BILL ANALYSIS SB 899 Page 1 Date of Hearing: July 9, 2003 ASSEMBLY COMMITTEE ON INSURANCE Juan Vargas, Chair SB 899 (Poochigian) - As Proposed to be Amended: July 9, 2003 SENATE VOTE : 36-1 SUBJECT : Workers' compensation. SUMMARY : States that it is the intent of the Legislature to improve the workers' compensation system by promoting the efficient delivery of high quality appropriate medical care. EXISTING LAW: Workers' compensation, implemented in California in 1913, is a no-fault system, entitling workers to compensation for illness or injury arising out of and in the course of work duties, regardless of the blame which might otherwise be placed on the employer or the employee. The workers' compensation system is premised on a bargain between employers and employees: employees are supposed to receive benefits for on-the-job injuries, and in return, the benefits are the exclusive remedy for injured employees against their employer, even when the employer negligently caused the injury. The Benefit Structure : There are five basic types of workers' compensation benefits available, depending on the nature and severity of the worker's injury: (1) medical care; (2) temporary disability benefits; (3) permanent disability; (4) vocational rehabilitation services; and, (5) death benefits. Temporary Disability Benefits : Those workers unable to return to work within three days are entitled to temporary disability benefits to partially replace wages lost as a result of the injury. The benefits are generally designed to replace two-thirds of the lost wages, up to a specified maximum. Beginning 1/1/03 the maximum is $602, which increases to $728 on 1/1/04 and to $840 on 1/1/05. For injuries occurring in 2006, the maximum temporary disability rate will be $840 per week or the state average weekly wage (SWAA), whichever SB 899 Page 2 is greater. Starting with injuries in 2007, the maximum limit will be $840 plus the percent increase in SAWW or the actual SAWW, whichever is greater. For dates of injury in 2003 through 2006, injured employees who are temporarily disabled with wages less than $189 are entitled to a weekly TD rate of $126. Starting with injuries in 2007, the minimum limit will be $126 plus the percent increase in the SAWW. After 2007, the TD minimum and maximum limits will be indexed every year to the percent increase in the SAWW. Temporary disability benefits are payable every two weeks, on a day designated with the first payment, until the employee is able to return to work or until the employee's condition becomes permanent and stationary. Permanent Disability Benefits : Injured workers who are permanently disabled are entitled to receive permanent disability benefits. A worker who is determined to have a permanent total disability receives the temporary disability benefit for life. A worker determined to have a permanent partial disability receives weekly benefits for a period which increases with the percentage of disability. Permanent partial disability benefits are also payable at two-thirds of the injured workers' average weekly wages, but are subject to a lower maximum. The maximum permanent disability (PD) rate increases from $185 in 2003 to $230 by 1/1/06 for those cases claiming less than 70 percent PD and from $230 to 2003 to $270 by 1/1/06 for those claiming 70 percent or more. The minimum PD rate increases from $100 in 2003 to $130 in 2006. Vocational Rehabilitation Services : Injured workers who are unable to return to their former type of work are entitled to vocational rehabilitation services if these services can reasonably be expected to return the worker to suitable gainful employment. This includes the development of a suitable plan, the cost of any training, and a maintenance allowance while participation in rehabilitation. The maintenance allowance payable to an injured worker while in rehabilitation is, like temporary disability benefits, designed to replace two-thirds of lost earnings, but the maximum weekly amount is lower -- $246 per week. The worker may, however, supplement the SB 899 Page 3 maintenance allowance with advances of permanent disability benefits up to the point where the worker is receiving the same weekly amount as he or she received in temporary disability benefits. Total costs for rehabilitation are limited to $16,000. For injuries that occur on or after 1/1/03 an employer and a represented employee may settle the employee's right to prospective vocational rehabilitation services with a one-time payment to the employee not to exceed $10,000 for the employee's use in self-directed vocational rehabilitation. Death Benefits : In the event a worker is fatally injured, reasonable burial expenses, up to $5,000, are paid. In addition, the worker's dependents may receive support payments for a period of time. These payments are generally payable in the same manner and amount as temporary disability benefits, but the minimum rate of payment is $224 per week. Effective 1/1/06 death benefits will double: from $125,000 to $250,000 for one dependent; from $145,000 to $290,000 for two dependents; and from $160,000 to $320,000 for three dependents. Effective 1/1/04; if no dependents exist, a benefit payment of $250,000 will go the employee's estate. The Benefit Financing System : The benefit financing system is the process by which employers finance their liability for workers' compensation benefits. Employers may finance their liability for workers' compensation benefits by one of the three methods: (1) self-insurance, (2) private insurance, or (3) state insurance. Self-Insurance -- Most large, stable employers and most government agencies are self-insured for workers' compensation. To become self-insured, employers must obtain a certificate from the Department of Industrial Relations. Private employers must post security as a condition of receiving a certificate of consent to self-insure. Private Insurance -- Employers may purchase insurance from private insurance companies which are licensed by the Department of Insurance to transact workers' compensation insurance in California. Insurance companies are free to price this insurance at a level they deem appropriate for the insurance and services provided. SB 899 Page 4 State Insurance -- Employers may also purchase insurance from the State Compensation Insurance Fund, a state operated entity that exists solely to transact workers' compensation insurance on a non-profit basis. It actively competes with private insurers for business, and it also effectively operates as the assigned risk pool for workers' compensation insurance. FISCAL EFFECT : Unknown COMMENTS : Workers' compensation carriers, service providers, and attorneys all agree with the employers who pay workers' compensation premiums and the employees who rely on the workers' compensation benefits that the California workers' compensation system is in the midst of a crisis. The costs of the system, which was originally created to achieve the dual purpose of (1) ensuring compensation for occupational injuries, and (2) protection of employers from the high costs of occupational injury litigation, have increased dramatically over the past few years. These skyrocketing costs have resulted in employers threatening to take action such as discontinuing employee coverage, diminishing other employee benefits or closing their businesses. Increased workers' compensation costs: Workers' compensation costs have increased for a number of reasons. In 1993, the minimum rate law was repealed in an attempt to spur competition in the sluggish insurance market. As a result insurers began under-pricing their product. Rates plunged during the ensuing price war; falling nearly 50% between '93 and '99. Insurance was being sold below cost, but the Department of Insurance (DOI), under Commissioner Quackenbush, failed to require insurers to use adequate rates. A growing workforce and higher payroll during the 1990s meant there were higher potential losses, but rates and premiums remained inadequate. Several California insurers were bankrupted by inadequate rates, and the surviving national insurers ended the price war and sharply increased rates. Approximately 25% of the private workers' compensation carriers in California failed, creating further stress on the entire system. The State Compensation Insurance Fund (SCIF), a part of SB 899 Page 5 the Department of Industrial Relations (DIR), had to absorb the bulk of the business that had been insured by insurers that had become insolvent, increasing their market to approximately 50%. The California Insurance Guarantee Association (CIGA) had to step in to the shoes of the failed insurers to pay their workers' compensation benefit obligations. As a result, approximately 75% of the workers' compensation market are in government hands. Rates also increased due to national conditions, a $40 billion loss from the 9/11 attacks led to the first annual loss for the insurance industry ever. Because insurer profits were heavily reliant on investment income, the stock market collapse and economic slowdown was probable cause for insurers to raise rates across-the-board. California increases were particularly high because the insurance industry rate war ended just as rates were increasing due to 9/11 losses and lower investment income. Although the average rate level in 2002 was only 8% higher than in 1993, employers have been harmed by the steep erratic price swings of the last few years. One reason insurance premiums are increasing is the cost of medical care in the system. Medical care in California's workers' compensation system is estimated to be approximately 50-100% higher than medical care in non-occupational medical systems. Medical costs are high in the California workers' compensation system for a number of reasons. Medical billing for provider services and in-patient hospital facility fees in workers' compensation is regulated by the Official Medical Fee Schedule (OMFS). Many have argued that the OMFS is outdated and does not have applicable codes for many medical services. Additionally, there is no requirement that providers bill at the fee schedule rate rather than their regular and customary charge rate, and providers, employers and insurers are able to contract for alternate rates. Furthermore, no fee schedules exist at all for certain areas such as outpatient surgical center facilities. While the Administrative Director of the Division of Workers' Compensation (DWC) within DIR is statutorily obligated to update the OMFS biennially, due to staffing shortages, budgetary constraints and an overly complex and cumbersome fee scheduling SB 899 Page 6 system, the fee schedule has not been thoroughly and adequately updated for several years. In addition, the system which was created to avoid costly and time consuming litigation, has given rise through its complex makeup to litigation regarding appropriateness and adequacy of care, disability ratings and myriad other issues. Conference Committee: While there is agreement among the parties that the system is in need of repair, what remains subject for debate is what the real systemic problems are and how best to address them without diminishing the arguably meager benefits injured workers receive in this state. Workers' Compensation Bills: There are 20 workers' compensation measures, which have passed out of their houses of origin this session. These bills cover such complex and varied subject matter areas as medical fee scheduling, utilization and insurance market regulation. With the agreement of Senate and Assembly Leadership, the Chairs of the Senate Labor and Industrial Relations Committee and the Assembly Committee on Insurance, and the authors of this session's workers' compensation legislation, all workers' compensation bills will be submitted to conference committee to ensure comprehensive workers' compensation reform. To that end, all such workers' compensation bills will be amended to reflect the same intent language prior to submission to conference. The following Senate bills will be amended to reflect the same intent language for submission to conference committee: SB 191 (Alarcon), regulates and stabilizes the workers compensation insurance market, by requiring that workers' compensation insurance rates not be excessive. Provides a formula for the Insurance Commissioner (IC) to determine whether rates are excessive. Requires IC to disapprove rates, which are excessive. Requires IC to maintain an online comparison guide for workers' compensation insurance rates. Requires insurers, desiring to use rates lower than the IC's pure premium rates, to file an application with the IC, and to provide for a method of review, determination and appeal as specified. Requires an SB 899 Page 7 experience rating plan to contain a provision for rewarding employers that have been claim free for a specified length of time. SB 223 (Margett), clarifies that the generic drug requirements from last year's AB 749 (Calderon) be applied to hospitals, clinics and physicians. Currently, it applies only to pharmacies. SB 228 (Alarcon), establishes a fee schedule, effective January 1, 2004, for provider fees, inpatient facility fees and outpatient facility fees at 120% of Medicare and for pharmaceuticals and pharmacy services at 100% of Medi-cal; provides that this fee schedule shall remain in effect until the AD adopts an OMFS, which may not exceed 120% of Medicare for provider fees, inpatient facility fees and outpatient facility fees, and 100% of Medi-Cal for pharmaceuticals and pharmacy services; authorizes providers, insurers and employers to contract for rates outside of the fee schedule; repeals all fee scheduling provisions within existing law; provides that the fee scheduling provisions of this bill will not become operative if the AD establishes fee schedules for out-patient facilities and pharmaceuticals and updates the OMFS by January 1, 2004. SB 229 (Burton), prohibits the State Compensation Insurance Fund (SCIF) from raising small employers premiums, for a two year period, if such small employers are claim free for five years and if they provide health insurance coverage for their employees. Requires the SCIF to submit their findings to the Legislature by January 1, 2005. SB 354 (Speier), sets a limit of 15 one-hour visits to a chiropractor, absent approval by a Medical Doctor (MD) for more visits; doubles the maximum fine for fraudulent claims to $100,000 or double the value of the fraud, whichever is greater; doubles the maximum fine on employers who fraudulently obtain lower premiums to $100,000 or double the value of the fraud, whichever is greater; and prohibits MD's from referring workers' compensation claimants to outpatient surgical centers owned by the referring M.D, or immediate family member. SB 457 (McPherson), expresses legislative intent that DWC review the effectiveness of specified provisions of current law in penalizing and deterring unreasonably late and denied benefit payments. SB 899 Page 8 SB 757 (Poochigian), mandates out patient surgery fee schedule based on "national standards"; mandates "utilization schedule" based on national standards; mandates that medical providers are required to provide only tests, evaluations and treatments, necessary to diagnose and treat work-related injury; and mandates that work related injury must be 50% of cause of injury to be compensable. SB 899 (Poochigian), provides that a physician can not refer a person to an outpatient surgery facility in which he has a financial interest. SB 1007 (Speier), expands the definition of "common trade or business" for the purposes of association or trade group workers' compensation insurance policies to include manufacturing facilities as identified in the North American Industry Classification System. SB 1071 (Vincent), requires that if any corporation provides any medical judgement or independent review and interpretation of diagnostic test results that they meet specified legal requirements regarding the corporate practice of medicine. The following Assembly bills will be amended in Senate Labor and Industrial Relations Committee to reflect the same intent language for submission to conference committee: AB 149 (Cohn), extends the statute of limitations for claims for workers' compensation death benefits in the case of firefighters whose death results from asbestosis. AB 227 (Vargas), requires the Administrative Director (AD) of the Division of Workers' Compensation (DWC) in the Department of Industrial Relations (DIR) to adopt an interim outpatient surgery facility fee schedule using data that meets specified criteria pending development of a fee schedule. AB 968 (Correa), clarifies that any injury suffered by an employee as a result of a vaccination administered to prevent infection by a biochemical substance or blood-borne infectious disease arises out of and in the course of employment for workers' compensation purposes. AB 1099 (Negrete Mcleod), clarifies current law by including the SB 899 Page 9 Employment Development Department (EDD) among the agencies authorized to request and receive information related to workers' compensation fraud investigations, and provides that licensed rating organizations are authorized to release information regarding workers' compensation fraud. AB 1215 (Vargas), requires the State Compensation Insurance Fund (SCIF) to develop a program that allows workers' compensation insurers to have access to quarterly wage reports filed by employers with the California Employment Development Department (EDD) for the sole purpose of detecting workers' compensation insurance fraud. AB 1262 (Matthews), requires insurers to certify that their claims adjusters meet minimum standards. Requires the Department of Insurance (DOI) to adopt applicable regulations setting forth those standards. AB 1324 (Steinberg), provides that an employee's dependent who contracts a blood-borne infectious disease from the employee may be compensated for health care costs associated with the disease. AB 1483 (Richman), requires physicians who treat and evaluate injured workers to be certified by the Industrial Medical Council (IMC); educates physicians through a certification process; requires AD to contract with a university or policy institute to develop physician utilization management, billing, quality of care, and outcome measurement data; and, requires mandatory training on the medical coordination of workers' compensation claims. AB 1578 (Vargas), increases the fine for committing workers' compensation insurance fraud from $50,000 to $150,000. AB 1579 (Cogdill), extends the prohibition against self referral to providers who have a financial interest in out-patient facilities; requires certification of all physicians providing workers' compensation treatment by the Industrial Medical Council; requires the Administrative Director (AD) to contract with a research entity to develop physician utilization management, quality of care, billing, and outcome measurement data, and to publish a report regarding same; requires the AD to establish a mandatory annual training program for persons who determine permanent disability ratings for injured workers; SB 899 Page 10 requires the AD to establish a mandatory annual insurance claim administrator training program; repeals provisions in existing law authorizing carve-outs, as specified, for the aerospace and timber industries; expands carve-outs in existing law, to be non-industry specific, but eliminates vocational rehabilitation provisions in these carve-outs; amends the definition of injury for purposes of workers' compensation to rely on objective medical findings; amends liberal construction provision in current law to apply only after the injury has been deemed to have arisen out of and in the course of employment, is specific and results in serious bodily harm; requires employees to prove by a preponderance of evidence that the injury was substantially caused by employment in order for a cumulative injury to be compensable; requires psychiatric injuries be proved by clear and convincing evidence; requires that incarcerated individuals pre-incarceration average weekly wage be the basis for their compensation for work-related injuries and provides that the injured inmate's injury must be the predominant cause of the injury and may not be the result of the criminal act for which he has been convicted; makes vocational rehabilitation voluntary rather than mandatory, at the option of the employer and would provide for a one time payment of benefits; requires applicants for employment to disclose whether they have ever been adjudicated to have committed a fraudulent act relating to workers' compensation; authorizes an employer to contract with a PPO for health care services to be provided to injured employees under the workers' compensation laws and would provide for Independent Medical Review (IMR) under these contracts; extends the time frame during which an employee who has not pre-designated a physician must be under the control of the employer for medical treatment from 30 to 120 days; provides that where an employee has failed to pre-designate and a health care service is disputed, the employee may request IMR; extends the generic unless otherwise prescribed pharmaceutical provision to all pharmaceutical dispensers; imposes additional reporting requirements on physicians; requires employers to pay medical bills stemming from authorized treatment within 45 days of receipt; provides that if the employer contests, denies, or seeks review of medical billing, the employer shall only be required to pay any interest or increase in compensation for delayed payment if the provider objects in writing to the employer's written explanation for contesting, denying, or seeking review of the billing within 45 calendar days of receipt of payment, notice of nonpayment, or explanation of review and, precludes the provider from seeking further reimbursement or SB 899 Page 11 filing a lien if the provider fails to make this objection within the 45 calendar day period; repeals the provision in existing law providing for a 10% increase to awards where benefits have been unreasonably delayed or denied; prescribes procedures under which the amount of the payment unreasonably delayed or denied would be increased to 25%, not to exceed $500; requires physicians to bill at the fee schedule rate and requires the AD to adopt an out-patient facility fee schedule; requires the AD to consult with the Industrial Medical Council prior to the adoption of an update to the official medical fee schedule; requires the AD to adopt a utilization schedule and provides for IMR; provides that in apportionment determinations, the appeals board may not rely on any report that does not fully address the issue of apportionment; provides for a conclusive presumption that a prior injury existed at the time of the subsequent injury if an applicant has received a prior permanent disability award; precludes the accumulation of permanent disability awards from exceeding 100% unless the employee's injury or illness is conclusively presumed to be total in character; prohibits the payment of permanent disability and death benefits unless the industrial injury is the predominant cause of the death or disability; provides that the burden of proof for apportionment is borne by the injured worker; requires that all evaluations and reports regarding degree of permanent disability be based on demonstrable medical evidence using established medical guidelines regarding restriction of bodily function; and, prohibits disability ratings from being based on evaluations and reports that do not follow established medical guideline. REGISTERED SUPPORT / OPPOSITION : Support None as amended. Opposition None as amended. Analysis Prepared by : Michael Mattoch / INS. / (916) 319-2086