Legislature(2003 - 2004)
04/22/2004 09:03 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 311(JUD) "An Act providing for a special deposit for workers' compensation insurers; relating to the board of governors of the Alaska Insurance Guaranty Association; stating the intent of the legislature, and setting out limitations, concerning the interpretation, construction, and implementation of workers' compensation laws; relating to restructuring the Alaska workers' compensation system; eliminating the Alaska Workers' Compensation Board; establishing a division of workers' compensation within the Department of Labor and Workforce Development and assigning certain Alaska Workers' Compensation Board functions to the division and the Department of Labor and Workforce Development; establishing a Workers' Compensation Appeals Commission; assigning certain functions of the Alaska Workers' Compensation Board to the Workers' Compensation Appeals Commission and the Workers' Compensation Hearings Board; relating to agreements that discharge workers' compensation liability; providing for hearing examiners and hearing panels in workers' compensation proceedings; relating to workers' compensation awards; relating to an employer's failure to insure and keep insured or provide security; providing for appeals from compensation orders; relating to workers' compensation proceedings; providing for supreme court jurisdiction of appeals from the Workers' Compensation Appeals Commission; providing for a maximum amount for the cost-of-living adjustment for workers' compensation benefits; providing for administrative penalties for employers uninsured or without adequate security for workers' compensation; relating to assigned risk pools and insurers; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated this bill, sponsored by the Senate Rules Committee at the request of the Governor, "changes the way workmans' compensation disputes and appeals are resolved. Under SB 311, appeals are reviewed by the newly created Workmans' Compensation Commission, which is composed of three persons experienced in practicing Workmans' compensation law in Alaska instead of the Alaska Superior Court." LINDA HALL, Director, Division of Insurance, Department of Community and Economic Development, noted the complexity of the legislation and testified as follows. With this Committee previously, I have discussed the financial crisis in the Alaska Insurance Guarantee Association. The other area of tremendous concern to me today is the lack of a healthy workers' compensation insurance environment. I'd like to give a little background on the problems that we're encountering. We have had for the past five years, a lack of profitability in out market, which is making it unattractive to insurers. Losses have ranged from a low of 99.9 percent to a high of 154 percent. At that high, insurance companies are spending $1.54 for every dollar of workers' compensation premium they collect. Alaska carriers are loosing five percent more money in Alaska than the national average. The second area that has created a problem has been the cost of workers' compensation claims. As everyone is aware, cost of medical benefits has increased substantially over the past several years. We have seen double-digit increases in the cost of medical care. This is accepted and at least understood usually in the health insurance arena, but sometimes we don't make that connection with the cost of workers' compensation. It does have a dramatic impact on the cost of claims. Major cost drivers in the state of Alaska for workers' compensation insurance are physician's fees, [which] are among the highest in the country. We have a permanent partial cost per case that is 40 percent higher than the countrywide average. We have lengthening duration of claims, as we have an aging workforce. I think maybe we heal less quickly. We have a claim frequency in our temporary total that is total the countrywide average. These cost drivers affect the cost of claims, which in turn certainly impact the cost of insurance. As I think everyone is aware, I've talked about it with this group before, we have had substantial premium increases. Effective January 1 of this year, the average rate increase was 21.2 percent. As the cost of claims is increased, the actuarial analysis of historical claims cost and projections into the future indicated the need for that substantial rate increase. The change was an average. We actually have seen ranges from a 15 percent reduction in costs to a high of 57 percent increase in people's workers' compensation. We had 17 classifications that had increases in excess of 50 percent. Combining that increase in premium with the assessments that are occurring for the deficit in the Guarantee Association, has combined to make dramatic increases in the cost of workers' compensation. The fourth factor that is impacting our workers' compensation market is the assigned risk pool. It's another factor that has made the Alaska marketplace increasingly unattractive. Due to the mandatory nature of workers' compensation, we have a mechanism called the "assigned risk pool", where, if an employer is unable to obtain insurance in the traditional market, they can obtain insurance in the assigned risk pool. Currently, 17 percent of the market is in the assigned risk pool. When the cost of claims in the assigned risk pool exceeds the cost of the premiums collected, the difference is charged back to insurance companies. Over the past five years, Alaska has had the highest charge of any state for the losses in the assigned risk pool. This charges range from four percent to six percent. It's an additional cost to insurance companies, comes directly out of their operating costs and makes doing business in Alaska very expensive. Overall, we have a workers' compensation environment that is becoming very expensive for employers and very unattractive to insurers. As these issues became apparent, staff from the Division of Insurance, the Department of Labor and Workforce Development and the Department of Law have met to attempt to find ways to overcome these challenges. We cannot continue to merely increase workers' compensation premiums for employers. We must look to find ways to stem the increasing costs of providing benefits to workers. We've looked at a number of options, ranging from the cost of medical benefits, provider fee payments, definitions of compensability, and a variety of technical terms that deal with the benefit system. SB 311 makes some insurance changes to enhance our marketplace and it proposes a change in the workers' compensation adjudicatory process that we feel will bring about more efficiencies, more predictability. We desperately need a healthy workers' compensation marketplace in Alaska. We need a market that's sustainable, that will encourage companies to continue to do business, to attract new markets. We need compensation insurance that is available and affordable for employers to continue to develop jobs to sustain economic development. This bill is fairly unique in that it's a cross departmental effort to find solutions to the issues. I will address the insurance pieces of the bill, Director Paul Lisankie and Deputy Attorney General Scott Nordstrad will address the Department of Labor, workers' compensation pieces of the bill. Realizing that the bill is fairly long, there are only four sections that I would like to address for insurance. Section 3 is a requirement for an increase in the deposit required of insurance companies writing workers' compensation. This deposit will be for the protection of Alaskans covered under the workers' compensation system. As you've seen, and this body has passed a bill funding the current deficit in the AIGA [Alaska Insurance Guarantee Association] these special deposits would go to the Guarantee Association, which would diminish the need for assessments that we're currently facing. Section 4 really makes that an order of priority and bankruptcy. Section 5 changes the composition of the Board of Governors of the Guarantee Association. Currently, insurance - there are seven insurance company members and two public members. The proposal is to change that composition so that all stakeholders have a seat at the table. We've seen what a dramatic impact in solvencies can have on both injured workers and on employers and I'd like to see more people at the table. Section 105 is the other insurance section I'd like to discuss. Section 105 repeals the 25 percent statutory cap on surcharges on the assigned risk pool. The assigned risk pool currently has a statutory cap of 25 percent. I feel strongly the pool must be self-funding. Premiums have lagged well behind the cost of claims in the pool. Nearly 6,000 of the 8,800 policies in the pool will have premiums under $3,000. The average cost of claim in Alaska today is $19,363. So we have an $800 premium and a $19,000 claim. That is an average. The pool has lost money at an even more rapid rate than the traditional insurance market. Small employers are the bulk of these 6,000 policies. They are just as likely to have claims even though probably not as many as larger employers. As I described in the introduction, the financial burden on insurance companies from the Alaska assigned risk pool, has contributed dramatically to the overall attractiveness of Alaska to insurers. We have a fragile insurance marketplace and we're looking for solutions to bring about change to that marketplace so that we can have an impact on the cost of workers' compensation. Co-Chair Green interrupted to question the section of the bill the witness was explaining. Ms. Hall corrected that Section 106 pertains to the assigned risk pool, as she was discussion. Co-Chair Wilken announced as much time as necessary would be allotted for consideration of this bill due to the importance and complexity of the matter. PAUL LISANKIE, Director, Division of Workers' Compensation, Department of Labor and Workforce Development testified that several features in bill would affect the administration of workers' compensation insurance in Alaska. He stressed that this bill proposes no changes to workers' compensation benefits payable to residents of Alaska, although the calculation of rates for nonresidents would be changed. He explained this is to prevent injured nonresidents from receiving higher benefit payments while residing outside the State. Mr. Lisankie furthered this bill would formally divide the functions of the Workers' Compensation Board into adjudication and administration. He informed that the Division currently assists the Board in all Board functions, although this is not required by statute. He stressed the need to "informally" insure that claims are not decided as a result of the current practice whereby the Division and the Board both investigate claims, accuse parties of wrongdoing and issue joint determinations. Due process constraints, he specified, provide that the party charging and prosecuting matters could not be the same party that judges upon those matters. He noted this bill would make a formal distinction between the Division, which would undertake administrative, investigative and prosecutorial activities, and the Board, which would resolve any disputes between the Division and the party. Mr. Lisankie told of the proposed establishment of a Workers' Compensation Appeals Commission in this legislation. He stated this Commission would hire and retain hearing examiners, who along with the current panel members would undertake the initial hearings in disputed claims for benefits and accusations against employers failing to provide insurance. Mr. Lisankie then shared that currently, if the Division discovers an employer failing to provide insurance, the only sanction that could be imposed is closure of the business if such insurance is not purchased; however, he remarked that once insurance is purchased, no other consequences could be imposed on the employer. He stated that this legislation would impose penalties of up to $100 per day, per employee that the employer fails to carry insurance. He expressed the intent is to strengthen cease and desist orders, and to show to employers that this issue is critical. He asserted that employers failing to carry insurance place the physical health of employees at risk, and also provides an unfair fiscal advantage against other employers who lawfully purchase this insurance. Mr. Lisankie listed the motivation behind the proposed changes is greater consistency of decisions and predictability of decisions. He remarked that injured workers would have more certainty of the benefits they would receive. He gave the history of the Workers' Compensation Board established at statehood in 1959 with three members, with no question as to who resolved the issues. However, he noted that with increased population in the State, the Board membership expanded to the current seven panels, with the 14 total members appointed by the Governor to seats designated for labor interests and industry interests, and confirmed by the Legislature. Each panel, he informed, independently decides how to interpret and implement the workers' compensation laws and are not required to be consistent with the other panels. Mr. Lisankie noted that if a party is dissatisfied with the ruling of a panel, they are entitled to an appeal through the Alaska superior court, which serves as the appellate body. He remarked that most superior court judges do not have expertise in workers' compensation law. He furthered that the decisions of the superior court are binding but that panels are not required to follow the rulings in future cases. Mr. Lisankie explained that this bill would eliminate the superior court from the workers' compensation appeal process and establish a commission to address appeals. This commission of three members, he said, would issue binding decisions that would set precedence for future cases. He qualified that the Alaska Supreme Court remains the sole arbiter of law in the State and that final commission decisions could be appealed to the Supreme Court. He indicated that precedence set by the commission would continue to apply to other ongoing cases until overturned by the Supreme Court. Mr. Lisankie predicted that the consistency and predictability of decisions would result in less litigation and be less costly. He informed that the proposed changes in this legislation are similar to the laws of some other states. He anticipated that insurance providers currently not issuing policies in Alaska would be encouraged to participate in the Alaska marketplace knowing that their experiences here would be similar to those in other states. LORI WING, President, Alaska Independent Insurance Agents and Brokers, testified via teleconference from Anchorage and read testimony into the record as follows. Our association, the AIIAB represents in the insurance marketplace employers from Ketchikan to Barrow, from Kaktovik to Adak. Our clients are governmental entities, privately held, and publicly traded corporations, limited liability companies, and joint ventures. They are for-profit and not- for-profit; they are large and small. All together they make up the business community, the economic base of the State. Each of these entities is required to comply with the respective statutes that are often referred to as the "Work Comp Act". Each of these entities contribute a significant portion of their revenues to a work-comp program regardless of whether they are insurers to a commercial insurance product or self insured through an alternative risk financing technique. The past few years, these employers, regardless of what mechanism they have chosen to comply with the Act, have experienced significant increased costs. The cost of insurance, reinsurance, claims and the associated expenses; the costs have increased. For those that have purchased a commercial insurance product, the cost is reflected in the insurance premium. For those self-insuring, the cost is reflected in the direct payment of claims. Regardless, the employer is paying the cost, the increased cost. We, the AIIAB, as an association, agree that some of these costs are difficult to control. Workers' compensation claims are every bit as much subject to the increased cost of medical care as a health or medical insurance program. But there are some costs we think can be controlled. Costs that can be quantified, defined, not subjected to the opinion to what is commonly referred to as [indiscernible]. Those costs can be controlled. Our hope is that Senate Bill 311 will allow those costs to be quantified, defined once and for all, allowing rate-making organizations and insurers to adequately trend and price the cost of workers' compensation, making the recent rate premium or claim cost, the increases or a portion of those costs, unnecessary. I can tell you that I personally deal with a client, a regional hospital out in Dillingham. Their work comp this year, based on the rate increases as of January 21st will go from $391,000 to $524,000 without changing the payroll a penny. Senate Bill 311 does not limit or eliminate any benefits due an injured worker or an injured employee, but it may help reduce the cost of complying with the Act to employers. It may help, and we believe it will, make those corporations, governmental entities, and other organizations from Ketchikan to Barrow, from Kaktovik to Adak, remain viable, profitable, Alaskan employers. We the AIIAB respectfully request that you the members of the Senate Finance Committee, refer the bill on and we ask that your colleagues, regardless of they're Republican or Democrat, do the same. We, those that deal with the employers, the insurers, the few that we have in this State, the adjusters and attorneys, the employees and the claimants, are confident that this bill will help stabilize and hopefully reduce the costs associated with compliance with the mandates defined in this Act. We are confident Senate Bill 311 will help those employers that are the economic base of this State. Senator Hoffman remarked upon the significant cost increase for the Bristol Bay Health Corporation and asked how this bill would reduce those costs. Ms. Wing was unsure this legislation would affect rates in the current year, but predicted that cost reductions would begin the following year and continue for several years. Senator Hoffman asked what emphasis should the State place on reducing claims through promotion of workplace safety. Ms. Wing admitted this is a viable component, but stressed that regardless of how safe a workplace is, injuries occur. She noted that all employers she works with emphasize safety. Senator Olson asked whether the witness supports the proposed appeals commission of three attorneys, or predicts the commission would complicate future matters. Ms. Wing expressed the association supports the bill as written with the three attorney positions. KEVIN DAUGHERTY, Alaska Labor and Management Ad Hoc Committee, testified via teleconference from Anchorage that this bill does not reflect the process of the Ad Hoc Committee, which has been in place since 1981. He reminded that during the 1990s, Ad Hoc Committee efforts reduced premiums for employers a total of 49 percent. He cited this as an example of the ability of the Ad Hoc Committee to protect benefits and provide for a more cost effective system. He charged that this bill departs from the actions of the Committee and instead proposes to replace a "common-sense layman board" with three "so-called expert" attorneys. Mr. Daugherty remarked this would not provide better "decision making", stressing this is not only his opinion, but also reflects the assessment of the National Commission of Compensation Insurers (NCCI). He relayed the process in which a Pacific Northwest panel within the Commission reviews all proposed legislation relating to insurance matters in the region. He pointed to the lack of documentation in this legislation of any actual economic savings to employers. He provided the phone number of the Commission, (503) 624-5890 to allow Members to obtain more information and he qualified that the Commission has not taken an official position on this bill. Mr. Daugherty cited the 2002 Workers' Compensation Board Annual Report, the most recent available, noting that total death benefits paid to all survivors in Alaska was $3.2 million, compared to $7.06 million paid to attorneys representing insurance companies. He surmised that if currently, over double the amount is paid to attorneys than survivors, the system should be made more efficient rather than adding more attorneys and appeals. He pointed out that this legislation does not provide that additional benefits would be provided for injured workers or survivors. Mr. Daugherty next referenced a fiscal note from the Alaska Court System projecting an implementation cost of approximately $500,000. He also predicted the cost of a new office for the appeals commission would be approximately $500,000, plus additional expenses for support staff. He reiterated that no increased benefits would be provided for injured workers or survivors and that cost savings would not be realized for employers. CHUCK LUNDEEN, General Counsel, Liberty Northwest Insurance, testified via teleconference from an offnet location, that the Oregon-based company has staff located in Anchorage and writes workers' compensation insurance policies. He furthered that the company insures 20 percent of Alaska's assigned risk pool and over 125 Alaskan employers on a voluntary underwriting basis. He supports bill because it provides a "clear statement of purpose that all parties will receive impartial fair treatment in the dispute resolution process". He opined this is good for employers and workers. Mr. Lundeen further supported the bill because it streamlines the litigation process and would produce faster results, which would also benefit injured workers and employers and reduce costs as well. He explained that the elimination of involvement of the superior court would save money. He then spoke to the "precedential value" of the decisions of the proposed appeals commission in that they would provide to all parties understanding of Alaska law. Mr. Lundeen was uncertain whether the NCCI had reviewed this legislation, but he expressed intent to bring the matter to the organization's attention. He told of his 20 years in the insurance industry and assessed this legislation would reduce costs. He compared it to similar legislation adopted in the state of Oregon, which has resulted in reduced costs. Senator Hoffman surmised the intent to streamline the process to save premium costs, although the addition of the commission would increase expenditures. He therefore concluded that any cost savings must be garnered from reduced benefits. He understood that judges must be impartial in interpreting the law and asked how the number of claims awarded or the amount of benefits paid would be reduced to meet the goals. Mr. Lundeen responded that the "body of law" if adopted in this legislation would, over time, result in claims adjustors and attorneys representing injured workers would make better decisions whether to litigate or settle claims. He doubted this legislation would affect benefits or compensability standards or make it easier to deny a claim. He predicted the cost savings would be realized as a result of a streamlined process. Senator Hoffman referenced Ms. Hall's presentation listing statistics proposing that this legislation would better align the State with the national averages and potentially result in cost savings. He asked Mr. Lundeen's comment on this information. Mr. Lundeen replied that this bill is a portion of the process of reviewing and revising the workers' compensation system in Alaska to address cost drivers. He reiterated his prediction this legislation would reduce litigation, which is more costly. He qualified this bill is not a "cure all" but is a "positive first step". Senator Hoffman again asked how this legislation would "reduce the claims". Mr. Lundeen responded it would not, but rather would reduce the number of litigated claims due to consistent interpretation of the law. SFC 04 # 91, Side A 10:38 AM Mr. Lundeen continued that in situations of uncertainty, attorneys advise litigation. He remarked that current interpretations of the workers' compensation laws are inconsistent. DENNIS MURRAY, Administrator, Heritage Place Nursing Home, and former president, Alaska State Hospital and Nursing Home Association, testified via teleconference from Kenai, in support of the bill, as proposed and recommended against adoption of proposed amendments. He opined that the proposed amendments would not improve the system, noting the premium increase of 160 percent for the company. He told of a study conducted by the Association of nursing homes in Alaska that found that workers' compensation premiums had increased 100 percent. He relayed the Department of Law determined this legislation is more consistent with operations in other states. PAUL BRENNER, Vice President, Quality Management, Central Peninsula General Hospital, testified via teleconference from Kenai, that the proposed amendments seem to remove the strengths of the bill would make it ineffective. He supported the creation of the Commission, predicting it would bring continuity to workers compensation system. He told of the significant increase in workers' compensation claims and the desire for resolution of the situation and predictability of the process. Co-Chair Wilken ordered the bill HELD in Committee.