Interim Committee to Study Issues Related to Pinnacol Assurance (09/04/2009)

Final
STAFF SUMMARY OF MEETING

INTERIM COMMITTEE TO STUDY ISSUES RELATED TO PINNACOL ASSURANCE

Date:	09/04/2009	ATTENDANCE

Time:	09:01 AM to 05:37 PM	Gardner B.	X
		Gerou	X
Place:	HCR 0112	Harvey	X
		Hodge	X
This Meeting was called to order by		Miklosi	X
	Senator Carroll M.	Mitchell	X
		Ryden	X
This Report was prepared by		Tochtrop	E
	Leora Starr	Johnson	X
		Meersman	E
		Morrison	*
		Parry	X
		Ross	X
		Simon	X
		Pace	X
		Carroll M.	X
		X = Present, E = Excused, A = Absent, * = Present after roll call

Bills Addressed:		Action Taken:
Call to Order Introduction to Structural Options for Pinnacol Assurance A Case Study in Privatizing a State Fund Impact of Changes - Industry Perspective Impact of Changes - Consumer Perspectives Adjourn for Lunch Pinnacol Panel Public Testimony		- - - - - - - -

09:04 AM -- Opening Remarks

Senator Morgan Carroll, Chair, called the meeting to order.

09:05 AM -- Introduction to Structural Options for Pinnacol Assurance

Bart Miller, Office of Legislative Legal Services, presented three structural options for Pinnacol, referring to a research memorandum describing the options (Attachment A). He began with the option of restoring Pinnacol's status as a state agency, then went on to describe details of the quasi-governmental option (Pinnacol's current status), and concluded with the option of making Pinnacol a completely private enterprise. Mr. Miller further explained an accompanying table that summarizes additional detail on the three options (Attachment B). He referred to 1999 legislation in Nevada and Texas to privatize these state's workers' compensation funds and gave a brief history of the events that led several other states, including Colorado, to consider similar changes. He noted that the Colorado General Assembly considered a similar bill in 2001 that did not pass.

09:14 AM

Upon the completion of the overview, Mr. Miller responded to questions. Senator Harvey asked about the possibility of selling Pinnacol Assurance. Mr. Miller explained that Pinnacol owns Pinnacol but they don't have the authority to sell themselves, and that the legislature would have to give them the authority. Mr. Miller referred to HB 01-1407 and explained the process that would have to occur in order for Pinnacol to be sold. Senator Mitchell continued with questions on the statutory nature of Pinnacol. Mr. Miller explained that, at this time, there is not a clear set of legal rules regarding the sale of Pinnacol. Senator Mitchell acknowledged there is no controlling legal authority, and asked if there is a logical solution. Mr. Miller stated there would have to be a policy solution determined by the legislature. Questions ensued about the characteristics of Pinnacol and private insurance companies. Mr. Miller explained the difference between an insurance company versus a mutual insurance company, noting that "mutual" means the policy holders are part owners who can sit on the board of directors and receive dividends.

09:28 AM

Mr. Ken Ross, President and CEO of Pinnacol Assurance, asked questions about the private or public status of Texas Mutual. Mr. Mark Simon, committee member, continued with a question on the assets that Pinnacol was begun with. Mr. Miller explained that there was probably money transferred into a fund for the company to begin. Mr. Simon continued with other questions regarding the purpose of the creation of a workers' compensation institution. Representative Sal Pace, Vice Chair of the committee, clarified some details on the formation of the company. He also explained a few details regarding Colorado Compensation Insurance Authority (CCIA) being turned into Pinnacol. He noted that CCIA was a state fund, and when funds were diverted, how the company became Pinnacol, a quasi-governmental organization. Representative Cheri Gerou reminded the committee that not only were funds diverted to Pinnacol, there was an issue with the liabilities that Pinnacol took responsibility for. Senator Carroll followed with a question regarding terminology in statute that suggests what the legislature should do in the case of selling Pinnacol. Mr. Ross stated statute suggests there is a statement regarding dissolving Pinnacol, but not selling Pinnacol.

09:40 AM -- Case Study in Privatizing

Mr. Doug Dirks and Ms. Ann Nelson, Employers Insurance Company of Nevada, were present to explain how the former Nevada State Fund was privatized. Mr. Dirks explained that states converting to private from public are doing so under the details of the laws of the respective states. Therefore, converting will be different for each state. The committee received a handout entitled "Oklahoma workers' comp panel meets" (Attachment C) which was a news article from newsok.com. Mr. Dirks discussed the time-line and process of the monopolistic nature of the Nevada system and its conversion to a private entity. He explained, in a stock company, people own stock and are eligible to participate in the running of the company. In a mutual company, you have no ownership, just certain rights. In Nevada, all assets and liabilities of the state fund were transferred to a mutual company. All policy holders became members at that time. Premiums paid to the company belonged to the companies that paid. Nevada had terminology in their statutes that detailed how such a transition should occur.

09:50 AM

Ms. Ann Nelson, Employers Insurance Company of Nevada, provided a history of her employment with the agency. She explained Senate Bill 37 of the 1999 legislative session is a very long bill that reflected the compromise between the Nevada Senate and House regarding the transition from public to private. Ms. Nelson described the steps they took in order to transition. First, a board was created to derive the bylaws of the company. Then, the loss portfolio transfer and independent audit by the division of insurance were conducted as these were important to ensure the newly developed company would be successful. Nevada also had public employees that required provisions for employment rights for two years, to consider whether they wanted to stay as a state employee or remain with the new company as a private employee.

09:59 AM

Questions began with Mr. Ken Ross, asking if it was the amount of the liability that motivated the transition. Mr. Dirks stated the first motivation was for competition, the second was that they believed the state should not be in the insurance business. Federal taxes are paid now since they are private. They provide workers' compensation only to about 30 states. Mr. Dirks clarified some of the processes that the company went through in the transition from a mutual insurance company to private. Representative Su Ryden asked about being the insurer of last resort. Both Ms. Nelson and Mr. Dirks agreed that Nevada had no intention of being the residual carrier, so the committee members were satisfied with having only 6 percent share of the market, down from having 65 percent share. They noted that the National Council on Compensation Insurance (NCCI) provides residual insurance to Nevada. Nevada writes policies particularly for small businesses. Senator Mitchell asked if the company was asked to pay an amount as its price for independence. Ms. Nelson explained that the question did come up, but since they were taking on such debt, they were not asked to pay an amount as a ''price for independence."

10:10 AM

Mr. Mark Simon asked about the premiums paid. Mr. Dirks explained that insurance premiums did go down. Senator Harvey asked about the difference between Nevada and Colorado, noting the difficulty in comparing the two, since Pinnacol is the insurer of last resort and the Nevada group is not. Mr. Dirks stated that if someone can not be insured, they go through NCCI which has a list of providers. Senator Carroll asked if there was a noticeable difference between customer satisfaction prior to and after the transition. Ms. Nelson was not sure that such numbers or observations exist.

10:16 AM -- Impact of Possible Changes

The panel to discuss the industry-perspective impact of possible changes to Pinnacol Assurance on the Colorado workers' compensation market included Mr. Bruce Wood of the American Insurance Association, Kelly Campbell of the Property Casualty Insurers (PCI) of America, and Brandon LaSalle of both the Colorado Insurance Guaranty Association and the National Conference of Insurance Guaranty Funds. Attachments D, E, and F were distributed to committee members. Mr. Wood explained there is a gradual trend for state workers' compensation programs to transition to private, and consequently, there are several important steps that needed to be taken. He discussed the policy considerations from an outline he handed out (Attachment D), nothing that many states were in a situation where they were gravely in debt. He testified that the threshold question asked in Nevada was whether providing workers' compensation was a core function of state government. He further explained if it were to be state sponsored, a state fund should be placed on a more level playing field that it is on now and pay state and federal premium taxes. If it is going through privatization, Nevada's experience is a very good model.

10:26 AM

Mr. Wood continued discussing residual market mechanisms of other states. Some states transition more easily, but others, like Florida, had difficulty. Ms. Kelly Campbell continued by explaining the purpose of Property Casualty Insurers (PCI). Ms. Campbell gave an overview of Pinnacol's structure. She explained, from PCI's perspective, Pinnacol is a hybrid company. There are some ways that Pinnacol is like a state agency, and ways that it is not like a state agency. She referred to Attachment E, which provides details on the differing structures, including state agencies, hybrids, and full privatization. Ms. Campbell explained some of the problems associated with keeping Pinnacol as a state agency and further explained the benefits of privatizing.

10:39 AM

Mr. Brandon LaSalle provided background on how the Guaranty Fund program works. He explained the different types of insurance that can and can't be included in the Guaranty Fund. He discussed the Colorado Insurance Commissioner's responsibilities, especially if there are problems with an insurance company. He further explained the liquidation process. Mr. LaSalle provided an additional handout that offered some basic statistics on the assessment history (Attachment G). If Pinnacol was to be a state agency, it could be included in the Guaranty Fund.

10:48 AM

Questions ensued, beginning with Mr. Ken Ross, regarding restructuring. Mr. Ross clarified the status of Pinnacol, that it is regulated by the Colorado Division of Insurance, like all other insurance companies. The committee expressed concern regarding the coverage of high risk employers. Mr. Wood explained we still would have a system, albeit different, that would cover all workers. He further explained that Pinnacol serves a very important purpose that, if dissolved, would need to be replaced. Senator Harvey asked about how Pinnacol was being managed and asked if there were better ways for it to be managed and if there was a better model to follow. Ms. Campbell explained some of the differences between different types of insurance. She continued to explain some of the components of property and casualty insurance as autos, homeowners, and other insurance.

11:14 AM

Representative Cheri Gerou stated that Colorado requires workers' compensation for all employees and noted states have different mechanism for covering all employees.

11:18 AM -- Impact of Changes - Colorado Workers' Comp

Mr. Paul Tauriello, Deputy Director of the Colorado Division of Workers' Compensation, offered to answer questions regarding the state agency status that existed at the time of Pinnacol's creation. There were no questions asked of him.

11:21 AM

Mr. John Berry, Workers' Compensation Coalition (WCC), commented on the impact of possible changes to Pinnacol, representing the business community view. Mr. Berry suggested that the state could level the playing field by making Pinnacol subject to taxation. He also suggested all insurance companies should be subject to the same scrutiny as Pinnacol. Senator Carroll asked Mr. Berry to comment on the structural options. Mr. Berry said he would oppose Pinnacol being taken back as a state fund. He suggested there would be a 30 percent cost increase if there was an assigned risk pool so he opposes this. If Pinnacol is privatized, Mr. Berry thinks the state loses the oversight of the company. He believes the current system works best.

11:30 AM

Mr. Neil O'Toole, Workers' Compensation Education Association (WCEA), representing the worker community, agreed with Mr. Berry's opinion that Pinnacol should remain a quasi-government agency. Also, because of Pinnacol's transparency and their current success of building up the surplus, this can help support all businesses by keeping insurance rates down. Mr. O'Toole clarified that no state money has gone to Pinnacol since 1923. Representative Su Ryden asked about what Pinnacol had or did not have when it became Pinnacol in terms of an unfunded liability. Both Mr. O'Toole and Mr. Berry provided explanations. Mr. Ken Ross explained that CCIA had a $200 million operating loss which grew to $500 million surplus throughout the decade. During that period, CCIA had to enter into a surplus recovery plan with the Colorado Division of Insurance.

11:41 AM

Tony Gagliardi, State Director of the National Federation of Independent Business (NFIB) joined Mr. Berry and Mr. O'Toole to give his opinion on the impact of possible changes to Pinnacol. Mr. Gagliardi testified that he believes nothing should be done to Pinnacol at this time because the current system works. He asked that if anything is done, it be presented in a survey to NFIB members. He also suggested that both sides meet to express their viewpoints.

11:52 AM -- Recess

The committee recessed.

01:31 PM -- Pinnacol Assurance Panel

Senator Carroll explained that during the afternoon the committee would be hearing from a panel of Pinnacol Assurance representatives. She added that the panel would be available to answer committee members' questions.

01:33 PM

The Pinnacol Assurance panel included the following people: Dan O'Neil, Vice President of Claims and General Counsel for Pinnacol Assurance; Don M. Collins, Vice President of Underwriting and Chief Marketing Officer; Robert Norris, Vice President of Strategic Development and Chief Information Officer; and Mark Mulvaney, actuary, Milliman, Inc., a consulting actuary firm.

Mr. Mulvaney gave a PowerPoint presentation regarding the estimated reserves of Pinnacol Assurance as of December 31, 2008. He discussed the process of estimating reserves and talked about the amount of uncertainty involved. Mr. Mulvaney explained that once a reserve is set by Pinnacol Assurance, Milliman, Inc. comments on the reasonableness of that estimate. He stated that as of year end, Pinnacol's estimate was reasonable.

01:43 PM

Mr. Mulvaney discussed the factors that may cause material adverse deviation, including: unanticipated trends such as inflation being higher than anticipated; economic and social factors; and internal changes, such as changes to settlement practices. Mr. Mulvaney showed a slide that illustrated Pinnacol Assurance's surplus and policyholder dividends since 1990. He also showed Pinnacol Assurance's rate history since 1990. Mr. Mulvaney was asked to talk about Pinnacol Assurance's recovery following its deficit in the late 1990s and how Pinnacol was able to recover.

01:52 PM

Robert Norris, Vice President of Strategic Development and Chief Information Officer, explained that he supervises many departments within Pinnacol Assurance. He showed a PowerPoint presentation that illustrated Pinnacol Assurance's business strategies, including its vision and mission statement. Mr. Norris displayed some charts that showed policyholder and injured worker satisfaction with Pinnacol Assurance. He explained that Pinnacol Assurance has a different dynamic compared to other companies since it does not choose to do business with injured workers, they do business as a result of an accident. Mr. Norris suggested that the Division of Workers' Compensation conduct its own survey of injured workers across all workers' compensation companies.

02:07 PM

Mr. O'Neil discussed the structure of the various teams within Pinnacol Assurance. He walked the committee through the life of a claim. Mr. O'Neil explained that there are many different ways a claim can come to Pinnacol Assurance, including via fax and on-line. After receiving a claim, Pinnacol Assurance has 20 days to determine whether the claim is compensable by determining whether the injury happened at work and that it is work related. He explained that once Pinnacol Assurance determines an injured worker has reached Maximum Medical Improvement (MMI), the worker can appeal that determination. He talked about the various appeals processes an injured worker can use. Mr. O'Neil also talked about the fact that Pinnacol Assurance can settle claims, which is not always the case in other states. He explained that a judge signs the settlement and then discussed the appeals processes for those cases.

02:13 PM

Don M. Collins, Vice President of Underwriting and Chief Marketing Officer, talked about Pinnacol Assurance's relationship with its patients. He talked about the Pinnacol Foundation which awards college scholarships to the children of Colorado workers injured or killed on the job. Mr. Collins also talked about Pinnacol in Action, an employee-run volunteer program that supports Colorado nonprofits.

02:18 PM

The chair opened the panel up to questions and called on Senator Mitchell who suggested an industry-wide survey regarding workers' compensation in order to get a true picture of the market. He also asked Mr. Mulvaney some questions regarding reserves and talked about the danger of a company minimizing its reserves in order to show it has a profit. There was a discussion about the difference between reserves and a surplus. Mr. Mulvaney explained that a surplus is what is left over after liabilities are deducted from assets. There was a discussion about the management positions in the company and their various duties.

Senator Mitchell asked how executive compensation is determined at Pinnacol Assurance. Mr. Norris deferred to Mr. Johnson who explained that the board is responsible for the hiring, termination, and compensation of the Chief Executive Officer (CEO). He explained the salary determination process for the CEO and also talked about the problem with comparing the CEO of Pinnacol's salary with other state agencies since Pinnacol Assurance does not have any state money.

02:30 PM

Representative Ryden asked whether reserves are estimated for the following year. Mr. Mulvaney explained that the estimate is made to pay obligations to injured workers for as long as they are needed. A discussion ensued about how often reserves are used and how their accuracy can be determined.

02:33 PM

Senator Carroll asked some questions about the claims that are denied by Pinnacol Assurance. She also asked about claims that are neither denied nor admitted. Mr. O'Neil explained that the majority of claims, about 85 percent, run through the system, are medical only, do not include loss time claims, and do not have to be filed with the division. He then talked about general admission claims which do need to be filed with the division. Mr. O'Neil also talked about denial forms and reasons for denying a claim, such as the injury not being work-related, the employer's insurance lapsing, or Pinnacol Assurance needing more information.

Senator Carroll asked about incentives and Pinnacol Assurance's performance surveys. Mr. Norris talked about the surveys of injured workers and policyholders. Senator Carroll asked how the survey sample is determined. Mr. Norris explained that an independent surveyor takes a random sample and determines who receives the survey until an adequate sample is reached. Senator Carroll asked about incentives for closure rates. Mr. O'Neil talked about closing a case.

02:48 PM

Mr. Simon asked whether Pinnacol Assurance's policy states that it is operating as a mutual insurer. Mr. O'Neil explained that the policy incorporates the statutes and therefore that is included. Mr. O'Neil responded similarly to another question regarding how dividends are determined. Mr. Simon asked whether employers have any decision making control over the company, to which Mr. O'Neil explained they have no voting rights according to statute. Mr. Simon asked a number of questions relating to expenses, including who is allowed to take travel expenses, who oversees CEO expenses, and who is able to use the sky boxes and other perquisites. A discussion ensued regarding expenses. Mr. Collins explained that less than one percent of premiums is spent on entertaining and explained that other insurance companies typically spend about 6-8 percent on them.

03:09 PM

Mr. O'Neil talked about Pinnacol Assurance's expenses, including employee benefits: life, health, dental, vision, and long term disability, 401k match, workers compensation, employee education, company training, parking, coffee, and books.

03:11 PM

Representative Miklosi talked about the injured workers that testified at the August 31 meeting, and asked what Pinnacol Assurance is doing about those types of cases. He also read an e-mail from an injured worker. Mr. O'Neil explained that injured workers are given information on what they can do to appeal decisions. Mr. Ross said state law prohibits him and his colleagues from talking about any particular claim, but mentioned that there is a lot more to the case than what is provided in the e-mail Representative Miklosi read.

03:21 PM

Mr. Johnson responded to Mr. Simon's questions regarding expenses. He explained that the board is in charge of budgeting and that Pinnacol Assurance is in competition for business from all companies. Mr. Johnson added that Pinnacol Assurance is run like a competitive insurance company and has to compete for business and people. Senator Harvey asked about the one percent that is spent on entertainment as compared to the six percent most companies spend. He talked about the importance and the benefits of memberships to national organizations and compared it to the state paying for the National Conference of State Legislatures and the Council of State Governments that are paid for by taxpayers.

Mr. O'Neil was asked to explain the process an injured worker must take to file a complaint against Pinnacol Assurance. He also talked about the process of filing an appeal and holding a hearing. Senator Harvey asked when legal counsel typically gets involved. Mr. O'Neil said it can happen at any point. Mr. O'Neil continued to explain other appeals processes injured workers may use, including the Industrial Claims Appeals Office, the Colorado Court of Appeals, and the Colorado Supreme Court, noting the various time frames involved.

03:33 PM

Senator Mitchell talked about Mr. Collins' comments on the less than 1 percent that is spent on promotions versus other companies' 6 to 8 percent. He explained that the amount makes no material difference to policyholders and that if that were to be removed it would just make Pinnacol Assurance less competitive. Senator Mitchell pointed out the uniqueness of the transparency of Pinnacol Assurance. Mr. Ross asked the panel to explain why the residual market has rated Pinnacol Assurance so high above other carriers. Mr. Norris responded.

03:41 PM

Commissioner Morrison talked about alternate models for Pinnacol Assurance: a state agency, quasi-governmental, and private, and asked Mr. Mulvaney if he has ever dealt with any of those models and whether he has any comments on any of them. Dr. Parry asked some questions regarding the medical director's duties and about the conflicts insurance companies face when making medical decisions. Representative Ryden asked what the panel thinks Pinnacol Assurance should look like in 10 years.

04:06 PM

Senator Carroll asked about incentives that are given based on medical and indemnity. Mr. O'Neil responded and explained the various factors that go into the incentive program. Senator Carroll asked some questions about the incentive structure. Mr. O'Neil responded and gave an example of how they began faxing medical reports which has helped shorten time and allows for a quicker delivery of care. Mr. O'Neil said they look for efficiencies. He also talked about how Pinnacol Assurance is trying to begin bar coding forms with the division.

04:13 PM

Mr. Norris talked about reducing costs and its effect on net income. Senator Carroll asked how physicians are selected for SelectNet, Pinnacol Assurance's network of primary care physicians, specialists, rehabilitation service providers, ancillary medical providers and hospitals located throughout Colorado. Mr. O'Neil explained that Med Advantage does that for them and looks at whether there is a geographic need, enough providers to meet needs, and the provider's specialty. He explained that the quality control group audits members in SelectNet and the peer group reviews them and makes recommendations. Mr. O'Neil talked about providers who have been removed for various reasons. Senator Carroll asked whether anyone tracks physicians' days to MMI.

04:19 PM

Senator Carroll asked if Pinnacol Assurance's business plan can be expanded to include the injured worker satisfaction. Mr. Norris explained that all of their strategies support the injured worker since it is in Pinnacol Assurance's mission. Senator Mitchell commented on the injured worker element. There was a discussion about surveillance.

04:40 PM

Senator Carroll asked whether a process is in place for tracking denials. Mr. O'Neil responded and listed some statistics. Senator Carroll talked about pro se claimants and whether they are aware that they can appeal decisions about surgeries. Representative Gerou talked about the injured worker survey. There was a discussion about claims that are litigated and how to reduce litigation. The committee talked about providing better information to consumers.

04:57 PM -- Public Testimony

Mike Pierce testified about his 25 years as an independent agent in northern Colorado and as an independent agency owner. He spoke about Pinnacol Assurance and its predecessor CCIA and how dysfunctional the workers compensation system was 20 years ago. Mr. Pierce talked about CCIA's shift into Pinnacol Assurance. He discussed how Pinnacol Assurance has taught businesses about cost savings they can achieve as a result of having a safe workplace. Mr. Pierce expressed concern about the committee's proceedings and urged the committee not to change what is working.

Senator Carroll asked about the injured worker testimony and Mr. Pierce noted that there are extenuating circumstances in any case. She asked him about privatization to which Mr. Pierce said he is happy with how Pinnacol Assurance works now. Representative Gerou noted that CCIA was poorly run and asked if people who were not paid enough by CCIA should be paid from the state General Fund. Representative Ryden asked about Pinnacol Assurance continuing to do well without current management. Mr. Pierce stated he would be concerned if the vision were not continued by a future CEO. Mr. Johnson discussed the selection process when the board hired Mr. Ross.

05:16 PM

Mr. Ross stated that a number of people share Mr. Pierce's opinion and that Pinnacol Assurance works with employers to prevent accidents and with injured workers to get them back to work. He added that agents do a lot of work with the employees of Pinnacol Assurance.

05:18 PM

Robin Wise, President and CEO of Junior Achievement, testified about her organization and its mission for financial literacy for kids. She talked about how Pinnacol Assurance is active in volunteering for Junior Achievement and donating money to the organization. She mentioned that Pinnacol Assurance is also involved with other nonprofits and the Aurora Chamber. Ms. Wise thanked the Pinnacol Assurance employees who have volunteered. Senator Mitchell thanked her for coming.

05:23 PM

Frank Cavanaugh, a witness who represents respondents and used to do work for Pinnacol Assurance 10 years ago, testified in front of the committee. He said he has seen Pinnacol Assurance go from a dysfunctional entity to better overall claim handling. He explained that ten years ago he saw unreasonable denials from Pinnacol Assurance. Mr. Cavanaugh has worked for insurance companies who try to recruit staff from Pinnacol Assurance and are unable to do so. He disagrees that Pinnacol Assurance is underpaying claims and mentioned that large competitors do not have the same customer service as Pinnacol Assurance.

Representative Ryden asked if they have the optimum business model. Mr. Cavanaugh testified that he would be concerned about privatization. Representative Gerou asked if the state owes the claimants who were not taken care of by CCIA. Mr. Cavanaugh said we have to live in the now because things have improved. Mr. Cavanaugh noted that people need to be educated about the system.

05:37 PM

The committee adjourned.