CWCI’s Nolan Discusses Calif. Workers’ Comp Marketplace

Insurance Journal staff writer Cynthia Beisiegel recently met up with Michael Nolan, president of the California Workers’ Compensation Institute (CWCI) at the ACIC XIV Annual General Counsel Seminar in Las Vegas. Nolan spoke about the current state of California’s workers’ compensation market, discussing the difficulties in today’s system, the solutions for stabilizing the marketplace, and methods to reduce the amount of fraud.

Insurance Journal: Tell us a little bit about what the California Workers’ Compensation Institute (CWCI) does.
Michael Nolan: We are a non-profit member organization. Our members consist of both insurance carriers and self-insureds, and our purpose is to do research and to educate all stakeholders and the public about the California workers’ compensation system. We were founded in 1964 and have been called upon by the various stakeholders in the system and by government to act as a resource for them.

IJ: How many members do you have?
Nolan: We have on the carrier side approximately 30 members and on the self-insured side approximately 25 members.

IJ: Let’s talk a little bit of the problems in the workers’ compensation system. According to the CWCI, what are the biggest issues?
Nolan: Some of the problems in the system are a matter of perspective. If we were talking at the same time last year and if I were an employee, I would say that the biggest problem in the system would be that the indemnity benefits paid to the workers are too low. And, the issue of benefits was addressed last year in AB 749. I don’t want to speak for employees, but I suspect that they were pleased with that bill. Now from the standpoint of the employers, probably the principal issue has been the dramatic rise in insurance premiums over the last several years, even though they sometimes forget that the average rates were not as high as they were back in 1989 until calendar year 2002. But once we got into calendar year 2002, rates blasted through 1989 levels so they are at historic highs at the present time. And if we look upon rates as a percentage of payroll, I think the current numbers are about $5.85 per $100 dollars of payroll which is the highest in the country. Now from the standpoint of the carriers, their concern is the unprecedented and unpredictable rises in the cost of indemnity claims. They have difficulty in underwriting when indemnity claims continue to increase. For example the average indemnity claim back in 1993 was about $20,400, where in 2002, the average cost of indemnity claim was about $57,300. So there was a dramatic increase and some of that was unpredictable. From the carriers’ standpoint, that is a major problem. Not only the carriers, by the way, but I am talking about all payers—self-insureds have also been hit by the unprecedented increase in cost of an indemnity claims. Now an insured claim should be passed along as a premium, but what really has happened, if you look at the insurance companies’ combined ratios, or even the pure loss ratios and compare that to the amount of money they’ve received in premium, is that the carriers as a whole have not made a profit on the work comp business since 1994. An individual company may have, but I’m talking here about an industry average.

IJ: Are the rising costs of indemnity claims and the advent of open rating interrelated?
Nolan: I don’t know that they are interrelated in a sense that there is a causation between open rating and indemnity costs—that would be difficult to prove. What happened is there were two phenomenons that were occurring simultaneously. In 1995 the system went to open rating, which was a change from the prior minimum rate law, and carriers were free to file and charge what they thought were appropriate rates. Their prices have proven to be below their loss costs. But what happened at the same time, in part because of the changes that occurred with the ’93 reforms and particularly the concept of treating physician presumption, plus the whole run up of medical costs, is that the cost of an average indemnity claim skyrocketed. Most carriers would say that they were surprised by that and didn’t account for that when they were setting prices. I don’t think they intended to write to combine ratios of 170 percent or 150 percent when they were writing competitively. Carriers have been less competitive in their pricing certainly over the last couple of years, 2001, 2002. But at the same time their
combined ratios have been unacceptable. So that’s evidence, carriers would say, that the cost side of the work comp system is unpredictable and out of control and needs to be reigned in.
IJ: Of the new legislation introduced this year, which bills do you think will be most effective in remedying the workers’ comp situation, and do you think they will be addressed in the Legislature’s special conference committee formed to address the work comp crisis?
Nolan: There are a number of bills that focus in on issues that are major cost drivers, as opposed to last year, which was more of a focus on the side of benefit increases. The bills this year are focusing more on cost drivers, how to reign them in, and particularly on the medical side, how to reign in medical costs. So there are bills dealing with the unit price of medical services. And in unit price one of the issues they are tackling is what do we do with areas that are not covered by a fee schedule, like outpatient facilities fees. To the extent that substantive legislation gets passed, most payers would see that as a positive. Another issue that the Legislature is considering is utilization control, to include control through independent medical review or treatment protocols. The ability of the payers to say “no” to what they deem to be excessive medical costs is incorporated into some of those concepts, and I think that if those concepts get enacted, the payers of the system will see that as a positive.

IJ: Let’s talk about the success of AB 749. Is that bill working?
Nolan: Again, I think it is a matter of perspective. If you look at the bill from the standpoint of the employees and labor, they would certainly say that the benefit increases were long overdue, and should have been passed several years ago, so that the system is working because of that bill. If you look upon it from the standpoint of the employers they would say that the benefit increase is a factor, not necessarily the key factor, but a factor in the rates continuing to increase and that is why, through their representative, they supported a bill to have a rollback of those benefits earlier this year. That bill did not get out of committee. Now, what AB 749 did on the cost reduction side is it brought in the partial repeal of the treating physician presumption, so carriers and payers in general are waiting to see if that repeal will bring an amelioration of the continuing run up of medical costs. We won’t know that for at least a year until the evidence comes in.

IJ: Tell me a little bit about the different types of fraud that you see in the system.
Nolan: One thing about fraud is that it is also an issue of perspective, and when employers are thinking of the word fraud they are thinking employee claims fraud. They are thinking, for example, of an employee who injured himself or herself playing touch football over the weekend and then comes in on Monday and files a work comp claim. If you look at it from the standpoint of the employee, they equate the word fraud with employers who don’t buy work comp coverage, or employers who have their own medical professionals housed within the institution, that doesn’t give good care. If you look at it from the standpoint of the regulators, particularly the Department of Insurance, they see it as a cost driver in the system. If you look at it from the standpoint of the researcher, its very difficult to earmark dollars related to fraud. In fact, probably the only hard numbers come out of the Department of Insurance Fraud Division. Those numbers may be the best to try to benchmark the system. Although certainly from the payers’ standpoint, they will argue that there is more fraud than appears in the Fraud Division numbers. Now another concept about fraud, which I think causes confusion, is fraud meaning “abuse.” There certainly is the ability, because the system in some areas can’t say no, to push the benefits beyond what a payer thinks were intended by the system. Here payers are concerned, for example, with employees who stay out too long where they could come back to work or employees who receive more medical treatment than they should. Another way to look at fraud is from the standpoint of those regulators who monitor the providers. They may say that some people who supply medical services or legal services, do it in such a way that is either fraudulent or abusing the system.

IJ: Can you tell me which areas of fraud are most prominent?
Nolan: It’s a very difficult number and we don’t have the data that answers that question. We’re aware of all these different issues but we haven’t been able to quantify them, in part because some of it is just what’s your definition of fraud and is it an action fraud or do you actually mean abuse?

IJ: Do you have any ideas of how we can prevent fraud?
Nolan: It goes back to what you mean by fraud. From the standpoint of employee fraud, I think the best way to prevent that is good management-employee relations. If employers primarily rely on the work comp legal system to prevent fraud that is a poor way of trying to prevent it. The system that works the best is when both the employer and the employee feel that they are getting a fair shake and can work in cooperation with one another. The other thing for the employers is they have the ability (at least the larger employers do) to look upon work comp as part of an integrated system of benefits provided to the employee. To the extent employers can manage workers’ compensation as part of their whole integrated system, I would think they would have a better shake at preventing fraud.

IJ: What about fraudulent doctors?
Nolan: I think there is a real need for treatment protocols. If there were accepted treatment protocols and possibly an independent medical dispute resolution process that the medical professionals had a hand in creating, then that would help to reign in abuse in the system and the fraud also. But of course, in the end there also needs to be a strong enforcement mechanism. The regulators need to make provider fraud a priority and here the California Department of Insurance has reaffirmed their commitment to strong enforcement.

IJ: We always talk about the negative aspects of the workers’ compensation system. What are some of the positives?
Nolan: To me, the most positive aspect of the current work comp system is that there is a critical mass of people, which is forming, to try to deal with it. People have begun to be aware of the difficulties of the system, they are looking for solutions and there seems to be a willingness to attack the cost drivers in the system. It’s spoken about by the governor; it’s spoken about by the insurance commissioner. It’s spoken about by the Department of Industrial Relations and the Division of Workers’ Compensation. It’s a key area of the legislature because the legislature has put together a conference committee. Whether or not at the end of the legislative process something good will emerge from the standpoint of controlling cost drivers, I can’t predict. But the most positive light is that they are talking about cost reforms this year, whereas for the last few years, the focus was primarily on benefit increases. From the employee standpoint, one would say the passage of AB 749 was very positive. Another positive would be that despite the difficulties faced by carriers they still provide a market for employers to purchase coverage, although at higher rates than at what employers would like. So despite all the difficult times, despite the negative combined ratios, and negative returns on capital on their products for carriers, there still is a market. Some states which experienced great difficulties have melted down where carriers have fled the system and left very few if any writers. But right now we still have companies willing to write in the system.

IJ: Do you think that we’ve ignored the signs of potential problems in the workers’ comp system, and are paying the price for it now?
Nolan: Remember this is a statutory system. So most of the system’s changes have to come through statutory changes or the regulations derived from those statutes. Like all other statutory issues it often takes a critical mass of issues to bring the system to a point where it will correct itself. What we see now is the beginnings of a critical mass of interest in the system to fix it.

IJ: You were appointed by Commissioner Garamendi to participate in his workers’ compensation task force. Can you tell me a little bit about what you brought out of that?
Nolan: First of all, let me mention that there were actually two task forces. There was the payer task force, which consisted mainly of insurance carriers and self-insureds both from the private and public sector. Then there was the non-payer taskforce, that had representatives from the business community, from labor and from both the applicants and the plantiffs bar. Each task force produced a report, which is public. From that report the Commissioner took several points, which he has made public. One of the points dealt with the medical area. Another of the points dealt with what I may term the credentialing of people who adjust claims in the system to ensure that they are knowledgeable. I think the Commissioner’s recommendations are worthy of study. The one area of the final recommendations, which the Commissioner is championing, and which I think is not shared by the payer committee, is this concept of 24-hour coverage or universal health care, and the idea of rolling up the medical portion of work comp into a different structure than the work comp structure. That to me is a long-term issue that may be tied to overall changes, if there are any in the future, to the whole healthcare delivery system. The other items are ones that can be addressed in the near future and some of them are being picked up in concept by the Legislature. I do have one other concern about the system and that is the California Insurance Guarantee Association (CIGA). They are now the second largest claim payer association in the state coming after the State Compensation Insurance Fund. They are insolvent on a book basis, meaning they have more liabilities than assets. Fortunately, on a cash basis (in other words the ability to pay claims that come before them), they have the cash needed to date, but their cash resources are being strained. The Legislature is attempting to deal with this issue by considering a bond issue to bring money into CIGA. That is a good start. But CIGA being one of the weakest links in the system (despite the wonderful efforts of its staff) will need continuing monitoring and assistance well into the future.

John Michael Nolan is president of the California Workers’ Compensation Institute. For more information, visit www.cwci.org.

Topics California Carriers Fraud Legislation Claims Workers' Compensation