The 1st meeting of the Interim Joint Committee on Labor and Industry was held on Thursday, August 21, 2003, at 10:00 AM, in Room 149 of the Capitol Annex. Representative J. R. Gray, Co-Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Katie Stine, Co-Chair; Representative J. R. Gray, Co-Chair; Senators Julie Denton, Brett Guthrie, Alice Kerr, and Richard Roeding; Representatives Denver Butler, C.B. Embry Jr, Dennis Horlander, Joni Jenkins, Thomas Kerr, Russ Mobley, Rick Nelson, Jim Stewart, and Brent Yonts.
Guests: Janie Miller, Commissioner, Department of Insurance; Cathy Booth, State Relations Executive, and Natasha Gonzalez, Actuary, National Council on Compensation Insurance (NCCI); Larry Greathouse, Commissioner, Department of Workers' Claims; Gary Davis, Director, Security and Compliance, Department of Workers' Claims; Dwight Lovan, Chairman, Workers' Compensation Board; Deborah Wingate, Division Director, Information and Research, Department of Workers' Claims; and Dr. Gregory Gleis, Workers' Compensation Medical Director, University of Louisville.
LRC Staff: Linda Bussell, CSA; Melvin LeCompte; Adanna Hydes, Betty Davis and Reni Krey.
Chairman Gray welcomed members and explained the absence of some of the members who had a conflicting meeting at the Kentucky State Fair. He reminded members that the House Labor and Industry Committee would have a meeting at Kentucky Dam Village during the annual Labor-Management Conference, September 9, at 2:00 p.m. at which time Roger Fries, CEO, Kentucky Employers' Mutual Insurance Authority (KEMI) would present an overview and status of KEMI, Kentucky's state operated insurance carrier. Chairman Gray also announced that there would be either a joint or separate committee meeting in October, depending on what can be worked out at that time.
Chairman Gray told the members that the purpose of today's meeting was to inform them of the significant increase recommended in the NCCI workers' compensation loss cost filing. The filing recommends an average increase of 20.5 percent. He said the recommendation was shocking not only to the committee but to Kentucky's employers, labor organizations, and to the general population. Chairman Gray said the General Assembly has made diligent efforts to reduce workers' compensation costs over the past two decades. He pointed out specific efforts which have been made over the years including dramatic cuts in benefits to injured workers in 1980; deregulation of the insurance industry for workers' compensation by authorizing competitive rating in 1982; and in 1994, the creation of KEMI to eliminate the residual market problems for workers compensation carriers. He also stated that benefits were reduced to such unconscionable levels in 1996 for both injuries and black lung that minor corrective action was taken in 2000 and 2002. Chairman Gray further pointed out that fee schedules for doctors, hospitals, and pharmacists have been in place for years, managed care has been an option for Kentucky's employers since 1994, utilization review is also in place to control medical costs to employers, income benefits are limited or terminated when a person becomes eligible for social security, and coal miners are still not getting compensated for black lung even after the corrective action in 2002. He said that despite all of these changes, workers' compensation rates have increased during the past couple of years, including a ten percent increase in 2002. He said the proposed to increase of 20.5 percent was unbelievable, stating that the proposal was reminiscent of the 1980s before the major reforms occurred. He said the NCCI proposal was particularly difficult for legislators who have been witness to the major cuts in the workers' compensation program and the impact they have had on injured workers.
Chairman Gray introduced Commissioner Janie Miller, Department of Insurance. Commissioner Miller said the NCCI filing is the advisory loss cost filing for the voluntary workers' compensation insurance market. The filing is designed to cover medical costs associated with workplace injury as well as wage replacement, or indemnity benefits to injured workers. She said that as required by statute, the loss cost filing only includes the pure premiums. She explained that the loss cost filing does not include expenses such as administrative expenses, commissions, taxes, and other types of expenses. She said the filing is designed to identify projected costs related only to the medical costs and indemnity benefits for injured workers. She said each insurer offering workers' compensation insurance in Kentucky must separately file a pure premium multiplier to be applied to any approved voluntary pure premiums or loss costs in order to compute the final workers' compensation rates they intend to charge. NCCI filed the voluntary loss cost filing on July 3, 2003, which proposes an effective date of September 1, 2003. The original filing included an overall average increase of 5.8 percent for the coal classes but the filing was amended to reduce the increase to three percent for the coal classes after a computation error was corrected. The department has 30 days to respond, but due to the significant size of the filing, the department requested a 30-day extension, and subsequently decided to hold a public hearing to help the department in consideration and review of the filing. She informed the members that, because of the hearing, the law requires her to make a determination 30 days from the date of the hearing, which she said would be September 12.
Commissioner Miller explained the process which the department would use to review the filing. She said the criteria for the process is set forth in KRS 304.13-031 which states that "rates shall not be excessive, inadequate or unfairly discriminatory; due consideration shall be given by the department to past and prospective loss experience within and outside the state, to the conflagration and catastrophe hazards, to a reasonable margin for underwriting profit and contingencies, to dividends, savings, or unabsorbed premium deposits allowed or returned by insurers to their policyholders, members, or subscribers, to past and prospective expenses both countrywide and especially those applicable to this state, and to any other relevant factors within and outside the state."
Commissioner Miller said that in addition to department staff, the department has contracted with Milliman USA, through a bidding process, to assist with the review of the filing. She informed members that representatives of Milliman were present at the public hearing which she said was helpful. She said that as a result of the public hearing, the department has identified some additional questions to be posed to NCCI, and that the department has not developed a position on the filing to date.
Chairman Gray introduced Cathy Booth, State Relations Executive, and Natasha Gonzalez, Actuary, representing NCCI. Ms. Booth explained that as State Relations Executive, she is responsible for the states of Kentucky, Georgia, South Carolina and Tennessee and that her primary responsibility is to work with the Department of Insurance concerning all of the NCCI operations and duties such as loss cost filings, policy forms manual, experience rating, and basic manual rules. She said that NCCI, as the rating and statistical organization in Kentucky, collects data on workplace injuries and using that data develops the loss costs for the voluntary market. Ms. Booth introduced Natasha Gonzalez, NCCI Actuary, who heads the team responsible for the development of the loss cost filing in Kentucky. Ms. Gonzalez, who is a Fellow of the Casualty Actuarial Society, and a member of the American Academy of Actuaries, provided details of the underlying data that resulted in the 20.5 percent average increase.
Ms. Gonzalez provided a power point presentation and explained the market conditions in Kentucky that have been seen in the last few years and she explained that the 2001 combined loss ratio for Kentucky was 143 which meant that, for every dollar an insurance company collects, it is paying out $1.43 either through losses, expenses, or dividends. In the year 2000, Kentucky's combined ratio was 146 percent. She said that the combined ratio is based on losses and experience but investment income is not included. She compared Kentucky's combined ratio to other states and said it ranked second highest in the accident year 2001.
Ms. Gonzalez provided a breakdown of the components of NCCI's loss cost filing between medical and loss components. The medical portion comprises approximately 14 points of the recommended increase and the indemnity portion comprises about six and a half points. She said that the components can be broken down further regarding experience, trend, and any change in benefits. She provided a breakdown of the proposed changes for the industrial and coal mine codes citing that from 1993 to 1997 there was a sharp decline in injury rates for workers and a steady rate of claims from 1997 to 2001, which did not offset increases in medical costs. She said the coal mine loss cost components could be broken down into traumatic and disease components, with most of the increase attributed to the traumatic portions and no changes are being recommended for the disease component.
Ms. Gonzales stated that medical losses represent almost 60 percent of the loss cost dollar in Kentucky so any deterioration in medical is going to drive the indication more than the indemnity. The medical indemnity split is much more equal in other states than it is in Kentucky.
Ms. Gonzalez explained the indemnity cost drivers in Kentucky noting that the multipliers for permanent partial disability have been increasing in recent years which can be attributed to a slower return to work and harder economic times. She also cited increasing permanent total awards, higher impairment ratings based on the fifth edition of the AMA guides, higher incidence rates, longer recovery rates and increasing attorney involvement. She further stated that even though the list of cost drivers for the medical portion was shorter, the impact was higher on the loss cost indication. She cited increasing use and costs of medical care, more expensive drug use, and increasing attorney involvement. Additionally, she provided an overview of Kentucky's average indemnity permanent partial cost per case, loss distribution by injury type, and the number of permanent total awards from 1994 through 2001. She said that Kentucky's average permanent partial medical cost is $75,000 versus the countrywide average of $25,000, and the regional average of $21,000. She also stated that compared to other states, Kentucky has the highest average cost per medical case for permanent partial disabilities. She said Kentucky's medical costs are growing faster than those in the rest of the country. She also stated that the rise in prescription costs are rising twice as fast in Kentucky as they are in other states.
Chairman Gray introduced Commissioner Larry Greathouse, Department of Workers' Claims. Appearing with Commissioner Greathouse were Mr. Gary Davis, Director of the Division of Security and Compliance; Mr. Dwight Lovan, Chairman of the Workers' Compensation Board; Dr. Gregory Gleis, Workers' Compensation Medical Director, University of Louisville; Ms. Deborah Wingate, Director of the Division of Information and Research.
Mr. Davis, utilizing a powerpoint presentation, provided an overall system cost analysis which he said is made up of two primary units, premium and assessment. He said there was a reduction in total system costs from 1996 until 1999. He explained that premium is based on every one hundred dollars worth of payroll and has been decreasing, as has the total system cost, through 2000. He noted increases in 2001 and 2002. The total system cost in 1996 was a little over one billion dollars. Premium costs in 1996 was $2.52 per $100 of payroll. Premium costs in 2002 were $1.72, which was still significantly less than in calendar year 1996. He further stated that from a more practical view, the voluntary market, adding back in deductibles and self-insured group funds, would indicate a $750 million premium system as opposed to NCCI's reported $405 million system for the calendar year 2002. Mr. Davis said individual self insurance is part of the total system and there are 175 individual self insured employers in Kentucky. He noted that there has been significant growth in premiums in both the self insurance groups and in KEMI. He provided an overview of total system costs from 1990 through 2002, with estimates for 2003. He noted the major reform of the workers' compensation system in 1996 and pointed out that the total system cost is still significantly lower than those prior to 1996. Mr. Davis provided examples of different insurance class codes and how they would be impacted by NCCI's proposed loss cost filing. Mr. Davis said every insurance carrier will take the loss cost rate and will use a multiplier to determine the ultimate rate.
Mr. Dwight Lovan, Chairman of the Workers' Compensation Board, who has been involved with the workers' compensation system as an adjudicator since 1990, outlined recent history of workers' compensation, particularly the use of multipliers in permanent partial cases. The first multiplier in permanent partial appeared in 1994. At that time when an individual went back to work at the same or greater wage, he was limited to one to two times their functional impairment. In 1996 the change was much more substantial due to a pure grid determination of permanent partial disabilities. Mr. Lovan explained that in 1996 there were three multipliers: 1.5 if the individual lacked the physical capacity to return to the job they were doing at the time of injury; 1 multiplier if the individual had the physical capacity to return to the work they were doing at the time of injury but had not returned, or had returned and left; and a .5 multiplier for an individual who returned to work at the same or greater wage. The multipliers changed during the 2000 Regular Session. He said that the 1.5 multiplier was modified to a three multiplier; a one multiplier was changed to a two multiplier; and the .5 multiplier was changed to a one. Mr. Lovan said that though there was an increase in the multiplier, there was a decrease in the grid factors. The purpose of modifying the multipliers was to increase benefit levels for individuals who sustained injuries with low impairment ratings, while not increasing benefit levels for individuals who had more serious injuries. Additionally, Mr. Lovan provided examples of specific case ratings comparing post 1996 computations to post 2001 computations, pointing out lower grid factors and the difference in weekly benefits. Mr. Lovan also provided data regarding permanent total awards as a percent of all awards. He said that when discussing percentages, it is important to remember that you are comparing it to the number of cases decided indicating that there were over 10,000 cases filed in 1996 and 3,700 to date in 2003, and he pointed out that the percentage goes up when the numbers go down. He said some of the statistics regarding permanent total awards includes settlements. He also said that based upon data compiled by the department, and the reality of the numbers, they are seeing a significant decrease in permanent total disability awards and total indemnity benefits beginning with 2001, noting that part of that is attributable to the 2000 grid factor modification.
Mr. Lovan introduced Dr. Gregory Gleis who explained the differences in the fourth and fifth editions of the American Medical Associations (AMA) Guides. He said the AMA guides provide an impairment rating, thereby providing a standard by which the social impact or disability can be established. He said use of the fifth edition of the AMA guide was begun approximately two years ago. Dr. Gleis provided examples of changes in impairment ratings established in the AMA fifth edition guide which provides a range of impairments allowing an adjustment of the impairment range depending on the severity of the problem within that category. He also said the definition of injury has changed between the fourth edition and the fifth edition of the AMA guides and he provided specific examples.
Ms. Deborah Wingate, Director, Division of Information and Research, Department of Workers' Claims discussed Kentucky's data trends. She said NCCI provided information on trends, but she hoped to provide up-to-date information, where NCCI left off, that was specific to Kentucky trends. In the continued powerpoint presentation provided by the department, Ms. Wingate pointed out the number of claims from 1996 with a projection through 2003. She said it was important to note that the rise in claim filings in 2001 was a result of HB 992, and the rise of claims in 2002 was due to increased black lung or coal workers' pneumoconiosis claims and that the impact of those claims may not affect the system costs because the Coal Workers' Pneumoconiosis Fund would be assuming the majority of that liability. Ms. Wingate further stated that Kentucky's claim frequency rose in 2001 due to the December 12, 2000 deadline set forth in 1996 House Bill 1. She provided a comparison chart of claim frequency from 1997 through 2003, detailing the impact of legislative changes, noting that the slight incline for 2002-2003 indicated the impact of HB 348. Also, in response to NCCI's indication of attorney involvement as a cost driver, Ms. Wingate stated that defense fees have always been a factor. She said the plaintiff side is indicated as a cost driver but that not every plaintiff's attorney is successful in obtaining benefits for their clients, and by factoring in claim dismissals, the fees will go back down.
Commissioner Greathouse, the final speaker from the Department of Workers' Claims detailed ways that Kentucky has addressed managing medical costs and said that one of the ways NCCI was trying to validate what appeared to be the largest cost driver asserted by their data was by indicating medical as the foremost cost driver, pointing out that medical accounted for 14 percent of NCCI's 20.5 percent proposed increase. Commissioner Greathouse explained Kentucky's managed health care and cost containment components for workers' compensation claims. He said any employer in Kentucky can utilize a managed care program which must be approved by the Commissioner of the Department of Workers' Claims. He said that the managed care companies are required to report annually to the department and that he did not believe any of the statistics were represented in the NCCI report. Commissioner Greathouse said it is critical to examine the layers of costs, otherwise the figures would be skewed, and he provided examples of managed care costs as they relate to pharmaceutical, chiropractic, and medical and pain management costs. In addition, Commissioner Greathouse provided an overview of Kentucky initiatives for medical cost containment. He explained that a medical fee schedule is in place by statutory mandate and that KRS 342.035 requires a schedule of fees be "reviewed and updated, if appropriate" essentially every two years. Commissioner Greathouse said the department works with doctors and the disciplines of the American Medical Association to identify specific procedures that must be considered in the treatment of patients. The last fee schedule for physicians became effective January 1, 2002, and will be reviewed this fall because the CPT (Current Procedural Terminology) will change this November. He added that prior to 1994, costs for medical care in workers' compensation claims were nine to 15 percent higher than for medical care in other types of insurance. Regarding the hospital fee schedule which regulates hospital fees for all Kentucky hospitals and all out-of-state hospitals that accept a workers' compensation patient for treatment, Commissioner Greathouse informed the committee that the first hospital fee schedule was established ten years ago and is updated annually. The current fee schedule for hospital bills became effective April 1, 2003. Additionally Commissioner Greathouse outlined the workers' compensation pharmaceutical fee schedule which entitles pharmacists to be reimbursed in the amount of the equivalent drug product wholesale price of the lowest priced therapeutically equivalent drug the pharmacist has in stock, plus a $5.00 dispensing fee and taxes if applicable. He said other factors are in place for cost containment of medical expenses in workers' compensation cases including utilization review and medical bill audit.
Chairman Stine thanked Commissioner Greathouse for his expeditious effort in compiling and providing information to the committee in response to the NCCI filing. She asked him, based upon his analysis, if he thought the NCCI proposed increase was justifiable. Based on the data utilized by NCCI, with respect to medical costs, and the unwillingness to look past the 2001 year taking into account the experience of trends which show a tremendous downward trend, Commissioner Greathouse emphatically stated that he could see no justification for a 20.5 percent increase. He said he was certain there is some justification for an increase, but not based on the data submitted to the Department of Insurance. He reiterated that he would submit his information to Commissioner Miller who would have to analyze the data and determine its relevance.
Chairman Stine recognized Representative Yonts who asked Ms. Gonzalez, NCCI, to return to the table for questioning. He asked her how much of the data was based on investment loss through the stock market and how much was based on investment income. Ms. Gonzalez replied that none of the data was based on investment loss or income. Represented Yonts referred to the disparity between Commissioner Greathouse's comment regarding the downward trend of workers' compensation disabilities and NCCI's interpretation of the data. Ms. Gonzalez said the data included in NCCI's filing was based purely on the data reported by the insurance carriers for the medical losses in Kentucky and the wage loss benefits in Kentucky, however to explain increases, she said she relies on other sources of data that include all types of health care costs. Representative Yonts asked Ms. Gonzalez to explain how NCCI's data differs from the data compiled by the Department of Workers' Claims. In response she explained that it was NCCI's policy to rely upon and review policy year and accident year data which she said they believe is more predictive of the future. She explained that other data is organized from a calendar year approach.
Representative Yonts asked Ms. Gonzalez if, in light of the data presented and factoring it in to her analysis, would it be possible that a lesser increase could be recommended. Ms. Gonzalez, referring to the testimony provided by Dr. Gleis regarding the switch to the AMA fifth edition ratings, said she was concerned that the increases in the AMA rating that are not fully reflected in the data are going to impact the costs in the future. She also said that the cost ratios used for hospitals are not solid indicators because even though the fees are fixed, the charges are moveable. Additionally she added that the data shows that there is a shift to more expensive drugs for which there are no generic equivalents and she believed the increase in loss costs is warranted.
Senator Stine directed the members' attention to a letter provided by the Kentucky Hospital Association and read aloud a statement from the letter, "The charts cited in the NCCI report gives the false impression that Kentucky's costs are higher than the nation and rising inappropriately."
In response to a question by Representative Yonts, Ms. Gonzalez said the largest increase was indicated for the contracting class codes.
Senator Stine referred to page one of Commissioner Greathouse's report, and asked Ms. Gonzalez why NCCI used the 2001 data rather than data that could be obtained for 2002 and 2003 which shows a decrease in the permanent total awards. Ms. Gonzalez said that NCCI's standard is to use the data that is provided by the insurance companies and the latest data they had that could be used in an experience filing is evaluated as of December 31, 2002.
In response to questioning, Mr. Lovan said defense attorney fees have always been a factor in costs but that NCCI focuses on claimants' attorney fees. He added that true trends consider the defense side because they are more stable.
Responding to Senator Stine, Ms. Gonzalez explained that self-insurers are not required to submit information to NCCI, therefore it is not factored into their analysis.
Senator Stine reminded Ms. Gonzalez that in 2000, NCCI projected a 6.8 percent cost impact of HB 992 and questioned the disparity between that prediction and the current filing. Ms. Gonzalez indicated the cost analysis had been underestimated.
When Senator Stine asked how much of the loss cost increase was based on strengthening of reserves by insurance carriers, Ms. Gonzalez explained that the filing was based on paid losses only. She said last year's loss cost filing for indemnity was based on strengthening case reserves.
In response to questioning, Mr. Lovan explained that claims that are filed in a given year are difficult to correlate and cannot be compared to attorney fees that are approved because fees are not approved until the end of a case which may occur in a subsequent year. He said the Department of Workers' Claims evaluates data for the fiscal year whereas NCCI examines the policy year.
Chairman Gray said that many of his questions had been answered during the meeting and said he could see an onslaught of employers converging on Frankfort if NCCI's recommended filing were to be approved. He also voiced concern that there may be interest in reducing benefits to injured workers as a result of the approved filing. He said based on the conflicting information provided, he motioned for the committee to request Commissioner Miller to reject and or disapprove the loss cost filing by NCCI.
Before voting on the motion, Chairman Stine recognized Senator Denton who commented that she had the privilege as a freshman legislator in the mid 1990s to work on workers' compensation legislation. She said she felt that if the recommended rate increase was approved, Kentucky would be moving backwards, that employers would leave the state and benefits would be reduced and she said she hoped to impress upon Commissioner Miller that it is critical that she reject the rate increase, particularly to the degree it is recommended.
Chairman Stine entertained the motion and a second to the motion was made by Senator Denton. The motion passed by voice vote.
There being no further business, the meeting was adjourned.