STAFF SUMMARY OF MEETING
INTERIM COMMITTEE TO STUDY ISSUES RELATED TO PINNACOL ASSURANCE
|Time:||09:02 AM to 04:26 PM|
|This Meeting was called to order by|
|Senator Carroll M.|
|This Report was prepared by|
X = Present, E = Excused, A = Absent, * = Present after roll call
|Bills Addressed: ||Action Taken:|
Committee Member Introductions
Overview of Committee Materials
Colorado's Workers' Compensation System
WC Process from Claimant and Defense Attorney
Adjourn for Lunch
Residual Market Mechanisms
Overview of Pinnacol Assurance
09:05 AM -- Opening Remarks
Senator Carroll, Chair, called the meeting to order. She presented the charge of the committee and provided an overview of the agenda, as well as summarizing the future agendas. Senator Carroll also reminded the committee members and the public that testimony from the public will be accommodated at each meeting. She continued with instructions on how to access the committee's website for documents and other materials presented at the meetings: http://www.state.co.us/gov_dir/leg_dir/lcsstaff/2009/comsched/09PinnacolAssurance.html
09:10 AM -- Committee Member Introductions
Senator Carroll summarized her background and her reasons for serving on the committee, and asked other committee members to offer some basic information about themselves. Each member in attendance summarized their background and goals for serving on the committee.
09:25 AM -- Overview of Committee Materials
Ms. Christie Lee, Legislative Council Staff, provided an overview of notebook materials. She informed the committee that all meetings would be held in House Committee Room 0112 except for the August 31 meeting which will be in the Legislative Services Building, Room A. Clare Pramuk, Legislative Council Staff, used the table of contents to outline what was available in the notebooks and through the staff. She pointed to the glossary for definitions and acronyms and explained the format of some of the multi-page tables. Senator Carroll asked for an explanation of the rules and voting, both for legislators and non-legislators. Ms. Lee explained that the rules require a majority of the legislators to pass a bill. Discussion then moved to other tables located in the committee notebook. In response to a question from Mr. Ken Ross, Ms. Pramuk provided the source of information in the 50-state table. She also noted that other information was available on two cd's in each member's notebook. Ms. Lee told the committee that all of the presented material would be available online.
09:34 AM -- Colorado's Workers' Compensation System
The following staff from the Colorado Division of Workers' Compensation gave a presentation on the workers' compensation process: Bob Summers, Director; Paul Tauriello, Deputy Director; and Brandee Galvin, Special Assistant to the Director. Mr. Summers offered a handout of a slide presentation (Attachment A) entitled Overview of Workers' Compensation. He explained the nature of the workers' compensation system, beginning with the history of workers' compensation in Colorado.
Mr. Paul Tauriello provided a more detailed explanation on the role of the Colorado Division of Workers' Compensation and the process of covering injuries under a variety of circumstances. He discussed the insurance aspect of Workers' Compensation, noting penalties that employers would receive if they do not provide coverage for Workers' Compensation. He stated that the division conducts investigations to find employers who do not provide insurance, sometimes working off of tips. Mr. Tauriello explained the time duration that can occur with some claims and injuries. He continued with explanations of other aspects of the program, including rules and incentives offered to employers.
Mr. Tauriello discussed the Medical portion of the Workers' Compensation system, explaining the role of physicians and defined topics such as Independent Medical Exams (IME) and Maximum Medical Improvement (MMI). He explained the final aspect of the workers' compensation system, which is the claims portion under the control of the division's claims management section. He explained the process of claims and adjustments made when deviations to the claims process occur. He then discussed the audit process of carriers, and the potential fines and pre-hearings that occur. He noted the role of Administrative Law Judges and prehearing procedures.
Mr. Summers explained a 'compensable claim' and provided examples. He discussed both claims and injuries and explained that lost time claims include injuries that result with an absence of three or more days. He also explained the timeline for reporting injuries and filing claims. Mr. Summers offered some statistics on claims for 2008 in Colorado, and the number that came from Pinnacol. He discussed different types of claims and benefits and provided greater detail on medical benefits, payments, treating physicians, and the process of deviating from workers' compensation physicians. Mr. Summers explained in more detail the benefits associated with Temporary Total Disability (TDD), and how monetary payments are calculated. He further explained the process of an injured worker returning to work and the rules governing an injured worker's benefit being reduced. He continued to discuss the process of an insurance company paying claims, and the scenarios that would result in a change of benefits.
Ms. Brandee Galvin added to the discussion with details on the benefits for a worker who has achieved MMI. She explained the two levels of physicians, and the guidelines they must follow, and noted that Colorado uses an older edition of the AMA guides. Ms. Galvin discussed impairments related to injuries to the head or extremities, as well as injuries to the trunk of the body (whole person injury). She also explained the rating system and various calculations, including the use of a person's age. Ms. Galvin discussed differences in impairment ratings and the claimant's ability to earn wages. She also provided statistics on the number of claimants. She discussed the process for resolving disputes between parties, a hearing process that uses administrative law judges instead of the courts. She clarified that these hearings are intended to cost less than typical litigation, noting that unresolved disputes can be appealed to the Colorado Court of Appeals. She provided statistics on the number of claims that actually go to litigation.
Committee questions began. Senator Mitchell asked about the positive nature of Colorado's workers' compensation system, and why Colorado uses an older edition of the AMA Guides. Mr. Summers explained the nature of the guidelines. Representative Gardner asked about multiple appeals. Ms. Galvin explained that the disputes can be in regard to multiple parts of the claim, where one segment of the claim is appealed and resolved, but then another aspect of the claim is disputed. Rep. Gerou asked about subsequent injury funds, self-insured employers, medical policy, and the division's pre-hearing unit. She also asked if all insurance companies to go through the same process. Mr. Tauriello explained the aspects of the different programs. Mr. Summers explained the pre-hearing conferences and noted the similarity to mediation.
Senator Mitchell asked about multiple appeals and the standard process. Ms. Galvin explained the notion of substantial evidence. Senator Mitchell asked the panel for more information about how Colorado compares to other states in terms of the workers' compensation process. Mr. Summers explained many states look at Colorado's workers' compensation process in a favorable manner. Senator Mitchell continued with questions more focused on Pinnacol Assurance and asked if the division had any positive or negative feedback on Pinnacol Assurance. Mr. Summers explained that the division's views of Pinnacol were neutral.
Mr. Simon asked about the number of employers who don't have insurance and additional questions on benefits. He also asked how long the appeals process could take. Mr. Tauriello provided explanations on the number of uninsured, noting there is no concrete way of measuring the actual number of employers who do not provide workers' compensation. Mr. Summers answered questions regarding vocational rehabilitation, noting it is voluntary and not often provided. He explained some details on Permanent Partial Disability. Ms. Galvin stated that, on average, the appeals process is 18 months, and working with the Supreme Court usually takes six to nine months beyond that. She offered a few statistics on the number of claims that do go to appeals. Mr. Simon asked the same questions on Partial Temporary Disabilities and cost-of-living adjustments (COLAs). Mr. Summers stated there are no longer COLAs.
Representative Pace asked the panel about the history of workers' compensation in Colorado and the 1914 incident at Ludlow. Mr. Summers thought the changes in law made in 1915 were due to Ludlow. Representative Pace asked about the ranking of Colorado's benefits awarded compared to the benefits actually paid out. Mr. Summers noted that the data shows Colorado workers tend to have less frequent accidents than workers in other states, so benefits per employee are smaller. Representative Pace asked if any data show Colorado be safer for workers. Mr. Tauriello noted the reduction in the frequency of claims in Colorado. Representative Pace continued with a question about the list of insurers that deal with workers' compensation and asked if it is legal for insurers to give incentives to claims adjusters for a decrease in claims. Mr. Summers said the Workers' Compensation Act does not address this.
Representative Ryden asked about Special Funds and asked why some were discontinued. Mr. Tauriello explained the purpose for certain funds. Representative Ryden asked about extended claims. She also asked how many employees were covered by self-insured employers. Mr. Tauriello answered in terms of statistics on premium market shares. Representative Ryden asked about the number of claims in terms of percentages of the self-insured. Mr. Tauriello answered that about 20% of claims came from employees in self-insured plans. Discussion also ensued about pre-existing injuries.
Mr. Meersman asked about the number of employers who are insured through Pinnacol. Mr. Tauriello explained that the division did not track data by employees. He discussed the difficulty in coming up with a market share number. Mr. Ross explained Pinnacol had a 57.4% share of all workers' comp insurance premiums paid, but that did not account for the self-insured. Mr. Ross said that Pinnacol estimates that it represents about one million employers of the estimated 2.5 million total workers in Colorado. Mr. Meersman asked about future changes to Pinnacol and potential legislation. Mr. Summers explained they normally stay neutral on bills, but occasionally take positions.
Senator Mitchell asked about the ranking and the nature of the state's employment base, in terms of worker safety. Mr. Summers responded that the nature of the workplace in Colorado does have an effect on worker injuries. Senator Mitchell asked if the panelists had any knowledge of a practice where an insurer provides financial incentives to claim adjusters for denying claims. Mr. Summers replied that he did not know of any such practice, but he also stated that bad faith claims to exist in Colorado.
Mr. Simon referred to the list of about 100 carriers, and asked if any stand out with having a significant share of the market, other than Pinnacol. He asked if there is a statute that denoted incentives for Pinnacol to be the insurer of last resort. Mr. Tauriello stated Liberty Mutual and AIG have some market share, but much less than Pinnacol He also noted that Section 8-45-101 (5)(f), C.R.S., gives Pinnacol an exemption from the one percent insurance premium tax rate for companies with a home office in Colorado.
Dr. Lynn Parry asked about independent medical examiners and a possible conflict of interest. Mr. Summers discussed a rule in place that deals with that issue and two opposing rules that are currently being examined. Senator Harvey asked for a list of the 100 insurers and also asked if Colorado has the most self insurers. Also, he asked if Colorado should contract out its workers compensation coverage to a private company. Mr. Tauriello responded that self-insuring might be less expensive because of the large number of state employees and the potential for economies of scale savings.
11:04 AM -- A Discussion of the Workers Compensation Process, by Claimant and Defense Attorneys
Ms. Shelley Dodge, an attorney representing claimants, and Mr. Bernard Woessner, a defense attorney spoke about the workers' compensation process from the legal side. Mr. Woessner introduced himself and his firm and explained their responsibility in the process. He walked through a powerpoint presentation on the respondents' perspective (Attachment B), giving the attorney's viewpoint, and recommended that the committee also consider interviewing a workers compensation claims adjuster. He explained that with the no-fault system, the exclusive remedy is through the workers' compensation process, and that this process has replaced the injured workers' right to sue. He noted that law specifies benefits to workers who are injured in amounts that are likely smaller than personal injury benefits (no pain and suffering).
Mr. Woessner continued with the definition of "compensable injury" and gave details on how this type of injury can take place. He further explained the complications of causation with compensable injuries. He discussed the workers' compensation benefits in regard to medical treatment, temporary disability, and permanent disability. He further explained that medical treatment, and thus claims, can go on for many years. He offered examples and statistics.
Ms. Dodge introduced herself and summarized her background. She responded to questions raised earlier in the day, discussing the Industrial Claim Appeals Panel (ICAP), Administrative Law Judges, and the strict nature of appeals. She explained the Subsequent Injury Fund that started in 1919, and also discussed occupational diseases based on prolonged exposure to particular elements. She noted that Pinnacol's financial success has eliminated its governmental immunity and now allows for the filing of bad faith claims by injured workers. Ms. Dodge explained the workers' compensation claim process and noted Pinnacol's response time to claims. She explained medical care is the most disputed part. She explained the process once the claimant is classified as Maximum Medical Improvement. She noted the timeline that claimants go through. Ms.Dodge provided information on the maximum benefits, and the offsets from having social security benefits. She described what she considers flaws of the system and complications that arise, as well as some potential solutions. She commented on some of Pinnacol's medical providers and discussed non-medical issues that sometimes arise, such as employees not receiving benefits in a timely manner, disputes on the manner of calculating impairments, and other issues.
Senator Mitchell asked about the potential causes of Ms. Dodge's concerns, including miscalculations, improper practices, the statutory framework for workers' compensation, and inherent friction that exists in any adversarial process. Dr. Parry asked about the role of the Administrative Law Judge. Mr. Woessner stated the judge is the fact-finder, and if there is a contest, the factual finding has to have substantial backing or evidence to support it. Ms. Dodge suggested there are two stands of measuring facts or disputes.
Mr. Meersman asked about legal fees. Mr. Woessner stated there are two different mechanisms. Ms. Dodge noted there is a specific workers' compensation law that sets forth attorney fees.
Representative Miklosi asked about bad faith. Ms. Dodge explained that there is a 'bar' set at a particular level, and that Pinnacol has reached that bar due to their profit margin.
Representative Gerou asked about the history of workers' compensation in Colorado and the notion that some states have turned to workers' compensation funds for budget fixes.
Commissioner Marcy Morrison asked the panel about injured worker light duty assignments and questioned the role of the attorney, the claimant, and the employer. Ms. Dodge stated if the claimant has light duty, and the employer does not have a light duty job, the claimant does not work and remains classified as Temporary Total Disability. Mr. Woessner further explained the determination of a claimant working light duty.
Senator Mitchell noted to Representative Gerou some issues with other states using workers' compensation funds for budget fixes. He also discussed issues in regard to Pinnacol's financial stability.
Representative Ryden asked for ideas on how statutes should be changed, in their opinion. Mr. Woessner gave examples of how the system doesn't work, and other issues with the claimant, the employer, and the law. Ms. Dodge stated her belief that oversight is needed of the physicians and benefits.
Representative Pace asked the panel about the profitability of Pinnacol and the relation of benefits given, and questioned how that affects the profit margin. Ms. Dodge discussed represented versus non-represented claimants.
12:02 PM -- Recess
The committee recessed.
01:33 PM -- Residual Market Mechanisms
Mike Taylor, representing the National Council of Compensation Insurance (NCCI), talked about residual market mechanisms and presented a powerpoint (Attachment C). He started by explaining that a residual market is an insurance market of last resort that is created by each state to ensure that all eligible employers have some means of complying with their statutory obligations to hold workers' compensation insurance. Mr. Taylor explained rate tiers and the following types of residual market mechanisms:
- State Funds - a guaranteed market that may have different rate levels and can be operated as a state agency, quasi-public agency, mutual-type insurer, or a monopolistic operation.
- Joint Underwriting Association - (only used by Florida) is designed to be self-supporting, has three rating tiers, and assembles policies for largest firms.
- Alternative Residual Market - (only used by three states) a single carrier selected by the state that issues all policies, retains all premiums, and pays all claims to a predetermined loss ratio.
- Traditional Residual Market Plan (used by 21 states) - the servicing carrier is generally selected by a bid process, carriers are compensated by retaining a predetermined percentage of assigned premium, carriers service employers, issue polices, pay claims, etc. as they would in voluntary market, and any incurred overall deficit is paid by voluntary market carriers based on a percentage of market share (i.e. carrier has a 15 percent market share, it is responsible for 15 percent of operating loss).
Mr. Taylor talked about what to look at when determining the type of Residual Market Operation to use in regards to state-approved rules governing administration. He said one must look at administration, participation of carriers, eligibility of employers, quota management (random and equitable assignment), policy issuance requirements, duties and responsibilities of the plan administrator and assigned carriers.
Mr. Taylor showed some statistics on residual markets, including the percentage of state premium for each state and what makes up residual market policies. He also illustrated how policies and premium sizes are distributed based on size.
Senator Carroll asked Mr. Taylor to explain the difference between residual and voluntary markets. Mr. Taylor explained that the voluntary market is when you go to an insurance agent and he gives you an insurance company to use. In the residual market, you go to an agent and no one will write a policy for you because of your loss or the industry you're in, so they send you to the residual market, or to Pinnacol if you are in Colorado. She asked how many states use the voluntary market. Mr. Taylor said that there are 30 states that use the residual market, four that have a monopolistic system, and six states that use the voluntary market. Mr. Taylor was asked to further clarify where the line is drawn between the voluntary and the residual market. Mr. Taylor explained that in Colorado, there is not a residual market, rather there is a market of last resort. Senator Mitchell asked whether NCCI had any ranking of how states perform in the residual market. Mr. Taylor stated that insurance companies are not ranked based on performance. Mr. Ross asked a few questions of Mr. Taylor regarding the line between the voluntary and residual market and explained that other states have clear definitions, but Colorado does not have that. Mr. Simon asked about surcharges for residual markets and Mr. Taylor explained that almost all states have a surcharge.
Representative Pace asked whether there are any trends in mechanisms that states use. Mr. Taylor said more states are making a residual market mechanism. There was a discussion about privatization Representative Ryden asked what is driving the reduction in the number of claims in the residual market. Mr. Taylor explained that the recession has impacted the number because as more workers are laid off, the amount of claims goes down because employers tend to lay off new employees and keep veterans who are more experienced and do not get hurt. He added that workplaces have become safer.
Senator Carroll asked Mr. Taylor to explain the term lost cost. There was a discussion about other states that have open bidding for carriers in the high risk market. Mr. Taylor talked about Nevada and West Virginia that went from a monopolistic to a private system. Senator Carroll asked if there was a downside to opening up to an open bid process. Mr. Taylor said to make sure that the chosen carrier is competent and can handle that type of a market. Senator Mitchell asked Mr. Taylor to talk about the history of NCCI and its purpose.
Mr. Taylor explained that he is the state relations executive and that NCCI is funded by the insurance companies; NCCI prepares a budget and the companies fund their operations. Senator Carroll asked if NCCI had any data on frequency of claims and severity of claims. Mr. Taylor said he would gather that information and provide it to the committee.
02:30 PM -- Overview of Pinnacol Assurance
Mr. Ken Ross, CEO Pinnacol Assurance, and Mr. Dan O'Neil, Vice President of Claims and General Counsel for Pinnacol Assurance distributed a book of information regarding the history of Pinnacol (Attachment D). Mr. Ross talked about his work experience and background. Mr. Ross gave the history of workers' compensation in Colorado. Mr. Ross discussed the history of Pinnacol and the members of the Board of Directors who are each appointed by the Governor. Mr. Ross stated that from 1987 to 2000, Pinnacol was in debt and at one point they were $500 million in debt. Following this, Pinnacol was put on a recovery plan in 2000 to reach a reasonable level of surplus. In 2003, the recovery requirements were reached and Pinnacol had a surplus of $250 million. Once the level was reached, Pinnacol gained control over its own assets. Mr. Ross talked about the various units within the company, including the fraud department and the return to work specialists. He talked about the dividends have been distributed over the last 5 years totaling about $350 million.
Mr. Ross talked about the Pinnacol Foundation which awards scholarships to children of workers killed or seriously injured in a compensable work-related accident while working for a Colorado employer using money raised in the community. He also talked about Pinnacol in Action, the volunteer program at Pinnacol where employees volunteer at various nonprofits.
02:46 PM -- Mr. Dan O'Neil, Vice President of Claims and General Counsel for Pinnacol Assurance, talked about the structure of Pinnacol Assurance. He clarified that Pinnacol lost government immunity in 2003 when the recovery requirements were reached. Mr. O'Neil talked about the make-up of the board of directors. Mr. O'Neil discussed the four committees under the board: the Audit Committee, Compensation Committee, Investment Committee, and the Governance and Ethics Committee. He discussed the audits that are conducted by the state and the Division of Insurance. Mr. O'Neil responded to an earlier question about federal tax exemptions.
Representative Pace asked about the surplus in Pinnacol Assurance and whether they have considered returning more in dividends. Mr. Ross talked about the process the company goes through to determine surplus. He explained that the company had a good year in 2008, and as a result, the dividend were increased from $55 to $120 million. Representative Pace asked if there are any incentives for denial of claims. Mr. O'Neil stated that bonuses are not given for individual performance. Senator Carroll stated that there are team incentives. Mr. O'Neil agreed and was asked to expand on the bonus structure. He talked about what they look at when deciding bonuses. He said they look at how the company is doing on a whole and how is the team doing relative to its goals. There was a discussion about losses and benefits paid to workers. Mr. Ross talked about how insurance companies measure performance. He said if you took the combined premium collected and it matched the amount of benefits paid (losses) the company would be at 100. If a company is under 100, it is doing well, and if a company is over 100, it is losing money. Mr. Ross responded to additional questions from the committee about denial of claims and talked about the reduction in claims in the last 18 months.
Representative Ryden asked the witnesses to explain the difference between reserves and surpluses. Mr. Ross explained that every insurance company has to hold a certain amount of reserves to cover claims. He stated that it is difficult to determine this because of the long tail for claims and explained that some workers get paid benefits for 10, 20, and even 30 years. As of the end of 2008, Pinnacol set aside $1.2 billion in reserves for liabilities. Above that, there is a surplus, which Mr. Ross explained is more than most insurance companies because Pinnacol only writes workers compensation and writes it only in Colorado. He went on to explain that other companies spread their costs over employers in a number of states and can offer policies for less than cost as a result. Mr. Ross talked about the impact of 9-11 on New York's surplus. He said that Pinnacol has determined that between $450 and $600 million is where its surplus should be. In 2008, Pinnacol had just under $700 million in surplus and gave out $120 million in dividends. Mr. Ross stated that in August, the process will start over again and the surplus will be adjusted or dividends will be given if applicable.
There was a discussion about reinsurance and what it covers. Senator Harvey talked about the charge of the committee. Representative Ryden asked about the tax exemptions Pinnacol receives. Mr. Ross said there are two, the federal tax exemption and the state premium tax exemption. The state premium tax is 1 percent of premium, and last year Pinnacol had $500 million in premium, so if it paid the state tax, it would have had to pay $5 million last year. He also mentioned that they do not pay sales taxes or real estate taxes. Mr. Simon asked about the federal catastrophic coverage in disaster situations.
There was a discussion about the charge of the committee. There was also a discussion about the relation of the amount of dividends and the cost of premiums. A discussion ensued about how compensation is determined at Pinnacol.
04:08 PM -- Public Testimony
The committee began public testimony. The following witnesses testified:
04:08 PM -- Ms. Sandra Torrence talked about her experience when she injured her arm working for University Hospital in 2001. She talked about being video taped for a year following her claim and that she was given surgery, but had to pay for her prescriptions. Ms. Torrence talked about he difficulty of going to the doctor because he was located outside of a bus route.
04:11 PM -- Mr. Ed Kahn, special counsel for the Colorado Center of Law and Fiscal Policy, distributed a handout (Attachment E). Mr. Kahn talked about the privatization approach for Pinnacol. He advised the committee that the center has not taken a position on what to do with Pinnacol. He mentioned that in 1996, he was asked to represent the public interest in blue cross legislation that would have changed blue cross from a for-profit from a nonprofit. He talked about the conversion of Blue Cross and Blue Shield in California. Mr. Kahn talked about the lack of protections in the 1996 legislation.
04:22 PM -- Mr. Ross asked Mr. Kahn some questions about Blue Cross and Blue Shield. Mr. Kahn responded to additional questions from the committee.
04:25 PM -- Ms. Paula Rhodes talked about the brain injury she sustained working for U.S. Homes and her experience in the workers compensation system.
The committee adjourned.