BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 899
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          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  








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          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  








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          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.








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          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  








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          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  








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          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  








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          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.








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          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  








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          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;  








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          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  








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          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