Legislature(2003 - 2004)
04/22/2004 09:03 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 311(JUD)
"An Act providing for a special deposit for 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 Workers'
Compensation Hearings Board; relating to agreements that
discharge workers' compensation liability; providing for
hearing examiners and hearing panels 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 assigned risk pools and
insurers; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill, sponsored by the Senate Rules
Committee at the request of the Governor, "changes the way
workmans' compensation disputes and appeals are resolved. Under SB
311, appeals are reviewed by the newly created Workmans'
Compensation Commission, which is composed of three persons
experienced in practicing Workmans' compensation law in Alaska
instead of the Alaska Superior Court."
LINDA HALL, Director, Division of Insurance, Department of
Community and Economic Development, noted the complexity of the
legislation and testified as follows.
With this Committee previously, I have discussed the financial
crisis in the Alaska Insurance Guarantee Association. The
other area of tremendous concern to me today is the lack of a
healthy workers' compensation insurance environment. I'd like
to give a little background on the problems that we're
encountering. We have had for the past five years, a lack of
profitability in out market, which is making it unattractive
to insurers. Losses have ranged from a low of 99.9 percent to
a high of 154 percent. At that high, insurance companies are
spending $1.54 for every dollar of workers' compensation
premium they collect. Alaska carriers are loosing five percent
more money in Alaska than the national average.
The second area that has created a problem has been the cost
of workers' compensation claims. As everyone is aware, cost of
medical benefits has increased substantially over the past
several years. We have seen double-digit increases in the cost
of medical care. This is accepted and at least understood
usually in the health insurance arena, but sometimes we don't
make that connection with the cost of workers' compensation.
It does have a dramatic impact on the cost of claims.
Major cost drivers in the state of Alaska for workers'
compensation insurance are physician's fees, [which] are among
the highest in the country. We have a permanent partial cost
per case that is 40 percent higher than the countrywide
average. We have lengthening duration of claims, as we have an
aging workforce. I think maybe we heal less quickly. We have a
claim frequency in our temporary total that is total the
countrywide average. These cost drivers affect the cost of
claims, which in turn certainly impact the cost of insurance.
As I think everyone is aware, I've talked about it with this
group before, we have had substantial premium increases.
Effective January 1 of this year, the average rate increase
was 21.2 percent. As the cost of claims is increased, the
actuarial analysis of historical claims cost and projections
into the future indicated the need for that substantial rate
increase. The change was an average. We actually have seen
ranges from a 15 percent reduction in costs to a high of 57
percent increase in people's workers' compensation. We had 17
classifications that had increases in excess of 50 percent.
Combining that increase in premium with the assessments that
are occurring for the deficit in the Guarantee Association,
has combined to make dramatic increases in the cost of
workers' compensation.
The fourth factor that is impacting our workers' compensation
market is the assigned risk pool. It's another factor that has
made the Alaska marketplace increasingly unattractive. Due to
the mandatory nature of workers' compensation, we have a
mechanism called the "assigned risk pool", where, if an
employer is unable to obtain insurance in the traditional
market, they can obtain insurance in the assigned risk pool.
Currently, 17 percent of the market is in the assigned risk
pool. When the cost of claims in the assigned risk pool
exceeds the cost of the premiums collected, the difference is
charged back to insurance companies. Over the past five years,
Alaska has had the highest charge of any state for the losses
in the assigned risk pool. This charges range from four
percent to six percent. It's an additional cost to insurance
companies, comes directly out of their operating costs and
makes doing business in Alaska very expensive.
Overall, we have a workers' compensation environment that is
becoming very expensive for employers and very unattractive to
insurers.
As these issues became apparent, staff from the Division of
Insurance, the Department of Labor and Workforce Development
and the Department of Law have met to attempt to find ways to
overcome these challenges. We cannot continue to merely
increase workers' compensation premiums for employers. We must
look to find ways to stem the increasing costs of providing
benefits to workers.
We've looked at a number of options, ranging from the cost of
medical benefits, provider fee payments, definitions of
compensability, and a variety of technical terms that deal
with the benefit system.
SB 311 makes some insurance changes to enhance our marketplace
and it proposes a change in the workers' compensation
adjudicatory process that we feel will bring about more
efficiencies, more predictability. We desperately need a
healthy workers' compensation marketplace in Alaska. We need a
market that's sustainable, that will encourage companies to
continue to do business, to attract new markets. We need
compensation insurance that is available and affordable for
employers to continue to develop jobs to sustain economic
development.
This bill is fairly unique in that it's a cross departmental
effort to find solutions to the issues. I will address the
insurance pieces of the bill, Director Paul Lisankie and
Deputy Attorney General Scott Nordstrad will address the
Department of Labor, workers' compensation pieces of the bill.
Realizing that the bill is fairly long, there are only four
sections that I would like to address for insurance. Section 3
is a requirement for an increase in the deposit required of
insurance companies writing workers' compensation. This
deposit will be for the protection of Alaskans covered under
the workers' compensation system. As you've seen, and this
body has passed a bill funding the current deficit in the AIGA
[Alaska Insurance Guarantee Association] these special
deposits would go to the Guarantee Association, which would
diminish the need for assessments that we're currently facing.
Section 4 really makes that an order of priority and
bankruptcy.
Section 5 changes the composition of the Board of Governors of
the Guarantee Association. Currently, insurance - there are
seven insurance company members and two public members. The
proposal is to change that composition so that all
stakeholders have a seat at the table. We've seen what a
dramatic impact in solvencies can have on both injured workers
and on employers and I'd like to see more people at the table.
Section 105 is the other insurance section I'd like to
discuss. Section 105 repeals the 25 percent statutory cap on
surcharges on the assigned risk pool. The assigned risk pool
currently has a statutory cap of 25 percent. I feel strongly
the pool must be self-funding. Premiums have lagged well
behind the cost of claims in the pool. Nearly 6,000 of the
8,800 policies in the pool will have premiums under $3,000.
The average cost of claim in Alaska today is $19,363. So we
have an $800 premium and a $19,000 claim. That is an average.
The pool has lost money at an even more rapid rate than the
traditional insurance market. Small employers are the bulk of
these 6,000 policies. They are just as likely to have claims
even though probably not as many as larger employers. As I
described in the introduction, the financial burden on
insurance companies from the Alaska assigned risk pool, has
contributed dramatically to the overall attractiveness of
Alaska to insurers. We have a fragile insurance marketplace
and we're looking for solutions to bring about change to that
marketplace so that we can have an impact on the cost of
workers' compensation.
Co-Chair Green interrupted to question the section of the bill the
witness was explaining.
Ms. Hall corrected that Section 106 pertains to the assigned risk
pool, as she was discussion.
Co-Chair Wilken announced as much time as necessary would be
allotted for consideration of this bill due to the importance and
complexity of the matter.
PAUL LISANKIE, Director, Division of Workers' Compensation,
Department of Labor and Workforce Development testified that
several features in bill would affect the administration of
workers' compensation insurance in Alaska. He stressed that this
bill proposes no changes to workers' compensation benefits payable
to residents of Alaska, although the calculation of rates for
nonresidents would be changed. He explained this is to prevent
injured nonresidents from receiving higher benefit payments while
residing outside the State.
Mr. Lisankie furthered this bill would formally divide the
functions of the Workers' Compensation Board into adjudication and
administration. He informed that the Division currently assists the
Board in all Board functions, although this is not required by
statute. He stressed the need to "informally" insure that claims
are not decided as a result of the current practice whereby the
Division and the Board both investigate claims, accuse parties of
wrongdoing and issue joint determinations. Due process constraints,
he specified, provide that the party charging and prosecuting
matters could not be the same party that judges upon those matters.
He noted this bill would make a formal distinction between the
Division, which would undertake administrative, investigative and
prosecutorial activities, and the Board, which would resolve any
disputes between the Division and the party.
Mr. Lisankie told of the proposed establishment of a Workers'
Compensation Appeals Commission in this legislation. He stated this
Commission would hire and retain hearing examiners, who along with
the current panel members would undertake the initial hearings in
disputed claims for benefits and accusations against employers
failing to provide insurance.
Mr. Lisankie then shared that currently, if the Division discovers
an employer failing to provide insurance, the only sanction that
could be imposed is closure of the business if such insurance is
not purchased; however, he remarked that once insurance is
purchased, no other consequences could be imposed on the employer.
He stated that this legislation would impose penalties of up to
$100 per day, per employee that the employer fails to carry
insurance. He expressed the intent is to strengthen cease and
desist orders, and to show to employers that this issue is
critical. He asserted that employers failing to carry insurance
place the physical health of employees at risk, and also provides
an unfair fiscal advantage against other employers who lawfully
purchase this insurance.
Mr. Lisankie listed the motivation behind the proposed changes is
greater consistency of decisions and predictability of decisions.
He remarked that injured workers would have more certainty of the
benefits they would receive. He gave the history of the Workers'
Compensation Board established at statehood in 1959 with three
members, with no question as to who resolved the issues. However,
he noted that with increased population in the State, the Board
membership expanded to the current seven panels, with the 14 total
members appointed by the Governor to seats designated for labor
interests and industry interests, and confirmed by the Legislature.
Each panel, he informed, independently decides how to interpret and
implement the workers' compensation laws and are not required to be
consistent with the other panels.
Mr. Lisankie noted that if a party is dissatisfied with the ruling
of a panel, they are entitled to an appeal through the Alaska
superior court, which serves as the appellate body. He remarked
that most superior court judges do not have expertise in workers'
compensation law. He furthered that the decisions of the superior
court are binding but that panels are not required to follow the
rulings in future cases.
Mr. Lisankie explained that this bill would eliminate the superior
court from the workers' compensation appeal process and establish a
commission to address appeals. This commission of three members, he
said, would issue binding decisions that would set precedence for
future cases. He qualified that the Alaska Supreme Court remains
the sole arbiter of law in the State and that final commission
decisions could be appealed to the Supreme Court. He indicated that
precedence set by the commission would continue to apply to other
ongoing cases until overturned by the Supreme Court.
Mr. Lisankie predicted that the consistency and predictability of
decisions would result in less litigation and be less costly. He
informed that the proposed changes in this legislation are similar
to the laws of some other states. He anticipated that insurance
providers currently not issuing policies in Alaska would be
encouraged to participate in the Alaska marketplace knowing that
their experiences here would be similar to those in other states.
LORI WING, President, Alaska Independent Insurance Agents and
Brokers, testified via teleconference from Anchorage and read
testimony into the record as follows.
Our association, the AIIAB represents in the insurance
marketplace employers from Ketchikan to Barrow, from Kaktovik
to Adak. Our clients are governmental entities, privately
held, and publicly traded corporations, limited liability
companies, and joint ventures. They are for-profit and not-
for-profit; they are large and small. All together they make
up the business community, the economic base of the State.
Each of these entities is required to comply with the
respective statutes that are often referred to as the "Work
Comp Act". Each of these entities contribute a significant
portion of their revenues to a work-comp program regardless of
whether they are insurers to a commercial insurance product or
self insured through an alternative risk financing technique.
The past few years, these employers, regardless of what
mechanism they have chosen to comply with the Act, have
experienced significant increased costs. The cost of
insurance, reinsurance, claims and the associated expenses;
the costs have increased. For those that have purchased a
commercial insurance product, the cost is reflected in the
insurance premium. For those self-insuring, the cost is
reflected in the direct payment of claims. Regardless, the
employer is paying the cost, the increased cost.
We, the AIIAB, as an association, agree that some of these
costs are difficult to control. Workers' compensation claims
are every bit as much subject to the increased cost of medical
care as a health or medical insurance program. But there are
some costs we think can be controlled. Costs that can be
quantified, defined, not subjected to the opinion to what is
commonly referred to as [indiscernible]. Those costs can be
controlled. Our hope is that Senate Bill 311 will allow those
costs to be quantified, defined once and for all, allowing
rate-making organizations and insurers to adequately trend and
price the cost of workers' compensation, making the recent
rate premium or claim cost, the increases or a portion of
those costs, unnecessary.
I can tell you that I personally deal with a client, a
regional hospital out in Dillingham. Their work comp this
year, based on the rate increases as of January 21st will go
from $391,000 to $524,000 without changing the payroll a
penny.
Senate Bill 311 does not limit or eliminate any benefits due
an injured worker or an injured employee, but it may help
reduce the cost of complying with the Act to employers. It may
help, and we believe it will, make those corporations,
governmental entities, and other organizations from Ketchikan
to Barrow, from Kaktovik to Adak, remain viable, profitable,
Alaskan employers.
We the AIIAB respectfully request that you the members of the
Senate Finance Committee, refer the bill on and we ask that
your colleagues, regardless of they're Republican or Democrat,
do the same. We, those that deal with the employers, the
insurers, the few that we have in this State, the adjusters
and attorneys, the employees and the claimants, are confident
that this bill will help stabilize and hopefully reduce the
costs associated with compliance with the mandates defined in
this Act. We are confident Senate Bill 311 will help those
employers that are the economic base of this State.
Senator Hoffman remarked upon the significant cost increase for the
Bristol Bay Health Corporation and asked how this bill would reduce
those costs.
Ms. Wing was unsure this legislation would affect rates in the
current year, but predicted that cost reductions would begin the
following year and continue for several years.
Senator Hoffman asked what emphasis should the State place on
reducing claims through promotion of workplace safety.
Ms. Wing admitted this is a viable component, but stressed that
regardless of how safe a workplace is, injuries occur. She noted
that all employers she works with emphasize safety.
Senator Olson asked whether the witness supports the proposed
appeals commission of three attorneys, or predicts the commission
would complicate future matters.
Ms. Wing expressed the association supports the bill as written
with the three attorney positions.
KEVIN DAUGHERTY, Alaska Labor and Management Ad Hoc Committee,
testified via teleconference from Anchorage that this bill does not
reflect the process of the Ad Hoc Committee, which has been in
place since 1981. He reminded that during the 1990s, Ad Hoc
Committee efforts reduced premiums for employers a total of 49
percent. He cited this as an example of the ability of the Ad Hoc
Committee to protect benefits and provide for a more cost effective
system. He charged that this bill departs from the actions of the
Committee and instead proposes to replace a "common-sense layman
board" with three "so-called expert" attorneys.
Mr. Daugherty remarked this would not provide better "decision
making", stressing this is not only his opinion, but also reflects
the assessment of the National Commission of Compensation Insurers
(NCCI). He relayed the process in which a Pacific Northwest panel
within the Commission reviews all proposed legislation relating to
insurance matters in the region. He pointed to the lack of
documentation in this legislation of any actual economic savings to
employers. He provided the phone number of the Commission, (503)
624-5890 to allow Members to obtain more information and he
qualified that the Commission has not taken an official position on
this bill.
Mr. Daugherty cited the 2002 Workers' Compensation Board Annual
Report, the most recent available, noting that total death benefits
paid to all survivors in Alaska was $3.2 million, compared to $7.06
million paid to attorneys representing insurance companies. He
surmised that if currently, over double the amount is paid to
attorneys than survivors, the system should be made more efficient
rather than adding more attorneys and appeals. He pointed out that
this legislation does not provide that additional benefits would be
provided for injured workers or survivors.
Mr. Daugherty next referenced a fiscal note from the Alaska Court
System projecting an implementation cost of approximately $500,000.
He also predicted the cost of a new office for the appeals
commission would be approximately $500,000, plus additional
expenses for support staff. He reiterated that no increased
benefits would be provided for injured workers or survivors and
that cost savings would not be realized for employers.
CHUCK LUNDEEN, General Counsel, Liberty Northwest Insurance,
testified via teleconference from an offnet location, that the
Oregon-based company has staff located in Anchorage and writes
workers' compensation insurance policies. He furthered that the
company insures 20 percent of Alaska's assigned risk pool and over
125 Alaskan employers on a voluntary underwriting basis. He
supports bill because it provides a "clear statement of purpose
that all parties will receive impartial fair treatment in the
dispute resolution process". He opined this is good for employers
and workers.
Mr. Lundeen further supported the bill because it streamlines the
litigation process and would produce faster results, which would
also benefit injured workers and employers and reduce costs as
well. He explained that the elimination of involvement of the
superior court would save money. He then spoke to the "precedential
value" of the decisions of the proposed appeals commission in that
they would provide to all parties understanding of Alaska law.
Mr. Lundeen was uncertain whether the NCCI had reviewed this
legislation, but he expressed intent to bring the matter to the
organization's attention. He told of his 20 years in the insurance
industry and assessed this legislation would reduce costs. He
compared it to similar legislation adopted in the state of Oregon,
which has resulted in reduced costs.
Senator Hoffman surmised the intent to streamline the process to
save premium costs, although the addition of the commission would
increase expenditures. He therefore concluded that any cost savings
must be garnered from reduced benefits. He understood that judges
must be impartial in interpreting the law and asked how the number
of claims awarded or the amount of benefits paid would be reduced
to meet the goals.
Mr. Lundeen responded that the "body of law" if adopted in this
legislation would, over time, result in claims adjustors and
attorneys representing injured workers would make better decisions
whether to litigate or settle claims. He doubted this legislation
would affect benefits or compensability standards or make it easier
to deny a claim. He predicted the cost savings would be realized as
a result of a streamlined process.
Senator Hoffman referenced Ms. Hall's presentation listing
statistics proposing that this legislation would better align the
State with the national averages and potentially result in cost
savings. He asked Mr. Lundeen's comment on this information.
Mr. Lundeen replied that this bill is a portion of the process of
reviewing and revising the workers' compensation system in Alaska
to address cost drivers. He reiterated his prediction this
legislation would reduce litigation, which is more costly. He
qualified this bill is not a "cure all" but is a "positive first
step".
Senator Hoffman again asked how this legislation would "reduce the
claims".
Mr. Lundeen responded it would not, but rather would reduce the
number of litigated claims due to consistent interpretation of the
law.
SFC 04 # 91, Side A 10:38 AM
Mr. Lundeen continued that in situations of uncertainty, attorneys
advise litigation. He remarked that current interpretations of the
workers' compensation laws are inconsistent.
DENNIS MURRAY, Administrator, Heritage Place Nursing Home, and
former president, Alaska State Hospital and Nursing Home
Association, testified via teleconference from Kenai, in support of
the bill, as proposed and recommended against adoption of proposed
amendments. He opined that the proposed amendments would not
improve the system, noting the premium increase of 160 percent for
the company. He told of a study conducted by the Association of
nursing homes in Alaska that found that workers' compensation
premiums had increased 100 percent. He relayed the Department of
Law determined this legislation is more consistent with operations
in other states.
PAUL BRENNER, Vice President, Quality Management, Central Peninsula
General Hospital, testified via teleconference from Kenai, that the
proposed amendments seem to remove the strengths of the bill would
make it ineffective. He supported the creation of the Commission,
predicting it would bring continuity to workers compensation
system. He told of the significant increase in workers'
compensation claims and the desire for resolution of the situation
and predictability of the process.
Co-Chair Wilken ordered the bill HELD in Committee.
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