Legislature(2003 - 2004)
06/23/2004 08:10 AM Senate JUD
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE JUDICIARY STANDING COMMITTEE
Special Session
June 23, 2004
8:10 a.m.
TAPE(S) 04-72
MEMBERS PRESENT
Senator Ralph Seekins, Chair
Senator Scott Ogan, Vice Chair
Senator Gene Therriault
Senator Hollis French
MEMBERS ABSENT
Senator Johnny Ellis
COMMITTEE CALENDAR
SENATE BILL NO. 1002
"An Act providing for a special deposit for workers'
compensation insurers; relating to assigned risk pools and
workers' compensation insurers; relating to the board of
governors of the Alaska Insurance Guaranty Association; stating
the intent of the legislature, and setting out limitations,
concerning the interpretation, construction, and implementation
of workers' compensation laws; relating to restructuring the
Alaska workers' compensation system; eliminating the Alaska
Workers' Compensation Board; establishing a division of workers'
compensation within the Department of Labor and Workforce
Development and assigning certain Alaska Workers' Compensation
Board functions to the division and the Department of Labor and
Workforce Development; establishing a Workers' Compensation
Appeals Commission; assigning certain functions of the Alaska
Workers' Compensation Board to the Workers' Compensation Appeals
Commission and the office of administrative hearings; relating
to agreements that discharge workers' compensation liability;
providing for administrative law judges in workers' compensation
proceedings; relating to workers' compensation awards; relating
to an employer's failure to insure and keep insured or provide
security; providing for appeals from compensation orders;
relating to workers' compensation proceedings; providing for
supreme court jurisdiction of appeals from the Workers'
Compensation Appeals Commission; providing for a maximum amount
for the cost-of-living adjustment for workers' compensation
benefits; providing for administrative penalties for employers
uninsured or without adequate security for workers'
compensation; relating to fraudulent acts or false or misleading
statements in worker's compensation; and providing for an
effective date."
MOVED SB 1002 OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: SB1002
SHORT TITLE: INSURANCE & WORKERS' COMPENSATION SYSTEM
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
No previous action to record.
WITNESS REGISTER
Mr. Doug Wooliver
Alaska Court System
303 K St.
Anchorage, AK 99501-2084
POSITION STATEMENT: Informed committee members of fiscal
implications of SB 1002 on the court system
Mr. Chuck Lundeen
Chief Counsel
Northwest Insurance
No address provided
POSITION STATEMENT: Supports SB 1002
Mr. Paul Richards
Alaska State Chamber of Commerce
217 Second Street
Juneau, Alaska 99801
POSITION STATEMENT: Supports SB 1002
Mr. Martin Peale, Chairman
Board of Governors
Alaska Timber Industry
No address provided
POSITION STATEMENT: Supports SB 1002
Ms. Barbara Huff-Tuckness
Teamsters Local 959
No address provided
POSITION STATEMENT: Expressed concerns about SB 1002
Ms. Lori Wing, President
Alaska Independent Insurance Agents & Brokers
No address provided
POSITION STATEMENT: Supports SB 1002
Mr. John Guichici
Fairbanks, AK
POSITION STATEMENT:
Mr. Guy Bell, Director
Division of Administrative Services
Department of Labor & Workforce
Development
PO Box 21149
Juneau, AK 99802-1149
POSITION STATEMENT: Explained the fiscal notes to SB 1002
Mr. Scott Nordstrand
Department of Law
PO Box 110300
Juneau, AK 99811-0300
POSITION STATEMENT: Presented SB 1002 for the administration
Ms. Linda Hall
Division of Insurance
Department of Community & Economic Development
PO Box 110800
Juneau, AK 99811-0800
POSITION STATEMENT: Described the insurance provisions of SB
1002
ACTION NARRATIVE
TAPE 04-72, SIDE A
CHAIR RALPH SEEKINS called a work session of the Senate
Judiciary Standing Committee meeting to order at 8:10 a.m.
Senators Ogan and Chair Seekins were present. Senator Stedman
was also present.
SB 1002-INSURANCE & WORKERS' COMPENSATION SYSTEM
MR. DOUG WOOLIVER, Administrative Attorney, Alaska Court System
(ACS), informed members that the ACS takes no position on the
merits of the legislation but he would testify as to the impact
one provision of SB 1002 would have on the ACS and that is the
provision that pertains to appeals from the agency which would
bypass the Superior Court and go directly to the Supreme Court.
He maintained that the bottom line issue is that the ACS expects
to hear the same number of appeals as it has heard in the past.
Over the last five years, the number of cases appealed from the
agency to the Superior Court has averaged 36 cases per year. The
agency process itself is likely to have a very big impact on the
number of appeals. The ACS does not believe the proposed changes
within the agency will impact the ACS, except that the appeals
will go directly to the Supreme Court. Out of the 36 cases that
have come to the ACS each year, 75 percent are settled or
resolved at the Superior Court level. About 9 of those cases are
further appealed to the Supreme Court. The ACS believes that by
bypassing the Superior Court, the Supreme Court will see about
36 cases per year, rather than 9. The Supreme Court does not
have the capacity to absorb caseload increases, as the Superior
Court can. The number of Superior Court judges was increased by
two to 34 in 2001; that increase has allowed the Superior Court
to hear more cases. In addition, the Superior Court can bring in
pro tem cases. At the Supreme Court level, the same five judges
must resolve all cases so absorbing a caseload increase is more
difficult. The ACS has requested additional staff on its fiscal
note to absorb the increased caseload.
MR. WOOLIVER said one important part of the reform that SB 1002
reflects is a possible timesaving because the cases should work
their way through the agency more quickly. He noted that
bypassing the Superior Court will also speed up those cases that
would have first been heard by the Superior Court and
subsequently heard by the Supreme Court. Cutting out the
Superior Court step should save at least one year of time. He
said the ACS's concern is about the 75 percent of cases that
come to the court that are never appealed to the Supreme Court.
The Supreme Court would be forced to hear those cases and it
takes longer to resolve cases than the Superior Court for
several reasons. The first reason is that a Superior Court judge
is a committee of one. The Supreme Court is a committee of five;
it is a deliberative body. When an opinion is drafted, it is
circulated among the members, changes are suggested and it is
redrafted. He repeated the ACS does not support or oppose the
bill but will be making a request for extra staff for the
Supreme Court next year to deal with the increased work load.
CHAIR SEEKINS announced that Senator French had arrived so the
Senate Judiciary Committee had a quorum and its official meeting
was now in progress. He then asked Mr. Wooliver how many
additional staff the ACS anticipates needing.
MR. WOOLIVER said the court would like to hire a staff attorney
with expertise in workers' compensation cases to write a legal
analysis for each case. In addition, the court wants to hire a
secretary and a clerk to handle the additional paperwork and
transcription work.
CHAIR SEEKINS asked Mr. Lundeen to testify.
MR. CHUCK LUNDEEN, Chief Counsel, Liberty Northwest Insurance
based in Portland, Oregon, told members that Liberty Northwest
writes workers' compensation policies in Alaska and hopes to
expand into other insurance markets in Alaska. Liberty Northwest
currently insures 20 percent of Alaska's assigned risk pool, as
well as 150 voluntary insureds. Liberty Northwest supports SB
1002; it views the legislation as a very modest step in a
process of workers' compensation reform in Alaska. Workers'
compensation rates are of concern. Losses and loss adjustment
expenses determine those rates. SB 1002 will address one
component of the rate picture - litigation, which is a component
of loss adjustment expense. An important element of the bill is
a faster, streamlined process of decision making for workers and
employers. Those decisions would be published and have precedent
value, which is important.
MR. LUNDEEN said he has looked at the administrative realignment
from the board to the division and, although he is not
completely conversant with that administrative process, he views
putting people with knowledge in charge of certain functions in
the department, instead of the board, will streamline the
process. The anti-fraud provision that was added will be
beneficial. He pointed out that the Oregon Legislature grappled
with various reform issues. SB 1002 is similar to the Oregon
workers' compensation system, in regard to the workers'
compensation appeals commission. Oregon uses attorney
administrative law judges (ALJs) at the first level. A core of
ALJs under the board handles the compensability of decisions,
regarding whether the claim falls within the act. Oregon also
has an independent ALJ pool, which decides benefits issues, such
as medical services and vocational services. Everyone in the
first level is an attorney. Oregon's workers' compensation board
is comprised of five members - both lay members and attorneys.
He repeated that he sees SB 1002 as a modest first step.
Workers' compensation should be a fast, efficient process. It is
supposed to be a no-fault system, not a tort system.
MR. LUNDEEN said that he hopes that labor and management can
collaborate on an ongoing basis. That is essential to a
successful reform and to avoid getting to a crisis point.
SENATOR FRENCH asked what would happen to workers' compensation
rates in Alaska if the total amount spent in litigation was cut
by 50 percent.
MR. LUNDEEN replied:
It could certainly do that, Senator French and,
additionally, I think that Mr. Nordstrand made some
points on this in discussion of this bill in the
regular session. It's more than just I guess what I
would call the hard current costs that we can point to
- that $11 million. But as this process works its way
through, as claims are resolved more quickly, as you
get this body of law so that there's certainty, and I
know there's some dispute about whether that exists or
not currently, our view is when the system
participants know what the rules of the road are,
they'll settle cases or they won't file for litigation
so there is this $11 million that you can point to as
a current expenditure, if you will. But I think
there's much more than that. We'll tend to reduce
rates as we reduce litigation over time. But I'll be
happy to get back to you with some analysis.
SENATOR FRENCH asked Mr. Lundeen to make an educated calculation
as to the amount of the rate reduction.
MR. LUNDEEN said that is the job of the actuaries and he would
be happy to provide that information.
CHAIR SEEKINS said his concern is the length of time it takes
for a claim to be fully processed and whether that process is
being unnecessarily dragged out. He asked how that factor plays
in to the rates.
[A short portion of the recording could not be transcribed due
to tape failure.]
MR. LUNDEEN said he believes this bill will help.
CHAIR SEEKINS asked how the rates of a small employer who has a
claim that has been repeatedly delayed and has additional costs
pile up will be affected.
MR. LUNDEEN replied, "I think as we use losses to calculate year
over year, if he has a case that's going on for three or four
years and there's a reserve held on that, that would go into the
rate calculation Senator, and certainly drive up his rates." He
said he has seen that happen countless times in his career.
CHAIR SEEKINS asked Mr. Richards to testify.
MR. PAUL RICHARDS, Alaska State Chamber of Commerce, said he was
asked to represent the Chamber since Pam LaBolle recently
retired. He told members the Chamber supports SB 1002 and
compliments the administration for looking at how to improve the
efficiencies of workers' compensation in Alaska. He said any
efficiencies, consistencies and less cost to business are
supported by the Chamber. He asked committee members to move
forward with this legislation.
SENATOR THERRIAULT joined the committee.
MR. MARTIN PEALE, Chairman, Board of Governors, Alaska Timber
Insurance Exchange (ATIE), said ATIE was formed in 1980 as a
reciprocal workers' compensation insurance company owned by
policyholders. ATIE's specialty has been the logging industry
and higher risk coverage. ATIE has been very successful in
promoting work place safety and it returns any profit it earns
each year to its policyholders as a dividend. It sets its rates
conservatively high to protect its policyholders' surplus
balances, knowing the dividend will reduce costs to the net
basis. He said over the last 10 years, its dividend has averaged
67 percent of premiums, however for the year 2003, despite one
of its best years in terms of accident frequency and severity,
ATIE's profit was wiped out by assessments of the assigned risk
pool, which equaled $642,000.
Mr. PEALE said the legislature has been addressing a crisis in
workers' compensation and SB 1002 is part of that. Over the last
seven years, the assigned risk pool has an aggregated $60
million in losses. ATIE has absorbed about $2.9 million. ATIE
cannot continue to absorb those assessments, as its solvency
would be threatened. He explained that assigned risk pool
losses continue into 2004 and the surviving insurance companies
continue to face these assessments, which are out of ATIE's
control. Those assessments largely result from mismanagement and
lack of control in the system managed by the division. He asked
members not to blame the current director for mismanagement.
MR. PEALE noted that the assigned risk pool losses over the last
seven consecutive years have resulted from suppression of rates,
established by previous directors of the Division of Insurance.
Heavily discounted rates also contributed to the magnitude of
the burden of insolvencies on the Alaska Insurance Guaranty
Fund. Rates have been so inadequate that insurance companies
have declined applications in the voluntary market and forced a
great number of increased insureds into the assigned risk pool.
He continued:
Premiums in the assigned risk pool increased three-
fold in the last five years from about $12 or $13
million to about $40 million. He said heavy
discounting of rates has also contributed to the
magnitude of the burden of insolvencies on the
Guaranty Fund. Rates have been so inadequate that
insurance companies have declined applications in the
voluntary market and forced a great number of
increased insureds into the assigned risk pool.
Premiums in the assigned risk pool have increased
three-fold in the last five years from about $12 or
$13 million to about $40 million. You've heard
testimony about recent increases. Yesterday a graph
was presented showing a 21.2 percent increase in the
rates from 2004. We all share a concern about rate
increases but this must be viewed in perspective.
Rates from 1993 to 1999 were flat, if not decreased,
and included a great deal of discounting. Today rates
are just about back to the level they were in '93, in
spite of 10 years of inflationary impacts and costs
and we all know what medical costs have done.
We have followed this year's workers' comp legislation
closely with obvious interest. We have worked with the
administration and the director, promoting needed
fixes to improve management of the system and avoid
continuation of losses, which continue to be assessed
against insurance companies and our policyholders. We
appreciate changes, which have been agreed to working
with the division. Improving the loss cost system, as
provided by HB 540, was a major first step. Two other
steps, collateralizing the assigned risk pool reserves
to protect Alaska and a mandate that the assigned risk
pool be managed at least on a break-even basis on a
three year rolling basis - these provisions were in HB
357 but were stripped in the last day of the
legislature and they are now being incorporated into
SB 1002 before you now. However, words were added in
the mandate language at the bottom of page 4, line 31,
words that say 'that are approved by the director,'
which substantially changes the mandate provision.
This is a change from the previous language agreed to
at the director of administration. Director Hall told
us this morning that will be changed. The wording will
be moved so it doesn't basically say the director
would be free to pick and choose what's built into the
rate structure. So we appreciate that. We have revised
wording we would like to submit, which does that and
I'm sure the administration will.
The third amendment we have sought is known as the
quarter share fix. Last year we saw a major insolvency
of the Fremont. Under current statute, when an
insolvency occurs, that company shares assigned risk
pool losses. It's reassessed against the remaining
insurance companies. For us that was about one-half of
the $642,000 in assessments our policyholders were
forced to absorb in 2003. Insolvent insurers direct
writing reserves are covered by the Guaranty Fund.
Under SB 276, the assessment rate, which all workers'
comp policies, including assigned risk policies, pays,
was increased from two to four percent.
Here's what I want to emphasize. Since an insolvent
insurer has collected or received its share of the
assigned risk pool premiums, and the two - now four
percent assessment of workmen's comp policies has been
paid, we strongly believe that an insolvent insurers'
share of assigned risk pool losses should travel as
part of that insolvent insureds' bankruptcy to the
Guaranty Fund. Why treat the direct writing reserves
differently than the [indisc.] reserves in the
assigned risk pool? In several discussions with the
director and administration, we seem to get agreement
that this quota share reallocation is grossly unfair.
The state should be anxious to fix this injustice if
it wants to create a more open and competitive market
to benefit employers and the injured workers. The
Division of Insurance should manage to avoid
insolvency but, when they do [indisc.], the Guaranty
Association or fund should have its place. We offer
amendment language that would fix this.
As to the bulk of SB 1002 before you, we support the
changes proposed by the administration in the hearing
process of how it worked. We believe the process will
be fair to injured workers and more expeditious. We
all, I think know that any process that is not fair to
the injured worker is not going to survive the test of
time. Thank you for this opportunity to testify. We'd
be happy to answer any questions.
8:35 a.m.
MR. PEALE referred to the graph presented to members on the
previous day that shows that rates increased 21 percent and said
the data from the National Council shows that in the last five
years, the assigned risk pool direct losses from just claims
paid have equaled 90 percent of premiums before all other costs.
He pointed out that a 21 percent increase against a 90 percent
loss ratio will not break the system; that would require another
20 percent.
SENATOR OGAN asked if Mr. Peale feels the system is broken and
could be causing insolvencies among insurance providers at this
time and if he feels continuation of the current system will
compromise the ability of businesses to even obtain workers'
compensation in the future.
MR. PEALE said a good number of insurance companies have already
exited Alaska. He thought the division sent out questionnaires
to 90 insurance companies; 27 did not respond and 20-something
indicated they pulled out of Alaska. Premiums have been
inadequate.
SENATOR OGAN said building contractors can only get so much for
a house and that amount is dictated by market value. He noted
their workers' compensation prices are skyrocketing and have
various forces opposing any changes. He said workers everywhere
will be hurt if employers cannot afford workers' compensation
insurance. Businesses will fold, people will lose their jobs,
and home prices will increase.
MR. PEASE said insurance is the process of spreading risk and
providing a profit to an insurance company, based on its
capital, which is at risk over a period of time. He said the
market should be competitive so that a lot of insurance
companies are offering policies. ATIE offers policies on a cost
basis with no profit.
MS. BARBARA HUFF-TUCKNESS, Director of Governmental and
Legislative Affairs for the Teamsters' Local 959, stated
opposition to SB 1002. She said throughout the entire
legislative process with workers' compensation [this year],
Local 959 has been consistent in its concerns about the issue.
She said that the hearing yesterday was her first opportunity to
hear about this new 68-page bill. It is her understanding that
the administration is supposed to give a demonstration of the
bill to labor participants this morning. She asked to cover a
few of labor's concerns:
While the bill, we believe, has been drafted, it has
gone through changes. It continues to go through
changes and that should be a concern for not only the
members of this committee but I think the entire
legislative body. We seem to be going through
continued draft after draft and yet the same
arguments, even with some of these changes - well now
we're flipping, for example, the hearing process now
instead of having the lay individuals hearing the case
initially and then going to a superior court or a
higher level of appeal, we now have the lay
individuals that are deciding some very serious
concerns with respect to the law and allowing an
individual, i.e. the hearing officer or I guess it's
the administrative law judge in this particular
process, to hear a case. You're losing - we're
concerned that by doing this you're losing continuity.
As I understood, and we didn't spend a lot of time
with the most recent bill, which of course puts into
the system the administrative law judge process, but
now you're taking individuals and having them hear
cases. There is no, I guess, specialty requirement out
there or those requirements for individuals,
especially the current hearing officers who probably
don't even qualify for these particular positions. So
now you're creating a new system under this bill.
You're putting in individuals to hear cases who have
little, if any, experience and you're creating a
system that we believe is going to encourage - and I
think the testimony has probably also added to this -
encourage litigation. Now is that going to be for a
year, two years, until we have everything on record
out there? And then we go on to do a new
administration, new individuals coming into the system
and we start all over again and that is a concern
that, at least from organized labor's perspective, we
do represent injured workers. We don't represent all
the injured workers. In fact, I'd like to come before
you and say that if we had safety programs that were
working efficiently and effectively, we probably
wouldn't have the number of injured workers that we do
right now.
If we're talking about reducing costs, we need to
start looking at what's driving those costs and I
think this was in House Labor and Commerce at the end
of session there were statistics that were introduced
there. The driving force with workers' comp costs and
those rates right now, of which organized labor -
Teamsters Local and our trust - we employ over 60
employees. We pay, as an employer, those workers' comp
costs as well. We are part of not only the cost
bearing, but we also represent workers that are going
through the system. But in looking at those numbers,
the driving cost is medical. There is nothing in this
bill, and I would ask anybody in this audience or
anybody that's watching television today to come
forward and say that this bill is going to reduce
those costs because it does nothing, unless what this
system ultimately ends up doing is denying those
rights or benefits to injured workers. Then you're not
paying those medical costs and that is a serious
concern that we have with this bill.
And I'd like to run through a couple of other issues
as well. There was testimony yesterday by the
administration that they have taken a look at this
bill. The new draft addressed concerns that we had.
The de novo review was a concern, is a concern, and
has continued to be a concern. It is still in this
bill and the administration, in drafting this new
bill, at least never talked with a representative of
the Teamsters. I don't believe anybody from AFL-CIO
was contacted. The first that we'd actually seen of
this bill was yesterday so there was no communication.
Evidently listening to some of our concerns, or maybe
our written documents that have been submitted through
this process, again all we're saying is we want to be
a part of the process. We want to work with the
employers out there to take a look at what are the
driving costs or issues out there. We represent
injured workers going through this process. There has
not been a complaint about the slowness of the system
but yet we've heard testimony here that this is going
to speed up the process. Well, if it's a complaint
then yes, maybe we do need to look at how we make
those changes with the system but at least to our
understanding, that particular statistic has not come
forward. It has not been a complaint with the folks
that we represent and granted, there are a lot of non-
represented injured workers in this state and again,
why is that happening. I think what you really need to
do is take a look at where are the injuries. What's
the cost driving those and maybe improving some of the
safety programs out there, which does reduce your
workers' comp costs directly.
Small business - we believe that the small business
owners should be concerned about SB 1002 and,
specifically, and maybe there's somebody here from the
administration that can talk about this. We have not
had an opportunity to ask and answer questions but we
do believe that under Section 6, with the small
businesses lifting that surcharge cap, that the
employers, especially the small business employers,
will be paying more, not less. I don't know what the
response from the administration is on that.
Let's see, it also permits, under Section 12(j) of
this bill, conflict of interest - at least creates a
potential conflict of interest for some state
employees or former state employees. We also believe
that there needs to be some consistency applied with
respect to fraud for all parties, not a specific
individual or individual claimant out there but from
employers' medical, as well as employees. I believe
that you do have a system that does address fraud as
it's currently drafted.
There's no change in the insurance code to better
protect employers against future Fremont failures and,
again, I think that the previous speaker did an
absolutely excellent job in discussing those issues
and concerns. I believe, as do many of my co-workers,
the reason that this bill was introduced to begin with
was nothing more than a message out there, and we're
concerned a bad message for employers that while we
are going to increase your rates by 21 percent, we're
also going to guarantee, through the Insurance
Guaranty Association, that we are protected from those
Fremont situations - we're going to give you this bill
and it's going to be a fix for all. We don't see that
fix in this bill and, in fact, we aren't concerned
that the only thing that this is doing is sending some
bad mixed messages with respect to the workers' comp
and the workers' comp system.
I can actually go on and on and on and I don't know
that the committee necessarily needs to hear all of
this. We had Jim Sampson - and I believe that each
member of the committee did receive a copy of his
letter yesterday - a couple of areas. One number that
was actually disputed in this particular letter and
I'd like to read it into the record, Jim talks about
the workers' comp system here - the fact that Alaskans
have enjoyed a very, very healthy workers'
compensation climate for many years that through the
joint labor and management ad hoc committee that met
in the '80s, actually saved over 50 percent in
workers' comp costs at over $400 million since 1988.
Now there was a question that was raised yesterday. I
did some checking to see where this particular number
came from. Kevin Dougherty, who is an attorney that
represents laborers, actually has that number and if
anyone is interested in taking a look at how we
actually came about that I'd be glad to provide that.
But it goes back to I guess the climate of the time,
the fact that it was a joint working relationship
between labor and management that actually addressed
those serious issues and concerns with respect to the
cost out there of workers' compensation. We do not
believe that this bill does that at all. We don't
believe that this was a joint effort. We believe that
it was nothing more than a pacifier, so to speak,
because of all the other changes that actually, I
think everybody in this room will sit and agree,
actually needed to occur and it was very unfortunate
that it took the Fremont incident to bring all this to
everybody's attention. The fact that the insurance
rates have not gone up - five years ago I remember
talking with folks in the halls, looking at, again,
the rates of workers' comp - the fact that they have
not increased, they were not going to increase under
the previous administration and yet now everybody's
sitting here going we're looking at 21 percent. Well,
for the last eight years there was no increase. Take a
look at - there was a chart that the administration
has circulated that actually grabs out amongst the 50
states where their workers' comp rates are and a
question that had been asked - Nevada, I think, was
actually the lowest - I think it's at least a minus 12
percent out there. Has anybody taken a look at what
the State of Nevada has done and the answer to that
was no. There's been discussion with Oregon. On that
chart Oregon's at a - I believe they're probably at
zero. So there was no increase, no decrease for this
particular period of time. But there's got to be other
factors. State of Nevada - I think everybody sitting
here realizes that their economy has been going very,
very well. There are a lot of people that are
employed. There are probably a lot of employers out
there that are paying into their fund, which would
tend to reduce those costs out there versus
increasing. And, of course, if you have a good safety
program, as all of the workers are working in the
system, then ultimately that also helps reduce the
cost.
Changing the system we do not believe needs to occur
with respect to the hearing. There haven't been
complaints. If you take a look statistically at those
decisions - 50/50 with employer/employee decisions
coming back. Again, it goes back to what is the issue
and what is it that we're trying to fix and we don't
believe that this particular bill does that.
CHAIR SEEKINS asked MS. Wing to testify.
MS. LORI WING, President of the Alaska Independent Insurance
Agents and Brokers (AIIAB), stated support for SB 1002. Her
organization works with a variety of employers and has watched
rates increase over the last few years to the point where those
rates could put employers out of business. AIIAB realizes that
some of the cost increases are due to large claims and are
driven up by skyrocketing medical costs but the state has to
address what it can, that being the manner in which claims are
being handled. She said she couldn't describe the impact that
increasing workers' compensation premiums are having on
employers in the state. Some of those premiums have doubled. If
those employers cannot find some relief, they will be forced out
of business, which will have a devastating effect on the
economy. The AIIAB does not want to take away any benefits from
injured workers, but the problem of increasing rates must be
addressed somehow.
TAPE 04-72, SIDE B
MS. WING said that SB 1002 is the first step and repeated
support for the bill.
MR. JOHN GUICHICI, IBEW, Fairbanks, said Mr. Lundeen emphasized
how labor and industry got together in Oregon and came to
consensus on workable situations. He pointed out that a
similarly concerted effort has been virtually absent with this
legislation. He said the lay board, in the process of early
determination, has been removed again. He personally thinks when
these cases go before an administrative law judge without
involvement of the layperson who is familiar with the workforce,
delays in resolution will occur and ultimately be more costly
because of probable litigation. Disputes should be resolved at
the lowest level with people who are familiar with the work
place; turning it over to an administrative law judge will not
do that. Also absent in the bill are transition provisions with
the current staff within the workers' compensation division. He
questioned why those workers were eliminated in SB 1002 and said
he believes it is only fair that those people are considered as
they have been doing a good job. The reversal rate on their
decisions is one-third of the reversal rate in other states. He
said, regarding the de novo review, any decision can be
overturned with little regard for the merits of the case and
that is unfair. He expressed concern that SB 1002 has flaws and
that people should have more than one or two days to review it.
He repeated that it is imperative that labor and industry work
together to come up with a satisfactory bill.
SENATOR FRENCH referred to the four fiscal notes: an
indeterminate fiscal note from the Division of Risk Management;
a fiscal note with a net increased cost of $415,000 from the
Department of Labor and Workforce Development; a fiscal note
from Centralized Administrative Services with an increase of
$826,000 the first year and $770,000 in subsequent years; and a
fiscal note from the court system projecting increased costs of
$188,000. He questioned the large fiscal note from Centralized
Administrative Services.
MR. GUY BELL, Division of Administrative Services, Department of
Labor and Workforce Development, said the answer is technical in
nature. He explained:
You'll notice that the funding source for the
Department of Labor and Workforce Development fiscal
note of $415,000 is the workers' safety account.
Included in that fiscal note is a reduction in
personal services and an increase in contractual
services. 100 percent of the cost of the fiscal note
for the Department of Administration is in the
contractual services budget in the labor and workforce
development fiscal note. So, you'll notice that the
funding source for the Department of Administration's
fiscal note is interagency receipts so basically what
we're indicating is that the workers' compensation
commission, the new commission, will contract with the
Office of Hearings and Appeals in the Department of
Administration for the services of the administrative
law judges so it's not a net increase in cost, it's
just a demonstration that some of the cost of this
program will actually be incurred in the Department of
Administration.
SENATOR FRENCH thanked Mr. Bell for the explanation. He then
asked if the labor costs and the court system costs would be
general fund costs.
MR. BELL said the funding source for the Department of Labor is
the workers' safety account, which has sufficient funding to
cover this cost. The workers' safety account was designated by
the legislature and is the result of receipts from self-insured
and workers' compensation insurers, collected by the Division of
Insurance. It is a component of the total rates directed to the
workers' safety account for the cost of administering workers'
compensation programs.
SENATOR FRENCH asked if that account is funded by the industry.
MR. BELL said that is correct.
SENATOR FRENCH replied, "That's still a cost to industry so it's
not as if they're experiencing a savings. Their rates still have
to reflect that cost."
MR. BELL again said that is correct.
SENATOR FRENCH asked if the $188,000 for the court system is
from general funds and the $415,000 is from insurance
surcharges.
MR. BELL agreed.
SENATOR THERRIAULT asked if the ongoing cost for the
administration is $295,000 of new expenses.
MR. BELL said there is a one-time cost of about $140,000, which
involves moving staff and office reconstruction due to the
required separation of offices. The ongoing net increase in
cost, outside of the court system, is estimated to be $295,000.
SENATOR THERRIAULT asked to be reminded of the ongoing costs for
SB 311.
MR. BELL said they were $554,000, so this amounts to about half.
CHAIR SEEKINS said the Senate Finance Committee will review the
fiscal notes and consider additional amendments.
SENATOR THERRIAULT asked the administration to respond to
comments made by witnesses today.
MR. SCOTT NORDSTRAND, Deputy Attorney General, Department of
Law, said he would defer the insurance comments to Ms. Hall but
would clarify a few other comments that were made. He began:
In terms of there being no requirements that the
administrative law judges have special expertise - I
think that was mentioned earlier by one witness - if
you look at Section 60 of the bill, this is a specific
provision that in addition to the requirements to be
in the administrative law judge cadre, they also must
have three years of experience in this state in the
field of workers' compensation law or a similar field
of practice. That's the identical language that was
used in SB 311 and I think most found acceptable to
ensure that, in that case, a hearing examiner with
sufficient qualifications. Literally all we've done is
taken that hearing examiner from [SB] 311 and put
those duties with the central panel to ensure
independence and to go along with the flow, so to
speak, of the new system. So that's one thing.
There was some suggestion that somehow when there's a
new administration that the system would all start
over and ... case law would run amuck ... that there
would be new decisions. Remember, by operation of
statute, the terms of the five folks on this panel
will be staggered with five year terms. If you look at
the current workers' compensation board, you'll see,
as I understand it, there are three-year terms.
They're also staggered and also are appointed by the
governor and confirmed by the legislature in the same
way. In fact, by making them five-year terms we could,
in fact, have maybe a little bit more continuity, not
less or at least there is the staggering so that's
important to note.
And then there was a mention about the current staff
at the division and there not being transition
provisions for them into this new process. We simply
went with the methodology that was used in SB 203, as
I understand it, and all of those folks are certainly
capable and certainly can apply. The only real
limitation - obviously all the folks that are
presently working for the division and doing hearings
have lots of experience in workers' comp - the only
limiting factor will be that they'll have to be
admitted to practice law and I don't want to get into
the specifics but I understand there are some that are
admitted to practice law in there - maybe some that
aren't and if they choose to become qualified in that
way they can apply for these positions like anyone
else. That's exactly the same system, I think, that SB
203 contemplated because we are talking about a
significant increase in pay. It's a different
position. It's going from a range 21 to a 24, which is
consistent with what the central panel is paying the
administrative law judges so I think that's all I
heard. Linda maybe wants to mention something about
the insurance rate increase issues.
MS. HALL asked to address a few comments made earlier. Regarding
the rate increases, she explained that over the last five years,
the rate increases were as follows:
In the year 2000, the rate increase was zero but there
was a benefit change that resulted in a 7.9 percent
[increase];
In the year 2001, the rate increase was zero;
In the year 2002, the rate increase was 10.2 percent;
In the year 2003, the rate increase was 3.5 percent.
She pointed to a graph and explained that beginning in 1988,
rates started to go up. She said a phrase was added to Section 6
of SB 1002. The legal drafters changed the language to make sure
the director's approval provision applies to rates and not to
the factors that are used for rate making, which are prescribed
in statute. She said burdens on insurers have created an
unhealthy environment; one of those burdens is the loss in the
assigned risk pool and another is the reallocation to those
businesses that remain. She said that she agrees the
reallocation is a burden but disagrees with putting that in the
Guaranty Fund. That will put a traditional insurer obligation
into the Guaranty Fund for policyholders to pay. She continued:
We did just put into law the ability to increase
assessments up to four percent. That goes directly to
the cost of workers' comp for employers and I cannot
advocate doing something else that increases the cost
to employers so I have not supported that. I think we
need to find ways to deal with that but not by putting
it in the Guaranty Fund. That's not done in any other
state. It is a specific exclusion in the guaranty fund
statutes of every other state.
SENATOR OGAN questioned whether Section 6 is the bottom line and
will increase costs to businesses.
MS. HALL said it could increase costs. She explained:
If we make the assigned risk pool self funding, right
now there is a statutory cap and actually Section 111
of this bill removes that 25 percent statutory cap.
This provision is more of a proactive statement asking
that - requiring that the pool be self-funding on a
three-year average. I will tell you three years ago
there was a filing made by the NCCI that proposed
increasing the assigned risk pool rates by 70 percent.
I don't think - that was obviously not approved -
could not be approved under our current statutes. I
don't think anyone would ever anticipate increasing
the assigned risk pool rates 70 percent but it's an
indication of how severely under-funded the assigned
risk pool has been. It could potentially increase, and
I think would, at least for a period of time, increase
rates above the 25 percent statutory cap. So there is
a potential. Probably 85 percent of the pool policies
are small businesses and, by small I think I've used
statistics with this group, we're talking under
$10,000 in premium. The average premium in the
assigned risk pool is $864. The average claim cost is
$19,363. That's where the discrepancy comes from is in
the average premium that's very, very small. Our
average claim costs in Alaska are reasonably high.
They are higher than the national average.
Now that $864 premium won't go up to pay the $19,000
but they will go up to overall make that pool self-
funding.
CHAIR SEEKINS said he was pleased to hear about the planned
meeting between the administration and labor representatives.
SENATOR THERRIAULT asked Mr. Nordstrand how much of SB 1002 is a
rewrite of SB 311. He pointed out that the chairman encouraged
the Department of Law to meet with labor representatives in the
process used with SB 311 and asked how much of SB 311 was
carried forward.
MR. NORDSTRAND said a couple of the technical insurance
provisions in SB 1002 are new, as well as the fraud section. He
continued:
Beyond that, everything is the same with the exception
of the structure for a hearing being instead of with a
panel of lay members and the hearing examiner with an
administrative law judge and the commission having lay
members and a single attorney. The roles, the
standards of review, the methods, the division of
duties between the director now and the commission and
the other entities essentially dividing judging from
administering, all of that is identical. So it really
is just that as what was described as flipping of
where the lay participation happened and that's it.
SENATOR THERRIAULT said recognizing that the fiscal notes need
to be reviewed by the Senate Finance Committee, he will make
that referral today. He then moved to pass SB 1002 and attached
fiscal notes from committee with individual recommendations.
SENATOR FRENCH objected.
CHAIR SEEKINS said he feels comfortable that the bill will be
thoroughly discussed in the Finance Committee and hopes that
some consensus will come from the meeting between the
administration and labor representatives this morning.
SENATOR OGAN stated that his desire for workers' compensation
reform is based on the hope that the cost of doing business will
be lowered. He pointed out that he remains concerned that
Section 6 will increase the cost of doing business.
CHAIR SEEKINS agreed with Senator Ogan.
The motion to pass SB 1002 with attached fiscal notes passed
with Senators Therriault, Seekins and Ogan in favor, and
Senators French and Ellis opposed.
CHAIR SEEKINS adjourned the meeting at 9:22 a.m.
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