Legislature(2003 - 2004)
03/26/2004 08:06 AM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SB 311-INSURANCE & WORKERS' COMPENSATION SYSTEM MS. LINDA HALL, Director of the Division of Insurance, told members that she and Mr. Lisankie would describe the bill sections and indicated that the team that worked on SB 311 has been involved in discussions with other interested parties in an attempt to reach consensus on sections of the bill that are causing dissention. They hope to present a committee substitute next week that will reflect some agreement on those issues. She then offered to provide some background information on what prompted the bill. CHAIR SEEKINS announced that, at the request of the sponsor, he would not take public testimony today, but the bill would be rescheduled next week. He hoped to have a bill before the committee next week that would be ready to move out of committee. He then asked Ms. Hall to proceed. MS. HALL indicated that all members have heard her discuss the cash deficit in the Guaranty Association. She said she would also discuss the unhealthy workers' compensation environment in Alaska. The Division of Insurance is dealing with four problematic areas. The first is the lack of profitability in the workers' compensation market from 1997 to 2002, when losses ranged from 99.9 percent to 154 percent. The high of 154 percent means that insurance companies spent $1.54 for workers' compensation claims for every dollar of premium collected. The average over that same 5-year period was 124 percent, which is 5 percent higher than the national average. Alaska's workers' compensation claims are more expensive and costly than the national average, which isn't attractive either. The cost of medical benefits has increased substantially, which tend to increase the cost of workers' compensation claims and result in higher premiums. MS. HALL told members the Division of Insurance approved a rate increase effective January 1, 2004, which averaged 21.2 percent. As the cost of claims increased, the actuarial analysis showed that historical claims and projections of future claim costs indicated the need for a substantial rate increase. Within the 21.2 percent average, about 30 classifications decreased, mostly related to marine industries. However, 17 classifications had rate increases in excess of 50 percent. MS. HALL said the last factor in the increase is the assigned risk pool. Because of the mandatory nature of workers' compensation, the Division has a mechanism to ensure that everyone can afford to purchase workers' compensation insurance. That market has also suffered substantial losses; the dollars spent on claims have not met the revenue in premiums. Alaska has had the highest rate of any state of workers' compensation assessments for its assigned risk pool from 1997 through 2001. In 2002, Alaska dropped to number six. The average burden has ranged from 4 percent to 10 percent and is an additional cost to insurance companies on top of their operating costs, again making Alaska an unattractive marketplace. She emphasized that Alaska's workers' compensation environment has become very expensive for employers and unattractive to insurers. She said from her perspective, the state cannot continue to just increase workers' compensation premiums. The state needs to look for ways to stem increasing costs and bring about some efficiency in the system. The state needs a stable, sustainable workers' compensation environment that will encourage companies to do business here and provide affordable insurance so that employers can continue to develop jobs. MS. HALL informed members that a healthy environment depends on adequate rates, a self-funded assigned risk pool and a viable workers' compensation system. She pointed out, "SB 311 is fairly unique as it represents cross-departmental solutions to various issues." She emphasized that the bill addresses a number of issues, many of which affect insurance and the marketplace. The focus and stimulus of the bill were to affect changes in the marketplace. She then addressed the insurance pieces of the bill: Section 3 adds a requirement to increase the deposits of insurance companies that write workers' compensation. These special deposits would be for the benefit of workers in case of an insolvency. Section 5 addresses the Board of Governors of the Guaranty Association. Today we have nine member boards, seven of those are insurance companies. They have done an excellent job so the change in the board representation is not a reflection on what they've done. But what I'd like to do is see a board that has representatives of all the stakeholders. We have - in the proposal I have two members of labor, two members of employers, an agent and four insurance companies. The number would stay the same but they would have a different representation. Section 6 of the bill is called a net worth exclusion. It's a way to bring some cap to cost in the Guaranty Association. Currently, except [for] workers' compensation, all claims and Guaranty Association [costs] are capped at $500,000. Workers' compensation claims are unlimited. Thirty-two other states have what we call the net worth exclusion for workers' compensation and I'm proposing that we adopt that in our statutes. The purpose - the goal would be to not pay claims of employers whose net worth exceeds $25 million. The other states that have such caps, and there are 32 of them, range from $10 million to $50 million - 25 seemed like a number that would work well for Alaskans. Section 105 is the other section that is important to me in terms of our workers' compensation market. It repeals the 25 percent statutory cap on the surcharges for the assigned risk pool and exclusion for surcharges on policies under $3,000. I feel that the assigned risk pool must be self-funding. There are nearly 8,800 policies, 17 percent of our market is in the assigned risk pool. 6,000 of those policies have premiums under $3,000. The average premium for those policies is $864. Small employers have claims equally big as large employers. The size of the employer does not normally correlate with the size of the claim. We have an average premium of $864. A single claim will offset, probably in that size, several hundred of those policies. So I'm looking in this provision to make that pool self-funding to allow it to fluctuate as the losses in the pool fluctuate in the same way we allow rates for the traditional market to fluctuate based on the cost of claims. The assigned risk pool is probably one of the major factors that is a deterrent to new companies coming into our marketplace. When they look at that and know off the top they are going to pay anywhere from 4 to 6 percent of their income to offset work comp losses in the assigned risk pool, they frequently decide they don't want to do business here. It's a very fragile marketplace and I'd like to find ways to bring it to a healthier place where we encourage companies to do business in Alaska. CHAIR SEEKINS announced that Senators Therriault and Ogan had joined the committee some time ago. SENATOR THERRIAULT asked Ms. Hall to review the workings of the assigned risk pool. MS. HALL explained the assigned risk pool is considered to be the market of last resort. It is a place to obtain coverage when an employer cannot get workers' compensation from a traditional carrier. Many small employers, particularly those with premiums under $10,000, find it difficult to obtain coverage in the traditional marketplace. With a premium that size, a single loss costs enough that it is a losing proposition to underwrite that type of business. Some of the policies in the assigned risk pool are higher hazard, but not many. Usually employers with bad loss ratios are in the assigned risk pool, but about 93 percent of them are there because they are small. The pool losses have been exceeding the premiums collected since at least 1997 so the pool has been losing money at a very substantial rate. That 4 to 10 percent loss of money is a direct assessment back to the insurance companies that write business in our state. They must participate in those losses, known as reinsurance. That amount is not charged back to a policyholder, it is a direct obligation of the insurance company. SENATOR THERRIAULT affirmed that amount makes up the difference and then asked Ms. Hall to review Section 6. MS. HALL said Section 6 pertains to the net worth exclusion so that if an employer's net worth is over $25 million, the system would not pay the claims of the insolvent insurer for that employer. CHAIR SEEKINS commented that since the state requires employers to purchase workers' compensation, the assigned risk pool is a very valuable asset to small companies that may not be able to use a major carrier. SENATOR THERRIAULT asked Ms. Hall if she was speaking to the claims being paid out of the Guaranty Fund, in regard to Section 6. MS. HALL said that is correct. SENATOR THERRIAULT asked if the employers would pay into the Guaranty Fund, but if there was insolvency and a company had substantial assets, that company would still have to pick up its individual company claims. MS. HALL replied: Yes. The only way they would pay into the Guaranty Fund is in a situation where there is an assessment, which is certainly the case today. We have assessments that are passed back on to that policyholder. But as I said, in many states, it's felt to be the best public policy. Those employers in theory have more financial resources to take back and be able to fund the claims - the workers' compensation obligations for their employees. CHAIR SEEKINS asked if there is a mechanism in the bill that would allow a company who is subject to this risk to avoid the surcharge that would fund the Guaranty Fund. MS. HALL said not as proposed. CHAIR SEEKINS surmised that companies would have to pay into it as a part of their premiums, but would not be able to reap the benefits. MS. HALL said that is correct. CHAIR SEEKINS suggested the committee might address that. MR. PAUL LISANKIE, Director of the Division of Workers' Compensation, Department of Labor and Workforce Development (DOLWD), told members he would provide a brief overview of the major portions of the bill as they would affect the Division of Workers' Compensation and the Workers' Compensation Board and then answer questions. CHAIR SEEKINS interjected to announce that he intends to hear an introduction of the bill but not take public testimony today. He said the Division and other folks are working on a committee substitute to address the concerns that both sides have had on the issue. He believes this is a high impact bill and it is not his intention to ignore the entreaties of both sides of the matter. He intends to move some version of the bill out of committee by the end of the next week. MR. LISANKIE noted that SB 311 has four major areas that will impact the current workers' compensation program. The first change would impact the current cost of living provisions. Under the existing program, a person who is injured and gets a workers' compensation rate established and moves to a higher cost area than Alaska would get a higher compensation rate than an Alaskan injured worker who resides in Alaska. Under SB 311, the rate would be capped at the Alaska rate so that no one would get a higher rate than an Alaskan injured worker. The second important area of change is with uninsured employers. The Division currently fines employers that do not follow the law by properly insuring against their liability for workers' compensation benefits. The Division has a limited armament to use against employers. The Division can shut the business down but, more often, after detected the employer will get insurance so cannot be shut down. SB 311 will give the Division an accelerated procedure for imposing civil fines against employers who are working without the required insurance. The fine can be up to $100 per day, per employee. The intent is to make the fine so repugnant that businesses will be sure to get coverage. MR. LISANKIE said the third change SB 311 will make is to formally establish a Division of Workers' Compensation within DOLWD. The director will be required to have at least three years of experience in the field of workers' compensation. The formal establishment of a division will provide for a firm separation between the division and the group that resolves disputes. The division and division director will be responsible for investigations, administering the workers' compensation system, and attempting to informally resolve potential disputes about benefits. However, in the event that all attempts to resolve a dispute fail and the case has to be adjudicated, the case would go to a separate entity. The hearing before a separate entity should assure the parties involved that the previous attempts and players will not foreshadow the adjudication. That same procedure is now used informally. MR. LISANKIE said one significant change in the bill addresses a problem the division sees too often. Some people are unable to get an attorney if a dispute is appealed. SB 311 will give the division and division director the opportunity, in questions of unsettled law, to represent the position of the person without an attorney. That will enable the pro se claimant to be more focused and prepared for the hearing. SENATOR THERRIAULT asked if someone within the division would help the pro se claimant to focus on the appropriate legal points. MR. LISANKIE said that is correct. SENATOR THERRIAULT questioned whether the staff person would appear at the appeal hearing beside the claimant as legal counsel. MR. LISANKIE said the staff person would not be legal counsel but would be involved in the proceeding. He then continued with the impacts of SB 311 on the Division of Workers' Compensation and said the fourth change pertains to how the initial disputes are heard and resolved and who will hear the appeals. SB 311 proposes to have hearing officers hear the initial cases and that appeals be heard by a new commission, named the Workers' Compensation Appeals Commission, which would stand in lieu of the Superior Court appeals process. The change will create a more efficient, consistent and predictable system for decision- making. Decisions with precedent value will be made sooner so that the period of uncertainty about a given point on the law will be shorter. He explained: It sometimes happens now, for a variety of reasons, that the workers' compensation board can be of two minds on an issue and until it gets all the way to the Supreme Court, right now, you never know which one of those positions is going to be finally considered to be the correct one. As you go through the present system into the Superior Court appeal, you can get a decision from a Superior Court judge [indisc.] the question between you and your opponent in that particular dispute but it doesn't have broad precedential value across the board for anybody else. What this bill would do by having the workers' compensation appeals commission established is that first line of appeal would go to the Workers' Compensation Appeal Commission. Those commissioners would render a decision. That decision would be published and would have precedential value unless and until it was overturned by the Alaska Supreme Court, which would continue and be the final arbiter of what is and is not the law in the State of Alaska. So what it would do is give you a shortened period of uncertainty so that other parties that had read that decision could say all right, now we can base our decisions to pay or not pay - I am entitled, I am not entitled to certain benefits and they could move forward from that day on unless and until the Supreme Court gave other instructions. SENATOR THERRIAULT noted that although Mr. Lisankie is claiming that change will create efficiency and consistency early in the process, one of the major criticisms leveled at that approach is the expense. He asked Mr. Lisankie to comment about its cost effectiveness. MR. LISANKIE agreed it is difficult to quantify how much money a system that makes findings decisions more quickly will save. The intention is that if the insurance company or the employer and employee and their representatives have greater certainty in what their obligations are, they will be able to pay without having to litigate, which will create cost savings. He added: There would also be, presumably, cost savings in the many claims that in the current environment where you're not certain what the obligations to pay are and what the entitlements are - most cases in our system never go to litigation, thank goodness. It would overwhelm us. Most of them are settled between the parties and what goes into the valuation of how much money changes hands is what the entitlements might be construed to be, what the liabilities might be construed to be. So, if there's less in the way of uncertainty about what the benefits are, and then more benefits can be paid without litigation, fewer benefits will have to go into litigation and ultimately be settled. With money changing hands - obviously if that settlement is litigated, somebody would have gotten more and somebody would have gotten less but you're not precisely sure who would get how much more or how much less and that would be some savings there. The commission itself is not a cost savings. SENATOR THERRIAULT asked the projected cost of the commission. CHAIR SEEKINS estimated the total cost to be $750, between the division and the courts. He noted the court system's fiscal note estimates the cost to be $200,000. MR. LISANKIE specified the DOLWD's projected cost is $556,000, which includes some start-up costs that will not carry over. SENATOR THERRIAULT asked for an explanation of the source of the funding for the commission. MR. LISANKIE said the workers' safety account is comprised of a portion of the premiums paid by the insurers that insure their liability and an assessment against the self-insured employers based on the amount of the total paid out benefits. 8:40 a.m. SENATOR FRENCH thought it is important to remember that the proposed structure of the appeals commission will be comprised of six attorneys who will hold hearings and who will be overseen by three appellate judges. He suggested that is a fairly top- heavy appeals system. He guessed there are about 30 Superior Court judges statewide and five Supreme Court justices to hear their appeals, which amounts to a 6:1 ratio. He maintained the 2:1 ratio in SB 311 is inefficient. SENATOR FRENCH said his second area of concern is removing the hearing officer positions from classified service. In the model act, the hearing officers remain in classified service. He felt this issue is important because the hearing officers will have to make rulings against their very employers, therefore they will need to have some measure of cover to be able to make truly independent decisions. SENATOR FRENCH asked, in regard to the precedential weight being given to the appeals commission, how the opinions will be published to be sure everyone appearing before the commission has access to those opinions. MR. LISANKIE said he could not provide the specifics about publication of the precedential opinions. SENATOR FRENCH asked if the specifics will be worked out as the project progresses. MR. LISANKIE said that is correct. SENATOR FRENCH said he is also concerned about the commission's standard of review. SB 311 proposes a de novo review, meaning the commission's review will start afresh, so that it will give no deference to the facts given by the hearing officer. He noted that also strikes him as being inefficient. CHAIR SEEKINS asked Mr. Lisankie if the current court review is a de novo review. MR. LISANKIE said it is his understanding that the current review at the superior court level is constrained, meaning it only measures whether the fact finder had substantial evidence to support his or her fact finding. Therefore, the court review is not a de novo review. CHAIR SEEKINS announced that he would set SB 311 aside and strongly encouraged the stakeholders to work out a bill that everyone involved finds acceptable. SENATOR ELLIS requested that Chair Seekins provide public notice of a subsequent hearing on SB 311 at least one full working day before to provide adequate time for everyone to review the new version. CHAIR SEEKINS said it has never been his policy to rush legislation through the committee and not allow members adequate time to consider the legislation. SENATOR ELLIS also asked Chair Seekins to publicly announce the meeting one day in advance so that participants at teleconference sites will be aware of an opportunity to testify. CHAIR SEEKINS said his intent is to reschedule the bill, not to bring it up unannounced under bills previously heard. He then stated: Although, our notice - well I'll put it this way, our notice on intent to reschedule it may be required depending on how soon I get it to go outside of the normal notice process and still hold it under, but make sure that it's published to that effect. How would that be? Because if these guys - nobody should think if they - let me tell you - nobody is going to procedurally drag their feet to carry this thing forward, okay? SENATOR ELLIS responded: My concern is public notice. We have the CS. Since the CS is being talked about Mr. Chairman, by stakeholders, you know, behind closed doors or out in the hallway or wherever - outside the public process here until it becomes a committee CS presented by you, my interest is in adequate public notice so people can testify and [indisc.] the CS. CHAIR SEEKINS said he has the same interest and intends to give plenty of notice so that people will have the opportunity to weigh in and review the proposed legislation before it gets to the committee.