program. In 1998, only 1 such case was reported. On July 17, 1997, in the case of Ramon Becerra v. Eastside Reservoir Project (No. AHM 51304), the WCAB ruled that the proper procedure is for workers' compensation referees to dismiss applications, rather than stay them, if the claim is subject to ADR.

Has ADR Reduced the Amount of Formal Dispute over Claims?

In 1997, the 61 applications for adjudication represented nearly one in ten claims under the system. In 1998, the 44 claims represented only 3.5% of claims. This percentage is closer to that of early years of the program when the ratio was closer to one in 50 claims by the time of the employer report. It is notable that medical-legal expenses are still reported at a low level - $84,950 out of $9,172,279 in total incurred costs, or less than 1%.

Data Concerning Vocational Rehabilitation and Light Duty Programs

In 1998, employers reported 21 employees participating in vocational rehabilitation under the program, and 27 participating in a light duty program. In aggregate for 1997, employers reported 12 employees participating in vocational rehabilitation and 32 employees participating in light-duty programs. In 1996, four employees were in vocational rehabilitation and 65 participated in light-duty programs. No statistically valid conclusions can yet be reached from these figures.

Observations and Recommendations

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

Anticipating this need, the current regulations include a "placeholder" for requesting additional data on prior year claims that have not yet been settled or finally adjudicated. (See 8 CCR 10203(b)(12)). In past years, DWC has made requests that claims administrators provide this information on a voluntary basis, but the response has been minimal. The DWC has included the expansion of data reporting for getting updated information on past year's claims in the regulatory calendar for fiscal year 1999-2000, and expects to promulgate regulations to accomplish periodic updates to report resolution of claims filed in one calendar year but resolved in a later year for the next cycle of data collection.

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

Conclusion

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

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

 

Appendix 1

Labor Code Section 3201.5

Appendix 2

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

Footnotes:
1 1Based on eleven active carve-out programs reporting 1997 activity
2 200,000 person hours = 100 full-time employees.
3 In California, an indemnity claim involves lost time of 3 days or more.
4 Incurred loss = amount paid out plus any amount reserved to pay over the life of the claim.
5 In California an indemnity claim means a claim involving lost-time of at least three days.
6 Based on annual reports submitted by all eleven active and reporting carve-out programs.
7 For instance, NECA employers enrolling in the carveout program authorized the administering insurer to assess and transmit to the labor-management trust a fee of 2% of premium earned by the carrier. In the case of the Southern California Carpenters carveout, the employer agreed to contribute to the trust a sum of seven cents per hour worked by employees performing work under the agreement.
8 A report analyzing longer term experience of the carveout programs is being done by UC-Berkeley and Stanford University for the Commission on Health and Safety and Workers' Compensation. Using data obtained from the Workers' Compensation Insurance Rating Bureau for a subset of carveout programs, this report attempts to quantify the changes in incurred costs over time.
9 To protect the confidentiality of the programs, individual payroll and incurred losses for each program are not shown. The figures in the expected losses column (7) are based on the WCIRB pure premium rates published in the California Workers' Compensation Uniform Statistical Reporting Plan -- 1997. Expected losses are calculated for each program by weighting the payroll in each job classification and multiplying by the pure premium. For example, if a particular carve-out program had 60%of its payroll in Classification X, with a WCIRB pure premium of 3.00,and 40% of its payroll in Classification Y, with a pure premium of 10.00,the weighted average for that program would be (.60)(3.00) + (.40)(10.00)= 5.80. WCIRB pure premium rates include "loss adjustment expenses "of 20.1%. Deducting this 20.1% from the weighted average leaves a figure representing expected losses. The figure shows the expected incurred losses per $100 in payroll. In our hypothetical example, this would be (.799)(5.80)= 4.63. For every $100 in payroll in our example, one would expect $4.63in incurred losses.
10 See California Workers' Compensation Uniform Statistical Reporting Plan -- 1997.
11 1Loss adjustment expenses = the insurer's average costs for handling a claim.
12 This area is addressed in the CHSWC report.