Staff Report - April 2, 2002 - Agenda Item

The purpose of this report is to provide an analysis of the current Workers� Compensation (WC) situation affecting businesses in the State of California and to provide an update on the current steps being taken toward WC reform.

California's WC insurance provides businesses and their employees protection from the financial impact of on-the-job injuries. It annually provides benefits to more than 600,000 Californians and covers approximately 550,000 California employers. [1]

California�s employers of all sizes are being forced to pay unreasonably high WC premiums resulting in adverse financial hardship on the state�s employment sector and economy.

Employers renewing WC insurance policies in 2003 are facing unusually steep premium increases for the fourth year in a row. Several significant factors continue to contribute to driving up the cost of premiums, including: new legislation providing increased benefits; a 10.3% increase in the pure premium rate; [2] a surcharge to cover the cost of carrier insolvency; and increased system costs, particularly in medical benefits. These factors, combined with the continued anemic state of the WC insurance industry, have resulted in more premium increases.

WC has become more than a drain on business operations costs � it has been cited within the business community as among the most serious problems facing economic growth in California. WC costs in California have risen from $9 billion in 1995 to more than $30 billion in 2003. [3] This is a 222% increase resulting in a daunting amount for employers to absorb.

The State of California�s Division of Workers� Compensation [4] reports that WC is the oldest social insurance program; it was adopted in most states, including California, between 1910 and 1920. [5] It is a no-fault system, meaning that injured employees do not need to prove the injury was someone else's fault in order to receive WC benefits.

The WC system is premised on a trade-off between employees and employers -- employees are supposed to receive the statutory WC benefits for on-the-job injuries, and in return, the WC benefits are the exclusive remedy for injured employees against their employer, even when the employer negligently caused the injury.

This no-fault structure was designed to, and in fact did, eliminate the then prevalent litigation over whether employers were negligent in causing workers' injuries. Litigation is now over other issues, such as whether the injury was sustained on-the-job, whether or not the employee is actually injured or disabled, or how much in benefits an injured worker is entitled to receive (medical benefits and/or vocational rehabilitation).

1. The Benefit Structure

The benefit structure defines what injured workers are entitled to receive when they sustain an injury "arising out of and in the course of" their employment. Benefits available include: [6]

Medical Care - Injured workers receive medical treatment that is reasonably necessary to cure the effects of the injury. This includes medical, surgical, chiropractic and hospital treatment. There are neither deductibles nor dollar limits, although medical fees are subject to a medical fee schedule.

Temporary Disability - Workers temporarily unable to work receive two-thirds of their average weekly wage up to a statutory maximum set by the State Legislature, currently at $602. This is the most common payment.

Permanent Disability � If an injury results in a disability that remains after the healing period, the employee is entitled to permanent disability. Permanent disability can be total or partial. [7] Ordinarily, this is a disability that causes impairment of the normal use of a body part or impairment in earning capacity.

Vocational Rehabilitation � Workers who are unable to return to the same job, and whose employer is unable to offer other modified or alternative work, receive job retraining and placement.

Death Benefits � When an industrial injury causes a death, the spouse, children or other dependents of a worker receive a death benefit and reasonable burial fees. The amount is set by the legislature and depends on the date of injury.

Life Pension � Workers who are more than 70% disabled receive lifetime benefits after exhaustion of permanent partial benefits.

2. How WC Benefits Are Delivered

Unlike most social insurance programs (i.e., Social Security or unemployment compensation) WC in California, as well as in most other states, is not administered by a government agency. WC benefits are administered primarily by private parties; insurance companies authorized to transact WC claims, and those employers financially secure enough to be permitted to self-insure their WC liability.

The State's role in the benefit delivery is to oversee the provision of WC benefits, provide information and assistance to employees, employers, and others involved in the system, and to resolve disputes that arise in the process. The vast majority of WC claims are handled and administered without dispute or litigation. These are, for the most part, the smaller claims, those in which only medical care is provided and those in which the injured worker is disabled for only a few days. These smaller claims account for more than three quarters of all WC claims.

The balance of the claims, those in which there are significant periods of lost time from work or permanent disability, account for the vast majority of costs and litigation. These disputes are litigated initially before WC referees employed by the Division of Workers' Compensation (DWC) through the Department of Industrial Relations (DIR). [8] The decisions of WC referees are subject to reconsideration by the seven member Workers' Compensation Appeals Board (WCAB). A WCAB decision is reviewable only by the appellate courts.

3. How Benefits Are Financed

Every employer must ensure the payment of compensation to an injured employee by carrying insurance or obtaining permission to self-insure from the Director of Industrial Relations. Failure to insure is a crime and a basis for drastic penalties.

� Self-Insurance - Most large employers and most government agencies (for example, City of Burbank) are self-insured for WC. To become self-insured, employers must have a net worth of at least five million dollars and a net income of at least $500,000 per year. Self-insured employers must post security as a condition to receiving a certificate of consent to self-insure.

� Private Insurance - Employers may purchase insurance from any of the approximately 300 private insurance companies which are licensed by the Department of Insurance to transact WC insurance in California. Since the 1990 reform, insurance companies are free to price this insurance at a level they deem appropriate for the insurance and services provided.

� State Insurance - Employers may also purchase insurance from the State Compensation Insurance Fund (SCIF). SCIF is the largest WC insurance carrier, a state-operated entity that exists solely to provide WC insurance for employers who cannot obtain coverage elsewhere. SCIF actively competes with private insurers for business, and it now controls more than 51% of the market. Historically, smaller employers opt for SCIF as a last resort. However, given the current crisis, it is now becoming the carrier of choice by virtue of its solvency.

Special Funds

In addition, there are two special funds that pay benefits to injured workers under some circumstances: (1) the Uninsured Employers Fund, and (2) the Subsequent Injuries Fund. [9]

Uninsured Employers Fund (UEF) - When an employee is injured while working for an employer who is unlawfully uninsured, and the employer fails to pay or post a bond to pay the compensation due the employee, the employee's compensation is paid from the UEF. An attempt is made to recover the amount paid from the uninsured employer. About 1,000 to 1,500 new claims are filed with the UEF annually, at a cost that has reached about $24 million per year. Most of this cost is paid by an annual State General Fund appropriation.

Subsequent Injuries Fund (SIF) - When an employee has a previous permanent disability or impairment and sustains a subsequent injury, the employer is not liable for the combined disability, but only for that caused by the later injury. However, when the combined permanent disability is at least 70% and certain other criteria are met, the employee may receive additional compensation from the SIF. About 400 claims are filed with the SIF annually, at a cost of nearly $6.5 million. Approximately half the cost is financed by death benefits paid to the State in cases where the deceased employee had no dependents and the balance is paid by an annual State General Fund appropriation.

The main factor responsible for the current round of premium increases is the financial instability of the insurance industry, and especially insurers providing WC coverage in California. [10] The root cause of the WC crisis was the excessive rate competition by carriers once premiums were deregulated in an effort to bring employers� costs down, beginning in the mid 1990�s. As a result, insurers were actually paying out more in benefits than they were collecting in premiums.

Jack Kyser, Chief Economist with the Los Angeles Economic Development Corporation (LAEDC), stated that �WC costs skyrocketed out of control in the early 1990�s due to lawsuits, fraud, excessive and unnecessary treatments, and long delays in processing.� [11] Today, the same claim is being made but the conditions are much more dire.

As a result of the 1990�s deregulation, insurance carriers flooded the market. Competition drove rates down, thereby achieving some immediate relief, but it was illusionary. As a result of lower premiums, insurance carriers were unable to meet costs. Most insurance companies lost money and many pulled out of the state. Others ended up in receivership and bankruptcy. After the fierce battle for market share and dismal investment returns, the result was too few carriers to cover the market.

With fewer carriers offering insurance quotes, rates have steadily increased. To cover the costs of these existing and future bankruptcies, a percentage of employer premiums are paid by insurers into the California Insurance Guarantee Association (CIGA). CIGA takes over the payment of benefits in the event of an insurance carrier�s insolvency. A surcharge of 1% of premiums was required of all employers to fund CIGA. For a number of years CIGA did not pay claims, and in fact at one point the surcharge was eliminated. However, beginning in January 1, 2001 CIGA re-instated its 1% surcharge. Several large insurance carriers (Reliance Insurance, Superior National, HIH/Great States and Fremont Indemnity, for example) are now insolvent. The number of insolvent carriers currently is at an all-time high.

Under the provision of AB 1183, signed into law on September 12, 2003, insurers are now required to pay 2% of their premiums to CIGA, double the previous rate. Interestingly enough, general non-employer consumers are also being required to help fund CIGA (many homeowner�s, medical and even pet health insurance policies include a CIGA surcharge).

WC premiums are established at the Workers� Compensation Insurance Rating Bureau of California (WCIRB). [12] The WCIRB is a licensed rating organization and the designated statistical agent of the Insurance Commissioner. WCIRB operates with funds derived from membership fees, premium assessments paid by members and revenue generated from fees for services and products. No State monies are expended to support the operations of the WCIRB. [13]

The Insurance Commissioner, the legislature, insurers and others have been relying on data from the WCIRB for over 85 years. WCIRB is known as the premier source of reliable WC information and statistics. In addition, WCIRB analyses shed light on the complex and dynamic WC insurance system.

When establishing premiums, the WCIRB considers a host of factors including health costs, legal costs, disability costs, worker retraining, the kind of business, the types of workers and the size of the payroll. The WCIRB calculates these factors based on regular reports it receives from insurance carriers on how much they have already spent on claims and how much they project to pay out on existing open claims. The data is then applied to formulas that take into account medical inflation, the cost of drugs and other factors. Unfortunately, each business is given rates individually based on business type and experience, so a consortium-type of negotiating is not typically an option for WC.

Each year the WCIRB publishes �pure premium rates� (when costs rise rapidly, the rates come out more frequently). These rates reflect projected WC costs for every $100 of payroll in some 500 different job categories. For a job such as real estate sales, where the probabilities of an injury are low, the rate is set at 43 cents for every $100 of payroll. A more hazardous occupation, such as concrete construction workers, has a rate of $12.29 per $100 of payroll. But under California�s system, deregulated almost a decade ago, that rate is only advisory and carriers do not have to follow it. Insurance companies are allowed to �load� costs into their rates, such as general administrative, sales, legal and other expenses, as well as profit margins.

The system is complicated further as companies meeting a specific size criteria receive credit for attempting to reduce claims or are penalized for having compromised safety conditions and/or standards. This is done through another figure called the �experience modification factor� or �ex-mod� in insurance jargon.[14] This involves projecting a company�s expected losses by comparing pure premium rates to actual annual losses. For example, an ex-mod of 1.2 could raise the premium by 20%. The ex-mod formula involves calculations that penalize a company more for frequency rather than size of claims.

Current Challenges Facing Workers� Compensation

Robert P. Hartwig, Chief Economist at the Insurance Information Institute (a trade group in New York), stated that the average cost of WC insurance has risen 50% nationwide in the last three years. [15] But nowhere in the country have prices been rising faster and with more debilitating impact than here in California. One of the mysteries of the California WC system is the fact that claim frequency has dropped 3.4% from 2000, yet claim costs continue to rise along with overall system costs. [16]

The California Chamber of Commerce reports that medical inflation within the California WC system exceeds the national rate of medical cost inflation. California medical costs have increased 100% since 1995. This, compounded by the fact that the premiums collected do not provide adequate funding to cover the disproportionate medical inflation, makes the system dysfunctional. Allan Zaremberg, president of the California Chamber of Commerce, stated that �the only way to reduce WC costs would be to reduce payroll.� Businesses unfortunately can not trim their WC coverage to save money because every employee must be fully insured.

For the most part, disability rates paid to injured workers are lower in California than they are in other states. However, workers typically are out on disability leave for a greater length of time and receive longer, more expensive, and critics argue, more unnecessary medical care in California than in other states. The Workers� Compensation Research Institute in Cambridge, Massachusetts found that injured workers seen by chiropractors in California received an average of 34 treatments compared with an average of 17 visits in at least a dozen other states.[17]

When compared to other similar states, California has the highest insurance premiums, the highest average total cost per claim, the second highest duration of disability, and the highest utilization of vocational rehabilitation. [18] One example of the high premiums paid in California can be described by Automation Plating Corporation�s experience in Glendale. Bill Wiggins, Burbank resident and owner of Automation Plating Corporation in Glendale shared his story with staff about how California WC rates are affecting his business. Mr. Wiggins stated that his company's WC premiums have gone up 60% over the past two years. Mr. Wiggins established a division of his business in Arizona because he had two big customers in Tucson, Arizona. The difference between his California WC and Arizona WC rates is substantial. In California, he pays $10.50 in WC fees per $100 of wages. In Arizona, he pays only $1.94 per $100 of wages. His California WC rates are 441% higher than his Arizona WC rates. Automation Plating employs about 55-58 employees in Glendale, California. The WC situation along with the current challenges facing the manufacturing economy has been very hard on his business. His company is running with as few employees as possible in California. [19]

Mr. Wiggins believes that the biggest changes that can be made are in regards to fraudulent abuse and too many doctor visits. The system currently allows an employer to control its claims for 30 days. After this, the employee can shop around for rates and additional doctor visits which can lead to fraud. In an ideal situation, Mr. Wiggins would like the State to allow businesses to manage their claims for six months.

Businesses throughout California are experiencing the adverse effects of the WC crisis. Some California businesses are already laying off workers. Here is some anecdotal information [20] on how the situation is affecting businesses in the state:

When WC was introduced in the U.S. in the early 1900�s, it was intended to reduce disputes over on-the-job injuries and largely eliminate the need for litigation. But the WC system has become so complicated and laden with rules and regulations that many injured workers often find they need lawyers to guide them through the system.

More than a quarter of all California WC cases end up in court. Additionally, there is a delay in the adjudication of WC cases. A recent study by the RAND Institute for Civil Justice, a non-profit institution that helps improve policy and decision-making through research and analysis, found that severe understaffing and funding result in long, costly delays in the system. Because of a shortage in clerical and judicial staffing, high turnover and antiquated technology, �the courts fail to resolve most cases in the amount of time specified by California law.� [21]

These delays result in higher costs to employers because they can not get a timely decision and therefore cases stay open longer than necessary. They also work to the employee�s disadvantage because such delays can prevent obtaining speedy resolution of the case, and return to work.

The continued increases in WC medical costs stem more from a combination of the number of medical services and the prices paid for those services. A study by the Workers� Compensation Research Institute [22] reports that injured workers in California have 49% more visits with doctors and 105% more chiropractic visits than hurt workers in other states. Payments to chiropractors increased 126% from 1995 through 2002, outpacing the rise in overall medical costs. Additionally, outpatient surgical centers are not regulated under California�s official medical fee schedule and are also major contributors to the rapid increase in WC medical costs.

Health Insurance Costs - In addition to the current WC increases, health insurance premiums continue to go up. This situation is affecting employers across California, including Burbank businesses. [23] U.S. employers� health insurance premiums climbed an average of 13.9% this year, the most since 1990, in the third straight year of double-digit percentage increases. [24] On average, worker contributions for health insurance rose 8% for single coverage, to $42 a month, and 13% for family coverage, to $201. Allan Zaremberg, President of the California Chamber of Commerce stated that California health care costs are rising by approximately 15% a year. [25]

In addition to increasing health insurance and WC costs, California lawmakers passed a groundbreaking health insurance measure on September 13^th, 2003 that would require small businesses to provide coverage to one million of the state�s working poor, who now rely on tax-supported programs for medical care.[26]

SB 2 � This bill was signed into law on October 6^th, 2003. It requires companies with more than 200 employees to begin offering health benefits by 2006. Small companies with more than 20 employees would have until 2007 to offer coverage. Companies with 20 to 49 workers would have to provide health insurance but only if the legislature also passed a 20% tax credit for those firms. Access to health insurance is very important, but at this point this legislation might add another burden to the business community that is already facing serious challenges.

AB 749 - Although the current rate of increase in WC premiums is ample reason for employers to be concerned, they have not yet experienced the larger hikes expected due to AB 749, a $3.5 billion benefit increase bill signed into law in February 2002 by Governor Davis. [27]

This law boosted weekly disability benefits paid by insurers from a maximum of $490 to $602 per claim. By 2005, the amount is expected to rise to $840 per week. Insurers will be forced to pass those increases on to employers and the impact will continue to be devastating, particularly for small businesses and those who provide high-risk services, such as roofing and construction firms.

There are features of this bill that could push costs even higher. Higher benefits will likely lead to higher utilization of the WC program by workers. By the time this law takes full effect in 2006, the highest salary to qualify for the highest temporary disability benefits will be nearly $70,000 per year. This may create an incentive for a whole new economic class of employees to file claims since these workers will be eligible to receive two thirds of their salary.

Workers� Compensation Affecting Burbank

The City of Burbank hosts many small businesses in a variety of industries which are critical to our local economy and Burbank�s future:

� There are currently 10,519 business tax registrations and business licenses for Burbank-based businesses, of which 10,315 are issued to businesses with 50 employees or less (98% of business licenses issued)

� Of the 10,519 business tax and business license accounts for Burbank-based businesses, 9,234 are issued to businesses of five or fewer employees (88% of business licenses issued)

� The strength and survival of small business is an important factor to Burbank�s future growth and prosperity

Although the cost of doing business is considered low in Burbank (Exhibit �A�) and the City is viewed as a business friendly city, Burbank will face many challenges as the business community endures increasing WC rates and other costs. The WC issue is particularly relevant to the Burbank business community because most businesses do not have the ability to self-insure; therefore, the only option they have is to obtain WC coverage and endure increasing rates.

Staff contacted several businesses in the City of Burbank, both large and small, to assess how the WC situation is affecting them. Staff received consistent information from businesses which were interviewed at random. In all cases, businesses have seen their rates climb substantially, whether they had a clean injury record or not. In one case, a local retail business which employs over 300 employees in Burbank, and 29,000 statewide, stated that if WC costs continue to rise, employers like this one will have no choice but to move operations and employees out of California. This business� WC rates are so high that the California rates represent 70% of the total WC cost for all 36 states where they do business, even though California is home to only 36% of its employees.

In another interview, a Burbank employer who built his service business on local relationships and a loyal customer base also shared his story about how WC costs have affected his business. This business has been in Burbank for over 23 years and it employs close to 30 people, many of them who have worked there for as long as 15 years. This business has been drastically affected by the increasing WC costs. Unfortunately it is not possible for this employer to simply move to another state and start over as a result of the WC crisis. This business� WC rates have inflated 354% from 2002 to 2003, even though it has had an exceptional injury record. Sales in this business would have to grow by an annual volume of 25% just to afford the new WC fees. There is no guaranteed way to increase sales or come up with the additional funds to pay for these higher WC fees. The only other option would be to go out of business, leaving close to 30 employees out of work. This business owner requested that the City of Burbank use its leverage and clout to let the legislators know what this is costing Burbank. If business costs increase, there will be less sales growth, less tax revenue paid to the City and less employment opportunities.

A Burbank grocery store�s WC rates have gone up three-fold in one year. This employer�s local WC representative told him not to be surprised when he receives his next increase in January 2004 (on top of the three-fold increase) as a result of two claims against this store in the past two years. Although this business has not laid off any employees, the owner may have to consider eliminating the group medical benefits that employees receive, although the business will soon be hit hard again with the new health insurance legislation that just passed. These current increases in WC rates could otherwise translate to each employee receiving a $1.50 to $2.00 an hour salary increase if this business did not have to pay this additional WC insurance.

In another local situation, a business in the tourism industry has seen its rates go up 66% this year. In recent years, tourism industry businesses have taken a double-hit due to the decrease in travel caused by the September 11^th crisis and the WC increases. Profitability will likely go down as a result of increasing WC costs, since this business is not able to lay off any workers without impacting the service or environment provided to the customer.

An employer in the entertainment industry shared with staff that although they have experienced significant double-digit reductions in lost time injuries, they have seen their WC rates increase as well.

To summarize the current situation, businesses in Burbank are substantially affected by the current WC crisis. Those interviewed agree that if the situation does not improve, they may need to start looking at other options.

City of Burbank � As we are all aware, the City of Burbank has also seen an increasing focus on financial issues as the economic malaise continues. As the federal and state governments continue to struggle with budget issues, every aspect of the City of Burbank�s budget has been opened for review and will continue to be over the next five or more challenging years. According to James F. Patricola, Risk Manager with the City of Burbank�s Management Services Department, insurance costs, once a nominal aspect of the budget process, have increased disproportionately in recent years so as to become a major cost factor for all City departments. Although the City of Burbank is self-insured for WC (for the first $2,000,000 of any loss and then we purchase $25,000,000 of coverage above our $2,000,000 SIR), insurance increases have been dramatic, along with liability costs.

During Fiscal Year (FY) 98-99, WC insurance costs were $19,690 with a $500,000 SIR (self-insured retention fee � otherwise known as a �deductible per injury�). FY 02-03 saw the City�s premium rise to $501,505 with a $2,000,000 SIR (the City of Burbank pays the first two million of every employee�s WC injury-related costs).

This year, the City is anticipating an additional 10 to 20% increase in the WC premium. These premiums are in addition to the liability costs to the City which jumped from $3,610,000 in FY 99-01 to $4,575,000 in FY 03-04. Liability exposure includes medical reserve liability for all open City of Burbank WC claims.

The City is definitely absorbing a large share of the WC loss. Although the City does not experience a high litigation rate, it is also affected by the increased medical costs paid for each liability. Another factor that affects the City�s annual WC costs is the age of the working population including police and fire employees. The older the working population, the more likely the employee is to have an injury.

Burbank Chamber of Commerce � The Burbank Chamber of Commerce has been actively involved in urging reform of the WC system. The Chamber�s members have written letters to our legislators and to Insurance Commissioner John Garamendi expressing how their businesses are affected by increasing WC costs. They have visited legislators in Sacramento and hand carried WC invoices from their member businesses.

Staff met with Susan Bowers, Executive Director of the Chamber of Commerce, who shared valuable information about the current WC situation and how it is affecting the local business community. As a business, the Burbank Chamber of Commerce�s WC rates have also more than doubled in the past year. Susan Bowers submitted a summary on the Chamber�s activities related to the WC issue (Exhibit �B�). Staff will continue to collaborate with the Chamber in future efforts to support WC reform.

California Chamber of Commerce � The California Chamber of Commerce has been promoting an aggressive, ongoing WC reform campaign. They have an active WC Committee whose goals are to promote legislative, judicial and regulatory actions to maintain an efficient WC system that provides adequate worker benefits while protecting the competitive position of California employers.

At the beginning of this year�s legislative session, the Chamber sponsored and supported a package of major and comprehensive reforms to the WC system. [28] Nearly all those reforms failed passage in policy committees or were rejected by the conference committee that developed the package adopted by the legislature. The Chamber encouraged an �aye� vote on AB 227 and SB 228 on the principle that some savings are better than none.

The California Chamber of Commerce has played an important role in providing information and updates to businesses in California and other organizations. They are committed to substantive reforms that will constitute an overhaul of the current WC system and provide relief to employers suffering from these rate increases.

Economic Alliance of the San Fernando Valley � The Economic Alliance of the San Fernando Valley is also very supportive of health care and WC reform. To address the growing health care concern, the Economic Alliance and the City of Burbank�s Community Development Department sponsored a regional Health Care Summit for Valley businesses currently not offering benefits or offering coverage only to their full-time employees. An analysis of LA County�s health care situation was provided along with an overview of current and pending health care legislation. The event outlined and dispelled common misconceptions, presented testimonials on the benefits of offering coverage, and summarized the different products available from HMO�s, PPO�s, and publicly funded programs.

The Economic Alliance is also sponsoring a San Fernando Valley Hospital CEO Roundtable to discuss policy positions on health issues due to the significant effect health costs are having on the local health care system. CEO�s from San Fernando Valley�s major hospitals will participate in this roundtable event to be held on November 4^th (this report was written prior to this date). Issues to be discussed will range from the WC crisis to health care costs and unemployment insurance increases. A follow-up mini-conference will be held in late November or December, 2003 where the Economic Alliance will share the issues discussed at this initial meeting.

Bruce Ackerman, President and CEO of the Economic Alliance, stated that the Economic Alliance is supporting WC reform by joining forces with a number of economic development organizations [29] throughout California to ask the Governor to immediately reform the system by calling for a massive overhaul of the current WC situation.

The Economic Alliance of the San Fernando Valley supports these organizations who are lobbying heavily for WC reform. Their recommendation to the City of Burbank is to support the ongoing efforts of the California Chamber of Commerce along with the League of California Cities.

On Friday, September 12, 2003, the legislature approved a WC overhaul that is meant to cut the cost of treating job-related injuries by at least 20%. However, there is the expectation that the bills will produce only some modest savings, and that lawmakers must wring out much more from the WC system which has been in existence for close to 90 years. Assembly Bill 227 (AB 227) and Senate Bill 228 (SB 228), contain the bulk of this reform.

Employers generally support this reform package as a step in the right direction, but consider it a �drop in the bucket� as this legislation will not enact the full structural reforms truly needed. Tim East, Chairman of the Sacramento-based California Coalition on Workers� Compensation and Director of Risk Management for the Walt Disney Co. in Burbank, stated that �our initial impressions are that these are good reforms and this is a good start in a process where there is certainly more work to be done.� [30]

Governor Gray Davis signed these WC reform measures into law on Tuesday, September 30, 2003. Conference committee lawmakers estimate the reforms to cut approximately $5.3 billion from the system the first full year after enactment and approximately $4.8 billion to $5.3 billion annually in following years. The reform measures in AB 227 and SB 228 include the following main components:

� Adopting a fee schedule for outpatient surgical centers. The centers would be paid based on 120% of the current Medicare reimbursement rate for the facilities. Currently in California there is no limit on what surgical centers can charge for treating workplace injuries, which some have blamed as a key factor behind soaring costs.

� Adopting a fee schedule for drugs prescribed for WC claimants. Payments made to pharmacies for prescription drugs would be set at the current reimbursement schedule for the Medi-Cal system, the State�s Medicaid program.

� Cutting current reimbursement levels for hospitals and physicians by 5%, unless their rates are already below Medicare rates.

� Capping at 24 the number of chiropractor visits and 24 the number of physical therapy visits an employee is entitled to. Currently, there are no caps on either chiropractic or physical therapy visits.

� Introducing a new system for reviewing medical treatment for injured workers.

� Repealing the existing vocational rehabilitation statute. If an employee is already in rehabilitation, he or she will be allowed to continue.

� Additionally, the bill proposes increased payments by employers of user funding. Currently, user funding (which is essentially employer contribution to fund the Department of Workers� Compensation) is at 20%. It is proposed to increase to 100%.

While this WC legislation that was passed earlier in September takes a step toward curbing fraud and excessive and unnecessary medical treatment abuse, it is generally agreed that this reform did not go far enough. Two ideas that are being circulated may, if approved, provide additional measures toward comprehensive reform. Both involve the use of objective (rather than the current subjective methodology) criteria to establish injury and define the level of disability. [31] The California League of Cities is in support of this package of WC reform that was signed into law.

The Workers� Compensation Insurance Rating Bureau of California (WCIRB) recommended a pure premium rate increase of 7.2% on July 1, 2003 and an additional 12% rate increase on July 30, 2003. However, as a result of SB 228 and AB 227, the WCIRB prepared a formal evaluation of the cost impact of this legislation which was submitted to the Insurance Commissioner at the continuation of the January 1, 2003 pure premium rate hearing on September 29, 2003. [32] Based on savings estimates derived from WC reform legislation included in SB 228 and AB 227, the WCIRB recommended a 2.9% decrease from pure premium rates adopted on July 1, 2003. The WCIRB�s recommendation then negates the 12% increase and cuts into the 7.2% currently in effect, but does not eliminate it. This recommendation would apply to rates beginning January 1, 2004.

While some reform was accomplished in the California legislature this year, it did not go far enough to effectuate sustainable changes that will reduce costs to employers. During the legislative process, it was suggested that California should adopt a similar model to the WC system of the State of Arizona.

Although California cannot literally adopt Arizona�s WC system due to the fact that this is a much different culture than Arizona, both economically and politically, it might be helpful to discuss some of the things that work in Arizona that could be beneficial for the California legislature to consider.

There are other such labor code sections and rules in Arizona that keep the interest of both parties in balance. California, with its strong union lobby, has over the years chipped away at the system to serve the interest of those they represent. When the economy is booming and rates are low, there is little resistance to these �reforms.� However, with WC and medical costs continually rising, the drying up of assets statewide has occurred and this quickly caused employers and politicians to easily highlight the deficiencies in California�s WC system.

In addition to the issues highlighted in the California vs. Arizona WC comparison, the Management Services Department recommends other reforms at the State level that are necessary to reduce costs. The State needs to eliminate subjective add-ons to permanent disability awards. Presently, medical reports are rated based upon the objective findings of the physician and the subjective complaints of the employee. This causes awards to be increased when there may or may not be medical justification. A more objective measure must be instituted to reduce fraud and exaggeration.

Penalties are awarded to employees for a myriad of offenses without considering the justification of the amount or whether or not the employee was harmed by the infraction. All penalties are 10% of the species, (i.e. temporary disability or permanent disability) regardless of whether or not the infraction justifies such a penalty. Some reform language needs to be adopted to correct this imbalance. In addition, employees should not benefit (via an assessed penalty) because a medical payment is made late to a medical provider.

Adding to the reforms recommended at the State level, there are also some issues that staff is contemplating here in the City of Burbank as an attempt to reduce costs. Staff is studying the feasibility of the expansion and centralization of the City�s light duty program, establishment of a leave policy, discontinuance of salary continuation, and hiring of an on-site nurse. While these proposals will require extensive research and will be subject to the �meet and confer process�, it is important that staff at least begin the process of looking at alternative approaches so that we can be in a better position to manage the City�s WC process.

With regard to the light duty program, it might be feasible to expand the program to encompass all employees across all departments. By centralizing the program, all employees would be treated the same no matter what department they work in or what title they hold. Light duty assignments should be provided for a prescribed time, after which the employee may be subject to an accommodation study, as required by law, reassignment and/or termination.

Staff is also looking at the establishment of a standardized leave policy which would place a limit on the amount of time an employee can be gone from their position with the City regardless of the cause of their injury. It is a difficult burden on the City when employees are removed from the work site for extended periods of time, and it is not uncommon to have employees in this situation for more than one year, and sometimes even longer.

The City has a policy of providing six (6) months salary continuation (tax free) for miscellaneous employees. This makes up the difference between the $602 per week they receive and their actual salary. While not a State mandated program, it has been a City of Burbank program for over 20 years. Although it is not something that is subject to wide abuse, it is fair to say that it can be used by some malingerers to take advantage of the system. There would be some cost savings to the City if this plan were eliminated. However, it is important to note that those malingerers� intent on abusing the system more than likely would fall back on other sections of the labor code to meet their needs. Pursuant to State mandate, Police and Fire safety employees receive full salary for up to one full year.

Should the City be unsuccessful in eliminating the salary continuation, there are other avenues that could be explored. For instance, the City could limit the employee�s disability usage while they are receiving salary continuation. Currently, employees receive both short term and long term disability payments while receiving their salary (both of which are tax free). The City could also explore the idea of self-funding for the first 60 days in order to get employees to short term disability.

Another idea to be explored would be to add a position such as a nurse practitioner. This would help in centralizing all work injuries so that medical control can be maintained internally. First aid and WC issues can be dealt with immediately and departments can be notified of employee status in a timely fashion. In conjunction with this idea, it might also be worth bringing the City�s Employee Assistance Program (EAP) in-house as well. This could be on a full-time or part-time basis and could include a list of specialists for referral purposes.

The answers to these issues are many and they are extremely complex. State laws affect the most obvious and expensive portions of the WC system. Change will be slow. Current case law will affect all claims currently in the system. Any reform will only affect those claims occurring after the new laws are adopted. Reforms will, however, need to be made as costs will continue to rise until new laws take effect.

There needs to be a more balanced approach to both protect employees and make the system economically viable. The legal manipulation of the system and the medical waste expounded upon by medical providers needs to be eliminated. Criminal prosecution of fraud and unfounded frivolous lawsuits also need to be addressed by legislators before any meaningful reform can take place.

While there is no �easy fix� solution to the WC system, the City of Burbank�s Management Services Department believes that a realistic look at the benefits, cost, medical care and legal involvement must be conducted. It is worth looking at states like Arizona who reportedly pays one percent of payroll for WC premiums as compared to seven percent of payroll in California (Exhibits �D� and �E�). While some of Arizona�s rules may benefit California�s system, to truly effectuate viable reform that will serve to better balance the system, California needs to thoroughly review its entire labor code starting at page one. The recent legislative reforms are promising but they are only the beginning of what could be an arduous, difficult re-examination of a complex and convoluted system.

The League of California Cities also shares the view that more reform is necessary quickly. Staff discussed the importance of the WC issue with Amy Brown, Legislative Representative for Employee Relations. Ms. Brown stated that WC is receiving priority focus and that the League of California Cities will continue to actively support future WC reform.

The League of California Cities met with Governor Schwarzenegger�s transition team to discuss additional WC reform beyond AB 227/SB 228, which will take effect on January 1, 2004. The Governor�s staff stressed their commitment to making sure that the WC system does not �break the bank� with public and private employers while maintaining benefits to injured workers.

The League provided a list of additional reforms that were not included in AB 227/SB 228. The transition team is committed to reviewing the suggested amendments and a follow-up meeting will occur once a package begins to develop. The League of California Cities� suggestions are as follows: [34]

Permanent Disability Reform

Medical

Labor Code Section 5814 [35] Penalties

Burden of Proof/Standards of Compensability

Alignment of Public and Private Sectors

AB 749 Corrections

In addition to this proposed reform package, the League of California Cities would like the City of Burbank�s Management Services Department to submit information to them in regards to how the WC situation is affecting the City of Burbank as an employer, in order to include this information in a future package for Governor Schwarzenegger�s team. They also recommend that the City of Burbank support their package of WC reform.

The California Chamber of Commerce is also pushing for various WC reforms this year. However, at the time this report was written, it had not yet released its roadmap for 2004 WC reform. The California Chamber of Commerce is working very closely with Governor Schwarzenegger�s team to coordinate ongoing WC reforms which will be included in a future California Chamber of Commerce packet of information. The California Chamber of Commerce shares the following concerns regarding the WC issue:

1. The bills that were passed this year focused on reigning medical costs within the WC system. These new laws can only be considered a first step towards reform and now the real issues must be addressed in order to finish the job and deliver savings to employers.

2. The California Chamber of Commerce will focus on reforming the disability part of the system to limit the amount of fraudulent cases. This will entail making injury determination and ratings more objective. The system also needs to be reformed to ensure fairness to both injured workers and employers when it comes to treatment guidelines and disability awards. There is little reason for similar injuries to have different costs in the current WC system, yet this happens more than frequently.

3. There will also be a need to tighten and change some of the laws that were passed this year to make sure that they work. The utilization controls passed this year fall short of what the California Chamber would like to see. Some of the definitions of medical care need to change in order for these controls to be effective. Most importantly there is little guarantee that these controls will work unless employers have more control over choosing who provides medical services to injured workers.

Although the California Chamber�s list may seem simple, some of these reforms will probably be another up-hill climb for employers. The California Chamber supports Governor Schwarzenegger�s reform package, and he has pledged to make this issue a priority. The California Chamber will be working closely with Governor Schwarzenegger�s team and they recommend supporting Governor Schwarzenegger�s WC reform package.

During the brief recall campaign, Governor Schwarzenegger promised that he would introduce �real reform� of the WC system. [38] Now that he has been elected, he continues to show his commitment to WC reform. Governor Schwarzenegger stated: �I will take steps to help injured workers get the care they need, while ending the incentives and loopholes that encourage unscrupulous lawyers and providers to take advantage of the system. My work will continue until California Workers� Compensation costs have been reduced to at least the national average.� [39]

Governor Schwarzenegger has a five-step plan to reform the current WC system (Exhibit �C�):

Getting such an overhaul of WC through the legislature will not be an easy task, especially since legislators typically like to wait a year to see how just-enacted reforms work. Another obstacle in Governor Schwarzenegger�s path towards reform is the fact that some attorneys have promised to fight any WC reform that makes it more difficult for an injured worker to get treatment. [42] However, WC emerged as a central issue in the Governor�s campaign and Governor Schwarzenegger is making sure that the spotlight stays on the WC issue.

Without serious system-wide repairs, it is likely that California businesses may consider relocating to more business-friendly states, and those who remain will continue to face exorbitant WC premiums and pass the costs along to customers, or lay off employees to pay for these costs.

Improving the WC system can eliminate many claims and account for savings. But some of the State�s lawmakers face challenges as they try to make such improvements because of special interest groups that benefit from the current system. The increase of the costs of the WC system from $9 billion to over $30 billion in eight years is an outrageous circumstance which has led to job loss and employees not receiving increases in benefits due to the shift of dollars to WC premiums.

Typically, salary can be the �biggest ticket� item in a business� operating expenses, around 85% of the total costs. Some businesses in the state warn that their increases in the cost of WC insurance will result in layoffs and businesses moving out of state unless there is a way to cut these costs. The pressure of special interests is highly evident as is partisan politics; together they can create a somewhat pessimistic outlook for real change. But the results, or lack thereof, will play out in everyone�s business, as they try to absorb the impacts of the anticipated increases, the reduced number of carriers and the overwhelming frustration the whole process has brought.

It will become increasingly difficult for California to attract and retain businesses, and if WC costs continue to soar, this issue may be the �straw that breaks the camel�s back� in terms of business retention and attraction.

Jack Kyser reported that �WC costs are greatly influenced by government policy. Fixing the problem, however, requires confronting some very powerful political forces in the state, including lawyers, labor unions, and the medical community. It is a good reminder that in regards to labor regulations, no one gets health insurance or paid benefits if he or she is not employed. Having mandates that unnecessarily add to business cost burdens in California will lead to business departures and thus lower employment. These types of regulations can indeed hurt the exact people they seek to protect. Sometimes workers are so �protected� that they can lose their jobs because of these good intentions.� [43]

It is likely that by the time this report is distributed, additional changes will occur in regards to WC. Staff will return as necessary with appropriate updates and recommendations. When the Business Center opens as part of the Agency�s Economic Development efforts, staff is also planning to bring experts in the WC field to offer free seminars to the Burbank business community to help them understand the new legislation, discuss WC coverage, help employers reduce employee turnover and discuss innovative cost reduction.

Staff recommends that the City Council/Agency Board appoint two members to serve on a WC Sub-Committee to review and make recommendations on: 1) existing reform suggestions made by other organizations; 2) other possible reform measures and strategies that can be recommended to our legislators; and 3) direct staff to thoroughly analyze the City's internal WC process and implement changes (within the ramifications of the legal and labor relations constraints) that are deemed to be of benefit to the City both from a standpoint of process efficiencies and overall cost.

Bacci, Charles, �Workers� Compensation Changes Just First Step, Not Solution�,

Bacci, Charles, �Workers� Compensation Rates Skyrocketing; More Increases to

Ingram, et al, �Legislature OK�s Small Business Health Coverage� L.A. Times

Kyser, Jack, �History Repeats Itself?� The Economic Data Global Express - E-

Official California Legislative Information, Bill Information, AB 1357, Internet:

State of California, Division of Workers� Compensation Insurance, The California

[1] Workers� Compensation Insurance Rating Bureau of California (WCIRB), About WCIRB (California: 2003) Internet: www.wcirbonline.org. For more information on WCIRB, please see page seven of this report.

[2] Pure Premium Rates: Advisory rates prepared by the WCIRB and submitted to the California Department of Insurance for approval. These rates reflect expected losses and loss adjustment expenses on a statewide basis for each of the industry classifications and may be used by insurers to establish their premium rates. For more information on pure premium rates, please see page seven of this report.

Workers� Compensation Insurance Rating Bureau of California (WCIRB), Answer Center/Glossary (California: 2003) Internet: www.wcirbonline.org.

[3] California Department of Insurance, Communications Office, The Garamendi Plan Workers� Compensation Reform Phase II (California: October 22, 2003) 2,3. Internet: www.insuranceca.gov.

[4] The California Department of Workers� Compensation (DWC) monitors the administration of WC claims, and provides administrative and judicial services to assist in resolving disputes that arise in connection with claims for WC benefits. DWC�s mission is to minimize the adverse impact of work-related injuries on California employees and employers.

[5] State of California, Division of Workers� Compensation Insurance, The California Workers� Compensation System (California: 2003) Internet: http://www.dir.ca.gov/dwc/basics.htm.

[6] Bacci, Charles, �Workers� Comp Rates Skyrocketing; More Increases to Come � Reforms Needed, � California Chamber of Commerce, California Business Issues 2003. 16-19.

[7] Total permanent disability is considered (100%), such as loss of sight or total paralysis. In all other cases it is anything less than 100% and the degree of disability is determined based on the facts surrounding each claim.

[8] The California Department of Industrial Relations� mission is defined by the California Labor Code to promote and foster the economic prosperity and safety and health of the state's workplaces.

[9] State of California, Division of Workers� Compensation Insurance, The California Workers� Compensation System (California: 2003) Internet: http://www.dir.ca.gov/dwc/basics.htm.

[10] Bacci, Charles, �Workers� Comp Rates Skyrocketing; More Increases to Come � Reforms Needed, � California Chamber of Commerce, California Business Issues 2003. 16-19.

[11] Kyser, Jack, �History Repeats Itself?� The Economic Data Global Express - E-EDGE (California: August 2003 Volume 7, Number 33).

[12] Workers� Compensation Insurance Rating Bureau is an unincorporated, nonprofit association comprised of all companies licensed to transact WC insurance in California.

[13] Workers� Compensation Insurance Rating Bureau of California (WCIRB), Workers� Compensation Insurance Rating Bureau California 2002 Annual Report (California: 2003) Internet: www.wcirbonline.org.

[14] Experience Modification or �ex-mod� is a statistic used to compare an employer�s loss history to the average of their industry. For example, an employer with an 80% ex-mod would be expected to incur less than the average amount of losses for the industry during the coming policy year; a 120% ex-mod is greater than the average for that industry. The ex-mod is calculated using data reported to the WCIRB.

[15] �Workers� Compensation Fund Stretched - Compensation Fund Ailing Insurer Must Raise Its Rates� New York Times June 16, 2003: 2. Internet: www.nytimes.com.

[16] Workers� Compensation Insurance Rating Bureau of California (WCIRB), WCIRB Claim Frequency Analysis Executive Summary (California: May, 2003) 1. Internet: www.wcirbonline.org.

[17] � Workers� Compensation Fund Stretched - Compensation Fund Ailing Insurer Must Raise Its Rates�, New York Times June 16, 2003: 6. Internet: www.nytimes.com.

[18] U.S. Chamber of Commerce, Statistics and Research Center, 2003 Analysis of Workers� Compensation Laws (California: 2003) 6.

[19] A detailed comparison of the Arizona vs. California WC systems can be found on page 18 of this report.

[20] �Workers� Compensation Fund Stretched - Compensation Fund Ailing Insurer Must Raise Its Rates�, New York Times June 16, 2003: 8. Internet: www.nytimes.com.

[21] RAND�s Institute for Civil Justice, �RAND Researchers Recommend Reform of California�s Workers� Compensation Courts; Many Recommendations Being Adopted.� (California: May, 2003) 1,2. Internet: www.rand.org.

[22] U.S. Chamber of Commerce, Statistics and Research Center, 2003 Analysis of Workers� Compensation Laws (Washington: 2003) 3.

[23] In addition to the WC issue, health insurance is also a City of Burbank Work Program item. Staff is conducting research to find out if there are any successful health care consortiums in California. Staff is also working on developing a strategy to create a collaborative consortium to assist the business community with this issue.

In July, 2003, the City of Burbank and the Economic Alliance of the San Fernando Valley sponsored a regional Health Care Summit. This event provided businesses an analysis of LA County�s healthcare situation, an overview of current/pending legislation and a summary of the different products available from HMO�s, PPO�s and publicly funded programs.

[24] �Employers See Health Premiums Rise 13.9% - Kaiser Family Foundation and the Health Research and Educational Trust Survey�, L.A. Times September 14, 2003.

[25] California Chamber of Commerce Press Release, �Striking Grocer Unions Make Case for Repeal of SB 2� October 29, 2003.

[26] Ingram, et al, �Legislature OK�s Small Business Health Coverage� L.A. Times September 15, 2003.

[27] AB 749 gradually increases benefits over three years, from 2003, 2004 and 2005 and then links benefits to the cost-of-living index starting in 2006.

[28] Bacci, Charles, �Workers� Compensation Changes Just First Step, Not Solution�, California Chamber of Commerce Press Release (Human Resources/Health & Safety) (California: September 19, 2003).

[29] California Association for Economic Development (CALED), California Manufacturers & Technology Association (CMTA), California Chamber of Commerce and California Policy Reform Network.

[30] Ceniceros, Roberto, �California Compensation Reforms Would Trim Billions In Costs�, Business Insurance September 16, 2003. Business Insurance is a well-known publication for Human Resources Professionals.

[31] Objective criteria: �what the doctor actually sees� (what he can tell from observing the patient during an examination); a medical fact.

Subjective criteria: �what the patient tells the doctor.� Subjective complaints can not always be substantiated through medical evaluations.

Using objective and subjective methodology has been problematic to the WC system for years. Currently, both must be taken into consideration in determining a disability, and both are given equal weight.

[32] Workers� Compensation Insurance Rating Bureau California (WCIRB), �WCIRB Files Amended January 1, 2004 Regulatory Filing� (California: Sept. 30 2003) Internet: www.wcirbonline.org.

[33] City of Burbank, Management Services Department

[34] Brown, Amy, , �League of California Cities Meeting with Governor-Elect Schwarzenegger�s Transition Team - Workers� Compensation Update� October 29, 2003.

[35] Labor Code 5814 - When payment of compensation has been unreasonably delayed or refused, either prior or subsequent to the issuance of the award, the full amount of the WC award is increased by 10%. California Labor Code, Official California Legislative Information, Internet: www.leginfo.ca.gov.

[36]  Labor Code 4850 -  Whenever a public sector employee (PERS or L.A. Co. Employees' Retirement System or subject to the County Employees Retirement Law) is disabled, whether temporarily or permanently, by injury or illness arising out of the course of his/her duties, he/she shall become entitled, regardless of period of service  to a leave of absence while disabled without loss of salary in lieu of temporary disability payments or maintenance allowance payments, which would be payable for the period of the disability, but not exceeding one year, or until that earlier date as he/she is retired on permanent disability pension, and is actually receiving disability pension payments, or advanced disability pension payments.  California Labor Code, Official California Legislative Information, Internet: www.leginfo.ca.gov.

[37]  For injuries occurring on or after January 1, 2004, in the case of no total dependents and no partial dependents, two hundred fifty thousand dollars ($250,000) will be paid to the estate of the deceased employee.  California Labor Code, Official California Legislative Information, Internet: www.leginfo.ca.gov.

[38] Fine, Howard, �Recall: Businesses Await Schwarzenegger�s Choices� Los Angeles Business Journal 1, 12. October 13, 2003.

[39] �Governor Schwarzenegger�s Agenda to Bring California Back �Fixing the Runaway Workers� Compensation System� (California: 2003) 25, 26. October 28, 2003. Internet: www.joinarnold.com.

[40] According to Insurance Commissioner John Garamendi, every year some $1 billion to $3 billion is added to the cost of the WC system by fraud.

[41] AB 1357 - An act to amend Section 11770 of the Insurance Code, relating to the State Compensation Insurance Fund (SCIF).  In order to qualify for SCIF Board of Directors membership, three of the members of the board other than the ex officio members shall each have been a policyholder or employee of a policyholder in the SCIF fund for one year immediately preceding the appointment, and must continue in this status during the period of his or her membership.  Any member who is not a policyholder or an employee or member of a policyholder in the fund shall not have been an employee, officer, or member of the Board of Directors of an insurance company during the 12 months prior to the member's appointment to the board, nor have a controlling interest in an insurance company. Bill Information, Official California Legislative Information, Internet: www.leginfo.ca.gov.

[42] Fine, Howard, �Recall: Businesses Await Schwarzenegger�s Choices� Los Angeles Business Journal 1, 12. October 13, 2003.

[43] Kyser, Jack, �History Repeats Itself?� The Economic Data Global Express - E-EDGE (California: August 2003 Volume 7, Number 33).

Council Agenda - City of Burbank

Tuesday, November 18, 2003

1. The Benefit Structure