Joanne M. Ottone, FCAS, MAAA

© 2004 Towers Perrin

California Workers’ Compensation Impact of Recent Legislation

CAS 2004 ANNUAL MEETING

November 14-17, 2004

Montreal, Quebec

2© 2004 Towers Perrin

AB 749 Statutory Benefit Changes

Well-established methodologies for these types of changes

Use wage distribution to quantify impact of changing minimum and maximum wages on average benefit payment

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0 200 400 600 800 1000

Minimum wage

Maximum wage

3© 2004 Towers Perrin

AB 749 Statutory Benefit Changes (continued)

Use distribution of PD ratings to estimate impact of changing number of weeks per PD %

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

PDR Percentage

Pe

rce

nta

ge

of

Cla

ims

Source: WCIRB

4© 2004 Towers Perrin

AB 749 Statutory Benefit Changes (continued)

Number of Weeks of PD by PD Rating

0

100

200

300

400

500

600

700

800

0.25 12.75 25.25 37.75 50.25 62.75 75.25 87.75

PD Rating

Nu

mb

er

of

We

ek

s

Pre-2004 Injuries 2004 Injuries

5© 2004 Towers Perrin

AB 749 Statutory Benefit Changes – Cost Estimates

Effective Date

Impact on Indemnity – Excluding Utilization

Impact

Impact on Indemnity –

Including Utilization

ImpactImpact on Total

Losses

1/1/2003 9.1% 11.3% 4.4%

1/1/2004 9.3% 11.7% 5.6%

1/1/2005 4.8% 6.0% 2.8%

1/1/2006 4.7% 5.8% 2.7%

Increased claim frequency associated with increases in benefits is documented in several studies

6© 2004 Towers Perrin

AB 227 Vocational Rehabilitation Repeal

Vocational rehabilitation makes up about 15% of indemnity benefits

Education vouchers estimated to cost 14% of current voc rehab costs

All Other Indemnity

85%Voc

Rehab15%

Total savings of 13% of indemnity costs – or 5% of total losses

Savings13%

All Other Indemnity

85%

Vouchers2%

Before After

Source: WCIRB

Indemnity Benefits

7© 2004 Towers Perrin

SB 899 TD Duration Cap

TD benefits limited to 104 weeks within a period of 2 years from the date of the first TD payment – with exceptions for certain types of injuries

Date of Injury

Date of First TD

Date of First TD Payment

104 Week Limit

X

8© 2004 Towers Perrin

SB 899 TD Duration Cap

Temporary disability benefits make up about 15% of total losses

Approximately 15% of all TD benefits are estimated to be eliminated by the 104 week cap – for savings on total losses of 2.2%

WCIRB also assumes there will be reduced frequency of claims due to imposition of cap – total estimated savings of 2.5%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

Number of TD Days

Pe

rce

nta

ge

of

Cla

ims

104 week cap

9© 2004 Towers Perrin

SB 899 PD Apportionment

Estimates of changes due to apportionment of permanent disability awards to prior industrial injuries as well as non-occupational causes are far more subjective

WCIRB estimates that PD awards will be reduced by 10%, PD makes up 22% of total loss dollar

2.2% of total loss dollar eliminated

WCIRB also assumes that there will be reduced frequency of claims due to reduction in PD benefits from apportionment Total estimated savings of 3.1% of total

10

© 2004 Towers Perrin

SB 899 Change in PPD Weeks

WCIRB estimates savings of 7.6% of PD benefits, or 1.7% of total losses

With additional savings from reduced frequency: 2.5% of total losses

Change in number of weeks does not go into effect until new PD schedule has been adopted.

Distribution of ratings likely to change under new PD schedule.

Number of Weeks of PD by PD Rating

0

100

200

300

400

500

600

700

800

900

1000

0.25 12.75 25.25 37.75 50.25 62.75 75.25 87.75

PD Rating

Nu

mb

er o

f W

eeks

2004 Injuries Post-2004 Injuries

11

© 2004 Towers Perrin

SB 899 Two-Tiered PPD Benefits

Two-tier benefit based on offer of return-to-work

WCIRB estimates two-tier benefit will reduce permanent disability costs by 2.3%

0.5% of total loss dollar eliminated by two-tier benefit

WCIRB also assumes that there will be reduced frequency of claims due to reduction in PD benefits Total estimated savings of 0.8% of total

Assumes distribution of PD ratings will not change

Two-tier benefit does not go into effect until after new schedule is promulgated.

12

© 2004 Towers Perrin

SB 899 New PD Schedule

New schedule to be promulgated by Administrative Director Nature of injury shall incorporate AMA guidelines 5th

edition Diminished future earning capacity shall be numeric

formula — based on data and findings from RAND study

Schedule hasn’t been promulgated yet, so impact is unknown

13

© 2004 Towers Perrin

SB 899 – Summary of Indemnity Impacts

Provision Impact on Total Losses

Cap on TD Duration -2.5%

PD Changes Effective Now:Apportionment

-3.1%

Total Excluding PD Changes Effective Later

-5.6%

PD Changes Effective Later:ScheduleChange in Number of WeeksTwo-Tier

Unknown-2.5%*-0.8%*

Total Including PD Changes Effective Later ~9%

Source: WCIRB

14

© 2004 Towers Perrin

Reform Implications on Loss Reserves - Indemnity

New PD schedule applicable to claims where there has been no comprehensive medical-legal report or no report by a treating physician indicating the existence of permanent disability

Apportionment provisions apply regardless of date of injury – but “shall not constitute good cause to reopen or rescind, alter, or amend any existing order, decision, or award of the Workers’ Compensation Appeals Board”

When is an order an “order”? Legal decision already made which gives broad

definition to term May limit applicability of provisions to existing claims

15

© 2004 Towers Perrin

Impact of Apportionment on Unpaid Indemnity

WCIRB estimates savings on unpaid indemnity by assuming that all unpaid permanent disability benefits will be reduced by 10%

Accident Year Impact on Ultimate Indemnity

Impact on Unpaid Indemnity

1999 -0.3% -1.4%

2000 -0.7% -2.2%

2001 -1.7% -3.7%

2002 -2.8% -4.2%

2003 -4.0% -4.5%

16

© 2004 Towers Perrin

Reform Implications on Loss Reserves - Medical

Fee schedules apply based on date of service

Repeal of presumption of correctness of treating physician applicable to pre-2003 injuries

Medical treatment utilization guidelines and medical networks applicable regardless of date of injury

California Applicants Attorneys Association recently filed a lawsuit to block regulations which allow carriers to direct current claimants to network doctors CAAA does not appear to have opposition to

application of guidelines to existing claims

17

© 2004 Towers Perrin

Impact of Fee Schedule Changes

ComponentPercentage of Medical Costs

Impact of Fee Schedule

Impact on Unpaid Medical

Inpatient Hospital

11.0% +8% +0.9%

Outpatient Surgery Centers

16.5% -41% -6.8%

Pharmacy 7.2% -37% -2.7%

Official Medical Fee Schedule

50.2% -5%

CYs 2004&2005

-0.6%

[-2.5% of% Expected Paid in

2004 (14%) and 2005 (10%)]

Source: WCIRB

18

© 2004 Towers Perrin

Impact of Treating Physician Presumption Repeal

Impact on reserves should be for pre-2003 injuries only

Quantification of impact based on modifying assumptions in rate level calculations

Savings estimates range from 1.4% to 6.7% of unpaid medical, depending on accident year

Unpaid Medical Loss Ratios - Impact of Repeal of PTP

0.00

0.10

0.20

0.30

0.40

0.50

1994 1995 1996 1997 1998 1999 2000 2001 2002Accident Year

Before PTP Impact After PTP Impact

Source: WCIRB

19

© 2004 Towers Perrin

Impact of Medical Utilization Guidelines/Networks

Quantification of impact also based on modifying assumptions in rate level calculations

Savings estimates for guidelines/networks range from 1.4% to 15.6%, depending on accident year

Total savings estimates from PTP and guidelines/networks range from 2.8% to 15.6%, depending on accident year

Unpaid Medical Loss Ratios - Impact of PTP Repeal and Guidelines/Networks

0.000.050.100.150.200.250.300.350.400.45

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003Accident Year

Before Impact After PTP Impact After PTP and Guideline/Network Impact

Source: WCIRB

20

© 2004 Towers Perrin

Summary of Impact of Reforms on Unpaid Medical

Component Savings Estimate

Fee Schedules -9.2%

Primary Treating Physician -3.1%

Medical Utilization Guidelines/Networks

-7.1%

Total -18.3%

Assumes industry distribution of unpaid medical by accident year

21

© 2004 Towers Perrin

Impact of Reforms on Loss Reserves – Other Considerations

Impact on development patterns

Impact on trends

Double-counting