Jan Vick
Employers, workers, and insurers will all be affected by California's workers' compensation legislation passed in the summer of 1993, although it will be some time before its consequences are fully realized. State Compensation Insurance Fund, California's largest workers' compensation insurer, has provided Labor Management Decisions readers with a summary of the main elements of the reform package, as part of its effort to present the public with up-to-date information on the developments in this important area. Jan Vick is Information Officer in the company's Communications Department in San Francisco.
After many years of debate among all involved parties, the California State Legislature passed comprehensive workers' compensation reform in seven bills, which were signed by Governor Pete Wilson in July 1993. During the five years before the legislation, workers' compensation costs had escalated, driving up employers' premiums and insurance company costs. By the time reform discussions had begun, the number of claims had been increasing dramatically, and medical payments and litigation costs were rising.
As the first step in reforming the system, the legislature had passed a tough bill in 1991 that made workers' compensation fraud a felony. It provided money to district attorneys to investigate fraudulent claims activity and enabled insurers to clamp down on employees, vendors, and employers violating the system. Claims began to decrease in late 1992 and into 1993, partly as a result of the new law.
Despite the successful anti-fraud efforts, insurance premiums for policyholders continued to rise. However, indemnity payments to employees for time lost from work remained among the lowest in the nation. New legislation was introduced to give rate relief to employers, increase benefit payments to injured workers, improve workplace safety, reduce medical-legal expenses, and decrease the number of psychiatric and post-termination claims.
The reform package includes the following seven bills plus clean-up legislation passed in September:
| AB 110 | The major bill in the package, makes changes throughout the workers' compensation system. |
| SB 30 | Repeals the minimum rate law as of January 1, 1995. |
| AB 119 | Limits psychiatric and post-termination claims. |
| SB 484 | Appropriates funds to implement the new workers' compensation laws. |
| SB 983 | Allows certain workers' compensation benefits and dispute resolution processes to be negotiated through collective bargaining in the construction industry. |
| SB 1005 | Establishes the Commission on Health and Safety and Workers' Compensation. |
| AB 1300 | Expands anti-fraud measures. |
Another bill, SB 223, was enacted in September to clarify the reform package. An important provision in it concerns the effective date of the new rates under open rating. The new rates will be effective on the first normal anniversary date of a policy on or after January 1, 1995, and no policy may be issued or renewed for a period of less than one year for the purpose of changing the policy's normal anniversary date.
AB 110, AB 1300, SB 484, and SB 983 contained urgency clauses. Their provisions have various effective dates noted in the following discussion.
Changes Affecting Employers
The change of most immediate importance to employers is the decrease in premium rates, effective July 16, 1993. Each insurance company will determine how it will carry out the rate changes. All employers insured by State Fund, for example, will receive a 7 percent decrease in their rates on the portion of their 1992 or 1993 policies remaining as of that date. This means that the policy premium for an employer is based on the rate existing at the policy anniversary date for the effective period before July 16, and on a 7 percent lower rate for the period thereafter (see the following example).
In the long run, the provisions of SB 30 will have the most significant effect on workers' compensation rates. This bill repeals the minimum rate law, effective January 1, 1995. Under the old law, the Workers' Compensation Insurance Rating Bureau (WCIRB) proposed a schedule of new rates, which was then submitted to the Insurance Commissioner for public hearings and final rate determination. The WCIRB based the proposed rates on the loss experience (including an expense provision to cover the cost of adujusting claims) of each industry.
The new law requires a rating organization to publish "pure loss" rates by industry, with no expense provision. Each insurance carrier will then file its own rates with the Insurance Commissioner based on the pure loss rates, and it will factor in its costs of doing business. The rating organization must publish its first set of pure loss rates by October 1, 1994, and insurance carriers must file their rates at least 30 days before use. Since the new rates are to be effective for new and renewal policies as of January 1, 1995, carriers must file their rates no later than December 1, 1994.
The legislature expects that increased competition among insurance companies, due to the elimination of the guaranteed expense allowance, will result in lower rates for most medium to large employers. As the insurer of many smaller employers, State Fund is committed to stabilizing the rates for this segment of the business community as well.
Benefit Changes
Workers will receive a long-overdue benefit increase for covered injuries occurring on or after July 1, 1994 (see following table).
The new legislation bars claims where the cause of injury was a lawful, nondiscriminatory, good faith personnel action. It also makes substantial changes to the thresholds for psychiatric claims and post-termination claims based on injuries occurring on or after July 16, 1993. The applicant must now show that the actual events of employment were the predominant cause (over 51 percent) of a psychiatric injury.
Post-termination claims are those which are filed after an employee has been fired or laid off. Under the new law, it will be more difficult for an employee who is given notice of termination or layoff to file a valid claim for an injury that occurred before that date. To receive workers' compensation in such cases, an employee must prove one of the following: (1) that a sudden or extraordinary event in the scope of employment caused the injury; (2) that the employer had received notification of the injury before issuing the notice of layoff; (3) that medical records from before the termination notice show the injury had existed; (4) that the injury took place after the notice but before the actual discharge; or (5) that a court or other legitimate trier of fact has found that the employee had been racially or sexually harassed.
Costs of vocational rehabilitation benefits have been escalating rapidly in recent years, in 1990 accounting for over 10 percent of the total costs incurred for claims. The reform legislation places a cap of $16,000 on vocational rehabilitation services for injuries occurring on or after January 1, 1994, and, with some exceptions, it restricts the worker to one vocational rehabilitation plan.
The new law encourages the use of modified or alternative work assignments to get injured employees back to work as soon as possible. An employer's liability for vocational rehabilitation services may be terminated if such work is provided and meets certain wage and duration requirements. In addition, an employer who provides modified or alternative work may be eligible for a refund on its workers' compensation premium.
Litigation of claims has continued to be a major cost driver in the workers' compensation system. The number and cost of medical-legal evaluations have grown rapidly. To bring under control the expenses they entail, the new legislation mandates a more restrictive fee schedule for medical-legal reports and limits the number of them that either side may obtain in a disputed claim. The expense of any additional report must be borne by the party that orders it.
The treating physician will have a more prominent role in medical decisions, with responsibility for giving opinions on all medical issues necessary to determine eligibility for compensation. That physician's report is presumed to be correct, except where each party in a represented case has selected a qualified medical evaluator.
Cancellation Notice
The new legislation defines conditions under which an insurer may cancel a policy and sets minimum time periods for notifying an employer of cancellation. The insurer must give 10 days' notice for cancellation based on the following: (1) failure to pay workers' compensation premiums; (2) failure to report payroll or permit the insurer to audit the payroll; (3) material misrepresentation by the policyholder or agent; and (4) failure to cooperate in the investigation of a claim. The following require 30 days' notice: (1) material failure to follow federal or state safety orders or written safety recommendations by the insurer's loss control representative; (2) a material change in ownership; (3) a change in business that materially increases the hazard or requires additional or different classifications.
Employer Bill of Rights
The reform package gives employers expanded access to information about their claims or policy history. Upon request of a policyholder, the insurance carrier is obligated to provide a written report on those parts of a claim's reserves that affect the employer's premium. This report is to include information on estimated medical-legal costs, vocational rehabilitation, and other expenses. The insurer must disclose all elements of a claim file that will affect the employer's premium. Confidentiality provisions in the law, however, may restrict an employer's access to the injured worker's medical records and all documents protected under attorney-client privilege. Signed releases may also be required to obtain copies of claims information.
In addition to these requirements of insurers, there are new duties for the Workers' Compensation Insurance Rating Bureau. The WCIRB is to provide, at the employer's request, a written report containing information about that employer's loss experience, claims, classifications, and policy contracts. The report also must include information about rating plans, manual rules, and any other information that affect the employer's premium rates. The WCIRB will create the position of ombudsman to help employers obtain and evaluate the report from the bureau.
After January 1, 1994, every policyholder should be provided information about the new services and the changes in the law. Insurers must inform all of their policyholders about the ombudsman and the report available from the WCIRB. The insurer also must provide an explanation of the changes in workers' compensation laws and a summary of the changes in the rating law.
Workplace Safety
A major concern of the legislature has been establishment of programs to improve workplace safety. All insurers must provide loss control consultation services that meet minimum requirements to be published by the California Department of Industrial Relations (DIR). Insurers will inform all their policyholders of the loss prevention services available from them at no additional cost.
The DIR Division of Occupational Safety and Health is directed to create a program to identify and inspect the most hazardous industries. It also will set up model programs for prevention of repetitive motion injuries. Carriers may also be required to expand their loss control services to targeted hazardous industries.
Managed Care of Occupational Injury
Employers may extend their control of an injured worker's medical care beyond the current 30-day time limit, for a period that depends on how many Managed Care Organizations (MCOs) they offer care through and whether they provide non-occupational health insurance. An employer who offers at least two MCOs to employees can have medical control for 90 days. Control is extended to 180 days if the employer offers at least two MCOs and provides coverage for non-occupational health care. Control of medical care extends to 365 days if the employer offers two MCOs and provides non-occupational health coverage, and if the employee's personal physician or chiropractor is affiliated with at least one of the MCOs.
Health and Safety Commission
The legislature has created a new commission of employers and employees to oversee the workers' compensation system in its entirety. The reform package eliminates the old Health and Safety Commission and replaces it with an eight-member Commission on Health and Safety and Workers' Compensation. Four members of this commission will represent employers, and four will represent organized labor. The commission will conduct continuing examination of the workers' compensation system and of activities to prevent industrial injuries and occupational diseases. It may conduct relevant studies and investigate programs in other states, and is to issue a yearly report to the governor and the legislature. SB 484 appropriated $500,000 to the commission.
Conclusion
The 1993 reform package brings sweeping change to the workers' compensation system in California. Both industry and government leaders expect that the changes will bring runaway costs under control.
But there are many uncertainties about how parts of the new legislation will be implemented and what its results will be. Insurers must create new procedures for a wide range of services. State agencies such as the Department of Industrial Relations and the Department of Insurance, as well as the Workers' Compensation Insurance Rating Bureau, must create several new rules and procedures. Many new policies and procedures need to be developed under the rating system that replaces the repealed minimum rate law. Their effects cannot be known until after January 1, 1995.
Policyholders and the general public should remain alert to information from agencies and insurers as they make the decisions remaining to implement workers' compensation reform. n
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