California Workers Compensation Reform What Should We Expect Next

California Workers Compensation Reform What Should We Expect Next Dave Bellusci, FCAS, MAAA WCIRB Michele Lyons, RN, MSN, JD, CCM, MSCC Farmers Insurance Casualty Loss Reserve Seminar San Diego, California September 15-17, 2014 1

Overview Pre-SB 863 Environment SB 863 Summary Post-SB 863 Trends What s Next? Q/A 2

Pre-SB 863 Underlying Cost Trends - Reforms of 2002-2004 Rapidly Escalating Costs Prior to Reforms of 2002 through 2004 3-Year Series of Reforms in 2002 through 2004 Evidence-based utilization standards Unlimited employer control of medical within networks Limits of physical therapy and chiropractic visits New permanent disability rating schedule based on AMA Guides 2-Year cap on temporary disability Apportionment of permanent disability benefits WCIRB Retrospective Estimate of Savings: 66%, or $14 Billion Annually in Statewide Costs Industry Average Rates Declined by Two-Thirds from 2003 3

Pre-SB 863 Underlying Cost Trends - Erosion of Impact of Reforms of 2002-2004 Erosion of Reform Impacts Since 2005 Indemnity cost per claim up 40% since 2005 Medical cost per indemnity claim up 50% since 2005 ALAE cost per indemnity claim up almost 100% since 2005 Costs rising much quicker than underlying exposure Combined Ratios Increasing Industry Average Charged Rates up 22% since 2009 4

Estimated Ultimate ALAE per Indemnity Claim (Excl. MCCP) $15,000 As of December 31, 2012 $10,000 $5,000 4,997 5,529 5,671 6,060 5,977 6,018 6,772 7,509 8,639 10,053 10,889 11,329 11,756 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20 10 0 % Change 10.7 2.6 6.8 0.7 12.5 10.9 15.0 16.4 8.3 4.0 3.8-1.4-10 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 Accident Year 5

California Workers Compensation Claims and Wage Level Index % 175 Average Wage Level Index (Based on UCLA Data) Estimated Indemnity Claim Cost Level Index Pre-SB 863 155 150 139 143 147 126 125 121 114 123 125 121 117 105 113 112 110 100 100 105 2005 2006 2007 2008 2009 2010 2011 2012 (projected) Policy Year 2013 (projected) Accident Year 6

Accident Year California Projected Combined Loss and Expense Ratios As of March 31, 2014 200 150 100 50 0 194 22 23 149 175 20 21 134 151 18 18 115 136% Point Improvement over 6 Years 120 16 15 89 84 15 12 57 60 58 14 14 9 10 37 34 73 16 12 45 89% Point Deterioration over 5 Years 98 18 16 64 20 19 83 144 147 146 22 23 23 24 24 98 100 33 Other Exps. LAE Losses 127 20 25 116 19 23 90 82 74 99 00 01 02 03 04 05 06 07 08 09 10 11* 12* 13* 122 Accident Year * The cost of medical cost containment programs is reflected in LAE for accident years 2011 and subsequent. It is reflected in losses for all other accident years. 7

Estimated Average Charged Insurer Rate Per $100 of Payroll $8.00 $6.00 $6.29 $5.49 $4.36 $4.00 $2.85 $2.30 $2.15 $2.10 $2.25 $2.32 $2.39 $2.57 $2.84 $2.00 $0.00 7/03-12/03 7/04-12/04 7/05-12/05 7/06-12/06 7/07-12/07 2008 2009 2010 2011 1/12-6/12 7/12-12/12 2013 Policy Period 8

Rate Comparison Based on Oregon Studies California* vs. National Median Average Charged Rate $6.00 $6.08 California National Median $5.23 $4.00 $3.34 $4.13 $3.52 $2.00 $2.26 $2.42 $2.58 $2.48 $2.72 $2.68 $2.26 $2.87 $2.04 $1.88 $0.00 1/1/00 1/1/02 1/1/04 1/1/06 1/1/08 1/1/10 1/1/12 1/14-3/14 Rate Effective Period Projected * The information is based on the state of Oregon biennial rate comparison and is based on the state of Oregon classification mix and, as a result, the California average rates shown on this exhibit differ from other measures of the average California rate. 9

National Workers Compensation Medical Trends vs. CA Medical Costs per Fee Schedule Estimated $9 billion in WC spent on unnecessary medical costs Prices paid for nonhospital services in 2012 in Wisconsin, Indiana, and New Jersey double the prices in California, Florida, and North Carolina On other spectrum if prices too low reduce the number of providers willing to treat injured workers

National Workers Compensation Medical Trends Pharmacy Pharmacy providers becoming more sophisticated with data analytics, electronic communications, reporting and innovative drug therapy management Opioids remain top priority Many use soft programs-letters to providers, phone calls to doctors who may exhibit problematic prescribing patterns and urine drug testing Resulting in 21% drop in pharmacy inflation in last ten years Declines in new branded drugs, popular drugs going off-patent, and generic conversion programs

National Workers Compensation Medical Trends ICD-10 Codes 10/2014 new codes to apply Increases medical billing codes from 17,000 to 150,000 ICD-9 are 3 to 5 numbers long, ICD-10 is up to 7 digits with numbers and letters

National Workers Compensation Medical Trends Orthopedic Procedures Millions of dollars spent on medical procedures that are possibly unnecessary Examples: American Academy of Orthopedic Surgeons issued statement that the use of viscoelastic injections for arthritic knees is no better then placebo and very expensive Joint Commission-accredited hospitals have indicated that continuous passive motion machine after knee replacements is of no benefit and has risk factors

National Workers Compensation Medical Trends Spinal Fusion Surgery Many failed back surgeries in WC Spinal fusion was designed to treat fractures Increasing use for degenerative changes 1990s U.S.had rate twice of Canada and Norway, 5 times of the U.K. for spinal fusions 1990-2001 increase of 220 percent Cochrane Review of conservative care vs. spinal fusion with fusion group had little pain reduction or improvement in quality of life CA-Criminal and civil actions against medical providers providing false hardware for spinal fusion surgeries

Overview Pre-SB 863 Environment SB 863 Summary 15

SB 863 Summary Legislative Process Consensus that 2002 2004 Reforms Cut PD Benefits Back Too Far Several Attempts to Significantly Increase PD Benefits Vetoed 2011: Governor Indicated Would Consider Balanced Solution 2012: Labor and Employer Representatives Attempt to Negotiate Compromise Bill Reduce frictional costs Increase PD benefits Reduce employer costs 16

SB 863 Summary Bill Provisions Signed by the Governor on September 18, 2012 Includes Benefit Changes Effective 1/1/2013 and 1/1/2014 Series of Structural Reforms to Benefit Delivery System Lien Reforms Independent medical review (IMR) Permanent disability add-ons Medical provider networks (MPNs) strengthening Medical reimbursement levels Future earning capacity adjustments (Ogilvie decision) Return-to-work program New Medical Fee Schedules Independent Bill Review 17

WCIRB Prospective Cost Evaluation of SB 863 Process WCIRB Requested by Insurance Commissioner and Director of DIR to Provide Preliminary Cost Assessments Final WCIRB Estimate Reflected in Amended 1/1/2013 Filing WCIRB Assessments Reflect Review of legislative provisions Consultation with experts Review of relevant research and analyses New actuarial analyses based on data and timeframes available Judgmental estimates developed when there was consensus as to likely impact Revisions as legislation changed or new information became available Develop Plan to Proactively Monitor Emerging Costs Measure Impact on Loss Development Measure Impact Size of Loss Distribution 18

WCIRB Prospective Cost Evaluation of SB 863 Summary of WCIRB Prospective Estimates ($ s in billions) SB 863 Provisions Impact on Statewide Claim Costs % Impact on Claim Costs 2013 & 2014 PD Benefit Level Changes +$1.2 +6.4% Elimination of PD Add-ons ($0.2) -0.9% Three-Tiered Weekly PD Benefits ($0.1) -0.5% Liens ($0.5) -2.5% Surgical Implant Hardware ($0.1) -0.6% ASC Fees ($0.1) -0.4% IMR (Impact on Frictional Costs & TD Duration) ($0.4) -2.1% Ogilvie Decision ($0.2) -1.1% MPN Strengthening ($0.2) -1.0% Total Estimated Impact of SB 863 (pre RBRVS) ($0.5) -2.7% RBRVS Fee Schedule +$0.3 +1.8% Total Estimated Impact of SB 863 (post RBRVS) ($0.2) -0.9% 19

California Workers Compensation Claims and Wage Level Index % 175 Average Wage Level Index (Based on UCLA Data) Estimated Indemnity Claim Cost Level Index Pre-SB 863 Projected Based on Current WCIRB Cost Estimate of SB 863 157 Projected 166 155 171 158 150 138 138 145 145 127 130 125 122 125 125 128 100 100 105 105 114 110 112 113 117 120 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Policy Year 2014 Accident Year 20

Anticipated Post-SB 863 Trends Indemnity ) Temporary Disability Duration IMR and MPN provisions should accelerate claims process & reduce TD duration Ogilvie and Almaraz/Guzman Effectively eliminates Ogilvie adjustments Does not address Almaraz/Guzman Permanent Disability Rating Disputes/Litigation Eliminates PD rating add-ons and 3-tiered benefit system FEC factor replaced by 1.4 adjustment Increased Indemnity Claim Frequency Partly Driven by Cumulative Injury Increase Not addressed by SB 863 21

WCIRB Projected Indemnity Change After Initial Prospective SB 863 Adjustments $40,000 $30,000 +51% Average Ultimate Indemnity per Claim $26,422 +2% $26,894 $20,000 $17,480 $10,000 $0 Accident Year 2005 Policy Year 2013 Projected (Pre-SB 863) Policy Year 2013 (Adjusted for WCIRB Initial Propsoective SB 863 Estimate) 22

Anticipated Post-SB 863 Trends Medical Medical Treatment Costs ASC fees, surgical implant hardware, and MPNs provisions should reduce costs IMR process should reduce medical treatment disputes (impact on medical costs uncertain) New fee schedules and conversion to RBRVS (impact on medical uncertain) Medical Liens Filing fee and statute of limitations should materially reduce volume and cost Medical-legal Costs IMR process should reduce medical-legal disputes and cost Pharmaceutical Costs and Medicare Set-asides Not addressed by SB 863 23

WCIRB Projected Medical Change After Initial Prospective SB 863 Adjustments $80,000 Average Ultimate Medical per Indemnity Claim $60,000 +79% $55,498-5% $52,937 $40,000 $31,020 $20,000 $0 Accident Year 2005 Policy Year 2013 Projected (Pre-SB 863) Policy Year 2013 (Adjusted for WCIRB Intital Propsective SB 863 Estimate) 24

Anticipated Post-SB 863 Trends ALAE ) Liens Lien filing fee and statute of limitations should significantly reduce volume and cost of liens IMR should reduce lien costs related to utilization review Ogilvie and Almaraz/Guzman SB 863 effectively eliminates Ogilvie Does not address Almaraz/Guzman Medical cost containment Not directly addressed although IMR process may reduce frictional costs related to medical disputes Increases in Cumulative Injury Claims and Claims with Multiple Body Parts Not addressed by SB 863 25

WCIRB Projected ALAE Change After Initial Prospective SB 863 Adjustments $20,000 Average Ultimate ALAE per Indemnity Claim $15,000 +133% $13,795-20% $10,981 $10,000 $5,933 $5,000 $0 Accident Year 2005 Policy Year 2013 Projected (Pre-SB 863) Policy Year 2013 (Adjusted for WCIRB Initial Proposective SB 863 Estimate) 26

Overview Pre-SB 863 Environment SB 863 Summary Post-SB 863 Trends 27

Permanent Disability Benefit Increase Impact on Indemnity Claim Frequency Total SB 863 Impact (Including 2014 PD Benefit Increases) on Frequency Estimated to Increase Costs by 1.1% ($200M) Assumed Frequency Changes Approx. 0.2% for Every 1% Change in Indemnity Benefits Frequency in 2012 2014 Emerging Much Higher than Projected 28

Change in Estimated Indemnity Claim Frequency Actual vs. Projected % As of June 30, 2014 5 Projected Actual 4.1 3.2 2.3 1.9 0-0.1-1.3-5 2012 2013 2014 (6 Montths) Accident Year 29

Change in Estimated Indemnity Claim Frequency California vs. NCCI States 15 10 % As of June 30, 2014, 2014 California NCCI States 7.0 5 3.5 3.2 4.1 1.9 0-5 -1.5-3.0-4.5-4.1-3.7-6.6-6.4-4.5-2.3-2.2-3.8-4.3-1.9-5.9-1.0-1.0-6.1-2.0-10 -15-20 -13.9-17.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Accident Year 6 months NCCI estimates are based on the May 8, 2014 State of the Line Presentation (NCCI 2013 estimate is preliminary and the 2010 and 2011 estimates have been adjusted to remove the impact of audit premium and other factors). 30

Estimated Frequency Changes by Geographic Region USR 1 st Report Level 10 5 % Bay Area Los Angeles Other Regions 4.0 8.3 6.1 7.8 0-5 -10-5.9-5.5-6.9-4.9-2.9-4.3-3.6-8.2-7.9-7.9-0.8-3.2-3.4 0.1-0.5-2.2-4.0-15 -20-12.8-14.2-16.0 2005 2006 2007 2008 2009 2010 2011 2012 Preliminary Accident Year 31

Partial Permanent Disability Rates Effective for injuries on or after 1/1/13 PD ratings below 55%: minimum $160/maximum $230 PD ratings of 55% or greater but less than 70%: minimum $160/maximum $270 PD ratings of 70% or greater but less than 100%: minimum $160($130)/maximum $290($270) Effective for injuries on or after 1/1/14: Single Rate Structure: minimum $160/maximum $290 32

Impact of New Rates Rating % 2012 2013 2014 10 6,957.50 6,957.50 8,772.50 20 17,365.00 17,365.00 21,895.00 30 30,130.00 30,130.00 37,990.00 40 46,230.00 46,230.00 58,290.00 50 62,387.50 62,387.50 78,662.50 60 80,787.50 94,837.50 101,862.50 70 116,177.50 172,042.50 172,042.50 80 160,177.50 172,042.50 172,042.50 90 203,377.50 218,442.50 218,442.50 33

Impact of New PPD Rates on California Workers Compensation Industry Projected increase in Costs to Employers: $200 to $300 Million in 2013 $600 to $800 Million in 2014 and beyond Likely Results: Result in increased PD costs for PD ratings Reason for increase Last increase in PD was 2006 34

WCIRB SB 863 Cost Monitoring Liens WCIRB Prospective Estimate Total Impact of SB 863 Lien Provisions Estimated to Decrease Costs by 2.5% ($480M) Assumed 260,000 Liens (41%) Eliminated by Filing Fee and Statute of Limitations Relatively Smaller Liens Impacted Significant Savings in Administrative Costs 35

Liens Filed Counts by Region In Thousands 500 460K liens filed in 2011 1.2 million liens filed in 2012 47.3 Los Angeles Area Rest of State 65.5 400 300 30.4 200 398.3 21.9 465.7 190K liens filed in 2013 19.8 292.8 100 0 166.1 135.3 5.2 5.7 63.9 4.2 5.1 5.7 5.9 25.9 35.9 40.4 35.8 41.4 2011 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Calendar Year/Quarter Source: EAMS Liens Data 36

Current Rules for the Old Lien System Prior to SB 863 CA Workers Compensation had a system where a medical provider could file for a Lien Hearing to review medical bills that were not paid or not paid in full All those who had filed a lien on or before 1/1/14 were required to pay a mandatory $150 activation fee and by 1/1/14 the lien if not resolved had to file a $100 reactivation fee or the lien would be dismissed In compliance with a preliminary injunction by the U.S. District Court for the Central District of California in the matter of Angelotti Chiropractic, Inc., et al. v. Baker, et al., the Division of Workers Compensation will no longer collect lien activation fees as of Nov. 19, 2013. NOW-Most medical bills have to go through the new IBR process before can file a lien 37

Spinal Surgical Implant WCIRB Estimates Elimination of Separate Reimbursements for Implantable Hardware Estimated to Decrease Costs by 0.6% ($110M) Estimate Based on CWCI Study of Multiple Reimbursements Duplicate payments added $20,000 to each procedure Post-Reform Emerging Costs Calculated Billed and Paid Amounts for the 7 DRGs Pre- and Post-1/1/13 # Episodes % DRGS 454 & 455 Total $ Paid Avg. $ Paid Per Episode Pre-1/1/13 214 84% $5,870,125 $27,430 Post-1/1/13 52 85% $628,504 $12,087 Change -56% 38

Ambulatory Surgical Center Fees WCIRB Estimates Changes to ASC Fees Estimated to Decrease Costs by 0.4% ($80M) Some ASC Fees Reimbursed Under Contract Levels Below Current Fee Schedule Assumed Reduction in ASC Facility Fees of 25% Approximate average of savings if all fees are impacted (33%) and if no contract fees are impacted (20%) Post-Reform Emerging Costs Examined ASC Episodes of Care for the 30 Most Highly Reimbursed Procedure Codes (67% of All ASC Costs) ASC Surgeries Top 30 Paid Codes % of all ASC $ in Top 30 Codes # of Episodes $ Paid $ Paid per Episode Services Pre-1/1/13 65% 11.435 $37,628,741 $3,291 Services Post-1/1/13 68% 5,497 $13,430.373 $2,443 Change -26% 39

Independent Medical Review WCIRB Prospective Estimate Total Quantifiable Impact of SB 863 IMR Provisions Estimated to Decrease Costs by 2.1% ($390M) IMR Frictional Cost Saving Assumptions 30,000 medical liens for UR disputes replaced by IMR reports 21,000 QMEs for medical treatment replaced by IMR reports 9,000 expedited hearings eliminated Reduction in Delays for Medical Treatment Assumed to Reduce TD Duration by 4% Reduced Litigation Related to Medical Treatment Assumed to Reduce ALAE Costs by 2.4% No Estimate for IMR Impact on Medical Treatment Levels 40

Number of IMR Requests by Month 20,000 19,663 19,576 20,728 15,731 14,990 15,000 13,999 13,171 13,760 12,638 12,874 11,571 10,000 5,000 4,410 0 86 178 256 350 Source: DWC 41

IMR Requests to June 2014 IMR Requests Received (TOTAL) 187,248 Open IMR Requests 76,461 Closed IMR Requests *www.dir.ca.gov/dwc 42

IMRs eligible for Review *www.dir.ca.gov/dwc 43

2013 Severity Changes Projected Vs Actual 10% As of June 30, 2014 6.2% Projected Actual 5% 1.6% 1.8% 2.1% 3.8% 0% -5% -3.4% -10% -7.8% -15% Indemnity Medical ALAE -12.3% ULAE 44

WCIRB Cost Evaluation of SB 863 Summary of Estimates ($ s in billions) SB 863 Provisions WCIRB Prospective Cost Estimates (Impact on Statewide Claim Costs) Preliminary Monitoring Results (Impact on Savings Estimates) 2013 & 2014 PD Benefit Level Changes +$1.2 Elimination of PD Add-ons ($0.2) TBD Three-Tiered Weekly PD Benefits ($0.1) TBD Liens ($0.5) Surgical Implant Hardware ($0.1) ASC Fees ($0.1) IMR (Impact on Frictional Costs & TD Duration) ($0.4) Ogilvie Decision ($0.2) TBD MPN Strengthening ($0.2) TBD RBRVS Fee Schedule +$0.3 TBD Indemnity Severity Small Increase Medical Severities Small Increase ALAE and ULAE Severities Significant Declines 45

SB 863 Potential Impact on Existing Pre-2013 Claims Liens 1.2 million liens filed in 2012 - most are still in pipeline Activation fee on pre-2013 liens subject to court stay IMR, IBR and Most Other Medical-Related Provisions Effective on Post-2013 Services on Pre-2013 Claims ($480M) RBRVS Effective on Post-2014 Medical Services on Pre-2014 Claims TD Duration on Pre-2013 Claims Projected to Decline Modestly IMR Backlog May Delay Any Impacts to Emerge WCIRB Adjusting Development Factors Modestly for SB 863 Impact Recent Acceleration in Claim Settlement Observed 46

Incremental Indemnity Claim Settlement Ratio % Ratio of Incremental Closed Indemnity Claims to Prior Open Indemnity Claims 35 Diagonal: 2nd Previous Previous Latest 30 25 20 30 29 27 27 27 28 27 27 31 24 26 29 22 23 28 21 23 27 26 20 18 18 19 24 15 10 5 0 15 27 '10/'11/'12 27 39 '09/'10/'11 39 51 '08/'09/'10 51 63 '07/'08/'09 63 75 '06/'07/'08 75 87 '05/'06/'07 87 99 '04/'05/'06 99 111 '03/'04/'05 Source: WCIRB Quarterly Calls for Experience 47

Overview Pre-SB 863 Environment SB 863 Summary Post-SB 863 Trends What s Next 48

Current Activity Fee Schedules to be Adopted Interpreter, Copy Services, Home Health Pending Legal Challenges Lien Fees Legal Cases of interest 49

Recent California Workers Compensation Legal Cases of Interest Dubon-On 2/27/14 WCAB ruled that if a utilization review (UR) is untimely or suffers from material procedural defects of a material nature that the medical decision on the matter should be decided by the WCAB. SCIF filed a Petition for Reconsideration and accepted on 5/22/14 granting such. Impact: SB863 intent was to reduce costs of legal proceedings in the UR/medical decisions and that final decisions for medical necessity would be determined by the IMR process. If Dubon is allowed to stand it could result in higher medical legal costs and longer tail on medical claims. 50

Recent California Workers Compensation Legal Cases of Interest City of Sacramento-ALJ ruled in the initial proceedings that a claim for plantar fasciitis should not result in an impairment rating because it was not complex or extraordinary condition as required under Almaraz/Guzman II. On second level appeal the City argued that a condition that had no objective findings would not be complex or extraordinary condition and should not be used for the impairment rating. The Third Court held that this condition which is manifested by subjective findings was poorly understood and would qualify as a complex or extraordinary and allowed the impairment rating for plantar fasciitis. Impact: There are certain medical syndromes that are subjective in nature and difficult to prove or disapprove that could now receive impairment ratings and increase indemnity costs. 51

Recent California Workers Compensation Legal Cases of Interest Stevens-One of the first challenges to the validity of the IMR process. In the original case UR denied the treatment request and upon review by IMR the denial was upheld. The injured worker challenged the IMR process on grounds of due process, the right to a fair hearing, the right to cross examine the reviewer, and no meaningful judicial review because there is no ability to contest the opinion of the anonymous reviewer. District Court of Appeals denied the request for review. Impact: This is likely going to be one of many challenges to the legal validity of the IMR process. If the IMR process upholds the denial of the treatment in UR, this denial is valid for 1 year. If the IMR process would be found to be improper, it could cause increased costs and uncertainties what treatment can be denied and upheld. 52

Recent California Workers Compensation Legal Cases of Interest South Coast Framing-WCAB affirmed a decision that an injured employee died as a result of medications he took while treating for an industrial injury. The District Court of Appeals over turned the decision and found that the applicant had failed to establish a causal connection between the injured party s death of overdose of medications and the industrial injury. The case has been appealed to the Supreme Court and they accepted review and a decision with be forthcoming. Impact: The issue will likely be is the burden of proof one where the alleged issue was a material factor contributing to the death or is it a lesser standard of contributing cause. If the court finds the lesser standard, higher costs of having to pay death benefits could be anticipated on cases where the death occurs after an industrial injury then is occurring now. 53

Overview Pre-SB 863 Environment SB 863 Summary Post-SB 863 Trends What s Next Q/A 54