BILL ANALYSIS SB 1717 Page 1 SENATE THIRD READING SB 1717 (Perata) As Amended May 1, 2008 Majority vote SENATE VOTE :23-14 INSURANCE 7-3 ----------------------------------------------------------------- |Ayes:|Coto, Berg, Charles | | | | |Calderon, Carter, De | | | | |Leon, Lieber, Parra | | | | | | | | |-----+--------------------------+-----+--------------------------| |Nays:|Benoit, Duvall, Garrick | | | | | | | | ----------------------------------------------------------------- SUMMARY : Increases the number of weeks that permanent disability benefits are paid, thereby increasing the amount of money received for each percent of disability. Specifically, this bill : 1)Declares legislative intent that: a) The 2003 and 2004 workers' compensation reforms were intended to be fair to all parties involved; b) The Legislature should ensure that permanently disabled workers receive adequate compensation; and, c) Providing adequate compensation to these workers should not undermine the positive effects of the workers' compensation reforms. 2)Increases the number of weeks that permanent disability benefits are paid in each of the next three years, resulting in a doubling of benefits by the third year increase. 3)Repeals the provisions of law that result in a 15% reduction of the permanent disability award otherwise due an injured worker if the employer has offered the same or qualified modified work to the employee within 60 days after the employee has become permanent and stationary. SB 1717 Page 2 EXISTING LAW : 1)Establishes a system of workers' compensation benefits to compensate injured workers for, among other things, their permanent disability losses caused by on-the-job injuries. 2)Directs the Administrative Director of the Division of Workers' Compensation (AD) to establish a permanent disability rating schedule (PDRS) to determine the percentage of disability an injured worker suffers from the on-the-job injury. 3)Provides that the PDRS shall take into account the nature of the physical injury or disfigurement, the occupation of the injured employee, age at the time of injury, and the employee's diminished future earning capacity. 4)Specifies that the "nature of the physical injury or disfigurement" be based on the American Medical Association Guides to the Evaluation of Permanent Impairment (AMA Guides). 5)Specifies that "diminished future earning capacity" shall be a numeric formula based on empirical data and findings that aggregate the average percentage of long-term loss of income resulting from each type of injury for similarly situated employees. 6)Converts impairment ratings into benefit dollars according to a schedule that pays the injured workers two thirds of his/her average weekly wage, as defined, for a specified number of weeks that increases with the severity of the disability. 7)Requires the AD to base the initial post-reform adjustments to the schedule on a study that was released in 2003 by the RAND Institute for Civil Justice. 8)Provides for a 15% "bump up" or "bump down" of the permanent disability award depending on whether the employer makes a qualifying job offer within 60 days after the employee has become permanent and stationary. FISCAL EFFECT : Potentially significant costs to the state for SB 1717 Page 3 increased workers' compensation benefits for injured state employees. COMMENTS : 1)Purpose : According to the author, there is now sufficient evidence that the new PRDS is generating unintended low ratings to justify action to increase the ratings. Since the evidence suggests that benefits have been cut by an average of 50% for injuries that have been determined by objective medical findings, the bill's goal is to recover these benefits over a 3-year period. In addition, the bill originally repealed the "bump up/bump down" factor, which had been requested by employers during the 2003-2004 reform debate as an incentive designed to encourage return to work offers by employers. This program has had mixed results, at best. However, since a repeal was determined to result in a net reduction in already inadequate benefits, the bill now only proposes to repeal half of the program. 2)Background : In 2004, the Legislature passed major workers' compensation reforms in SB 899 (Poochigian), Chapter 34, Statutes of 2004. The bill was negotiated with the Governor early in the 2004 legislative year as the Governor was in the process of qualifying an initiative for the November, 2004 General Election ballot. SB 899 addressed a wide range of issues, including the permanent disability (PD) system. There were two primary changes to the existing system. First, the old PD system was criticized as being overly subjective. Similar injuries would receive widely divergent ratings by different raters; many injuries that did not have "objective medical findings" were nonetheless rated as having compensable permanent disabilities. The response was to adopt the American Medical Association Guides to the Evaluation of Permanent Impairment (AMA Guides). These guidelines are designed to enable the physicians who make disability reports to objectively measure the degree of impairment that various injuries cause for the injured worker. The AMA Guides recognize only objective medically identifiable injuries and impairments. SB 1717 Page 4 The second major change to the PD system involves one of the standards used to convert an "impairment rating" into a permanent disability rating (which then is translated into the degree of monetary compensation paid to the injured worker.) Under the old PD system, state law required an attempt to measure the extent to which the injury impeded the ability of the inured worker to compete in the labor market. Again, an attempt was made in SB 899 to inject a more objective approach. In this case, the "compete in the labor market" standard was replaced with a standard intended to measure the extent to which the injured worker's future earning capacity was adversely affected. Specifically, Labor Code Section 4660 provides, in pertinent part, "employee diminished future earning capacity shall be a numeric formula based on empirical data and findings that aggregate the average percentage of long-term loss of income resulting from each type of injury for similarly situated employees." The manner in which the AD implemented this new diminished future earning capacity (FEC) factor, and the way this FEC multiplier is built into the formula that produces disability ratings, has generated substantial controversy. Without getting into the minutia of the formulas, it became apparent very soon after implementation of the new PDRS that ratings were coming out much lower than under the old system. Some results were expected. For example, certain injuries that received low to moderate ratings under the old system, but for which there were no "objective medical findings" to support the impairment, received a rating of no PD under the new rules. Many of these so-called "zeros" were expected. However, many injured workers who have significant, objectively verifiable injuries saw their PD ratings come out much lower than under the old system, often 40-50% or more lower. It should also be noted that the pre-reform PD system was criticized as allowing far too many cases to receive benefits. In California, a much higher percentage of injury cases resulted in some level of PD award than in other states. Thus, costs in California were among the highest, if not the highest, in the country. However, the proponents of the reform bill did NOT argue that, for those workers with legitimate, medically objective injuries, the system was paying a benefit that was too high on an individual case SB 1717 Page 5 basis. While the shift to the new system using the AMA Guides involved a degree of uncertainty, it is fair to say that few predicted a ratings reduction of the magnitude that we have experienced, in particular for the types of injuries involved. In April, 2008, an administrative proposal was finally made by the Administration. The proposal calls for, on average, a 16% increase in PD benefits. To illustrate the impact, if we assume a worker with objective, agreed upon injuries used to receive $100, this benefit was cut in half to approximately $50 under the 2004 reforms. The recent administrative proposal would raise this $50 benefit to $58, still 42% less than under the former rating system. 3)AMA Guides : The AMA Guides are designed to measure physical impairment. By explicit language in the Guides, they are NOT intended to be used to generate bottom line disability ratings. Instead, they are intended to be one of the building blocks that lead to the ultimate permanent disability rating for a particular injured worker. Thus, additional factors, such as those noted in 3) of the Existing Law section of this analysis, are necessary components of a permanent disability rating system. In the end, it is a policy judgment about adequacy of compensation that must occur when taking the AMA Guides and using them as a foundation for a PDRS. The Guides ensure that the system is based on medically objective findings; however, the remaining components of the system must ensure that the results provide adequate compensation to the injured worker. AMA Guides-based objectivity is not, of itself, a sufficient policy goal in constructing a PDRS. 4)Prior legislation : The Legislature passed SB 815 (Perata) of 2006, and SB 936 of 2007, both of which were virtually the same as this bill. However, the Governor vetoed the bills. 5)Support : Supporters offer a number of arguments in support of the bill. Fundamentally, they argue that the SB 899 reforms have saved employers over $10 billion, that insurer loss ratios are in the 30% range, and that it is simply unfair for injured workers, in particular those injured workers whose disability has been determined based on objective medical findings, as required by the reforms, to have their benefits SB 1717 Page 6 reduced by 50%. More specifically, supporters point out that SB 899 reduced overall PD benefits in four ways: it reduced the number of weeks of benefit payments in most cases; provided for a reduction of 15% if the employer makes a qualifying job offer; allowed apportionment of the disability to other causes; and, required the "objective findings" of the AMA Guides. Supporters argue that the deepest cuts in PD benefits are occurring AFTER all of these reductions are taken into consideration, because the regulations adopted by the AD substantially undervalue the actual wage loss that injured workers face. 6)Opposition : The California Chamber of Commerce and other opponents acknowledge that PD ratings are down under the new system, but argue it is not clear that these reductions are a problem. They argue that pre-reform PD claims in California were filed at a rate three times the national average, and that the data, in particular from the Commission on Health and Safety and Workers' Compensation, paints an incomplete picture. The Chamber argues that the pre-reform data was taken from the year prior to the reforms, that this particular year was when PD costs were at their height, and thus do not form the basis of a fair comparison. Other opponents make similar arguments that the existing state of the data is incomplete, or fails to properly measure the relevant time frames. They argue that changes to the PDRS need to be based on empirical data that all stakeholders understand and trust. In this regard, they generally support the administrative process that the AD has initiated with the proposal estimated to result in a 16% increase in PD benefits. Opponents also argue that there is not yet a consensus on exactly what level of PD benefits are adequate, and therefore merely returning to pre-SB 899 levels begs the adequacy question. Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086 FN: 0005582