California Insurance Commissioner John Garamendi spoke recently to the Assembly Insurance Committee in Sacramento. Below are his comments as provided by the Calif. Department of Insurance.
Chairman Vargas and Committee Members,
Thank you for allowing me to speak today on an issue that is pivotal to the well being of California’s economy – workers’ compensation.
I have said repeatedly, the workers’ compensation system is broken. Today, I am here to tell you that we are fast approaching the point of no return, meaning if we do not hunker down and make the tough decisions to reform this system now, we face imminent disaster in workers’ compensation. My friends, there is no option, but to control the costs in the system.
In March, I testified that the State Compensation Insurance Fund (State Fund) was in appalling financial condition and subject to state fiscal control under the Risk Based Capital statute; I am here today to tell you the situation has worsened considerably. Currently, State Fund holds 50 percent of the market share; their next closest competitor holds less than five percent of the market. Based on this reality, if you fail to take immediate action, workers’ compensation in California faces total collapse.
The responsibility to do what must be done lies with the Legislature, with the Governor, and with administrative agencies. We must act now! As elected leaders, we are called upon to assume a bi-partisan collaboration to effectively address this most critical issue. California’s business owners and their employees are looking to us for the leadership necessary to move beyond the rhetoric, beyond special interest influence, and to do what must be done to drive down the out of control cost escalators that plague the system and restore workers’ compensation to what it was intended to do – protect employers and employees.
Our mission is clear – we must provide Californians with an insurance system that is efficient and effective. The action we must take is also clear, that is, approving legislation that reins in cost drivers and streamlines systems that are bogged down with inefficiencies.
I have been working with a number of legislators on both sides of the aisle to develop legislation that delivers immediate, quantifiable, and concrete reform.
Today, I will outline specific legislation that I believe will help us reach our goal of meaningful reform that will bring stability to the market and relief to California’s employers strapped by skyrocketing premiums.
MEDICAL COST DRIVERS
A primary cost driver is medical and health-related costs. There is promise for immediate, quantifiable, and concrete reform in Senator Alarcon’s bill SB 228, as it represents a major step forward in containing medical costs. AB 227 has similar promise, if it follows the same cost containment measures proposed in SB 228 — that is, use of the Medicare/Medi-Cal fee schedules, which will bring consistency and stability to health care costs.
Stability and consistency allow actuaries to predict costs. Our current fee schedule is not tied to Medicare/Medi-Cal, and is not updated and does not accurately reflect cost of care. Current law expects a state agency with inadequate funding and little experience to create and update fee schedules. It does not work. Tying costs to the Medicare/Medi-Cal fee schedule makes sense, providing a payment standard, and is an essential element of our reform plan. Not all services have fee schedules and many do not have utilization controls; in this environment, medical costs are on the up escalator and there is no second floor. The current system guarantees a crash, and it is not far off.
The Commission on Health and Safety and Workers’ Compensation (CHSWC) has conducted an eye-opening study that will illustrate my point on fee schedules. CHSWC estimates that if a medical cost control measure is enacted that does the following things: 1) pegs medical fees at 100 percent of Medicare/Medi-Cal fees for all professional in-patient hospital fees; 2) pegs outpatient surgery facilities fees at 120 percent of Medicare/Medi-Cal; 3) provides reasonable utilization controls (this measure substantially helps State Fund, which controls 54 percent of the workers’ compensation market, a long way toward financial health – it would also create the very real possibility of rate stabilization); and 4) ties prescription drug fees to the Medi-Cal payment rates. Other measures being considered by the Legislature that control medical costs would increase the likelihood of cost stabilization and lower premium prices in the future.
This can happen because of the large leverage caused by the high inflation rates in the cost drivers and their relationship to the reserve/surplus equation. High inflation rates require that existing reserves for old injuries be increased. The increases in reserves are directly charged to surplus – as surplus declines, solvency is threatened. Declining inflation rates have the opposite effect of reducing reserves and automatically increasing surplus. Thus, the company can be stabilized and future price increases reduced or eliminated. By tying inflationary trends to something more predictable, such as the Medicare/Medi-Cal fee schedule, the effect is lower reserves will be required, and that is not only for future claims, but existing claims.
Thus far, I have been greatly encouraged by the legislation that has been proposed to address these issues. I have worked with some of you to offer support and advice, and I will continue to look for opportunities to do so as we progress.
Senator Speier’s bill, SB 354, takes on the issue of medical utilization. We believe there should be utilization controls on all physical medical treatment, so that injured workers get all of the medical treatment they need, but not unnecessary treatment. Senator Speier’s bill is a good step in that direction and we will continue to work with her to further refine it.
We must also seek to stem the cost escalators associated with delayed or refused payments to injured workers. The penalties for these actions must appropriately reflect the negative action taken by the insurer or employer. Assemblymember Keith Richman’s AB 1480 would take important steps toward a resolution of this problem.
By instituting a rational penalty structure for delayed or refused payments, this bill would help reduce unnecessary litigation costs. And reducing the timeframe for the employer or insurer to investigate and accept or deny a claim from 90 days to 45 days will also act to cut litigation and administrative costs in the system. I also support its provision to increase civil penalties for fraud.
Continuing on the issue of medical cost drivers, we simply must also address how disputes over benefits for temporary and permanent disability, and medical/vocational rehabilitation are resolved. The current system is random and offers no quality assurance, which leads to disputes and litigation, which, in turn, drives costs higher. The field must be leveled to reduce disputes and litigation. We must have a single independent qualified medical evaluator to make certain determinations when there are disputed benefits in an injured workers’ case. This kind of quality assurance will result in a fair system that speeds service, reduces disputes and litigation, and thereby, reduces costs.
The issue of consistency in disability evaluations is another element of reform that must be addressed to reduce disputes and litigation. Assemblymember Richman has offered a useful proposal with AB 1483. This legislation will establish more efficient medical processes by requiring physicians to be properly trained and requires training for disability evaluation raters and claims adjusters. This measure will complement AB 1262 (Matthews) which I am sponsoring to certify claims adjusters.
CHSWC is nearing completion of an extensive study by the Rand Corporation that suggests a new method of determining the permanent disability of an injured worker. I am told that the study has promise in reducing the gross subjectivity that plagues the current system and leads to ever more litigation and unequal settlements in which small injuries get too much and serious injuries get too little. Hopefully, this report will be available in time to assist us in addressing this serious flaw in our current system. The proposals to use the American Medical Association’s (AMA) system seem to avoid the AMA caution that its schedules are not suited for this task.
The workers’ compensation system is riddled with disincentives to return employees to the workplace. The effectiveness of vocational rehabilitation is also in question. Under the current vocational rehabilitation system, there is a cash-out option that offers workers $10,000 cash instead of attending a Vocational Rehabilitation program with a maximum cost of $16,000. Apparently, the gross incentive to abuse this benefit was ignored when the provision was enacted. Additionally, the potential for abuse extends to the applicant attorneys because they secure an immediate fee when the employee takes the cash-out option.
Effective fraud interdiction is another crucial element of meaningful reform. I am restructuring, re-energizing, prioritizing and coordinating our fraud and investigation units with other state, federal, and local law enforcement agencies, and seeking to improve our working relationship with district attorneys. Chairman Vargas, your bill, AB 1215, will provide important new tools to support our fraud fighting efforts. We thank you for that.
I believe that insurance companies are derelict in their responsibility to vigorously fight fraud and I assure you that I will also energize them. They cannot ignore the cost of fraud and assume that I will allow that cost to be passed along to employers.
INSURANCE COMPANY COSTS
There is considerable evidence that insurance companies are also responsible for the escalating costs. I see very little evidence of any serious effort by companies to control medical costs, litigation costs, administrative costs, fraud costs and a host of similar expenses. In 1991, at my first hearing on workers’ compensation expenses I refused to allow a minimum rate increase until the insurance industry squeezed out its excessive costs. At the May 8, 2003, hearing on the WCIRB’s proposed rate increase of 10.6%, I will take up the issue of cost containment by insurance companies.
In an effort to force insurance companies to properly handle claims, I am initiating a process that will soon include the workers’ compensation insurance companies in the fair claims practices regulations.
STATE COMPENSATION INSURANCE FUND
Perhaps one of the most crucial elements to correct California’s workers’ compensation system is to return the State Compensation Insurance Fund to financial health. This entity, which provides more than 50 percent of workers’ compensation coverage in California, is in serious, serious trouble. I have directed State Fund to address its problems by using my regulatory powers, but as I have said before, the real solution is swift and effective legislative action. AB 1357, by Assemblymember Matthews, would help begin this process.
This measure, as amended, would eliminate the requirement that one member of the Board of Directors be from a labor union, and the remaining four be State Fund policyholders for one year prior, and during, their tenure on the Board. This is a clear conflict and it limits who may be appointed to the Board. Removing this restriction for two of the board members who must now be policyholders will broaden the candidate pool to others that may have more experience in determining solutions needed to lead State Fund back to financial health. The bill will also allow State Fund to have six exempt positions for the top management positions, thus providing the opportunity for new management ideas to enter the previous insulated management structure at State Fund.
I don’t think I can say it more emphatically. We must have laws this session that deliver immediate, quantifiable, and concrete reform. I have made clear my position on these bills and urge you to step up and take the action necessary to avoid a complete collapse of our workers’ compensation system. To do anything less is a complete disservice to all Californians.
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