Legislature(2003 - 2004)
02/10/2004 01:31 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 311-INSURANCE & WORKERS' COMPENSATION SYSTEM
CHAIR CON BUNDE announced SB 311 to be up for consideration.
MS. LINDA HALL, Director, Division of Insurance, Department of
Labor and Workforce Development (DOLWD), said SB 311 deals with
workers' compensation and that she wanted to give the committee
some background first.
I have discussed on multiple occasions with most of
you the financial crisis in the Guaranty Association
for which we are also hearing proposed solutions in SB
276. There is additional concern with the lack of a
healthy workers' compensation environment in Alaska.
Many of you, I think all of you here, heard the
overview of this problem at the Joint House and Senate
Labor and Commerce Committee meeting a couple of weeks
ago.
I would like to outline the major problems that we're
encountering in that environment. One of those
problems is a lack of profitability in our workers'
compensation market. Between 1997 and 2002, losses in
the workers' compensation line of business ranged from
99.9 percent to a high of 154 percent. At its high,
this meant that insurance companies are paying $1.54
for every dollar in workers' compensation premium they
collect. It's an unacceptable loss amount. Alaska
averaged 123.7 percent in losses per dollar of premium
collected versus a national average of 118.8 percent
in that same time period. Our carriers are losing, in
Alaska, approximately 5 percent more than even the
national average.
The second problem we're encountering that leads to
increases in premium are the cost of medical benefits.
The cost of medical benefits has increased
dramatically; the cost of prescription drugs has
increased dramatically. We have seen double digit
increases in these costs and while I think most of us
tend to accept the correlation between the rising cost
of health care and the rising cost of health insurance
premiums, we generally tend not to make that
correlation with workers' compensation premium. Those
pressures caused by increasing medical costs have the
same effect on workers' compensation that they do on
health insurance. That's a substantial increase.
Frequency of claims has decreased over the past
several years, which is a good sign. It means we have
safer workplaces, fewer injured workers.
That decline in the number of claims has tended to
mask the increase in the cost of individual claims,
which now has resulted in, what I will term, problem
three to address, which are premium rate increases.
Effective January 1 of this year, we saw an average
rate increase of 21.2 percent. As the cost of claims
has increased, the actuarial analysis of historical
claims data and projections on the cost of future
claims indicated the need for a substantial rate
increase, which was approved by the Division of
Insurance. That rate change ranged from a 15 percent
decrease to a 57 percent increase. While the average
is 21.2, I think it's important to look at the span of
these rate changes. We had 30 classifications out of
about 400 - we had a rate decrease - we have 17
classifications whose rate increases exceed 50
percent. So, when we talk about what premium increases
are, what cost claims are generating in premium
increases, we need to keep those kinds of increases in
mind. The current cash deficit in the Guaranty Fund
has already resulted in a 2 percent assessment in the
workers' compensation policies.
Proposed legislation in SB 276 would increase that
further. So, the combination of the rate changes and
the assessments are making workers' compensation
extremely expensive for employers. The first problem I
think we need to look at in our work comp environment
is the Assigned Risk pool. I've talked about this
briefly and I will keep that brief again, but I do
want to mention it. The Assigned Risk pool is a factor
in the increasingly unattractive Alaskan marketplace.
Workers' compensation is mandatory in Alaska. So, if
an employer is unable to obtain coverage in the
voluntary market, they can obtain coverage in the
Assigned Risk pool. So, there's always a place for an
employer to obtain coverage. Today, approximately 17
percent of our workers' compensation premium is in
that Assigned Risk pool. That Assigned Risk pool,
however, is also losing money. When the cost of the
claims in the Assigned Risk pool exceeds the premium
dollars that are collected, that difference is charged
to the insurance companies who write insurance in the
state. Currently, Alaska has the largest charge to
insurance companies for their Assigned Risk pool of
any state in the country. That has ranged over the
last six years from four to six percent. What that
represents is an off-the-top charge to insurance
companies for every dollar they write going in. They
are now going to pay anywhere from a four to six
percent charge for funding the Assigned Risk pool.
Overall we have a workers' compensation environment
that has become very expensive for employers and very
unattractive to workers' compensation insurers. As
these issues became apparent over the last number of
months, staff from the Division of Insurance, from the
Department of Labor, from the Department of Law and
the Administration have met and struggled to find ways
to overcome these challenges. We cannot continue to
merely increase workers' compensation premiums for
employers. We must look to ways to stem the increasing
cost of benefits to workers. We've looked at many
options over these past months. We've looked at costs
of medical care; we've talked about provider fees;
we've talked about definition of compensability, value
of the whole man, reemployment programs. What we will
submit to you today in SB 311 makes no changes to any
benefit levels. It does, however, propose a change in
the workers' compensation system that we feel will
bring more efficiency, consistency and predictability
to the process.
We need a healthy workers' compensation marketplace.
We need a stable environment that is sustainable, that
will encourage current companies to do business in our
state, attract new markets. We need workers'
compensation insurance that is available and
affordable to employers so they can continue to
develop jobs and we can have economic development in
our state.
This environment depends on four factors: adequate
[indisc.], a self-funded Assigned Risk pool, a sound
regulatory environment and a viable workers'
compensation system. This bill before you is fairly
unique as it is cross-departmental. We tried to find
solutions together for these issues. There is
certainly a very close tie between insurance and
workers' compensation. I will address the insurance
pieces of this bill and Director Lisankie will address
the workers' compensation pieces of the bill and,
again, we don't intend to read you all 58 pages
today....
CHAIR BUNDE indicated that he would schedule a hearing for this
bill again next week.
MS. HALL explained the insurance section of the bill as follows:
There are really six sections of this bill that deal
with insurance. It begins with - I'm going to begin
with section 2. Section 1 is an intent; section 2 has
Department of Labor; but, section 3 and 4 go together.
This is one of the things we're looking at to have
more financial stake for Alaska policyholders in
Alaska. This adds an increase in the deposit required
of insurance companies who write workers' compensation
in Alaska. This special deposit, as it's called in the
bill, will be for the protection of Alaska's
policyholders, Alaskan injured workers. It would go to
the Guaranty Fund should there be an insolvency.
Section 4 goes with that. It makes the Guaranty Fund
the first priority over other delinquency proceedings.
So, that money would specifically go back into the
Guaranty Fund. Statutory requirements today, which
would be doubled by this, are a minimum of $1 million.
So, we would have an additional amount of money from
the insurance company who might later become insolvent
to go to the Guaranty Fund.
Section 5 is dealing with the change in the
composition in the board of governors of the Guaranty
Association. Currently, it is a nine-member board:
seven insurance companies and two public members. On
the actual current board today we only have one public
member I appointed in November. As we've gone through
the problems with the Guaranty Association, the
insurance company representatives have been invaluable
board members. Their advice, their obvious familiarity
with the workers' compensation system, with insurance,
has been very very beneficial. However, it appears
that in the situation we face, there are a number of
stakeholders in the Guaranty Fund. In the instance
case where the workers may have an interruption of
benefits, employers who may get those obligations
back, it was my intent to expand that board not by
number, but by representation to give those
stakeholders a seat at the table as these decisions
are being made.
Section 6 is called the net worth...
CHAIR BUNDE interrupted to ask which member represents
licensees.
MS. HALL replied the insurance agent member (who works with the
insurance companies and employers). They are called licensees in
Alaska statute. She continued:
Section 6 provides for what's called a net worth
exclusion. This provision would exclude from coverage
under the Guaranty Association if the net worth of the
insured exceeds $25 million. Thirty-two other states
around the country have this type of provision today.
It may range from a $10 million net worth exclusion up
to $50. This is a more middle of the road, the one
most common around the country. The purpose here is to
provide some type of cap on the costs of claims in the
fund. It does. An employer whose net worth would
exceed the $25 million would not receive the benefit
of the Guaranty Fund for their claims.
In the situation we face today in the Guaranty Fund,
when all of the Fremont claims, all 700 of them, were
transferred to the Guaranty Association in July, those
claims are sent back to the state of residence of the
injured worker by statute. As we sent claims back out
to states, several of those were returned to Alaska to
the Alaska Guaranty Fund by states that had this same
type of provision. So, it would really bring our
Guaranty Fund more on parity with those of most other
states.
CHAIR BUNDE asked her to list a couple of Alaskan firms that
would have a net worth of more than $25 million.
MS. HALL said she knows of one, but didn't want to put the name
in a public record.
CHAIR BUNDE said the committee would probably want some
specifics as they go along.
MS. HALL said that was possible and continued:
Section 105, I addressed in my introduction purposely
- the assigned risk pool - and the need to make that
self-funding. It's a major component in our fragile
insurance environment. This section repeals the 25
percent....
Policies in the assigned risk pool today have a cap of
25 percent difference between the rates in the
traditional marketplace and the assigned risk pool.
That also has an exclusion for policies under $3,000
in premium. As I've indicated earlier, I think it's
critically important that the assigned risk pool be
self-funding. The losses in that pool have been even
more excessive than what we're seeing in the
traditional marketplace. The cap right now is lower
than that in many states. We see some states - the
highest cap I've seen is 65 percent and I can't give
you the state name. But we see a wide range of caps
there, obviously. So we don't overly burden those
employers who have their policies written in the
assigned risk pool - when the burden of that assigned
risk pool starts to affect our whole marketplace, I
think we really desperately need to reassess that
philosophy.
Approximately 6,000 of the 8,800 policies in the
assigned risk pool have premiums under $3,000. I've
looked at that cutoff; I've looked at 5,000. Eighty-
three percent of the policies in the pool have
premiums under $5,000. Generally, in the under $3,000
[group], the average premium is $864. These small
employers are just as likely to have claims as larger
employers and those claims can be just as costly as
the claim of a larger employer. Claims have costs
based on the nature of the injury. At an average
premium of $864, a single claim will offset hundreds
of those small policies. That's the biggest reason
today that the pool has been unprofitable. When you
have those very small polices and they're not paying
the surcharge, even, that the smaller, but higher
premium policies are, we don't have a self-funding
mechanism here. As I described in the introduction,
the financial burden on insurance companies from this
mechanism where they are charged anywhere from 4 to 6
percent has made Alaska a very unattractive market.
It's that fragile balance where we try to do consumer
protection, but we need a healthy competitive
marketplace to do that and I think we need to look at
these factors that are affecting that.
CHAIR BUNDE said, "My section 105 repeals that 25 percent cap."
MS. HALL replied that was correct, but there would be no cap and
rates would still go through the filing process with the
Division of Insurance.
CHAIR BUNDE asked her if this proposal was something like the
assigned risk auto pool where a young man's premium is
substantially higher than an older male's premium - the
reasoning being that the older male should not have to pay
higher insurance rates because the younger male would have more
claims.
MS. HALL replied that was right. They are both mandatory
insurance coverages, so there is a place where consumers can be
sure to obtain that coverage.
CHAIR BUNDE asked if there was a cap on the automotive assigned
risk pool.
MS. HALL replied no and that concluded her testimony.
CHAIR BUNDE asked Director Lisankie to address the committee.
2:00 p.m.
MR. PAUL LISANKIE, Director, Division of Workers' Compensation,
Department of Labor and Workforce Development (DOLWD), said
there is one change to the benefits that are payable under the
Workers' Compensation Act. He explained:
Section 86 deals with cost of living adjustments to
workers' compensation benefits. Currently, if someone
moves, if someone resides, outside the State of
Alaska, the division contracts with a company that
determines the cost of living in various parts of the
United States. Right now, if they are in an area of
the country where the cost of living is less than - I
think we're keyed to Anchorage - then the compensation
rate would be adjusted down. If, on the other hand, if
they live in any other part of the country where the
cost of living actually exceeds that in Anchorage,
their benefits would be adjusted upwards. That's under
the current act. What Section 86 would do is that it
would cap any upward adjustments at the amount that
could be paid to someone who resided in Alaska. So,
essentially what it would do is that no one would get
paid more compensation than someone who is an Alaskan
by dint of the fact that they moved outside. That's a
subtle change, but it is the one change that I am
aware of to the actual benefits.
Mr. Chairman, you alluded to the rather lengthy
section-by-section analysis, which I have found
helpful and hope the committee does, as well. I didn't
prepare it; I don't want to take credit for it. Other
people spent a lot of time putting it together.
MR. LISANKIE summarized saying that because the Workers'
Compensation Act is quite lengthy and the board is responsible
or involved in almost all aspects of the system, this
legislation contains a large number of what are essentially
conforming amendments.
He explained that the division director gets additional powers
that the position doesn't have now, in part, because nothing in
the current act identifies the position of director. This bill
establishes that position and puts the incumbent in the overall
posture of administrating the workers' compensation system.
One of the most important changes and a powerful tool
that would be available to the director surrounds the
area of uninsured employers. As the committee is no
doubt aware, there [are] a significant number of
uninsured employers in the State of Alaska who do not,
for whatever reason, conform to the legal requirement
that they make sure they insure for their employees'
workers' compensation benefits. The division currently
has a zero tolerance policy. We do attempt to
investigate and when we identify someone who appears
to be an uninsured employer, we take steps to further
that investigation. In the appropriate instances, we
file an accusation against them and require them to
appear and prove whether or not they have the
insurance that we believe they do not have.
CHAIR BUNDE asked if some employers also claim that they don't
have to have insurance.
MR. LISANKIE replied that is correct. He explained further, if
an employer is in violation of a statute, a stop order is
issued. Typically, the employer either proves that employees no
longer work for them and, therefore, there's nothing to stop or
they acquire the necessary insurance.
What SB 311 provides is an important civil penalty provision
saying that even if an employer brings his insurance current, he
would face a penalty of up to $100 per day, per employee, for
the period of time they operated without the required insurance.
Lack of insurance places the health and financial health of
employees in jeopardy, because neither their medical benefits
nor their time loss benefits are typically going to be paid.
Lack of insurance also gives those employers an unfair advantage
over other employers who follow the law.
MR. LISANKIE said this bill also provides a change in the way
disputed workers' compensation claims are resolved in a couple
of ways. Currently, the board resolves disputed claims. It has
been growing continually from a single panel of three
individuals since its inception in 1959 to seven panels. Each
one consists of members appointed by the governor representing
industry and labor and then the panel is chaired by the
commissioner of the DOLWD or their representative. Now there are
14 panel members, plus the commissioner and the last time a
commissioner had time to chair a panel was many years ago.
Typically, a workers' compensation hearing officer takes his
place.
Panels are entitled to act based on a quorum, so it's possible
to have a decision made by any two of the three. This means that
now workers' compensation hearing officers are functioning as
the multiple representatives of the DOLWD commissioner. Industry
and labor representatives don't always sit together on the same
panel and over 300 potential combinations of deciders are
possible. Consequently, the current system is kind of weighted
against consistency simply by the fact that there are so many
different panels that are each entitled to weigh in with their
own opinions about obligations, rights and legal
interpretations. Different panels can make different decisions
on the same issues and, "They are legally entitled to do it as
far as I know. They are not doing anything wrong."
If an individual knows there have been two different decisions,
he has no way of getting the question resolved. Each individual
can appeal to the Superior Court, but the problem with that, as
far as consistency goes, is that the court's opinion is not
viewed by the board to be binding other than for that individual
decision. "The current structure is weighted against
predictability or consistency by its very nature. It has nothing
to do with the intentions of the people that are serving."
MR. LISANKIE explained that this bill addresses that concern by
replacing the workers' compensation board in two ways: first,
language in section 11 establishes a workers' compensation
appeals commission. This commission would fill the appellate
role that is currently filled by the Superior Court judges. The
initial hearing role of the workers' compensation board is
replaced (in section 59) by a group of commission hearing
officers, who would be hired by the commission. They would hear
the initial dispute and issue a written ruling akin to what the
workers' compensation board does now (the initial decision). If
the parties were unhappy with the results of that decision,
their right of appeal would be to the workers' compensation
appeals commission. It would not go directly to the court
system. The commission would be made up of three attorneys who
are appointed by the governor and subject to confirmation.
TAPE 04-7, SIDE B
2:20 p.m.
MR. LISANKIE continued to explain that the commissioners would
be required to have experience in practicing law within the
State of Alaska and have other requirements, as well. Their sole
function would be to resolve workers' compensation disputes at
the initial appellate level by rendering a written decision,
which would have full force and effect as precedent on other
people not involved in the individual appeal. The decisions
would be published so they could be researched by others, who
would know in advance whether a decision could rule in the
present case. The Alaska Supreme Court will continue to be the
final stop.
MR. LISANKIE said the Council of State Governments, a non
partisan, non profit organization, has fostering excellence in
state governments as one of its goals and in 1965 it came up
with a draft workers' compensation and rehabilitation law. He
explained:
That law was done with the advice and guidance of an
advisory committee. The advisory committee that
originally came up with it was chaired by Professor
Arthur Larson of Duke Law School. The late Professor
Larson, at that time, was recognized as the kind of
preeminent expert in the field of workers'
compensation. Even following his death, his multi-
volume treatise is still consulted by all of us who do
workers' compensation in the United States and is
frequently cited by our Supreme Court and by anybody
who is trying to interpret workers' compensation
matters.
Since 1965, there has been a suggested workers'
compensation and rehabilitation law which has in it
this framework that is being proposed of having the
initial disputes handled by a hearing officer who has
to be admitted to law and practice law in the state -
and then have the appeals taken to either an appeals
board, an appeal commission, an appeals tribunal,
whatever you call it.
The only change that they made was in around 1970,
when the federal government was passing the
Occupational Safety and Health Act. They established a
national commission on state workers' compensation
laws, which Congress tasked with examining the laws of
the various states and coming up with suggestions -
kind of a state of the art or union, I guess. They
rendered a report around about 1972 that had about 84
specific recommendations for what they deemed a modern
workers' compensation program. But, as the Council of
State Governments points out in their publications,
the commission's recommendations were never put into
anything that could be adopted as a statute. So, what
the Council of State Governments did in around or
about 1974 was they revisited their original
recommended act; they changed it, as I say, strictly
to provide language that would permit a state to
follow the recommendations of the national commission
if it wished to do so and they called it their revised
workers' compensation and rehabilitation law. That law
was essentially the framework for this proposal as far
as having hearing officers be the first deciders and
then having appeals taken to, in this case, what we
have called a workers' compensation appeals
commission.
SENATOR FRENCH asked what the length of a term would be for an
appeals commissioner.
MR. LISANKIE replied that SB 311 proposes four-year terms, which
is in the range of other Alaskan boards and commissions.
SENATOR FRENCH asked if an individual could be reappointed and
if there was a limit to the time one could serve.
MR. LISANKIE replied that commissioners are not limited to one
term, but there is a limitation on consecutive terms for being
the chair and the bill distinguishes one of the three members as
the chair.
SENATOR FRENCH asked if the commission would sit essentially as
a court of appeals over the decision made by hearing officers.
MR. LISANKIE replied that is correct.
SENATOR FRENCH asked if their decisions would have the
precedential effect of being binding on the commissioners.
MR. LISANKIE answered that was correct.
SENATOR FRENCH asked if the commissioners would, then, be a set
of judges that would never go before the public for confirmation
- the way judges do now.
MR. LISANKIE replied that they would be confirmed by the
Legislature, but they would not be judges. The statute that
applies to judges would not apply directly to them.
SENATOR FRENCH said the court of appeals hears hundreds of
criminal cases per year and issues, maybe, 20 decisions that are
sort of precedential.
MR. LISANKIE said that was correct.
SENATOR FRENCH said he is trying to figure out why SB 311
contemplates giving an appointed board more legal authority than
the court of appeals has.
CHAIR BUNDE interjected that there was some concern as to
whether this bill should have a Judiciary hearing and maybe that
should be part of the discussion.
SENATOR FRENCH strongly agreed.
SENATOR STEVENS said it seemed that making the board more
professional would lead to fewer appeals on the surface, but the
cost would be much higher [for the commissioners' salaries] and
he asked him to explain the zero fiscal note.
MR. LISANKIE replied that DOLWD didn't provide a zero fiscal
note.
CHAIR BUNDE clarified that there are several fiscal notes and a
Finance referral.
SENATOR STEVENS wanted a brief explanation of the cost.
MR. LISANKIE replied that there would certainly be a cost.
Currently, the workers' compensation board is made up of
volunteer members of the public who serve at considerable cost
to their own lives and receive a $50 per day stipend, whether
they need it or not. To replace that system with three full-time
commissioners and staff would have a cost associated with it.
SENATOR FRENCH asked if this bill reclassifies hearing officers
or does anything different with the way they are employed or
retained by the state.
MR. LISANKIE replied yes; the hearing officers would be
partially exempt.
SENATOR FRENCH asked him to explain what the difference would
be.
MR. LISANKIE replied that the hearing officers right now are
members of the general government unit and are hired through
that system. The commission would be hiring partially exempt
hearing officers, a different system.
SENATOR FRENCH asked if the commissioners would be non-union
members.
MR. LISANKIE replied that he didn't know if partially exempt
hearing officers are union members or not.
SENATOR FRENCH said that he worked partially exempt for the
Department of Law as a criminal prosecutor and wasn't part of a
union. Partially exempt means that one serves at the pleasure of
the district attorney or the governor.
MR. LISANKIE said he didn't know enough to make a definitive
statement.
SENATOR FRENCH said he [Mr. Lisankie] was the person presenting
the bill and asked if it was his understanding that the
administration envisions union or non-union hearing officers.
MR. LISANKIE replied that his understanding is that the
partially exempt hearing officers would not be expected to be
members of a union.
MR. CHANCY CROFT, Anchorage attorney, said he thought this was a
very important bill and he hoped it received a lot of scrutiny.
While he admired and respected Ms. Hall and Mr. Lisankie, he
thought a major problem existed and explained:
I was often accused by Senator Zeigler in my days in
the Legislature of doing unprovoked good and I think
doing away with the workers' compensation board and
instituting a system of hearing officers dismisses the
public and it would be very bad policy. I would like
to spend some time talking about it and I would be
glad to come next week to do that.
CHAIR BUNDE set SB 311 aside until next week.
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