BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 1717
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          SENATE THIRD READING
          SB 1717 (Perata)
          As Amended May 1, 2008
          Majority vote 

           SENATE VOTE  :23-14  
           
           INSURANCE           7-3                                         
           
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          |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.








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           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  








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          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.









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          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  








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            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  








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            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 


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