MINUTES OF THE ASSEMBLY COMMITTEE ON LABOR AND MANAGEMENT Sixty-eighth Session January 31, 1995 The Committee on Labor and Management was called to order at 3:30 p.m., on Tuesday, January 31, 1995, Chairman Krenzer presiding in Room 321 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Ms. Saundra (Sandi) Krenzer, Chairman Mr. Dennis Nolan, Chairman Mr. David Goldwater, Vice Chairman Mr. Lynn Hettrick, Vice Chairman Mr. Bernie Anderson Mr. Douglas A. Bache Mr. John C. Carpenter Mr. Pete Ernaut Mr. Mark Manendo Mr. Brian Sandoval COMMITTEE MEMBERS ABSENT: None GUEST LEGISLATORS PRESENT: None STAFF MEMBERS PRESENT: Mr. Vance A. Hughey, Senior Research Analyst Mr. Fred W. Welden, Chief Deputy Research Director OTHERS PRESENT: Alice A. Molasky, Commissioner of Insurance Eloise Koenig, Self-Insurance Coordinator Douglas Dirks, General Manager, SIIS Cecilia Colling, Asst. General Manager, SIIS After roll was called, Ms. Alice Molasky began her presentation by introducing Eloise Koenig, the coordinator for the self-insured employers. Ms. Molasky asked that the committee refer to (Exhibit C), an Overview of the Department of Business and Industry, Division of Insurance. She stated that there are three areas of the division which are responsible for duties under NRS 616, Section 182: Property/Casualty, Workers' Compensation and Contract Examiners. There are also three fundamental duties under Section 182: first, the review of rates of SIIS, second, to investigate the solvency of insurers, and third, the certification of self- insured employers. Ms. Molasky stated as of January 13, 1995, the self-insured employers had approximately 280,150 employees. She pointed out, based on estimates from the Employment Security Division Research Section, as of November 19, 1994, there were 729,400 people employed in Nevada, therefore, approximately 38.4 percent of the Nevada work force is covered under self-insurance for workers' compensation. Assemblyman Anderson asked what was the specific number of employees that the 38.4 percent represented. Ms. Molasky responded that 280,150 employees were self-insured. The commissioner explained that an Admissions Committee hears recommendations for certification of insurers and of self-insured employers, eligibility of surplus lines insurers and registration of risk retention groups. They consider whether or not a license should be issued, then make a recommendation to the commissioner as to whether that certification or license will issue. Assemblyman Carpenter requested clarification of the column titled "Estimated Number of Initial Members" on the Associations Planning to Apply for Certification chart. Specifically, did that mean companies or employees? Ms. Molasky explained those were the associations of public or private self-insured employers which would commence, under S.B. 316, on July 1, 1995. Ms. Molasky continued her presentation by stating the division, in particular Ms. Koenig, conducts an on-site examination of each self-insured employer every three years. The self-insured employers must submit all of their financial data and statements at the end of each fiscal year. There are 28 excess insurers, under contract, who are responsible for insuring the excess portion of all self-insured employers. The division issues Managed Care Organization (MCO) permits, after determining the organization is meeting all requirements, and renewals. Contracts are reviewed between SIIS and the MCO before they are executed. On July 1, 1995, the insurance division will be responsible for the Associations of Self-Insured Public or Private Employers. The commissioner was unable to establish regulation, under the provisions of S.B. 316, over the self-insured associations. On November 15 or 16 of 1994, a hearing was held over a proposed regulation concerning whether the associations were intended to be homogeneous or heterogeneous. The regulation was written on the premise that the associations could only be homogeneous, because of Section 36 of S.B. 316 or NRS 616.3747 Subsection 2 which states associations or members of the association must be of the same or similar classification of employment in order to merge; or homogeneous. However, for the initial certification there was no such requirement. Ms. Molasky stated she and other members of the division had reviewed the statute and could not find any impediment to the certification of heterogeneous groups. That conclusion led back to the regulation which was in effect designed for homogeneous groups, so they are currently working on amended language for that regulation to apply it to the heterogeneous. The division's duties under those provisions will be to certify each association. There are differences between the associations and a single self-insured employer, the most fundamental is the associations are in effect quasi-insurers. They are by the provisions operating much the same as a mutual insurer. Another difference is the associations will be reviewed annually not every three years. Another responsibility of the division is to review rate requests by SIIS. The last request was in 1992 for a 9.2 percent increase, which was granted. The associations will be required to maintain actuarially sound reserves as is SIIS and the insurers. On December 15, in accordance with S.B. 316, the commissioner adopted regulations which stated the provisions of Title 57 with which SIIS must comply. One of the regulations require SIIS to report on its financial statement in the same manner as other insurers do, that is according to statutory accounting principles or the National Association of Insurance Commissioners Convention Form of the Financial Statement. Ms. Molasky concluded her overview by noting the Insurance Division is currently conducting a financial examination of SIIS which began on January 23, 1995. They are also conducting an actuarial review of their actuaries analysis, which commenced on January 15, 1995. The report from both the review and the financial examination will be presented to the Legislature as part of the Governor's report of the audit of the system. Mr. Anderson inquired if the increased rate has been set in such a manner as to not impact the ability to pay back in the future adversely. That is, have we made the tail long enough so that those people who left the system did not impact the people who are left in the system. Ms. Molasky responded that the payment of claims incurred by employees of persons who became self-insured remains with the system. Mr. Anderson concluded that the people who are now in the system are carrying a higher burden because of those people who exited the system because the 1992 rate was not sufficiently set for the actual cost of the tail. Ms. Molasky stated that she would need to speak with the division's actuary, who was not present, as she did not know what the basis was for the increase fully in 1992, but she does know that the system did not feel it was necessary to return to the commissioner from 1992 to the present time to request any further increase. For a point of clarification, Assemblyman Goldwater asked if the legislative intent was to only allow homogeneous groups for self-insured, but in the commissioner's estimation there is nothing that precludes heterogeneous groups from forming and self-insuring. To which Ms. Molasky replied only the legislature knew what their intent was. She felt, after looking at the statutes, there is no preclusion in the section that sets the requirements for certification for heterogeneous groups. The merger section is very clear, it prohibits heterogeneous associations from merging. Mr. Carpenter asked a two-part question: when would the regulations be out and would they have to go to a public hearing? Ms. Molasky explained the regulations would have to be implemented fairly soon because the statute would go into effect July 1, 1995. The provisions require the commissioner to issue or deny a certificate within a 60 day period from the date of the application. At the present time, we do not have the application form ready because of the delay in attempting to solve the problem of heterogeneous and homogeneous associations. There is an allowance of a 90 day extension following the initial 60 day period to review the application for certification. She hoped they would have the proposed regulation modified within the next 30 days. Ms. Molasky has asked for an opinion from the deputy attorney general for the Insurance Division on how to proceed in that area. The initial regulation was heard by the former commissioner and she questions if that ability has been extended to her. Mr. Carpenter asked if Commissioner Molasky has heard there are insurance companies that are willing to purchase the unfunded liability of SIIS and use it as a writeoff. The commissioner replied she had heard of practices of acquisitions of insurers who were in trouble, but would have to defer to her financial people to ask the frequency and business practice of insurers conducting themselves in that manner. Assemblyman Nolan asked when would the Governor's financial report of the system be out? Ms. Molasky replied it is due the first Friday in March. Mr. Anderson queried if the expansion from a homogeneous group to a heterogeneous group would create a three way insurance system in the state. The commissioner stated it could even under homogeneous. Mr. Anderson further inquired who has the responsibility of picking up the claimants if a homogeneous or heterogeneous self-insured group fails. Ms. Molasky pointed out if the association in totality fails, the required security deposit or the insolvency fund held by the commission would be applied. Ms. Koenig interjected the commission is holding approximately $122 million in security deposits for the self-insured employers and $2.7 million in the insolvency fund. The members are jointly and separately liable to the full extent of their individual assets. The presentation ended with no further discussion. Chairman Krenzer introduced Mr. Doug Dirks, General Manager of SIIS, who continued his presentation from an earlier meeting by referring to page 27 of The Path to Recovery, Monitoring the Impact of Workers' Compensation Reform (Exhibit D). He briefly reviewed the Legislative proposals from the last meeting which included: the two-year moratorium on the group self-insurance provision so that the state workers' compensation fund is not again in danger of becoming insolvent; expanding the managed care umbrella to employees who reside or work in a county of 100,000 or more; eliminating the 20 mile rule, which requires the injured worker to receive managed care treatment only if it is within 20 miles of his residence; expanding managed care to Carson and Douglas counties; and, removing the seven and five requirement so the agency can choose vendors as cost effectively as private insurance companies. The next issue is a subject of some confusion. SIIS is asking for clarification on who covers the injured worker in the period after June 18, which was the effective date of the law, but prior to January 6, which was the date managed care organizations came into existence. They are asking that all the injured workers in that time frame be covered by managed care. Mr. Dirks indicated there is a drafting error in the dispute resolution area that needs clarification. The Department of Administration does not have responsibility for Managed Care Organizations (MCO) dispute resolution, but the drafting error in the law would suggest that they do. He also pointed out it is not clear in the law that it is the general manager's responsibility to select the MCO's and that MCO's are mandatory. He would like to have those points clarified. Assemblyman Ernaut understood the companies who left the system in the 80's and 90's to become self-insured had assessments to take care of the so-called tail they would leave behind. Mr. Dirks responded he was not comfortable with the conclusion that tails were covered as employers went self-insured. There may have been an intent to do that, but that is not what occurred. Mr. Ernaut pointed out he was not clear why when a company leaves SIIS there is a tail. Mr. Dirks stated the presumption should be that each year a sufficient premium is being charged to cover all expenses that occurred from claims during that year. There should never be a tail. During the 80's and 90's, SIIS had loss ratios of 200 per cent. They paid out or incurred in losses, $2 for every $1 they collected in premium. The inadequate premium paid in those years created the tail. Mr. Ernaut interjected that this system was designed so there would be no concept of a tail. Had the premiums been adequately assessed in the initial stages of this system, there would have been no tail when companies left to become self-insured. He further stated that the managers of the system during the ten year period, by not assessing the correct rate, have put the system in the position it is now. Mr. Dirks agreed in theory that the rate set for the year should cover all expenses incurred in that year, but would not place all the blame on the managers because there was a consulting actuary and certified public accounting firm that were providing information to them. Mr. Ernaut voiced his concern about reporting to his constituency in good conscience that they are paying for the incorrect assessments of past years and cannot leave the system because of a moratorium. Mr. Dirks suggested that a moratorium is "a greater good" issue because if they do not address the situation and it goes back into negative cash flow, they will create a workers' compensation and a fiscal crisis in the state that will impact everyone. He emphasized that SIIS is supportive of group self-insurance and self-insurance, but right now they are facing a $2 billion unfunded liability that, if not addressed, will create a crisis. Mr. Dirks feels that they are in a position to rebuild the assets sufficiently in two years, address the operational issues that are of concern, and provide viable alternatives. Mr. Ernaut concluded by asking what would happen if the system just failed. It seems to him that they are at a crossroads, they need to decide if they want to save the system or not. Also, what rewards do the employers get that are caught in the moratorium. Mr. Dirks declared if SIIS was closed down, there would still be an obligation for the claims up to that time. Since SIIS does not have sufficient assets today to fund those liabilities, the burden will ultimately fall somewhere. He stressed that the benefit of staying with the system would be workers' compensation coverage which they probably could not attain through the private insurance market. In answer to Mr. Anderson's question regarding rates, Mr. Dirks replied under the current law, if you go self-insured, you pick up every dollar of every claim and the only assessment that is made is, do you have the financial ability to do that. Under the group self-provisions, there may be a need to underwrite some of the risks. They may have the financial ability, but they are combining inappropriate risks. Under that scenario, your loss experience would follow you. The impact would be, you would not be permitted to go self-insured. Mr. Anderson commented, that being the case, the people left in the system would be those that are high-risk. Mr. Dirks concurred. Mr. Carpenter remarked that we did have a rate increase through the $100 deductible being charged. He referred to (Exhibit E) the chart entitled Number of employers, by fiscal year leaving SIIS to become self-insured, and pointed out the number will probably continue to increase each year. Even if a moratorium is placed on group self-insurance, the others can continue to leave. The bottom line is, maybe it would be better to bail out now and let everybody pay a little bit rather than keep going further and end up in a situation where it will cost a horrendous amount to bail the system out. He inquired of Mr. Dirks if he felt his legislative proposals would not only turn the system around, but bring people back. Mr. Dirks responded if last year's performance would carry over to the future, and if they can out perform the past as they are doing now, they can work their way out of this situation. Mr. Nolan asked if Mr. Dirks believed removing the five and seven cap on the MCO's and dispersing managed care over a larger field of MCO's, some of which may fail, would be a healthy solution. Mr. Dirks felt that decisions on MCO's should be based on the quality of the bids and quality of the vendors that present themselves to SIIS, and the price they can get for it, not on set numbers. He would like to raise the standards in the managed care program and if he did not have to worry about coming up with 12 that could meet a particular standard, that enhances the program. Mr. Dirks continued with his review of (Exhibit D.) The next issue is a clarification of the law. At present, SIIS has been ordered to provide a rehabilitation program to a person with no disability. Mr. Dirks would like the law to clearly state if a person has a 0 percent disability, they do not qualify for a rehabilitation program. The next rehabilitative issue is in internal management of SIIS. Currently the law requires that a majority of the vocational rehabilitation cases be handled by outside vendors. Since there has been a dramatic reduction in rehabilitation caseloads, SIIS is capable of managing all of those internally now at a lower cost than the outside vendors. Mr. Dirks asked for the ability to determine whether or not a case goes to a private rehabilitation vendor because a particular expertise is needed, but in lieu of that, fully staff vocational rehabilitation internally for cost effectiveness and to put the responsibility back on the management of SIIS. Mr. Anderson questioned which AMA guide is being used to determine impairment. Cecilia Colling stated they are presently using the second addition. They will be supporting the adoption of the fourth addition based on a review by their medical advisors. Mr. Anderson pointed out in 1991 the medical community indicated physicians were concerned that some common practices were not included in the second edition. He was under the impression they had directed that be accomplished and they should be moving to a system where physicians' practices would be covered. Ms. Colling remarked SIIS does not adopt the guides, that is done by the IIRS. There is a need to adopt new guides, as it is increasingly difficult to educate the rating physicians about the second guides. The handbooks used to train people are outdated and you cannot find them. There were problems with the third edition, but they seem to be addressed in the fourth edition. Mr. Anderson expressed his belief that SIIS appeared to be out of compliance with NRS statutes, which require that the guides be available to physicians, and he hoped they would move with dispatch to correct the problem. Ms. Colling stated she would pass the message to IIRS. Assemblyman Hettrick requested documentation showing the relative cost of the private sector providing the same rehabilitation service that SIIS is providing. Mr. Dirks stated that information was available and would be provided. He further stated it was broken down in a per hour cost and found it was more cost effective to have SIIS do the program than the outside vendor. Mr. Dirk moved on to page 30 of (Exhibit D,) pointing out these are not grouped in any order. The first issue has to do with the excessive loss list, which encompasses those employers who over the past two years have losses exceeding their premiums. There are now 194 employers in that group. The formula was tied strictly to a loss ratio. SIIS is asking to be given a little more discretion in that area so that they can tie the formula to frequency of losses. This will give employers, who have made significant changes in their practices and became safer, some credit and not subject them to the $1000 deductible. Conversely, those employers that did not have a large claim but had a large number of small ones that are indicative of a safety problem might also be subjected to the $1000 deductible. Mr. Ernaut stated, in 1992, Nevada was number seven on the Misfortunate 500, have we dropped out of the top 25 at least. Mr. Dirks declared Nevada is no longer on the list as of this year. Mr. Carpenter questioned what kind of a written safety program SIIS had. Mr. Dirks responded they had hired a full-time risk manager to monitor every SIIS claim and is also assisting with their safety committees both north and south. Mr. Dirks went on with his review pointing out there is a provision in the law that requires all disbursement of funds by SIIS to be done by check. He would like to have authority to wire transfer funds as this is standard operating business procedure today. Mr. Dirks is also asking for a staggered policy provision. Currently, all policyholders must pay monthly or quarterly. In some cases, it costs SIIS more money to maintain a policy on an employer than they can collect monthly. He would like to provide an option of yearly payments and stagger their policy periods to make them more efficient internally. SIIS has to hire temporary employees at the beginning of each month and quarter to process the large amounts that arrive for a one week period. The next issue has to do with the subsequent injury fund. This was a drafting issue resulting in confusion over appeals and fraud and how the fund was supposed to work. Mr. Dirks would like the same provisions that IRS applies to the self- insurers apply to SIIS. The next issue addresses the current mandatory three times penalty. Mr. Dirks asked for discretion in that area. When there is no intent to defraud anybody or to avoid a penalty, they could waive it. Conversely, if someone clearly intended to purchase coverage and let it lapse for the purpose of not paying, they could apply it in that case. Ms. Colling interjected that if a policy is allowed to lapse, the penalty would apply. However, some Hearing Officers are finding it does not apply, so she would like that clarified. Mr. Dirks believes the next issue is an oversight. The law provided for a minimum $600 benefit per month for those individuals on pensions. Actually, what the law provides for is their dependents and their surviving spouse. The pensioner only realizes the minimum benefit if he dies. Mr. Dirks asked that the pensioner be included in the minimum language provision as well. Another oversight, SIIS withdrew a temporary total and temporary partial disability benefits for those that are incarcerated. They did not include in that pension benefits, however, they believe it should be included. The next issue is an inequity in the current system. If a worker gets a permanent partial disability (PPD) award, he can collect it in a lump sum or installment. If he chooses to collect it in an installment, then dies, his survivors get nothing. Mr. Dirks would like to have that issue addressed. Mr. Ernaut questioned why if a person died, would he still receive benefits. Ms. Colling explained that a PPD award is a compensation for a loss of some bodily function. The worker would have an option to receive a lump sum to invest as they chose or receive installments to help them through life. When he becomes a pensioner, the PPD is included in his pension or reduced if he takes a lump sum. If he dies from non- industrial causes, he is not given the benefit of that award. So it is an entitlement one person gets that another does not. Mr. Anderson asked if a claimant received permanent total disability and at some point was incarcerated, the state would still have to shoulder the burden. Ms. Colling responded that the claimant would still receive the pension even though he was incarcerated. Mr. Dirks proceeded with the issue of child care. Last session, they removed payment of child care for injured workers while they were in a vocational rehabilitation program. They are being ordered to make other payments such as dependent care, for a parent or a spouse. They are asking for clarification as they understood that all dependent care was to be excluded not just child care. The next one concerns office space. The law prohibits SIIS from leasing excess office space to anything but other public entities. Mr. Dirks is asking for an ability to lease to private vendors. The final issue deals with corporate officers. Presently, if you are a corporate officer, you must elect to reject coverage whether you are receiving salaries from the business or not. Ms. Colling would like this clarified to state that coverage is required for corporate officers who receive pay for service from the corporation. Chairman Krenzer asked for questions. As there were none, the meeting was adjourned at 4:55 p.m. RESPECTFULLY SUBMITTED: Susanne Mund, Committee Secretary APPROVED BY: Assemblyman Saundra Krenzer, Chairman Assemblyman Dennis Nolan, Chairman Assembly Committee on Labor and Management January 31, 1995 Page