Workers Compensation. in Arizona: Administrative Inventory. in Arizona: Workers Compensation. Research Institute. Duncan S.

Transcription

1 Workers Compensation in Arizona: Workers Compensation in Arizona: Administrative Inventory Administrative Inventory Duncan S. Ballantyne Workers Compensation Research Institute This report is protected under Copyright Law and is subject to the same use restrictions as a work printed on paper.

2 Workers Compensation in Arizona: Administrative Inventory Duncan S. Ballantyne WC September 2004 Workers Compensation Research Institute Cambridge, Massachusetts

3 copyright 2004 by the workers compensation research institute all rights reserved. no part of this book may be copied or reproduced in any form or by any means without written permission of the workers compensation research institute. Acknowledgments Library of Congress Cataloging-in-Publication Data Workers compensation in Arizona : administrative inventory / Duncan S. Ballantyne p. cm. April WC Includes bibliographical references. ISBN Workers compensation Arizona. I. Workers Compensation Research Institute (Cambridge, Mass.) HD U62A dc I am indebted to many people. Within the Institute, executive director Dr. Richard Victor and Carol Telles provided valuable advice, support, and internal review. Special thanks to Stephanie Deeley and Patrick Corcoran who prepared the manuscript with skill, patience, and good humor. Barbara McGowran added her deft editorial touch, and Janet Cocker proofread the report. Technical reviewers Mike Manley and Scott McAnally offered expert comments and probing questions. I thank them all very much. The Institute received excellent and timely cooperation from the Industrial Commission of Arizona. I especially want to thank director Larry Etchechury, claims division manager Noreen Thorson, and chief administrative law judge Harriet Turney for cheerfully responding to my many questions and requests for information. Also, Paul Van Gundy responded to my many requests for data. Many other industrial commission members (too numerous to name) also furthered my education on the system. The public and private people I interviewed helped me to understand how the system functions and to interpret the statute. Their contributions gave the report credibility; but of course, they are not responsible for my interpretation of their comments. Any errors in the report are mine. Duncan S. Ballantyne Cambridge, Massachusetts September 2004 publications of the workers compensation research institute do not necessarily reflect the opinions or policies of the institute s research sponsors. v

4 Table of Contents List of Tables List of Figures Executive Summary xi xiii xv 1. Introduction 3 Purpose of the Study / 3 Scope of the Study / 4 Research Approach / 4 Organization of the Report / 5 Change in the System / 6 2. Administration 7 Organization, Functions, and Staffing of the Agencies Administering the Workers Compensation System / 7 industrial commission of arizona / 7 Agency Data-Gathering and Analysis Capabilities / Benefits 17 Medical Benefits / 17 medical cost containment policies / 18 medical disputes / 20 Indemnity Benefits / 20 compensation rate / 24 average monthly wage / 25 vii

5 viii table of contents table of contents ix duration and coordination of benefits / 27 temporary total disability benefits / 28 temporary partial disability benefits / 28 permanent partial disability benefits / 28 permanent total disability benefits / 34 death benefits / 35 Vocational Rehabilitation Benefits / 36 vocational assistance / 36 rehabilitation bonus / 38 Occupational Disease / 38 Special Fund / 39 second injury fund claims / 39 Initiating and Paying or Denying a Claim / 40 Terminating TTD Benefits / 43 Reopenings and Rearrangements / Dispute Resolution 49 Dispute Prevention / 49 Dispute Resolution Process / 51 initiating dispute resolution / 51 assignment and scheduling / 51 frequently disputed issues / 52 Informal Dispute Resolution / 52 mediation / 52 rehabilitation conferences / 53 Alternative Dispute Resolution / 53 Formal Dispute Resolution / 53 preparation / 53 informal conferences / 54 formal hearings / 54 Resolving Disputes over Loss of Earning Capacity / 55 Appeals Process / 56 review by a judge / 56 appeals to the courts / 59 Attorney Involvement and Fees / System Performance Measures 61 Benefit Payments and Benefit Growth / 61 Special-Fund Revenues and Expenditures / 62 Costs of the System / 65 public administration costs / 67 benefit costs / 67 benefit delivery expenses / 67 Injuries and Utilization / 67 Return to Work / 69 Litigiousness / 69 Agency Workload / 71 Settlement Agreements / 71 Promptness of Reporting and Payment / 75 Speed of Resolution / Implications for Policymakers 77 Current Policy Debate / 77 Implications for Arizona Public Policymakers / 78 what causes formal-hearing delays in arizona? / 78 A Lesson for Other States / 80 active involvement of the state agency results in reduced litigation and attorney involvement / Attention Points Other Findings on Costs 93 Incurred Benefit Costs and Growth / 93 Frequency of Benefits / 96 Size and Type of Benefits / 96

6 x table of contents Statistical Appendix 105 List of Tables References Allocation of Staff to Workers Compensation Functions in the Industrial Commission of Arizona, 2003 / Commissioners Characteristics, Industrial Commission of Arizona, 2004 / Data Collection Activities of the Industrial Commission of Arizona, 2004 / Aspects of System Performance Tracked and Routinely Reported, 2004 / Benefit Characteristics in Arizona, January 1, 2004 / Maximum Weekly Benefits, / Vocational Rehabilitation Programs Supported by the Special Fund, / Dispute Resolution Activity, 2003 / Outcomes of Loss-of-Earning-Capacity Awards Issued by the Industrial Commission of Arizona and Protested by Workers and/or Insurers or Self-Insurers, 2002 / Benefit Payments in Arizona, / Special-Fund Receipts and Disbursements, / Industrial Commission of Arizona Staffing and Administrative Expenditures, / Indemnity Claims Filed, Medical-Only Claims Filed, and OSHA Lost-Workday Cases with Days Away from Work in Arizona, / Measures of Litigiousness, / Levels of Agency Activity, / Measures of Formal Dispute Resolution Staff Activity, / 74 xi

7 xii list of tables 6.1 Impact of Multiple Hearing Sessions on Speed of Formal Dispute Resolution, Cases with Hearing Awards in 2003 / Incurred Benefit Costs in Arizona, Policy Years / Cases by Type of Claim, Policy Years / Average Incurred Indemnity and Medical Benefit Costs, Indemnity Cases Only, Policy Years / Average Incurred Indemnity and Medical Benefit Costs by Type of Claim, Policy Years / Frequency of Claims by Type of Claim, Policy Year 2000 / Average Incurred Benefit Costs by Type of Claim, Policy Year 2000 / 103 SA.1 Claim Flow Statistics, / 106 SA.2 Claim Flow Activity, / 107 SA.3 People Interviewed for This Study / 108 List of Figures 2.1 Structure of the Industrial Commission of Arizona, 2003 / Sample Loss-of-Earning-Capacity Memorandum / Compensability Claim Flow / Terminating Temporary Total Disability Payments / 44 xiii

8 Executive Summary In designing its benefit structure, Arizona has fashioned a different set of tradeoffs than have most states the Workers Compensation Research Institute (WCRI) has studied. Most compensation benefits in Arizona are paid at a lower maximum weekly amount but for potentially longer periods than are benefits in other states. The following are some features of the Arizona benefit structure: Arizona pays temporary total disability (TTD) benefits at a much lower maximum monthly amount compared with other states. 1 Paid at a typical percentage (66 2 3) of the worker s average monthly wage (AMW), TTD benefits in Arizona are subject to a relatively low maximum monthly amount for benefit calculation purposes $2,400 plus $25 for one or more total dependents, the equivalent of $ per week. At 57 percent of the statewide average weekly wage (SAWW), 2 this maximum weekly amount for TTD benefits as of January 1, 2003, was among the lowest in the country. Arizona is in the minority group of six states that do not tie the maximum weekly TTD benefit to annual changes in the SAWW or the statewide average monthly wage (SAMW). 3 Twenty-two states set the maximum weekly TTD benefit at 100 percent of the SAWW, and another 22 states set the maximum weekly TTD amount at percentages of the SAWW or SAMW ranging from to 200. Arizona increases the maximum monthly amount periodically by legislation; the last increase became effective February 28, Arizona bases TTD benefits on the worker s average monthly wage instead of the average weekly wage that most states use. We used Arizona s SAWW in 2002 for benefit calculation purposes because for all states that base the maximum weekly TTD amount on the SAWW or SAMW, there is a lag (of varying intervals) between determining the SAWW or the SAMW and setting the maximum weekly or monthly amount. The other five states are California, Georgia, Indiana, Minnesota, and New York. xv

9 xvi executive summary executive summary xvii Arizona is a wage-loss system: A worker who has returned to work and is earning at the preinjury level whatever the extent of injury does not receive unscheduled permanent partial disability (PPD) benefits. Unscheduled PPD benefits in Arizona are based on the worker s loss of earning capacity. These benefits are paid at a lower rate (55 percent of the difference between the worker s AMW before the accident and his or her reduced monthly earning capacity) than are the benefits in most wage-loss states and are subject to the same maximum monthly amount as are TTD benefits. 4 Benefits are payable for as long as the worker has a loss of earning capacity. There are no time limits on reopening a claim, and settlement agreements (for accepted claims) do not close out liability for future indemnity and medical benefits. 5 The typical state places a time limit on reopenings and permits compromise lump-sum settlements that close out liability for future indemnity and medical benefits. Like all states, Arizona has two groups of workers receiving TTD benefits: those who receive TTD benefits equal to percent of their wages and those who receive less because their benefits are constrained by the maximum. However, a much larger group of Arizona workers (45 percent) fall into the second group than do workers in other states for which comparable data are available. WCRI s Detailed Benchmark/Evaluation (DBE) Round 4 data (for injuries in 2001, evaluated as of mid-2002, with more than seven days of lost time) show that, for most states that base TTD benefits on percent of the worker s average weekly wage and a maximum weekly amount equal to 100 percent of the statewide average weekly wage, the proportion of workers who received benefits constrained by the maximum TTD benefit was percent. Public officials say Arizona s benefit structure was not always as it is now. From 1948 to 1977, Arizona s maximum monthly benefit for calculation purposes was $1,000, which represented a much higher percentage of the SAWW than does the current maximum. Compared with states that annually adjust the maximum weekly TTD amount, Arizona has experienced an increase in the percentage of workers whose benefits are constrained by its maximum. We identified at least two possible effects of Arizona s relatively low maximum monthly TTD benefit amount. First, most system observers agree that workers earning more than the maximum amount (whom we refer to as higher-wage earners) could suffer economically while receiving indemnity benefits. Second, most system participants we interviewed said higher-wage earners in Arizona have a strong incentive to remain on the job or return to work as soon as possible after an injury, primarily because the difference between their earnings and the TTD benefit is not trivial. Arizona has a number of system features that act to protect workers. One example is that Arizona employers have lifetime exposure for paying medical and indemnity benefits. This provides a potential safety net for workers who cannot return to work. Another example is that the Industrial Commission of Arizona (ICA) calculates the worker s monthly unscheduled PPD benefit entitlement based on information supplied by the insurer or self-insurer and the worker and issues a determination, or award. Either side can contest this determination by requesting a formal hearing. In most states WCRI has studied, the insurer or selfinsurer makes the determination, and the worker can object by filing a request for adjudication. ICA data show that one or both sides protested less than one-fourth of the determinations made in calendar year 2003, suggesting that in the majority of cases both sides either saw the determinations as fair or did not consider objections worthwhile. Also, most observers on both sides say the ICA actively monitors the delivery of benefits by insurers and self-insurers. Most observers also agree that ICA staff are willing to help injured workers navigate the system. 4 5 Percentages for unscheduled PPD in other wage-loss states are as follows: Louisiana, Ohio, and Pennsylvania: percent of the difference between the worker s AWW before injury and the worker s wages or wage earning capacity; Maine and Michigan: 80 percent of the difference between the worker s preinjury after-tax earnings and current after-tax earnings or earning capacity; Rhode Island: 75 percent of the difference between the worker s preinjury after-tax earnings and current after-tax earnings or earning capacity; and Massachusetts and New Hampshire: 60 percent of the difference between the worker s preinjury after-tax earnings and current after-tax earnings or earning capacity. On reopening the claim, however, the insurer or self-insurer can take, as a credit, any future indemnity and medical care benefits that were provided for in the settlement. No additional indemnity and medical benefits are paid until the amount of the credit has been depleted. The Current Context This study may be useful for policymakers in Arizona as well as in other states. During the recent debate over reform in California, some public officials and members of the press in California inquired as to whether there were lessons to be learned from neighboring Arizona. Accordingly, Chapter 6 contains a lesson that other states might glean from the Arizona experience: Active involvement of the state agency results in reduced litigation and attorney involvement.

10 xviii executive summary executive summary xix Currently, debate over change in Arizona s workers compensation system is negligible. However, both business and labor representatives expect a movement to begin in 2005 to increase the maximum monthly amount for benefit calculation purposes. Workers representatives say the low maximum monthly TTD benefit is the greatest issue facing the Arizona system today. Most public officials, some attorneys on both sides, and some insurers and selfinsurers say formal-hearing delays are a concern. Further, a number of insurers and self-insurers say rising medical costs are a problem and cite prescription drug costs as a specific concern. Major Findings The maximum weekly TTD benefit in Arizona is among the lowest in the nation (as a percentage of the statewide average weekly wage). We compared each state s maximum weekly TTD benefit amount as of January 1, 2003, with its SAWW. 6 At 57 percent of the SAWW, Arizona s equivalent maximum weekly TTD benefit of $ was next to the lowest of all the states. 7 In 22 states, the maximum weekly amount for temporary total disability is 100 percent of the SAWW. Arizona s percentage has eroded steadily since February 28, 1999, when the equivalent maximum weekly amount for temporary total disability was raised 14 percent, from $ to $ Almost half the workers receiving TTD benefits have their benefits limited by the maximum monthly TTD amount in Arizona. ICA data show that 5,143 notices of average monthly wage were issued by the ICA between July 1 and October 24, In 45 percent of cases, the injured worker s average monthly wage Forty-four states base the maximum weekly TTD amount on a percentage of the SAWW or SAMW. For these states, we divided the maximum weekly TTD amount (as of January 1, 2003) by the applicable percentage to calculate the SAWW. For the remaining six states (including Arizona) that do not base the maximum weekly TTD amount on a percentage of the SAWW or SAMW, we calculated the ratio of each state s maximum weekly TTD amount to its SAWW for 2002, using data from the U.S. Department of Labor, Bureau of Labor Statistics. The lowest state was New York at 45 percent of the SAWW. The initial calculation of the employee s AMW is done by the insurer or self-insurer. The insurer or self-insurer then notifies the employee and the ICA. Within 30 days of receiving this notice, the ICA makes an independent AMW determination and issues a notice either approving the AMW submitted by the insurer or self-insurer or setting another AMW. exceeded the $2,400 maximum amount for computation purposes. Expressed another way, workers earning $28,800 or more per year received the maximum monthly TTD benefit. The low maximum monthly TTD benefit creates economic hardship for some workers, while for others it creates a powerful incentive to return to work. We have identified two major effects of Arizona s low maximum monthly TTD benefit. First, most system observers agree that higher-wage earners, who represent 45 percent of the workforce, could suffer economically while receiving indemnity benefits. On the other hand, the remaining 55 percent of workers are not affected by the maximum; their TTD benefits are like those in the typical state. Second, most system participants we interviewed said the low maximum serves as a powerful incentive for higher-wage earners in Arizona to remain on the job or return to work as soon as they can. Arizona s unusual method of calculating unscheduled PPD benefits creates low weekly amounts relative to most other wage-loss states. In most wage-loss states, unscheduled PPD benefits are calculated based on varying percentages of the difference between the worker s preinjury average weekly wage (AWW) and her or his postinjury earnings or earning capacity, subject to a maximum weekly amount. For example, consider a worker who suffered a back injury in January 2004 and whose AWW was $800 and postinjury earning capacity was $200. In Pennsylvania, another wage-loss state, the worker would receive ($800 $200 = $600) 0.67 = $400 per week. However, Arizona s unique method of determining a maximum monthly amount for calculation purposes ($2,400 as of January 2004) creates a much lower weekly amount. The same worker would receive ($ $200 = $353.89) 0.55 = $ per week less than half as much as the Pennsylvania worker. 9 This difference is due to two features of the Arizona system. First, basing unscheduled PPD benefits on the difference between a maximum amount for calculation purposes (instead of the worker s wage) and postinjury earning capacity significantly constrains the final weekly amount, especially for higher-wage earners. Second, Arizona has a lower rate (55 percent versus percent in Pennsylvania). 9 $ is the weekly equivalent of $2,400 per month.

11 xx executive summary executive summary xxi Most observers commented favorably on the state agency s active role in educating and assisting system participants, monitoring claims, and impartially determining key benefit amounts. Both sides of Arizona s workers compensation system generally consider the ICA to be an active agency in several respects. First, most system observers say the ICA monitors the progress of accepted claims, audits payor notices, and issues other notices. This is facilitated by the fact that the ICA claim file is the file of record in Arizona. In addition, the ICA makes certain impartial benefit determinations, such as the average monthly wage and the monthly entitlement to unscheduled PPD benefits (as described in the next paragraph). In addition, the ICA conducts an annual seminar for claims handlers, at which a detailed claims-processing manual is distributed. Most observers agree that the ICA is user friendly. That is, staff members are willing and able to assist participants, contact insurers and self-insurers about individual claims, and provide training and direction. Actions of the active Arizona agency help to reduce litigation in unscheduled PPD cases that are often disputed in other states. Most states strive to reduce litigation over determination of unscheduled PPD benefits. Often the determination process involves dueling expert doctors, attorneys on both sides, and litigation. The active Arizona agency takes on a different and particularly effective role in determining unscheduled PPD benefits. After a physician assesses that the worker s condition is medically stationary (a term similar to maximum medical improvement), a specialist at the ICA examines information supplied by the worker and the insurer or self-insurer (including medical reports) and collects additional information. In reviewing the information, the specialist considers the nature and extent of the worker s functional impairment as well as the worker s age, education, occupational history, previous disabilities, residence at the time of injury, rehabilitation efforts, wages received for work performed after the injury, and transferable skills. The specialist also determines the availability of suitable jobs and prevailing hourly wages for selected job titles in the worker s county of residence as of the date of injury. Based on all this information, the specialist issues a written determination, or award, indicating whether the injured worker has no loss, permanent partial loss, or total loss of earning capacity. If the loss is permanent partial or total, the award specifies the monthly amount of the entitlement. A study conducted by the ICA revealed that among loss-of-earning-capacity awards issued in 2002, 18.4 percent were protested by workers and 6.4 percent were protested by insurers or self-insurers. 10 Analysis of protested cases revealed that 43 percent resulted in stipulations as to weekly PPD amounts, 37 percent resulted in compromise settlements, and 8 percent resulted in formal-hearing decisions. 11 Most system observers on both sides say ICA awards are impartial determinations that are either regarded as fair by both sides or are not worth disputing because the amounts in disagreement are small. Adjudication delays result from the combined effects of the serial-style hearing process and the reliance on live doctor testimony to introduce medical evidence. ICA data show that, among cases from calendar year 2003 with awards and with one or more hearing sessions, the average interval from the date a case was assigned to a judge to the judge s award was 7.7 months. This interval ranks Arizona about in the middle of states that WCRI has studied in the past 10 years. ICA data also show that litigated cases with hearings and awards in calendar year 2003 involved 2.2 hearing sessions on average. The same data show that, on average, a second hearing session added about 3 months to the overall interval and subsequent sessions added about 2 months each. For example, cases with one or two hearing sessions were resolved in an average of 5.8 months, while cases with three or more hearings took 10.7 months almost 5 months longer. The ICA is considering instituting a voluntary fast-track hearing process designed to resolve cases (with apparently straightforward medical issues) using medical reports alone. Most attorneys on both sides and judges in Arizona describe litigated cases as typically involving dueling doctors who testify in person at hearings. They say this practice often drives the need for multiple hearing sessions. A 1998 WCRI study found that Arizona was one of five jurisdictions that relied primarily on live doctor testimony (Ballantyne, 1998, table 5.2 and jurisdiction summaries). 12 In 20 jurisdictions, medical evidence was usually introduced by medical reports alone, and 21 jurisdictions relied on depositions (with or without reports) Included in these percentages are 1.1 percent of awards protested by both sides. The remaining cases were dismissed, withdrawn, or otherwise not pursued. The other states that relied primarily on live testimony were New Jersey, New York, Vermont, and Washington. Four jurisdictions use a combination of reports, depositions, and live testimony.

12 xxii executive summary executive summary xxiii A unique feature of the Arizona system is that the ICA pays the doctor directly for live testimony ($110 for the first hour and $55 per half hour thereafter). We know of no other state where the public agency has this responsibility; in other states, the parties pay for the doctor testimony. Some observers say this feature in Arizona provides incentives to the parties to request live doctor testimony in some cases in which medical reports alone would suffice. Settlement agreements in Arizona appear to be uncommon compared with other states WCRI has studied. For claims in which liability is accepted, these agreements do not close out future medical and indemnity benefits. Using ICA data, we estimate that about 5 6 percent of indemnity claims in Arizona result in settlement agreements. 14 Based on our experience in conducting other Administrative Inventories and related WCRI studies, settlement agreements in Arizona seem uncommon (e.g., see Telles, Wang, and Tanabe, 2004, table 2.13). 15 In Arizona in the 1970s, settlement agreements were not approved for claims in which liability was accepted. Settlements are currently permitted for accepted claims involving genuine disputes. Although they result in the payment of indemnity benefits and palliative medical care benefits (known as supportive medical maintenance benefits in Arizona) in a lump sum, these settlements do not close out liability for future indemnity and medical benefits. Most system observers on both sides accept these limitations on lump sums, but some self-insurers advocate allowing the type of compromise-and-release settlements found in other states. Lifetime entitlement to indemnity and medical benefits (for accepted claims) provides a safety net for workers. A worker who experiences a new, additional, or previously undiscovered condition that is causally related to the workrelated injury can reopen a claim. Once reopened, a claim is processed as a new injury claim. Temporary disability benefits are paid until the worker again reaches maximum medical improvement. At that time, the right to PPD benefits and palliative care is assessed. Thus, indemnity claims in Arizona can go through several cycles of temporary and permanent disability benefits. Additionally, as previously discussed, settlement agreements do not close out liability for future medical and Lump-sum commutations are also permitted, but they are rare. Among 12 states studied, the percentage of claims with more than seven days of lost time (adjusted for injury and industry mix and wages) with lump-sum settlements among 2001 claims (evaluated as of 2002) ranged from 7 percent in Pennsylvania to 22 percent in Illinois. The 12-state median was 11 percent. indemnity benefits. The effect of these system features is that, once an insurer or self-insurer in Arizona accepts a claim, liability for indemnity and medical benefits continues for life. This provides a safety net for workers if their conditions worsen. Most observers in Arizona say unlimited reopenings and restrictions on settlements reflect a public policy decision to protect workers against the impact of future disability. About 5 7 percent of indemnity claims are reopened in Arizona. Although petitions for reopenings represented an estimated percent of paid indemnity claims (depending on the year), less than half of these petitions resulted in reopened claims. 16 ICA data show that insurers and self-insurers were notified of 2,918 reopening petitions in calendar year Of these, 56 percent were denied and 41 percent were accepted by insurers and self-insurers. 17 In response to denials, workers filed hearing requests in 45 percent of cases. 18 Among cases with hearing requests, 49.7 percent resulted in hearing decisions and 9.7 percent resulted in settlement agreements. 19 Among cases with hearing decisions, reopenings were approved in 34.2 percent and denied in 65.8 percent. In all, about 47 percent of reopenings reported to insurers and self-insurers in calendar year 2002 resulted in reopened claims. The data suggest that about 5 7 percent of indemnity claims are reopened in Arizona. Public officials and other system participants offer several reasons why the percentage of reopenings is not higher, given the lifetime potential. First, most workers proceed with their lives and have no need to reopen their cases. Second, unrepresented workers may be reluctant to consult with (and pay) attorneys when their petitions are denied. A reopening involves a new, additional, or previously undiscovered medical condition. Most experts say making a connection (based on medical documentation) between an old injury and a new medical condition is sometimes difficult given the worker s age and other environmental or physical We compared the number of insurer or self-insurer notices of reopenings with the number of paid indemnity claims, assuming a five-year lag (based on ICA recommendations). The remaining 3 percent involved dispositions ICA classified as other. For the remaining denials, either the worker did not protest, the insurer or self-insurer subsequently accepted the reopening, or the petition to reopen was withdrawn after the denial. The remaining 40.6 percent were either dismissed, withdrawn, held in abeyance by a judge, or have not yet been decided.

13 xxiv executive summary factors that could affect that condition. Some workers attorneys say many workers who consult with them discover they cannot meet these statutory standards and abandon their attempts. When a claim is reopened, the worker may not necessarily receive additional indemnity and supportive medical maintenance benefits if a settlement agreement had previously been reached. The reason for denying additional benefits is that the insurer or self-insurer is permitted to take a full credit for any future indemnity and medical benefits included in the settlement against any additional indemnity and medical benefits incurred. 20 Workers Compensation in Arizona: Administrative Inventory 20 Additional active medical care benefits provided to the worker are not affected by the credit.

14 1 Introduction Purpose of the Study States sometimes seek to improve their workers compensation systems through internal evaluations; others recognize that similar jurisdictions have struggled with problems comparable to their own. Adapting successful system features from other states may be an efficient method for solving problems, provided that one is mindful of the reality that these features may not work the same way in a different system context. However, few reliable sources of information describe in detail how various workers compensation systems function in practice. This study is the 35th in a series of Administrative Inventories of state workers compensation systems published by the Workers Compensation Research Institute (WCRI). 1 The purpose of this series is to help public policymakers and other participants understand the features of workers compensation systems and make informed interstate comparisons. The intended audience includes public officials, insured and self-insured employers, insurers, workers and their representatives, attorneys, and others interested in the features and operation of state workers compensation systems. The objective of this volume is to describe how the workers compensation system in Arizona is administered and functions. This volume shares a common outline with other Administrative Inventories and, as much as possible, addresses the same core issues. A reader familiar with the basic components of workers com- 1 Twenty-six states have been studied; nine states have been revisited. 3

15 4 workers compensation in arizona The report is organized around the questions listed earlier in this chapter. Chapter 2 is an overview of the administration of the Arizona workers compensation system. It describes the functions, responsibilities, and resources of the agency that acts as the primary administrator of the state s workers compensation system, the Industrial Commission of Arizona. In Chapter 3, we describe the types of workers compensation benefits available to injured workers. In Chapter 4, we discuss the informal and formal dispute resolution processes. Chapter 5 describes system outcomes, including utilization, litigiousness, administrative workload, settleintroduction 5 pensation systems should have little difficulty understanding the major features, provisions, and issues of the Arizona system. Scope of the Study This inventory addresses the following core issues of the Arizona workers compensation system: How is the system administered? What benefits are paid? What is the role of the special fund, and what are the costs? How do claims flow through the system? How quickly are payments initiated and claims resolved? What dispute resolution procedures are used and to what effect? How are attorneys involved in the system? How litigious is the system? What is the workload of the administration? What are the costs of administration, benefits, claims processing, and litigation? What can other states learn from the Arizona experience? What aspects of the system deserve special attention or further inquiry? We address these questions for the system in Arizona as it functioned in early Data generally are presented for the period from 1994 through 2003, and observations about changes over that period are made where relevant. By examining trends, it is possible to determine how Arizona s system has changed over time in response to particular problems, policies, and system reforms. It is important to point out that we had no a priori hypotheses guiding this research, and we do not make specific policy recommendations on the basis of our findings. Rather, our goal is to provide a comprehensive, substantive, and objective framework that system participants can use to structure future policy discussions. Research Approach The research conducted in this study is descriptive and seeks to offer a factual assessment of the Arizona system. We used a five-step approach to gather data and conduct our analysis: 1. Examining the statute and literature. We began by identifying and reviewing the relevant statutory provisions and literature on the workers compensation system in Arizona. 2. Conducting semistructured interviews. The purpose of the interviews was to probe beyond the statutory provisions and learn how the system operates in practice. The 42 individuals with whom we spoke represent a variety of perspectives: administrators and staff at the Industrial Commission of Arizona (ICA), insurers, self-insured employers, attorneys for workers and defense attorneys, representatives of organized labor, and interest groups (see Table SA.3). The diversity of the perspectives of the respondents helped to ensure balance in the information we obtained from the interviews. As much as possible (while preserving confidentiality), we describe the affiliation of the respondents when reporting conflicting perspectives on system features and changes. 3. Performing a descriptive analysis of the available data. To provide a statistical base for our examination of activities, outcomes, and trends in the system, we collected data for up to 10 years, when possible, from various state and federal agencies, including the ICA and the National Council on Compensation Insurance, Inc. (NCCI). All data are from the most recent years available. 4. Collecting and analyzing additional data. We asked relevant agency administrators to provide us with supplementary data to improve our understanding of certain details of the system. 5. Reconciling the information. Finally, we submitted the draft of the report to the individuals we had interviewed and asked them to review our observations for accuracy. Organization of the Report

16 6 workers compensation in arizona ment agreements, and speed of resolution. Chapter 6 discusses the implications of our findings for policymakers and presents a lesson that other states could learn from the Arizona system: Active involvement of the state agency results in reduced litigation and attorney involvement. In Chapter 7, we describe the features we believe to be the special strengths of Arizona s system, and we note aspects that merit the attention of those interested in improving the system. Finally, in Chapter 8, we provide data on incurred benefit costs and trends in incurred benefit costs using data from the NCCI for insured employers only. 2 Administration Change in the System The Arizona system has not seen major law or administrative changes in the past 10 years. This is unusual among states WCRI has studied recently. In this chapter, we describe the administration of the workers compensation system in Arizona and the organization and staffing of the agencies that play a role in the system. Organization, Functions, and Staffing of the Agencies Administering the Workers Compensation System The Arizona workers compensation law was enacted in The Industrial Commission of Arizona is the agency primarily responsible for the administration of workers compensation in the state. The insurance commissioner in the Insurance Department licenses and, with the ICA, monitors insurers who do business in the state. The ICA s special fund has a contract with the Rehabilitation Services Administration in the Arizona Department of Economic Security to provide vocational rehabilitation services for workers compensation claimants with unscheduled injuries and contracts with private vocational rehabilitation firms to provide vocational rehabilitation services, including job placement, for workers with scheduled injuries. industrial commission of arizona The ICA is charged with the administration of the following laws: workers compensation, occupational safety and health, boiler safety, elevator safety, employment and talent agencies, wage dispute resolutions, and youth employment. Here 7

17 8 workers compensation in arizona administration 9 Table 2.1 Allocation of Staff to Workers Compensation Functions in the Industrial Commission of Arizona, 2003 Special Fund Division Function Staff Positions Authorized Filled Percentage of Total Authorized Administration division Administrative law judge division Labor Division Claims division Legal division Special fund division Total Division of Occupational Safety and Health Note: As of December Excludes staff assigned to the labor division and the division of occupational safety and health, both of which are not directly related to workers compensation. Source: Industrial Commission of Arizona internal data. Figure 2.1 Structure of the Industrial Commission of Arizona, 2003 Governor Commissioners Director Administrative Law Judge Division Claims Division Administration Division Legal Division we focus on functions related to workers compensation. The policy-setting body for the ICA is a five-member commission whose members are appointed by the governor and confirmed by the state senate to staggered five-year terms. Figure 2.1 shows how the ICA is organized. The principal office is located in Phoenix, and another office is maintained in Tucson. The ICA carries out its responsibilities through the units described in the following sections. In April 2004, the ICA consisted of 287 employees. 1 At that time, 312 positions were authorized. Table 2.1 indicates the number of staff members assigned to each division of the ICA related to workers compensation as of December Commissioners The governor appoints five commissioners to staggered five-year terms. No more than three members of the commission can belong to the same political party. 1 The total includes 15 positions for the labor division and 63 positions for the division of occupational safety and health, both of which are not directly related to workers compensation.

18 10 workers compensation in arizona administration 11 Each member must have been an Arizona resident for at least five years before his or her appointment. The chairman serves at the pleasure of the governor. Duties of commissioners include establishing ICA policy, approving or disapproving lump-sum commutations, granting or denying applications to self-insure, approving penalties involving violations of occupational safety and health laws and labor laws, approving penalties for uninsured employers, appointing administrative law judges, establishing a medical fee schedule, and establishing annual administrative and special-fund assessments. Table 2.2 lists the characteristics of the commissioners active in With the exception of the chairman who is a medical doctor, all the commissioners have labor backgrounds. This contrasts with the policymaking entities of most states with such entities that we have studied, each of which consists of a public representative and equal numbers of business and labor representatives. Director The director is responsible for the daily operations of the ICA. Appointed by the commissioners, the director can be removed by the commissioners for cause. The present director has served in this capacity since December He was paid a salary of $116,064 in fiscal year Legal Division The legal division consists of 22 staff members, including the chief counsel, attorneys, investigators, and support personnel. The division represents the ICA in all legal matters affecting the agency. When notified that an employer is violating Arizona law by not providing workers compensation coverage for employees, division staff members investigate the charges. Staff of the legal division also become involved in collecting money owed as a result of safety citations or delinquent uninsured workers compensation claims, and they ensure collection of workers compensation benefits that the special fund has paid out as a result of the recent insolvency of several insurance carriers. Administration Division Fifty staff members in the administration division provide support services to the ICA. Functions include budgeting, accounting, data processing, purchasing, facilities, statistical reporting, printing and mailing, personnel, grants administration, processing applications for self-insurance, monitoring the financial soundness Table 2.2 Commissioners Characteristics, Industrial Commission of Arizona, 2004 Occupation Prior Workers Compensation Experience Term Expires Appointing Governor Name Title Year Appointed Jean Pierre Angelchik a Chairman 1997 Symington 2007 Physician Yes James B. Whitten Vice chairman 2000 Hull 2005 Labor official Yes Brian Delphs Commissioner 2003 Napolitano 2006 Firefighter and labor official Yes Joe Gosiger Commissioner 2003 Napolitano 2004 Labor official Yes Louis Lujano, Sr. Commissioner 2003 Napolitano 2008 Labor official Yes Originally appointed as commissioner. Appointed Chairman by Governor Napolitano in January Source: Industrial Commission of Arizona. a

19 12 workers compensation in arizona administration 13 of self-insured companies, and administering special-fund investments. In this division s ombudsman s office, two staff members assist injured workers and intercede on their behalf to ensure that workers get all the benefits to which they are entitled. Claims Division The claims division receives claims from injured workers and attending physicians and then notifies the appropriate insurers or self-insurers, which can then begin processing the claim. The division also is responsible for ensuring that payors process claims in accordance with the existing statute and rules. Seventy staff members are in this division. Claims division staff answer about 150,000 telephone inquiries per year from constituents and are responsible for making in excess of 31,000 claim determinations. Such determinations include allegations of bad faith, awards for facial scarring and loss of teeth, approvals or denials of requests to leave the state, and approvals or denials of requests to change physicians. Staff in this division also establish the average monthly wage for claimants who have been out of work in excess of seven days and determine loss of earning capacity for claimants who have incurred unscheduled permanent impairments. Administrative Law Judge Division This division consists of a total of 21 judges (a chief administrative law judge, a vice chief administrative law judge, an administrative law judge-in-charge of the Tucson office, and 18 other administrative law judges) and 33 support personnel. These judges conduct hearings and resolve disputes in workers compensation, occupational safety and health, and youth employment. Additionally, the judges can approve settlement petitions. Appointed by the commissioners, the judges must be active members of the State Bar of Arizona and have five years experience in workers compensation, labor, or a related field. Judges are civil service employees and therefore cannot be fired without cause. ICA officials say the turnover among the judges in this division is low. However, when turnover happens, the relatively low salary range for administrative law judges ($50,077 to $85,675 in fiscal year 2004) limits the number of applicants. Training of new judges consists of being assigned to an experienced judge for mentoring, and the probationary period is six months. Judges are evaluated annu- ally through a process that includes customer satisfaction surveys mailed to participants in every fifth closed case. Division of Occupational Safety and Health Arizona retains jurisdiction over occupational safety and health issues (excluding mining operations, Indian reservations, and federal employees) under the federal Occupational Safety and Health Act. The 63 staff members in ICA s division of occupational safety and health focus their efforts on compliance, consultation and training, and the state s boiler and elevator program. Labor Division The labor division administers and enforces labor laws in such areas as employment of children, payment of wages, and licensing of private employment agencies. The division has 15 staff members. Special Fund Division Under the direction of the special-fund monitor, the 15 members of the special fund division are responsible for processing all claims by injured workers against uninsured employers, providing rehabilitation benefits, paying for supportive medical maintenance benefits for workers injured before August 1973, and, if applicable, reimbursing insurers and self-insurers for one-half the permanency benefits in second injury cases. Agency Data-Gathering and Analysis Capabilities Arizona is unusual among states we have studied in that the state agency s file is the file of record. This means that the ICA has complete claim information on all workers compensation claims filed in Arizona, as far back as The ICA s system is paperless; users can access the system from multiple locations, and claims supervisors have access to the work of claims staff members. The computer system (rebuilt in 1990) contains a wealth of data on claim characteristics, injury reporting, claims-processing events, and dispute resolution activity and outcomes. Table 2.3 shows that the ICA collects and stores most of the data elements listed. With excellent cooperation from ICA staff, we obtained a number

20 14 workers compensation in arizona administration 15 Table 2.3 Data Collection Activities of the Industrial Commission of Arizona, 2004 Data Item Data Collected Computerized Database Initial indemnity payment No a No Denial of compensability Yes Yes Modification or termination of indemnity payment Yes Yes Payment for medical treatment Yes Yes Notice and date of attorney involvement Yes Yes Request for hearing or dispute filing Yes Yes Type of benefit claimed under request for hearing No No a Data are not collected and stored regarding the timeliness of payments. However, an official at the Industrial Commission of Arizona (ICA) says that ICA s claims-monitoring system protects workers and doctors from late payments, inappropriate changes to payments, and missed payments. Source: Interview with Larry Etchechury, director of the Industrial Commission of Arizona. of data runs that tapped this extensive database and enabled us to learn how the Arizona dispute resolution system performs. The ICA s 2003 annual report contains basic information on the functions of each division and data on claims processed, various awards issued, dispute resolution activity, the speed of dispute resolution, premiums reported, direct losses paid, claims filed, and breakouts for lost workday claims and fatal injuries. Table 2.4 describes aspects of system performance that are tracked and routinely reported. As the table suggests, some of the data that are reported to the ICA are not yet used to routinely measure or monitor system performance or report changes to stakeholders. For example, the ICA does not currently measure whether claims are reported and initial indemnity payments are made in a timely manner. However, an ICA official says that ICA s claims-processing system protects workers and doctors from late payments, inappropriate changes to payments, and missed payments. Table 2.4 Aspects of System Performance Tracked and Routinely Reported, 2004 Data Average time from injury to first report Average time from injury to first payment Denial rate Average temporary total disability duration Average time from filing to a hearing being held Rate of resolution at informal level Rate of resolution at formal level Average time from informal hearing to formal hearing Average time from filing to resolution of dispute Average time from injury to resolution of claim Average medical cost per claim Percentage of workforce covered by managed care arrangements a Interval is from Industrial Commission of Arizona notice. Source: Interview with Larry Etchechury, director of the Industrial Commission of Arizona. Tracked or Routinely Reported No No Yes Yes Yes Yes Yes Yes Yes Yes a No No