SB 311-INSURANCE & WORKERS' COMPENSATION SYSTEM Number 0123 LINDA HALL, Director, Division of Insurance, Department of Community and Economic Development, said she is present to answer questions raised at the last hearing of SB 311 about the rate making process. She mentioned that she has spoken previously about lack of a profitable market, cost of claims, exorbitant premium increases, and the assigned risk pool which needs to be self-funded. She noted that there are provisions in the bill that affect each one of those areas. MS. HALL continued to say that what she really wants to talk about today is rate making, and the role of NCCI Holdings, Inc. (NCCI) and why it was not involved in this process. She explained: NCCI develops base costs. The lost costs are incorporated from data that's countrywide and local. That is filed with the Division of Insurance. The Division of Insurance is the primary rate approval body in the state. We review the proposed lost costs and either approve, disapprove or modify those. Then insurance companies take those base costs, they adopt them, or they file deviations. They then also do a multiplier on top of that for their own expenses, profits, and contingencies, and it takes those three steps before we get a final rate. Each component is based on actuarial analysis. NCCI looks at cost. They were not able to make a cost projection, not because they weren't asked. I've had several communications with NCCI. This is a system change. It is not a benefit change. NCCI in the past has always costed benefit changes. This particular process is not quantifiable as is a benefit change. Number 0333 I also want to clear up rate increases/decreases. Today, as I sit here, we have no idea what the rate increases will be January 1, 2005. NCCI is in the data collection process analyzing that. We will start to get preliminary figures in July and August and go through the process I just described. There is no guarantee, and I've said this I think in prior hearings, that we will have rate decreases. Rates depend on the cost of claims. The goal of this legislation started as Commissioner O'Claray said last night. I went to the administration with what I term the crisis in workers' compensation. We have had insolvencies - five insolvent work comp companies - we have very large rate increases due to cost of claims, we have an assigned risk pool that has been losing money at a drastic rate for six years. We've looked at other things, other than this. This was an attempt to try to modify the system without changing benefits. We looked at changing our medical fee providers to the Medicare rate. It would save $50,000. It is a huge change in benefits. But, we also felt it was likely to mean injured workers could not find medical care if we did that. It's been done in several states lately. In a state the size of Alaska it could be dramatically injurious. What we're looking at is finding consistency, predictability - the time-line for decision is cut in half - we're looking to reduce attorney fees. In 2002 there were $11 million in attorney fees and $1.2 million in litigation costs. We have roughly $13 million tied up in claims costs just in the attorney fee litigation process. In general, without changes, we're going to continue to lose insurance companies and have no chance to develop a competitive, healthy market place. Earlier this week at a better time of day, you listened to me talk about insurance bill, and I'll agree that we need to do regulatory modernization. Alaska has fallen behind. We have one of the few states left with a very cumbersome process called prior approval. We are in that same place with our workers' compensation system. We need to change our insurance regulatory system; we need to update our workers' compensation system. We need to improve the state of our marketplace if we're going to continue to have - even begin to have - affordable work comp insurance. I support the bill as it's currently written, SB 311. Number 0527 BARBARA HUFF-TUCKNESS, Lobbyist for Teamsters Local 959; Member, Alaska Labor-Management Ad Hoc Committee on Workers' Compensation, testified against SB 311. She mentioned a letter she had drafted to the committee. "This is a workers' comp reform bill," she stated. She pointed out that the bill is a 62-page document with many issues. She said that her organization supports everything that Ms. Hall presented and that [those parts of bill] would produce a very good and positive system. Other parts of the bill such as the proposed changes concerning the upgrade of the hearing officers are also supported by her organization, she said. MS. HUFF-TUCKNESS spoke about the major bone of contention to labor, which is about changes to how injured workers are treated in this state. She opined that no one has time to read all of the contents in the bill, and she said that if the bill does not pass there are claims that there will be a 20 percent increase in insurance. She challenged any insurance representative to come forward with that information, and she stated that in 2002 there was a 50.6 percent increase in medical costs, a factor that the bill does not address. She noted that the bill is looking at establishing an appeals commission. She stated: We have said that if you as a legislative body [are] willing to bring on, at $500,000 to $1 million cost, [an] additional layer of government to this state, with three political appointees to listen and review cases ... then we will agree, we will support you making that increased cost ... but, we draw the line at the de nova review. We do not believe that this politically appointed appeals commission should have the power to take what you already have at a lower level now - and it's a brand new system ... where you have a hearing officer and attorney who is now instructing this panel at a lower level [than] what the law is. Number 0840 MS. HUFF-TUCKNESS asked the committee to take another look at the bill because her organization does not believe it is going to be good for injured workers, but it is going to be good for the employers. She opined that if the commission is removed from the bill, there would still be a system that brings predictability to the process. She appealed to the committee to not pass SB 311. Number 0977 MICHAEL JENSEN, Attorney at Law, Law Offices of Michael J. Jensen, stated that he represents injured workers before the workers' compensation board, as well as workers with longshore injuries and federal workers' compensation claims. He stated his appreciation for the committee's work on this bill. He said the bill has three parts, two of which pertain to provisions regarding the guarantee association and penalties for uninsured employers. He asked that those two provisions be stripped out of the bill and passed. However, regarding the part that deals with the appeals provision, he said he believes as Commissioner Sampson and Ms. Huff do, that it should be rejected. It is much too political and should be changed to have the selection of the commission members go through the judicial council. The de nova review should only be allowed if there is a procedural issue or if there is some evidence that the hearing panel decision was an abuse of discretion, he suggested. He urged that the provisions regarding uninsured employers and the guarantee association be passed and the commission section be rejected. Number 1132 CHANCY CROFT objected to the recess of the committee yesterday afternoon and the violation of the 24-hour notice provision of the uniform rules and the two-minute limit. He noted that people who had already testified were allowed to testify again without giving first-time testifiers an opportunity to speak. He emphasized that this bill contains a very important question about compensation and he referred to the bible as an early source of compensation information. He said: This bill addresses a problem that does not exist. It jeopardizes an essential benefit to injured workers - that is - promptness of payment of benefits. There's a study out of Maine that showed that when benefits are denied, that injured workers have to borrow money from relatives, they have to sell assets, they have to go on welfare, some of them even go into bankruptcy, and in the end, by the time they finally get to a hearing, 80 percent of their claims are determined valid. He claimed that the "two bites to the apple provision" in the bill adds confusion instead of clarification because one panel is in charge of credibility and another is in charge of weight. MR. CROFT opined that the bill is going to cause problems that did not exist before, such as who has or has not participated in this bill. "There are a lot of people besides the Chamber of Commerce that Ms. LaBolle testified about that haven't testified, he said. One third of the injured workers don't have an attorney and have had no input in this bill, he stated. He said that ways to improve the workers' compensation board have been suggested for years by himself and others, and they have not been asked to contribute to this bill. There are three board members - the longest serving board members and who are management members - who were not asked for input on this bill, he said. They would have told the committee that the decisions made by the board are about evenly split between injured workers and carriers, even though in the last year or two there were more decisions favoring the employer. He opined that the bill does not address any problems about fairness of board decisions, but adds confusion. He referred to Section 122, which deals with the credibility of witnesses and the treatment of a board decision like that of a jury verdict. He maintained that the bill will increase premiums because it is going to cause delay and confusion. He said the bill would require more that $20,000 to be spent per case to set up a system that violates the spirit of Alaska Constitution because it sets up a specialized court. He concluded by stating that passing the bill would raise premiums more and slow down payment to employees. Number 1455 LORI WING, President, Alaska Independent Insurance Agents and Brokers, spoke about the increased costs in workers' compensation programs. She noted that clerical rates have risen by 40 percent this year and 81 percent since 1999. Hospital employee rates are up 54 percent, sand and gravel digging up 35 percent, contractor supervisors up 22 percent, restaurant workers up 29 percent, street and road construction up 37 percent, and roofers, who took a modest increase of 4 percent this year, are up 99 percent since 1999. She termed this a crisis. As an example, she talked about a restaurant in Anchorage that paid $73,000 for workers' compensation last year and this year will pay $98,000. She cited several more examples. MS. WING stated that the organizations that have been hit the hardest are the not-for-profit businesses such as those that provided medical and social services. She gave an example of a hospital in Dillingham whose premium rose from $391,000 to $524,000 in one year. She emphasized that employers would rather be putting this money into employers pockets for benefits and compensation packages and safety programs. MS. WING concluded with a final example of a roofing contractor in Alaska with a payroll of $5,000,000 having to pay a workers' compensation premium of $2,111,000, whereas another contractor doing security work in Iraq with the same payroll only has to pay $745,000 in workers' compensation. She said that employers are begging for relief and she urged passage of SB 311. Number 1638 JOHN GIUCHICI, Member, Workers' Compensation Board, stated that he has been on the board for 13 years and that he agrees 100 percent with what Chancy Croft and Barbara Huff-Tuckness have said. He said he disagrees with the reasons for the cost increases that the last testifier gave. It is not the workers' compensation system that is causing [the cost increases], it is the health and medical cost increases across the country in conjunction with bankruptcies and low returns on monies that the insurance companies invest, he opined. MR. GUICHICI pointed out that he agrees with the first seven sections of the bill and with the penalties for uninsured employers. He said he totally disagrees with the part of the bill that deals with the appeals commission that is going to be established. The appeals commission should not have more power over and above superior court judges, who are neutral and fair, and who have done an admirable job, he opined. For insurance carrier attorneys and employee attorneys to state that [superior court judges] don't know anything about workers' compensation is a mischaracterization of the situation, he said. A few of the advocates of the appeals commission are promoting that it will save money, yet no one has been able to come up with an actual cost amount of savings. He concluded by saying: This appeals commission not coming - not being referred - from the same body that refers superior court judges, or any judges for that matter, and not have to take into account any of the findings of the workers' compensation board and the hearing officers and their ability to substitute "political judgment" on their part, is totally unfair to the system. Number 1782 MELINDA TAYLOR, Communications Director, International Brotherhood of Electrical Workers (IBEW); Executive Board Member, Anchorage Central Labor Council, associated herself with comments made by Mr. Sampson, Ms. Huff-Tuckness, Mr. Jensen, Mr. Guichici, and Mr. Croft. She spoke about concerns regarding the alleged cost savings stated in the bill and about the appeal process. She said that when she worked for the state she knew individuals who had been injured on the job and were devastated from having to face a maze of legal, medical, and financial issues. She explained that the only guarantee they had was the knowledge that the superior court process would deal with them in a fair manner. She opined that the trust and faith in the right to a fair hearing that these workers have is at risk in this bill. She asked the committee to "hold the bill over and let labor and the administration work together and try to figure it out and come up with the best bill possible for both business and the workers." Number 1853 DAVE KESTER, Commercial Insurance Broker, Ribelin Lowell & Company Insurance Brokers, Inc., testified in support of SB 311. He stated that there is a very complicated and diverse workers' compensation system that needs some fixes. This bill does not fix all things, but it does take a giant step in the right direction, he opined. He said he believes, regarding the appeals commission, that it is a good thing for the hearing officers to be admitted to the bar after having three years of workers' compensation experience because the issues are complicated. He stated that he is a volunteer workers' compensation hearing board member and said that he relies on the expertise of the hearing officers when hearing cases. He said that it is a good idea for appeals to be heard by the workers' compensation appeals commission rather than going right to the superior court because there are additional costs associated with going to the superior court such as filing appellate briefs, attorney's fees, and the extra time it takes. He pointed out that injured workers need to get back to work as soon as possible and not wait around for a hearing. Number 1972 CHAIR ANDERSON closed public testimony. REPRESENTATIVE CRAWFORD said looking at the costs it seems that there is a problem, but that the focus should be on a way to bring down medical costs and not on how to redo the system of appeals. He said he does not want to try to save the system by denying workers benefits, and said he believes that that is what the driver behind redoing the appeals system is focused on. He added that he would like to see [SB 311] worked on over the interim so that the real cost drivers can be addressed. Number 2040 REPRESENTATIVE ROKEBERG stated that he has a conflict of interest as a small business owner who pays extraordinarily high workers' compensation rates and who recognizes the crisis situation that the state is in. He said he agrees with some of the testimony about the cost drivers, but stated that the system is broken and needs to be reformed. He opined that the bill should be moved along through the process. REPRESENTATIVE LYNN related that [SB 311] is an extremely important bill for workers who become injured, for businesses who have to meet payroll and try to stay in business without excessive costs, and for the State of Alaska to try to bring these parties together. He stated his desire to have a win/win bill for all parties concerned. The bottom line is, if someone gets hurt they need to be treated fairly and taken care of, he said. The bill needs some work, he concluded. Number 2101 REPRESENTATIVE ROKEBERG moved to report CSSB 311(JUD)(efd fld) out of committee with individual recommendations and the accompanying fiscal notes. REPRESENTATIVE GUTTENBERG objected. He stated that the purpose of workers' compensation is to get workers who've been hurt on the job healthy and back to work. He said he has heard a lot of contradictions regarding this bill. He quoted a paragraph from Ms. Wing's letter [original punctuation provided]: The past few years these employers have experienced significant increased costs in their Workers' Compensation programs. These increases do not reflect any corresponding increase in workplace hazards or change in the types of reported injuries or diseases. In fact, employers have successfully reduced the frequency of workplace injuries by almost 40% since 1990. Despite these safety gains, Workers' Compensation costs have continued to rise far faster that the medical inflation rate. REPRESENTATIVE GUTTENBERG related that as he listened to the testimony on this bill he was looking for the mechanical device that would lower rates. He said: We've looked through this process, but not just restructuring benefits, the restructuring of a system that seems to me that has some basic significant flaws that we haven't ironed out here. There are some ... questions about this, not even getting into the de novo review. Costs have to come down. I haven't seen or heard that this bill is going to produce any reduction in compensation costs for employers. I've heard people claim they are, but I haven't seen any evidence that they are. I haven't heard any significant analytical information that says they're going to come down as a result of this bill and this restructuring. And, I don't know where the savings are actually going to come. I think that's a major question. And, I don't think it brings in the stability and the predictability that people are talking about, and I've seen no evidence that it actually will. Number 2203 REPRESENTATIVE GATTO pointed out that it is pretty clear that "if you represent labor you're against this bill, if you represent management, you're for this bill. He said he feels that he is stuck in the middle. Medical costs are going up, he noted, and he questioned if the bill has merit. He said, "Let's suppose medical costs weren't going up. Let's suppose that there was no crisis or anything. Should we revise all these statutes the way we're doing without any real motivation of money?" As a recipient of workers' compensation several times, Representative Gatto reported that he was very unhappy with the way he was dealt with. "In the long run it worked out, but in the immediate instance, it was disastrous for me," he said. CHAIR ANDERSON said he believes the process on SB 311 provided many opportunities for people to testify, and he said he takes exception to those who spoke otherwise in this meeting. He termed it sad that it has turned out to be labor versus employer, but stated that the testimony has been well intended with a reasonable effort to come to a compromise. He reported that his staff has looked for compromise in these areas: a balanced appeals commission with representation of employer/employee interests, continued participation of a lay panel, members in a hearing process from labor and industry, required participation of all three panel members in hearings to insure fairness, not just a quorum of two, new guidelines to avoid conflicts of interest for hearing examiners as well as lay panel members, a merit system of protection for hearing officers, 18-month allowance for existing workers' compensation hearing officers to meet new qualifications for hearing examiners, and an elimination of legislative intent language that went beyond existing law. Number 2323 CHAIR ANDERSON continued: And yet we still come to an impasse ... where the de novo issue seems to be the bone of contention, and just in discussions I've had, from what I can see, the hearing panel will still have the sole power to determine the credibility of witnesses - that was one of the arguments - and also the appeals commission can still review other findings de novo on the record, but can not hold a new hearing or take any new evidence, unlike the superior court. Unless disturbed by the appeals commission, all the findings of the hearing panel remain conclusive. And, then the fourth area that I thought led credibility to the bill was that the appeals commission was subject to review by the Alaska Supreme Court for an arbitrary or capricious decision. It's very difficult to simply hold this bill and not at least move it on to House Finance Committee for more review. One more day of holding it and the bill dies, and whereas some parties may want that, I think it's our duty as policymakers to move on. The governor said this is one of his main priorities. That doesn't mean you have to vote for the bill or concur with it, but we have another committee of referral. TAPE 04-53, SIDE B  REPRESENTATIVE ROKEBERG restated his motion to move the bill out of committee.   A roll call vote was taken. Representatives Rokeberg, Gatto, and Anderson voted in favor of reporting CSSB 311(JUD)(efd fld) out of committee. Representatives Lynn, Crawford, Guttenberg, and Dahlstrom voted against it. Therefore, CSSB 311(JUD)(efd fld) failed to be reported from the House Labor and Commerce Standing Committee a vote of 3-4. [Although the bill report for CSSB 311(JUD)(efd fld) was signed, delivered to the Chief Clerk, and read across the floor, the Speaker ruled that CSSB 311(JUD)(efd fld) didn't receive the required votes to move out of committee. The legislation was returned to the House Labor and Commerce Standing Committee.]