Calif. Reforms Meet Stiff Resistance

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Lawsuits, new legislation attempt to undermine Gov.Schwarzeneggers efforts

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Just weeks after their implementation, major reforms toCalifornia's workers' compensation system enacted last year toreturn stability and competition to the market are already underattack in both the courtroom and the legislature.

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Considered a top priority and a major success for Gov. ArnoldSchwarzenegger's administration and the insurance industry lastyear, the last pieces of the workers' comp reform bill known asS.B. 899took effect at the beginning of 2005.

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“We've really only had these laws on the books for a month now,”Nicole Mahrt, a representative for the American InsuranceAssociation in Sacramento, noted in early February. “All thedifferent moving parts have finally taken effect.”

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Those regulations that took effect on Jan. 1, however, were onlyimplemented by the Division of Workers' Compensation on anemergency basis and are now in the process of being made permanent.A hearing has already been held on rules regarding theestablishment of medical provider networks, with others expected ontreatment utilization and new regulations for establishingpermanent partial disability ratings.

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“The action on workers' compensation has shifted from thelegislative arena to the regulatory arena and the courts,”according to Sam Sorich, president of the Association of CaliforniaInsurance Companies, the Sacramento-based affiliate of the PropertyCasualty Insurers Association of America.

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In the courts, the intent is more an issue of potentiallykilling the reforms rather than implementing them, Ms. Mahrtcontends. The most serious threat to the reforms, she said, is alawsuit claiming the permanent partial disability regulations wereimproperly enacted, filed by two groups the California ApplicantsAttorneys Association and VotersInjuredatWork.org. The applicants'attorneys, she said, “are worried that fixing the system will hurttheir income.”

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The groups behind the suit have argued that it is workers whowill be hurt most, citing potentially drastic reductions tobenefits under the permanent partial disability schedule enactedunder SB 899.

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“The consequences for injured workers are dire,” said MarkHayes, president of VotersInjuredatWork.org. “The ratings fail toreplace workers pre-injury earnings. If these drastic reductionstake effect, more Californians will lose their cars, their homesand their good credit.”

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The suit, filed in state Superior Court in Sacramento inJanuary, effectively argues that the legislature improperly gaveexcessive authority to the administrative director of the Divisionof Workers' Compensation Andrea Hoch and that the regulationsimplemented violate provisions in the state constitution protectingthe rights of an injured worker to compensation.

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The suit contends that the legislature drafted SB 899 relyingheavily on recommendations from the Rand Institute for CivilJustice, including a suggestion that the disability schedule bebased on empirical data on actual loss of income of injuredworkers. In creating the new schedule, the suit contends that Ms.Hoch did not take these recommendations into account and seeks tohave the permanent partial disability ratings schedule set aside ordeclared ineffective.

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Ms. Hoch “is the most anti-worker bureaucrat to come along inthe past 30 years,” according to David Schwartz, president of theCAAA. “Her proposed regulations fly in the face of thelegislature's intent. There is no legal basis for what she hasdone, which she calls a 'policy decision.'”

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Susan Gard, a representative for the Division of Workers'Compensation, said the regulator filed a response to the suit inlate February. The division believes the regulations “uphold thespirit and intent of the legislature, and we are ready to standbehind them,” she said.

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However, she noted that the suit does cause problems among themore important is that it will “rob the division of the time andtalent to do the job we'd really like to do”namely, implementingand promulgating regulations passed by the legislature.

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Ms. Hoch had no direct response to the criticism leveled byworkers' comp reform opponents, although Ms. Gard said the commentswere “typical” and “what we'd expect from the opposition.” Thereforms passed by the legislature established some deep and seriouschanges to the workers' comp system, she noted. “We expect thisresponse from people who are entrenched in the system and profitoff of it.”

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For insurers, the lawsuit creates the problem of uncertainty.“It does put insurers in a bit of a quandary,” Mr. Sorich said. “Onthe one hand, insurers are beginning to see the effects of thereform, but on the other, there is great uncertainty whether theregulations will stay in effect.”

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Ms. Mahrt noted that litigation issues have undermined earlierattempts to reform the system. “It's very important that theregulations are properly implemented, so that this doesn't end uplike prior efforts,” added Ms Mahrt, who said the AIA believes thatthe Division was very careful in crafting the disability scheduleand predicts the regulations would survive the legal challenge.

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“In the past we've seen litigation undermine reforms, but wereally think the division did a good job with implementation andthere is no basis for the lawsuit,” she said.

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The dispute over the permanent partial disability ratingsschedule could become a larger concern for Ms. Hoch and theSchwarzenegger administration. Her appointment to head the divisionhas not been confirmed by the state Senate, Mr. Sorich noted, andlabor representatives said they had planned to make opposition toher confirmation a priority.

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While applicant attorneys and worker advocates have challengedthe specifics of SB 899, the insurance industry believes thatlegislation introduced recently in the state Senate couldeffectively reverse the overall progress workers' comp reforms haveachieved in the market.

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When SB 899 was passed, much fanfare was made over the premiumrate reductions it promised, which have not come swiftly enough forthe bill's critics. In response to the perceived lack of progress,Sen. Richard Alarcon, D-San Fernando Valley, who chairs the SenateLabor and Industrial Relations Committee, in January introduced SB46, which would establish a Commission on Workers' CompensationRate Regulation.

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The commission consisting of representatives of the governor,the state attorney general and the elected insurance commissionerwould be charged with setting pure premium rates, adopting auniform experience rating plan, issuing minimum and maximum expensemultipliers to be used by insurers, and hearing appeals of ratedecisions.

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The bill, according to AIA's Ms. Mahrt, would “politicize howrates are set” and effectively undo the improvements toCalifornia's workers' comp market achieved by the reforms. “Itwould hurt the progress made and the competition coming back intothe market,” she said.

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The insurance industry has maintained that workers' comp, whichhas been in the red for the past decade, cannot be expected tosuddenly offer drastic rate decreases without giving the reformstime to have an effect.

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ACIC's Mr. Sorich said that Sen. Alarcon's bill is the mostserious legislative threat so far to workers' comp reform but thathe expected other bills to be introduced. However, he added that itis unlikely Gov. Schwarzenegger who championed workers' compreform, and made the issue a key point in his election campaignwould allow the reforms achieved so far to be reversed.

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“We've seen no indication that the governor is in any way readyto back down from what has been accomplished,” he said.


Reproduced from National Underwriter Edition, March 4, 2005.Copyright 2005 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.


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