ALLIANT CSG CLAIMS ADVOCACY PRACTICE: COMP ADVISORY

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2 ALLIANT CSG CLAIMS ADVOCACY PRACTICE: COMP ADVISORY California Workers Compensation Updates 2014: A Macro and Micro Examination As a new year arrives, so too do a host of new laws and accompanying changes to California workers compensation. Most notably, the California State Legislature and Governor Jerry Brown enacted Senate Bill 863, which provides a number of structural changes to the California workers compensation benefit delivery. This publication will provide a general overview of the various bill updates as many key provisions were enacted on January 1, Moreover, we will examine critical landscape changes in the workers compensation arena that directly impact the construction industry. Finally, we will share some meaningful real world strategies for implementation, as workers compensation remains a primary cost driver for employers in the state. Insurance Rates Update Each year, the Workers Compensation Insurance Rating Bureau (WCIRB) of California submits advisory pure premium rates to the California Department of Insurance (CDI) for approval. Insurance carrier rates are typically derived from the advisory pure premium rates and can differ slightly from the WCIRB rates. Advisory pure premium rates, expressed as a rate per $100 of payroll, are based upon loss and payroll data submitted to the WCIRB by all insurance companies for all employer classification codes. These rates reflect the amount of losses an insurance company can expect to pay in workplace injury benefits, as well as the cost for adjusting and settling workers' compensation claims. On November 22, 2013, the CDI approved January 1, 2014 pure premium rates at an average of $2.70 per $100 of payroll for all 494 standard industry classifications. This represents a jump of over 7.6% from the $2.51 per $100 of payroll for all classes on January 1, Below is a sample listing of popular construction codes and the changes in pure premium rates from 2013 to Code/Description 2013 Rate 2014 Rate Change (%) 0042 Landscape Masonry Iron/Steel Erec Electrical Plumbing Concrete Carpentry Exec. Supervisor Waterproofing Roofing Grading Clerical Average: Paul Morales, Vice President 1

3 As exhibited, the average construction classification code rate change increase in 2014 of 14.5% is significantly higher than the average increase of all classification codes of 7.6%. While the general consensus is that construction codes are higher due to the nature and extent of the risk exposure to serious and complex injuries, there may be an additional reason for the dramatic rate hikes. As stated by the WCIRB in their December 26, 2013 report, Analysis of Changes in Indemnity Claim Frequency, indemnity claim frequency continued to rise from 2010 through 2012 and as the economy recovered regionally. As such, more hazardous industries like construction were hardest hit. The steady move out of the recession brought in a higher number of newer, untrained workers into the labor force and those workers were more likely to suffer an industrial injury. A large rash of Cumulative Trauma injury claims were also filed at an alarming rate during the last two to three years in California. Finally, the Bureau asserted that indemnity claim frequency for the first six months of 2013 was 6.2% higher than the comparable 2012 frequency, which was above their projected levels. They identify this sharp increase as concerning. Workers Compensation Benefits Update California's State Average Weekly Wage (SAWW) rose less than 1% from $1, to $1, in the 12 months ending March 31, This will boost temporary total disability (TTD) rates for 2014 work injury claims, as well as other workers' compensation benefits that are tied to changes in the SAWW. California's TTD maximum rate for 2013 job injuries was $ per week, but with the marginal increase in the SAWW maximum TTD rate will rise to $1, per week (tax free) for claims with injury dates on or after January 1, In other words, a construction worker earning an annual salary of $83, or more will qualify for the maximum TTD rate. State law also links the minimum weekly TTD rate to SAWW increases, so the minimum rate will edge up a fraction from the current $ per week to $ for claims with 2014 dates of injury. Additional workers' compensation benefits will be bumped up by the recent increase in the SAWW, including TTD paid two years or more after injury, life pension and Permanent Total Disability payments for injuries on or after January 1, 2013, and installment payments on death claims. One goal of SB 863 is to increase the permanent disability (PD) benefits paid to injured workers to compensate for the lasting effects of workplace injuries. As such, the new maximum rate for PD benefits for injuries on or after January 1, 2014, will be $290 per week. Paul Morales, Vice President 2

4 2014 Estimated Cost Impact of SB 863 Despite a difference of opinion among industry experts regarding the cost savings impact of SB 863, the WCIRB of California has shared some compelling estimates surrounding the potential cost reductions in their October 31, 2013, Cost Monitoring Report. According to the WCIRB (the information summarized in the Table below reflects the current estimate of the cost impact of the Senate Bill), the actual results will depend, in part, on a number of factors, including the development and implementation of future regulations required by the legislation, how the Workers Compensation Appeals Board (WCAB) interprets the new provisions, the result of any legal challenges to the components of legislation, the real changes in the medical treatment conditions, and other system practices or patterns. Nevertheless, the WCIRB sees about a $520 million saved for 2014 injuries. SB 863 Provisions Total Impact on Claim Costs ($ millions) Total % Impact on Claims Costs 2013 Benefit Level Changes $ % Elimination of Permanent Disability Add ons (sleep/psyche, etc.) ($170) 0.9% Three Tiered Weekly Permanent Disability Benefits ($100) 0.5% Medical/Legal Liens ($480) 2.5% Surgical Implant Hardware ($110) 0.6% Ambulatory Surgical Center Fees ($80) 0.4% Independent Medical Review ($390) 2.1% Ogilvie v. SFO Decision ($210) 1.1% Medical Provider Network Strengthening ($190) 1.0% TOTAL ESTIMATED IMPACT OF 2013 CHANGES ($1,110) 5.8% ESTIMATED IMPACT OF 2014 BENEFIT CHANGES $ % COMBINED ESTIMATED ANNUAL IMPACT OF SB 863 ON 2014 INJURIES WCIRB OF CA 10/28/13 ($520) 2.7% Patient Protection and Affordable Care Act (ACA) Impact The primary provisions of the Affordable Care Act (ACA) became effective January 1, Although there were no elements in the law that were directed at workers compensation medical costs, there are numerous potential indirect effects on the California comp system that could increase or decrease cost shifting to or from the industry. Paul Morales, Vice President 3

5 The most likely factor that could decrease comp expenditures would be a shift of the medical costs from the workers compensation market to the health insurance market as a large portion of the uninsured state population will no longer require workers compensation to obtain healthcare. This is fortified by the fact that the ACA states an individual cannot be rejected for care for a pre existing medical condition. Before the ACA was enacted, workers compensation was used by many claimants to obtain treatment for a preexisting condition that was arguably associated with a work related injury. Another strong concept that supports a cost decrease in the comp arena is that more affordable and available health insurance will promote a healthier workforce, which can lead to fewer workplace injuries and faster returns to work for employees. On the flipside, the shortage of primary care physicians. Doctors will likely be burdened with increased examinations under the ACA may contribute to an increase in workers compensation costs. As such, there could be employee evaluation delays on the comp side which could impede insurance carriers ability to deny or accept questionable claims in a timely manner Strategies As this new California workers compensation landscape take shape, 2014 will prove to be a unique and challenging year for employers. Class code pure premium rates have increased for the construction industry and will likely increase overall insurance premium costs, Indemnity claim frequency has bucked all trends and continues to rise, and benefit levels for workers compensation benefits have reached historical highs. Conversely, the passing of CA SB 863 and the WCIRB s anticipated savings from the ACA may offset burgeoning claim costs. Nevertheless, it is wise planning to have an offensive claim reduction strategy. Pre event workers compensation claim planning and post event claim management activities are the two most important factors to the success of an organization s claim elimination program. For pre event strategies, partner with loss control and safety for preloss planning and develop a return to work program by having injured workers volunteer at the Blind Center or soup kitchens in order to satisfy modified work requirements. For postevent management activities, instruct your carrier or Third Party Administrator (TPA) to utilize defense attorneys familiar with construction claims and Controlled Insurance Program (CIP or wrap up) coverages, engage in active surveillance, and investigate social networking sites to determine the extent of the claimant s physical activities that contradict doctor imposed work restrictions. Alliant Insurance Services is highly attuned to the many changes sweeping across the workers compensation market. We will collaborate with your risk management team to formulate aggressive and meaningful solutions to lower claims expenditures and improve your workers compensation experience by implementing well designed risk mitigation strategies. Paul Morales, Vice President 4