March 2016 1

March 2016

You Should Know

California Workers’ Compensation—Current Reform and Legislative Update

You Should Know2

The California Workers’ Compensation Reform of Senate Bill 863,1 signed by Governor Brown on September 18, 2012, aimed at increasing benefits to workers while reducing costs. It was also intended to improve the delivery of medical benefits by requiring use of evidence-based medicine to guide treatment decisions and by settling disputed medical treatment decisions by independent medical reviewers.2 This new process was meant to reduce the contentiousness in the California workers’ compensation system by reducing hearings and the need for medical/legal evaluations, which in turn was expected to reduce expenses. However, the expense portion of a California workers’ compensation claim continues to grow. The WCIRB (Workers’ Compensation Insurance Rating Bureau of California) projected in 2012 that cost-cutting provisions in SB 863 would cut allocated loss-adjustment expenses by a cumulative 1% in 2013 and 2014. In fact, these expenses have increased by 16% since 2012.3

Based on a recent WCIRB study, the estimated cost of a California indemnity claim is $83,958. The projected average indemnity cost of a 2014 indemnity claim is 8% higher than a 2013 claim, primarily due to the permanent disability benefit increases of SB 863. The projected average medical cost of a 2014 indemnity claim has declined for the third straight year and is now 6% below the projected average, largely as a result of the medical cost savings arising from SB 863; however, there was some erosion of the medical savings in the first half of 2015.

According to Gregory Johnson, director of medical analytics for the WCIRB, “There may be a reversal, or an erosion in some of the savings that have been achieved by SB 863,” and this is something to watch; the average medical costs are still about 8% lower than they were in 2012, primarily due to a decrease in medical utilization. Although the impact of utilization review (UR) and independent medical review (IMR) cannot be isolated, Mr. Johnson indicates IMR may be the predominant cause for reduction in medical utilization and related costs.4

California is the most expensive state for workers’ compensation, based on a current Oregon Study employing 2014 data. California workers’ compensation claim costs are 88% higher than the median for other states.5 While historically, California matched the rest of the nation relative to trends in frequency and severity, the frequency of California workers’ compensation claims is increasing by 3% (from 2010 to 2014),

but the frequency of workers’ compensation claims nationally has declined by 11% over the same period.6 According to the WCIRB, the frequency increases over the last few years are largely attributed to increases in cumulative trauma (CT) claims, late reported indemnity claims, and claims involving injuries to multiple body parts.7 As of 2014, approximately 18% of California indemnity claims are CT claims versus 8% in the 2005 to 2007 period.8

The Los Angeles basin has 13% more claims than Northern California and other parts of California which have experienced a 6% decline for same period of 2010 to 2014.9 Consequently, many carriers are enforcing a surcharge of 11% to 32% on workers’ compensation policies with exposures in the Los Angeles area.

In the workers’ compensation community, there are several theories as to what is driving the geographical trends and increasing costs. One theory is that the WCAB judges in Northern California do a better job of enforcing the rules and therefore reducing hearings and ongoing litigation. Also, the increase in expense costs may be due to the IMR program created by SB 863, which has not reduced the frictional costs as expected. Another theory blames the increase in filings of CT or post-termination claims — in addition to a previously filed workers’ compensation claims — which require investigation and often legal defense. Many claim administrators and employers are trying to mitigate the expense of these claims by pursuing early resolution and settling early for a nominal amount in conjunction with the accepted companion claim versus pursuing extensive litigation. Each case must be evaluated on its own merits, but early resolution of claims is one tactic to consider. We encourage employers to work with their claim administrators and Willis Towers Watson claim consultants to develop strategies to help mitigate unnecessary claims and litigation.

Liens – Savings and Pending Case Law

Southern California, and in particular Los Angeles, has seen a greater increase in continuous trauma claims and in liens than other regions of California.10 To combat the lien issue, SB 863 included a provision to deter the filing of frivolous

California Workers’ Compensation —Current Reform And Legislative Update

March 2016 3

liens, providing that, for treatment on or after 1/1/13, a medical provider must pay a lien activation fee of $150. Another provision stated that, if a medical provider wanted to activate a lien for dates of service prior to 1/1/13, it had to pay a $100 fee, but this issue was litigated at length. Angelotti Chiropractic et al v Baker, 791 F.3d 1075 upheld the lien activation fee, for medical liens resulting from treatment before 01/01/13, to be constitutional; medical vendors had until 12/31/15 to activate their fees or their liens would not be valid.

On January 6, 2016, the plaintiffs of Angelotti Chiropractic et al v Baker filed an appeal to the U.S. Supreme Court. This is their last recourse to get the lien activation fee decision reversed. Based on an article in WorkCompCentral of January 7, 2016, workers’ compensation defense attorneys state that they believe it is unlikely the Supreme Court will review this case. The reactivation of the lien fee should help alleviate some of the administrative time and costs associated with the lien resolution process as well as the actual cost of some of these liens. Since the initiation of the lien activation fee, the DWC has collected $21.2 million in activation fees.11

Once the lien reactivation fee issue is resolved, the Department of Industrial Relations (DIR) anticipates additional revenue. According to Christine Baker of the DIR, there should also be a reduction of frivolous liens. The greatest savings of SB 863 is due to the reduction of new liens resulting from the deterrent of lien filing and activation fees. Liens were reduced by 59% from 2001 rates with a projected savings of $270 million per year in litigation costs.

Although this is good news, it is doubtful that liens will go away completely. Due to the increase in CT claims, which are typically denied, claim administrators will continue to receive liens for treatment directed by applicants and/or their attorneys on these denied claims. However, the lien activation fee does provide a deterrent for the filing of some liens, particularly if the amount of the lien does not justify the activation fee.

Recent Legal Activity Against Medical Providers and Potential Lien Filings

In late 2015, several medical providers were named in lawsuits and even indicted for fraud and racketeering. Fifteen doctors were named in a grand jury indictment for defrauding carriers out of $150 million by billing for unnecessary procedures and allowing an untrained assistant to operate on 21 patients. One physician was arrested and indicted on 32 counts of insurance fraud, 21 counts of aggravated mayhem, three counts of capping or unlawful client referrals and one count of conspiracy.

In September 2015, the State Compensation Insurance Fund (SCIF) filed a civil Racketeering Influenced and Corrupt Organizations Act (RCCO) complaint (State Compensation Insurance Fund, Plaintiff, v. MICHAEL D. DROBOT, SR., et al., Defendants. United States District Court, C.D. California, Southern Division, Case No. SACV 13-00956-AG) against 13 doctors, one chiropractor and 26 medical companies. A number of well-known physicians are named in the suit. The majority of the liens were filed under a single orthopedic medical group, which is owned by a specific physician. The allegations primarily involved inflated bills as well as illegal kickbacks and referral fees paid to these providers. SCIF alone incurred millions of dollars in medical bills and liens from the providers identified in the lawsuit, and the impact to other carriers is expected to be much greater. There is a dispute as to whether these providers can be named in the lawsuit, and no actual finding of fraud has been determined as of this time; therefore, claim administrators may not be able to deny payment on their liens until this case is resolved. Claim administrators and employers need to be aware of this potential fraudulent activity and the legal filings to ensure that all medical payments and liens are closely scrutinized and only paid when warranted.

Pending Assembly Bills

Two bills were passed by the California legislature and were submitted to Governor Brown for approval or veto. (There was also a third bill [AB 563] that would have prevented utilization review of future medical care. This bill would have negatively impacted a claim administrator’s ability to help manage future medical costs; however, it was held in the Senate and did not move forward to Governor Brown.)

Assembly Bill 112412 was approved by Governor Brown on October 6, 2015. This bill will establish a prescription drug formulary in California’s workers’ compensation system, the goal of which is to help control rising prescription drug costs, limit the over-prescribing of highly addictive opioids and ensure injured workers get the necessary treatment to get back to work. The CWCI estimates a formulary could save between $120 million and $420 million a year. An evidence-based formulary has been enacted in four other states and has proven to be an effective tool in not only saving money but ensuring injured workers get the necessary level of care and are taking drugs appropriate for their conditions.

In July 2015, California Labor Secretary David Lanier announced that the DWC was not going to wait for this bill but was proceeding with creating a drug formulary. The DIR recognizes that a significant number of utilization review

You Should Know4

requests are related to medications that include opioids; it is creating a formulary as one tool to help address this issue.

The actual implementation of a drug formulary will take time. The DWC is currently reviewing the drug formularies adopted by Texas and Washington. The bill orders the DWC to implement a formulary by the middle of 2017 and also requires it to publish at least two status-update reports, the first report due by July 1, 2016. A drug formulary will likely produce cost savings in California, but it will be at least a couple of years until the results are achieved.

Assembly Bill 30513 was vetoed by Governor Brown on October 6, 2015. This bill would have precluded apportionment for disability resulting from pregnancy, menopause and from psychological damage from sexual harassment. The preclusion for osteoporosis was eliminated from the final bill. This bill could have resulted in paying for a disability not related to a workers’ compensation injury. Governor Brown vetoed a similar bill in 2011. In his letter to the Assembly, he stated that “this bill is based on a misunderstanding of the American Medical Association’s evidence-based standard, which is the foundation of the permanent disability ratings, and replaces it with an ill-defined and unscientific standard.” This is a positive finding for employers as this bill could have potentially increased permanent disability in these specific situations, which are typically nonindustrial.

California continues to be a challenging state for workers’ compensation and employers. There has been some positive impact from the last reform of SB 863 to reduce the costs of medical liens as well as some preliminary benefits of the Independent Medical Review process; however, the administrative costs continue to rise significantly. One of the primary drivers is increased litigation costs. Employers need to work closely with their claim administrators and Willis Towers Watson claim consultants to ensure they are providing prompt, effective medical care to mitigate unnecessary litigation regarding treatment or return-to-work issues. Although the reform has been successful in helping minimize the number of new lien filings, claim administrators need to aggressively evaluate existing liens to ensure they are resolving only liens that should be settled and for reasonable amounts. Early resolution strategies to resolve claims before additional new continuous trauma or post-termination claims are filed and litigation is initiated may be effective in managing new claim and expense costs.

For additional information, contact your Willis Towers Watson Claim Consultant or:

Michelle Lentes, MBA, ARM, WCCPRegional Practice Leader of CaliforniaRisk Control and Claim Advocacy PracticeWillis Towers Watson michelle.lentes@willistowerswatson.com

Sources

1 http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_0851-0900/sb_863_

bill_20120919_chaptered.html

2 SB863: Assessment of Workers’ Compensation Reforms, California

Department of Industrial Relations, July, 2015 http://www.dir.ca.gov/dwc/

SB863/SB863.htm

3 WCIRB Report on September 30, 2015 Insurer Experience, Released

December 15, 2015 http://www.wcirb.com/research-and-analysis/research-

and-analysis-overview

4 WorkCompCentral Articles – October 2015 – January 2016

5 Workers’ Compensation Premiums Ranked by State Sponsored by: Oregon

Department of Consumer and Business Services. Published February 23,

2015. http://www.cbs.state.or.us/external/dir/wc_cost/map.html

6 Analysis of Changes in Indemnity Claim Frequency, WCIRB, January 7, 2016

7 Ibid

8 Ibid

9 Ibid

10 Study of Geographical Differences in California Workers’ Compensation

Claim Costs, Released: November 5, 2015 http://www.wcirb.com/site/search/

geographical%20differences

11 WorkCompCentral Articles – October 2015 – January2016

12 http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_

id=201520160AB1124

13 http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_

id=201520160AB305

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