SB 130-WORKERS' COMPENSATION  9:38:38 AM MS. LINDA HALL, director, Division of Insurance (DOI), introduced herself and offered to answer questions. SENATOR GRETCHEN GUESS asked whether there was any reason to believe the changes in SB 130 would result in reduced rates. MS. HALL answered she had asked for analysis from the National Council on Compensation and there were indications of a 5 to 7 percent savings. 9:41:57 AM MS. HALL commented she has taken many calls from employers in panic over raised insurance premiums. It is disheartening to listen to employers who are deciding whether they can afford to stay in business. 9:43:09 AM SENATOR GUESS asked Ms. Hall to review how workers compensation insurance rates are determined. MS. HALL answered the National Council on Compensation collects data and is the preliminary filer of rates in 39 states. The data is collected from all insurance companies and the aggregate data is updated and put together along with Alaska experience by itself. The loss cost is one component based on claims cost and what the losses cost. The average overall rate is based on the overall costs in Alaska. They also look at trending of anticipated changes of the various things that go into medical costs. Those become the filing the National Council on Compensation makes with the Division of Insurance. 9:46:24 AM MS. HALL continued the analysis is not a total science. The second component of rate making is a loss cost multiplier. The DOI approves that for each individual company. From 1999-2003, workers compensation lines for all insurers averaged in Alaska were unprofitable. 9:48:39 AM MS. HALL hoped the 2004 rate changes would positively affect the unprofitable market because that is a huge part of what is driving insurance companies from Alaska. SENATOR GENE THERRIAULT said he has often heard that insurance companies are raising rates in order to compensate for September th 11. th MS. HALL responded the losses suffered on September 11 sparked a load called a "terrorism rate", which is done in all the states. 9:50:40 AM MS. HALL continued Alaska historically has more highly hazardous occupations. Fishing vessel claims are typically filed under the federal system under the Jones Act. In general the cost of claims in Alaska are 50 percent higher than the national average. When claims numbers go down it masks the fact that insurance costs are going up. Medical costs in Alaska are significantly higher than the norm. The National Council on Compensation estimates the Alaska fee schedule can range from 250 percent of what many states have capped. 9:52:40 AM Prescription drugs have become a major component of the cost of claims. The work force is getting older and they take longer to recuperate. Hospital stays are longer than they were ten years ago. SENATOR THERRIAULT asked Ms. Hall why she said medical claims never close in Alaska. MS. HALL confirmed that is not the norm around the country. The medical benefits in Alaska are open always. 9:54:40 AM MR. PAUL LISANKI, director, Division of Worker's Compensation, Department of Labor and Workforce Development (DOLWD), explained Alaska keeps the medical benefits open indefinitely following the recommendation by the National Commission on State Worker's Compensation Insurance. They recommended there be no limitations on medical benefits tied to the passage of time. 9:56:32 AM MR. LISANKI advised the United States Department of Labor took the essential recommendations of the Commission and they track year to year each state that follows the recommendations. There is an annual publication, which he offered to submit to the committee. SENATOR GUESS asked Ms. Hall whether insurance company investments impact the workers compensation. MS. HALL said she did not know. She has noticed it is more acceptable to an insurance company to have an underwriting loss if they are making money in market. 9:59:01 AM SENATOR GUESS asked whether the definition of "reasonable rate of return" changes with a director change. MS. HALL answered the DOI would not base rates on investment income. They look at various components of individual multiplier, which would include their level of profit. SENATOR GUESS said listening to the business community it seems as if there have been dramatic changes in rates due to loss ratios. MS. HALL said in actuality the rates were not only level but also decreased in the mid 1990s. The rate decreases were national and they reflected a variety of practices we don't see today. One of those is called "schedule crediting" where insurance companies competed for companies with good safety records. 10:04:18 AM SENATOR GUESS asked whether self-employed companies were included in the data of the National Council on Compensation. MS. HALL answered no. SENATOR GUESS asked whether they were included in the rate making. MS. HALL answered no. SENATOR HOLLIS FRENCH commented there is nothing in SB 130 that says cost reductions to the insurance company must be passed on to small businesses, yet the Division of Insurance seems to be charged with making that happen. He asked Ms. Hall when she could begin to see cost savings occur and then when would she be able to issue a ruling to insurance companies regarding rates. 10:06:08 AM MS. HALL replied the 2004 data will be filed end of July 2005 and will determine the 2006 rate. There will be a long wait before an effect is seen. SENATOR FRENCH asked whether SB 130 should contain an accelerated rate-setting mechanism. MS. HALL said she is not sure how that would be done. There is a data collection process that requires time. There are timelines in statute for both a beginning and an end so that the DOI is allowed time to get the rates done. It is a fairly complex process. 10:08:47 AM SENATOR FRENCH expressed concern that a law passed in July 2005 takes until January 2007 for the small businesses to see relief. MS. HALL replied that is a distinct possibility. SENATOR GUESS asked whether the problem is due to the fact there are only large companies and small companies in Alaska, and no medium-sized companies. The large companies are mainly self- insured. MS. HALL deferred the question to Mr. Paul Lisanki. MR. LISANKI said 22 percent of employees in Alaska are working for an employer who is self-insured. 10:11:01 AM SENATOR GUESS commented SB 130 proposes to phase out the second injury fund. Future claims will be paid through workers compensation. She asked whether that would result in an increase in rates. MS. HALL said the second injury fund assessment would continue so long as there are claims to be reimbursed. That could put the cost back into the system and could potentially provide for a one percent increase. 10:14:29 AM MR. LISANKI said the Division of Worker's Compensation internally estimates the contribution to the second injury fund will go down from 6 percent to 5 percent. CHAIR SEEKINS asked Ms. Hall to comment on insurance reform. MS. HALL said she has not heard talk of insurance reform. She offered to provide statistics on loss data and loss ratios. Alaska lost ratios was higher than the national average from 1998-2003. She doubts that insurance companies are making a profit on workers compensation. 10:16:25 AM CHAIR RALPH SEEKINS asked why Alaska is higher than the national average. 10:18:56 AM MS. HALL said she does not have the answer. Rates last year were back to 1992. 10:20:24 AM MS. HALL commented California has done major reforms that appear to be effective but they don't have the rate regulatory to control rates. 10:22:00 AM SENATOR FRENCH said it is hard to believe medical costs were cut by 30 percent between 1992 and 2000. There has to be some other reason rates are back to 1992 in the face of increasing costs. 10:23:33 AM MS. HALL offered to share a 15-page analysis from the rating organization on various components that make up claim costs. SENATOR THERRIAULT commented a combination of things like the boom years in the stock market allowed insurance companies to use that profit to cover losses and inadequate rates. 10:26:05 AM CHAIR SEEKINS asked Ms. Hall whether there were structural cost controlling changes in SB 130, which could have an effect on premiums. MS. HALL said the majority of SB 130 deals with the workers compensation system, which is not her area of expertise. 10:28:30 AM CHAIR SEEKINS asked if the costs associated with workers compensation go down, whether that becomes a part of the DOI's ratemaking process. MS. HALL answered yes. SENATOR GUESS asked the number of providers Alaska has for workers compensation. MS. HALL explained the DOI lists 96 licensed to write workers compensation but only five are active. Three of them have 60 percent of the market. 10:30:44 AM SENATOR CHARLIE HUGGINS asked Ms. Hall to comment on controlling insurance costs. MS. HALL said the environment was in a crisis, bordering on a train wreck. Alaska has limited markets. Alaska is in a position where the insurance companies support an assigned risk pool. If there is a deficit in the assigned risk pool that burden goes back to insurance companies. If the insurance companies decide to pull out, the state would have to form a state fund or not have mandatory workers compensation. 10:33:34 AM MS. HALL referenced California where two years ago 25 percent of the businesses were uninsured. As rates escalated businesses opted out leaving injured workers at huge risks. 10:35:32 AM MR. ROD BETIT, president, Alaska State Hospital Nursing Home Association (ASHNHA), commented on SB 130. ASHNHA is concerned that SB 130 would impose unacceptable medical practice guidelines on physicians. ASHNHA requested to roll back to 2004 rates be replaced with a freeze at 2005 rates. ASHNHA requested a hospital representative be included on the Review Committee. ASHNHA requested an independent actuary do any financial analysis provided to the Review Committee. 10:38:45 AM CHAIR SEEKINS advised Mr. Betit the committee would consider the advice offered by ASHNHA.