Legislature(2003 - 2004)
06/23/2004 12:00 PM House 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
HB1002-INSURANCE & WORKERS' COMPENSATION SYSTEM CHAIR ANDERSON announced that the final order of business would be HOUSE 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." Number 1685 DOUG WOOLIVER, Administrative Attorney, Alaska Court System, related that his testimony on this matter during the regular session would stand, which is that the Alaska Court System is neutral. Number 1609 GREG O'CLARAY, Commissioner, Department of Labor & Workforce Development (DLWD), explained that HB 1002 attempts to empower the lay board concept of the Alaska Workers' Compensation Commission. He further explained that unlike SB 311, HB 1002 substitutes administrative law judges for the multiple panels. The administrative law judges will hear the initial controverted claims without the three-person panel. If the matter is appealed, the claim will go before the three-member panel comprised of the professional attorney who is a professional expert on workers' compensation as well as two members of the four-member lay group. The structure is for a commission of five in which two members are designated from employee representatives and two from employer representatives. One of each of the two representatives will sit on the three-person panel to adjudicate appeals from the administrative law judge decision. If the parties aren't in agreement, they can appeal to the Supreme Court. COMMISSIONER O'CLARAY noted that HB 1002 also includes authorities for addressing workers' compensation fraud. He mentioned that there are other small tweaks in the legislation. Commissioner O'Claray highlighted that during the last several months, there have been discussions with representatives of organized labor. The department hasn't been able to reach agreement on all of [organized labor's] concerns. He related his understanding that organized labor believes that this workers' compensation issue should be addressed in the interim when there isn't a time crunch. However, the administration will continue to pursue this issue because he predicted that at some point the state will face a major issue with workers' compensation. The matter should be addressed sooner rather than later in order to avoid a situation in which the real costs have to be addressed. "This administration is not interested in depriving injured workers of the payments and compensation they deserve under the law," he emphasized. Number 1379 REPRESENTATIVE DAHLSTROM referred to a chart entitled, "Current NCCI Voluntary Market Approved Rate/Loss Cost Changes". She pointed out that Nevada, which has one of the highest growth rates in the country, has a decline of 12.3 percent [in workers' compensation]. She inquired as to the reason for that. COMMISSIONER O'CLARAY specified that this chart was prepared by NCCI in order to show what happened as of last year in regard to rates. If this chart was prepared in 1988 or 1989, it would've shown a decline for Alaska. Number 1282 LINDA HALL, Director, Division of Insurance, Department of Community & Economic Development (DCED), informed the committee that the chart only reflects the rates of 39 states because only 39 states use NCCI as their rate modeling organization. She noted that Nevada has been reviewed and it was discovered that there were some anomalies that will have no impact on what Alaska will do because they were changes that the state could incorporate. As workers' compensation reforms are enacted, changes in rates are occurring. REPRESENTATIVE GUTTENBERG pointed out that this legislation basically deals with restructuring the appeals process. He asked if there has been any review of restructuring the [point at which] claims are denied. "Is there any way that claims could be accepted and not denied that would significantly reduce the number of appeals that go forward," he asked. COMMISSIONER O'CLARAY reminded the committee that out of the approximately 25,000 claims that are filed, about 100 move into the controverted area. Of those 100 appeals, some 30 or so go to the superior court under the current system. The current system in place is a no fault system, and therefore the question is regarding "where do we get the disputes?" He indicated [that the problem] is that attorneys become involved. If an employer dealt with an employee through workers' compensation, many of the litigation costs would be eliminated, he opined. However, because it's such a complicated body of law, both sides need to be represented by legal counsel at some point. The aforementioned is why the change to make a swifter decision [and simpler process] is being made. The delay in reaching judgment with these cases create difficult times for employees. This legislation attempts to review the litigation costs in order to avoid cutting benefits or costs of medical reimbursement for the services provided to injured workers. Number 1010 REPRESENTATIVE GUTTENBERG recalled working on a workers' compensation case in which the claim denial of a welder with heavy metal poisoning was a considerable [problem]. He then turned to Section 12 of HB 1002, which defines two members [of the commission] as representative employees. How will that be defined, he asked. COMMISSIONER O'CLARAY interpreted this provision to mean that the employee representatives would have to be individuals who have spent the majority of their time representing employees. In fact, he opined, these individuals should currently represent employees. In further response to Representative Guttenberg, Commissioner O'Claray opined that it would have to be someone from organized labor. Number 0885 REPRESENTATIVE CRAWFORD recalled his own experience as an injured worker when the insurance carrier did all it could to stall the process to the point at which he would accept whatever settlement was offered. Representative Crawford said that he didn't know how reducing the number of panels hearing these cases would actually expedite the process. COMMISSIONER O'CLARAY explained that under the current system the logistics of setting up hearings is difficult and often just two people will hear the case, the hearing officer and a representative from management or labor. However, under this proposed legislation the administrative judges will primarily work on these cases and won't have to deal with the logistics of the cases. Therefore, he opined that the system would be reactive and more nimble in terms of time. The appellate group will be restricted to 90 days to make a decision. Number 0748 REPRESENTATIVE ROKEBERG remarked that in the global framework of the cost of workers' compensation the focus on the "lawyerization" of workers' compensation in order to avoid impacts to benefits of workers is only a portion of the total. Although Representative Rokeberg noted his agreement with the goal of not impacting the employee in regard to the services delivered to the employee, he questioned how everything couldn't be reviewed in order to work down the premium costs by controlling the costs of the benefits. COMMISSIONER O'CLARAY answered that initially the entire spectrum was reviewed. However, the administration felt that it didn't want to be seen as attacking injured employees. He related that out of the $210 million spent in 2002, almost $131 million went to medical providers, which is a little over 50 percent of the entire cost of workers' compensation in 2002. Just under $80 million went into the pockets of injured workers for wage replacement or other benefits and $11 million went to litigation costs. If this legislation doesn't pass, he opined that [the administration] will be forced to look at the entire spectrum and it'll be harder because of the potential problem of increasing rates. He further opined that without passage of this legislation, he will have to review how to administer the program in order to decrease costs. REPRESENTATIVE GUTTENBERG returned to the matter of administrative law judges to whom this legislation provides much power. He pointed out the language on page 38, line 15-18. He asked if administrative law judges are responsible for any type of judicial review or qualifications beyond three years of experience with workers' compensation. COMMISSIONER O'CLARAY answered, "I don't see anything other than their qualification requirements here. I think the suggestion earlier on the [SB] 311 commission was that they come through the judicial council, in terms of appointments instead of the governor appointing them. There's clearly a constitutional problem there with the judicial council under the separation of powers under the constitution." He related that the current workers' compensation hearing officers who are admitted to the bar will be in these positions. Number 0311 MARTIN PIHL, Chairman, Alaska Timber Insurance Exchange, informed the committee that the Alaska Timber Insurance Exchange was formed in 1980 as a reciprocal owned by its policyholders. He noted that the organization has specialized in logging and higher risk insurance. The Alaska Timber Insurance Exchange has been successful in promoting work place safety because the companies get close to their insurance program. Over the last 10 years the aforementioned has resulted in a return of profit as a dividend to the policyholder, which has been 67 percent of the premium returned. However, last year the organization's profit was wiped out by assessments against the organization that occur as a result of the assigned risk pool. Over the last seven years, the assigned risk pool has experienced losses in the amount of $60 million, of which $2.9 million is the Alaska Timber Insurance Exchange's portion. "We can't continue to absorb these assessments; our own solvency will be at stake," he stated. MR. PIHL pointed out that the losses continue into 2004 and there have been increases in rates. Frankly, the aforementioned is the result of mismanagement of the system and lack of control by the Division of Insurance. However, he emphasized that one shouldn't blame the current director because the situation has developed over a number of years. "A former director of insurance suppressed rates, there's just no doubt about it and it's led to this crisis in the assigned risk pool," he remarked. Furthermore, heavy discounts by insurance companies led to insolvencies that are assessed back to the surviving insurance companies. He related that rates have been so inadequate that insurance companies are forced to turn down applications and send them to the assigned risk pool, which has grown by three- fold. With regard to the 21 percent rate increase, Mr. Pihl urged the committee to view it in perspective because the rates today are back to about the 1993 level in spite of years of increases in costs. TAPE 04-56, SIDE A MR. PIHL noted his appreciation of some of the changes, such as the lost cost development system provided by HB 540. The steps of collateralizing assigned risk pool loss reserves and a mandate that the assigned risk pool be managed to at least break even on a three-year basis were in HB 357 until stripped out on the last day of session. The aforementioned will cost the state millions. He urged the committee to do collateralization, which other states require. By not collateralizing, the state is accepting a third or fourth mortgage position. Mr. Pihl highlighted that the items [stripped from HB 357] are included in HB 1002, which he appreciated. However, he suggested the "quota share fix." He reminded the committee that last year the insolvency of Freemont cost everyone a lot of money because under current rules the cost of insolvency is assessed back to surviving companies. He opined that when an insolvency occurs, that company's assigned risk pool losses should travel as part of its bankruptcy to the guaranty fund. He noted that the insolvent company's own direct writing reserves go to the guaranty fund, although that's not the case for the assigned risk pool losses. In several discussions with the director of the Division of Insurance, she seems to agree that the aforementioned is unfair. However, she doesn't seem inclined to do anything about it. Therefore, Mr. Pihl related that he has amendment language on the aforementioned matter. Mr. Pihl concluded by noting that the Alaska Timber Insurance Exchange supports the changes [included in HB 1002]. MR. PIHL, in response to Representative Rokeberg, explained that the Alaska Timber Insurance Exchange is a reciprocal insurance company that's owned by the policyholders, who put up capital and deposit premiums. In return, any profit is distributed in the form of a dividend. Mr. Pihl confirmed that the Alaska Timber Insurance Exchange falls under all the regulations of the state as would another insurance underwriter. Number 0432 LORI WING, President, Alaska Independent Insurance Agents & Brokers, informed the committee that collectively the association represents employers from Ketchikan to Barrow and the clients of the organization are governmental entities, privately held and publicly traded corporations, limited liability companies (LLC), and joint ventures. Furthermore, the employers are for profit and not-for-profit, large and small. Over the past few years these employers have experienced significant increased cost in the workers' compensation program. However, these increases don't correspond to any increase in workplace hazard or change in the types of reported injuries or diseases. In fact, employers have successfully reduced the frequency of work place injuries by almost 40 percent since 1990. Still, workers' compensation costs have risen faster than medical inflation. In the past year alone, the rates in Alaska have changed dramatically. For instance, clerical rates are up 40 percent this year and hospital employee rates are up 54 percent. She highlighted that sometimes these increases occur during jobs that are already bid or are in progress. Therefore, there's no way for the contractor to recover these additional costs. She reviewed various companies in which the [workers' compensation] rates have increased. Although one can't guarantee this legislation would result in a decrease in rates, one can guarantee that without it rates will continue to increase. The increase in workers' compensation [rates] nationwide is a problem. She highlighted that workers' compensation is not a negotiated benefit. Ms. Wing concluded by expressing hope that HB 1002 will be passed out of committee. LON TROTTER, Director, Risk Management, Arctic Slope Regional Corporation, testified in support of HB 1002 as a first step in streamlining the workers' compensation process. Number 0740 BARBARA WILLIAMS, Alaska Injured Workers Alliance (AIWA), explained that AIWA represents union and non-union members alike. She related that AIWA doesn't support HB 1002 because five new positions total are created to perform all of the work of 19 designees in the court system. The aforementioned leaves labor and management out of the hearing process and places them in the appellate process, although their expertise is dealing with workers rather than judicial processes. Therefore, the cost of appeals is driven up to 60 [percent] rather than 30 and there's no anticipated cap. She suggested that injured workers are going to have to do more litigation to receive benefits. She noted that in most cases, the injured worker is going through litigation without assistance from an attorney. Furthermore, there's no education program or continuing education charges for those being placed [on the commission]. MS. WILLIAMS highlighted that the fiscal note specifies that the costs for this legislation exceed $1.2 million and the figures don't quite add up. She reminded the committee that Ms. Johnson, a representative for the state risk manager, related that the [division] anticipates eventually capping the costs but savings can't be insured through administrative figures. Ms. Williams informed the committee that she's in a unique position because she is one of the few workers in the state who has had her insurance company fined for deliberately not paying bills 22 consecutive times. "There's no adequate oversight of the insurance process, the self-insured employers are grossly unregulated," she related. Shuffling these benefit programs and rearranging the administrative and adjudicative process is a disturbance to injured workers, industry, labor, and management. She highlighted that the attorneys for injured workers are $.50 on the dollar, which is the lowest paid in the nation. If the process is changed and complicated, there's no incentive for injured workers' attorneys to work for injured workers. However, there is no review of capping the defense costs, although $702,000 of the guaranty fund has been used for the cost of defense of the insurance companies. Ms. Williams opined that HB 1002 isn't going to help injured workers at all. In fact the legislation doesn't address many items, such as injured workers with catastrophic injuries who are stuck in the system for 10 years plus before their claims are litigated. Number 0914 KEVIN DOUGHERTY, Alaska State District Council of Laborers, began by saying that there's no question that workers' compensation is important for injured workers, widows, and surviving families. Workers' compensation is also very important to employers and insurance companies. Over the past 24 years, work has been done with the aforementioned communities in order to develop a fair balance. He turned to the issue of worker safety, which this legislation doesn't address. He mentioned incentives for worker safety and deterring poor safety records through experience modification, et cetera. Mr. Dougherty remarked that the increase in rates has nothing to do with the Alaska Workers' Compensation Board, which has wonderful business and labor representatives. He said the problem really begins with Freemont and the other 41 insurers that have gone bankrupt. Therefore, the aforementioned needs to be regulated and stopped. In response to Chair Anderson, Mr. Dougherty agreed to work on this matter in the interim. CHAIR ANDERSON closed public testimony. Number 1156 REPRESENTATIVE CRAWFORD moved to report HB 1002 out of committee with individual recommendations and the accompanying fiscal notes. REPRESENTATIVE DAHLSTROM objected. A roll call vote was taken. Representative Rokeberg voted in favor of reporting HB 1002 from the House Labor and Commerce Standing Committee. Representatives Dahlstrom, Lynn, Crawford, Guttenberg, Gatto, and Anderson voted against it. Therefore, HB 1002 failed to be reported out of the House Labor and Commerce Standing Committee by a vote of 1-6.
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