MINUTES OF THE ASSEMBLY COMMITTEE ON LABOR AND MANAGEMENT Sixty-eighth Session April 27, 1995 The Committee on Labor and Management was called to order at 3:30 p.m., on Thursday, April 27, 1995, Chairman Dennis Nolan 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 STAFF MEMBERS PRESENT: Mr. Vance A.Hughey, Senior Research Analyst Mr. Fred W. Welden, Chief Deputy Research Director OTHERS PRESENT: Ms. Alice Molasky, Commissioner of Insurance Mr. Ron Swirczek, Administrator, Division of Industrial Relations Ms. Eloise Koenig, Self-Insurance Coordinator, Division of Insurance Chairman Nolan explained today, the committee would hear sections 7, 8 and 9, of A.B. 498. The remaining sections would be addressed on Tuesday, May 2. He pointed out this will be the first of many bills addressing workers' compensation and the State Industrial Insurance System (SIIS), which will come before the committee. The committee will make every effort to allow for proper discussions and review of each bill and therefore will adhere to a strict schedule which will include extended committee meeting hours. Mr. Nolan asked the committee members when considering the SIIS issues, to approach the situation from two perspectives. They need to assure, regardless of who provides the service, injured workers in the state of Nevada are cared for quickly, appropriately and their true needs are taken care of. They also need to assure that the current SIIS liability is reduced by managing claims wisely, expeditiously and the system is provided with every available tool to improve its financial picture. Mr. Nolan explained failure on the committee's part to address these issues in a responsible manner could easily result in this burden being absorbed by every business owner, injured worker and tax paying citizen in the state. Chairman Nolan, in order to give a brief introduction on A.B. 498, passed the gavel to Co-chairman Sandi Krenzer. Ms. Krenzer disclosed she works for Sierra Health Services, a managed care organization. She will not be voting on this bill however she will participate in discussion and she is able to chair the meeting. ASSEMBLY BILL NO. 498 - Makes various changes related to industrial insurance. Assemblyman Dennis Nolan, Assembly District 13, began his presentation by explaining there are two forms that currently exist in which an employer in Nevada may insure his employees for work related injuries. This is done either through SIIS or self-insuring. Group self-insurance which this bill addresses is an "off-shoot" of self-insurance. As the name implies, group businesses may band together and insure themselves. The 1993 Legislature provided for this type of insuring to take place however, there were no clear regulations on how certain aspects would occur. The bill before the committee is simply a starting point for discussion in regards to what statutes would be required to assure that group self-insurance is developed in a way that is productive and will never represent a liability to the state of Nevada. The committee on Labor and Management will be receiving a bill from the Senate but it does not include the subject matter of this bill. Vance Hughey, Senior Research Analyst with the Legislative Counsel Bureau, reiterated A.B. 498 deals with associations or groups of self-insured employers. There are five elements of this bill, the first requires associations consist of members with the same or similar classifications of employment. This provision is found in sections 4, 5 and 6 of the bill and is intended to clarify that only homogeneous groups may form for workers' compensation purposes. The second element of the bill requires each member of an association file a financial statement reviewed by a certified public accountant annually. The initial financial statement must be an audited financial statement certified by a certified public accountant. This provision is found in sections 2 and 6 of the bill. The third element changes the current net worth requirement for associations to a tangible net worth requirement. This is found in section 7. The fourth element requires the commissioner of insurance to establish minimum requirements that must be met before an employer may join an association of self-insured employers. It also requires that a member who leaves an association to return to the SIIS must remain in the system for atleast two years before it can again be considered for group-self insurance. This provision is found in sections 3 and 11. The last element repeals references in the current statute to service companies however, the commissioner of insurance will be providing the committee with proposed amendments regarding this element. Mr. Hughey stated this bill would become effective on July 1, 1995. Ms. Alice Molasky, Commissioner of Insurance, read from prepared testimony. See (Exhibit C). She pointed out there has been a mystique about what the words "service company" and "third-party administrator" mean as they appear in those provsions of chapter 616 of the Nevada Revised Statutes (NRS). The provisions allow a "service company" to adjust claims which is a matter reserved by law to a licensed third-party administrator. Chapter 616 provided no requirement for licensure of a service company. She also expressed concern with the fact that current provisions which refer to service companies diminish and extinguish the provisions of chapter NRS 616.3793, which prohibit services companies and third- party administrators (TPA) from holding a financial interest in one another. Ms. Molasky explained S.B. 316 of the 1993 session, from which these provisions were adopted, was taken from the 1989 edition of the Private/Public Employer Workers' Compensation Group Self-Insurance Model Act. In attempt to resolve the question regarding service companies, she contacted Mr. Eric Nordman from the National Association of Insurance Commissioners (NAIC). Mr. Nordman is responsible for working with the NAIC committees on alternative workers' compensation coverages. He explained "service company" is intended to mean a third-party administrator. It does not mean the manager or the administrator which appears under the Model Act. The word "adminstrator" under the Model Act is intended to be the manager of the association. This is the person who is principally responsible for the fiscal affairs and day-to-day management of the association. She stated the Division feels the person who performs these functions, by whatever name called, should be responsible for providing biographical and financial data that can determine he/she is fit to become such a manager. When the sections of chapter 616 were adopted from the Model Act, in each and every provision, the words "third-party" were inserted before the word "administrator". The result was a transposition, among these provisions, of the roles of a "third- party administrator" and a "manager". For a point of clarification, Chairman Nolan interjected sections 7, 8 and 9, deal specifically with service companies/service organizations and net worth of the organizations or what are they going to ask these organizations to provide to the state to assure they are solvent working organizations. For the committee's purpose, Mr. Nolan asked they turn to page 6 of the bill. He referred to text that this bill originally requested be repealed. At the time of evaluating this, "service company" as it was put in the Model Act and then re-defined in 1993, appeared to have no functional purpose in the bill draft. Since that time, it has come to light it does serve a purpose and refers to "third-party administrators" or organizations who otherwise work to administer and manage claims for self-insured companies. Mr. Nolan stated they will review any proposed amended language and possibly just redefine service companies as third-party administrators. Ms. Molasky pointed out her proposed amendments for A.B. 498. See (Exhibit D). She stated these would effectively clarify the distinction between a third-party administrator and his function and the role that the NAIC anticipated for a manager which they called administrator. Her purposal is to use the words "executive director" in place of "administrator" in order to avoid any confusion. The proposed definition is found in Exhibit D, page 2. She realizes section 6 is not among those sections to be discussed today but amendments would also be necessary there to make that distinction. Ms. Molasky's amendments to section 7 include both the executive director and the third-party administrator as far as their bonding requirements because it was intended under the NAIC that the executive director be required to have a bond that would essentially indemnify his fidelity, his trust worthiness. This stems from the fact that his role is typically to look over the financial and fiscal affairs of an association. The amendments for section 8 and 9 similarly address this need for distinction. In addition, section 9 addresses the conflict of interest between these two positions. She proposes language be added which recommends that executive directors and third-party administrators be prohibited from a financial interest in each other. Ms. Molasky emphasized the amendments she is proposing as far as the third-party administrator is concerned, are the exact same type of requirements and standards imposed on the individual self-insured employer. This would effectively require an association to have a third- party administrator to adjust the claims and that person would be properly licensed under the insurance laws, chapter 683A of Title 57. She also pointed out that an association may, just like self-insured individual employers, act in adjusting their own claims if in the application process they demonstrate having sufficient expertise and experience to adjust those claims. Chairman Nolan attempted to summarize the intention of Ms. Molasky's proposed amendments. Ms. Molasky added the NAIC model and chapter 616 should follow this because it is not envisioned that the employers operate the daily management of the association. The provisions at this point do not effect the separation of interest between the third-party administrator and what she would propose be termed as the "executive director" of the association. Chairman Nolan inquired if the requirements are consistent with the current requirements in regulation for self-insureds. Ms. Molasky reiterated they are in regards to the third-party adminstrator. Self-insured employers do not have a need for the executive director. They already have their organization in place. With employers who are members of an association, the association is a distinct entity from the employer members in regards to daily business. Mr. Nolan asked Mr. Hughey for a clean draft of this section in order to follow it more easily. Mr. Hughey stated this would not be a problem. Assemblyman Carpenter inquired who oversees the third-party administrators to make sure they are doing their job properly. Ms. Molasky replied an association engages in a contract with the third-party administrator. They would need to make sure those obligations are being fulfilled under their contract. The Division of Industrial Relations (DIR) also examines, as a regulatory body, the claims services of the TPA or if there is no TPA, the self-insured employer himself. Mr. Carpenter further inquired what recourse does a worker have if they are dissatisfied with the performance of the TPA. Ms. Molasky explained they would report their complaint to the DIR and referred to Mr. Ron Swirczek for more information. Mr. Ron Swirczek, Administrator of the DIR, stated under NRS 616.2947, the self- insured employer is liable for any violation that is caused by the TPA and as such is held liable for any penalty that may be assessed for any proposed violation. In so far as an individual worker having a complaint that he or she is being treated improperly by a TPA, the DIR is also responsible for the investigation of these complaints under NRS 616.182. When a complaint is received the Division will immediately contact the TPA and do a full investigation. If there is justification for improper treatment, penalties are assessed. Mr. Carpenter questioned if he was to file a complaint today how long would it take for a response. Mr. Swirczek replied generally, it is done within 10 days. Mr. Anderson commented one of the more frequent telephone calls his office receives is a self-insured wishing to complain about the long delay for a response. He expressed his concern that the third-party administrators are causing every bit as great a problem as the system had two years ago in regards to the complaint process for the self-insured. He believes this to be one of the great disappointments of this whole process. Chairman Nolan explained Mr. Anderson's concern wiil be addressed a little more closely when the committee begins hearing the SIIS bill. He then inquired if there was anyone else wishing to testify on sections 8 and/or 9 referring to service organizations. Being there was none they would begin discussion of section 7. Ms. Molasky testified the only amendment the Division suggests is the addition of the word "tangible" before the words "net worth". It pertains to the combined net worth which must be maintained by the members of an association in order to form the association. Tangible net worth is the same term applied to the individual self- insured employers. The intent is to exclude from the determination of net worth those intangible assets that are not readily available to pay the assessments of the association. These would include assets such as prepaid expenses and goodwill. Chairman Nolan reiterated Ms. Molasky's proposal pointing out this assures the company has liquid assets which could be easily liquidated for the purpose of resolving debt. Mr. Carpenter questioned on page 4, lines 6 through 11 of the bill, why is this section regarding bonding being repealed. Ms. Molasky replied this is for the purpose of eliminating the bonding for service companies. It was suggested before she was able to determine that a service company is in fact a third-party administrator for all intents and purposes. She explained there is a separate bond requirement for a third-party administrator. The amendment she is proposing addresses maintaining this bond requirement as well as adding the bond requirement for the executive director. Assemblyman Goldwater questioned why the bond requirement applies to the executive director rather than each individual member of a group. Ms. Molasky stated it is primarily because the executive director is the person whether that is a corporation, individual or a partnership, who would have control of all funds belonging to the association. It is essentially to provide indemnification in the event of some sort of misappropriation or mishandling of those funds and also to preserve the funds available for compensation to injured workers. Mr. Goldwater further inquired if something happened which was not related to anything the executive director did, for example financial problems with the business in general that caused some sort of deficiency, would the bond be able to be redeemed by the State. Ms. Molasky asked if he is referring to the business of the association or to the business of each individual member. Mr. Goldwater remarked the business of each individual member might relate to the business of the association to which Ms. Molasky replied the executive director is not to have oversight of each member's business but oversight of the association and its funds. In response to Mr. Goldwater's next question, Ms. Molasky responded the bond is adjustable depending on the makeup and the composition of the association. There is a minimum amount but that might be increased based on the composition of the group and the claims available. Ms. Molasky referred to Ms. Koenig for more information. Eloise Koenig, coordinator of the self-insured workers' compensation section of the Insurance Division, stated the Division anticipates that the required bond amount of the executive director will be contigent upon the amount of funds that the company or individual is handling for the association. Chairman Nolan asked if Ms. Koenig would identify what the bonding for the individual association is as well. Ms. Koenig replied each association is required to put up what he is calling a bond or what she calls a security deposit. This deposit can be in the form of a bond, a letter of credit or a certificate of deposit. After a brief recess, Chairman Nolan called the committee back to order. Referring the committee to a handout prepared by Ms. Molasky, he asked if she would be willing to walk them through it. See (Exhibit E). Ms. Molasky referred to Ms. Koenig because of her familarity with this material. Ms. Koenig reviewed Exhibit E, pointing out the costs to establish a group self- insurance program, including the certification process and the certificate of authority for the association, and other costs which will be incurred by the association. Ms. Koenig continued with page 7, explaining the order of collection based on the way the law is set up. Mr. Goldwater inquired, "In regards to the collection, who has the trigger?" Ms. Koenig answered in reality, the association is supposed to notify the commissioner but if someone comes to the Division of Insurance to report claims not being paid, the commissioner has the authority to examine the books and records at any time. For further clarification, Ms. Molasky explained the association is obligated to inform the commissioner if there is any type of insolvency, deficit or change in membership. The commissioner is also obligated by the current statutes to audit the association on an annual basis. If there was a complaint made by an individual claimant or group of claimants who had not been properly paid, the commissioner or the administrator of DIR could take immediate action. There may by some legal impediments approaching that mechanism through the courts but the court could mandate that the commissioner perform his or her duty under the law. Ms. Molasky expressed her hope the duty would have been performed before it attained that level. Mr. Goldwater expressed his concern these groups might try to solve any insolvency problems internally and not come to the commissioner until it is far too late. Ms. Molasky assured him the Insurance Division has strong oversight authority over the associations in so far as the assessment process and their solvency. Chairman Nolan remarked if an individual business within the association got into financial trouble the association may not be affected because they would have an amount appropriately posted of aggregrate reserve as well as excess insurance that would cover them. He questioned how do you know when one of the businesses within the association is suffering a financial hardship. Ms. Molasky stated the regulation she is proposing requires an audited financial statement from the individual employers, in order to establish $2.5 million of combined net worth is available. Regular submission by the employers would also be required in order to ascertain whether the individual members are in a solvent fiscal position. She feels this is necessary being the position of any of the members could change after the commencement of the association. Mr. Nolan commented the only difference between the group self-insured and the self-insured is that the $2.5 million is an aggregate amount for the the group self- insured. Ms. Molasky stated this is correct. It is aggregate among all the employer members. It does not specify the percentage each member is responsible for but it must total $2.5 million. Mr. Carpenter questioned if there are any other states which have these associations in order to look at their success. Ms. Molasky told Mr. Carpenter of the situation in Oklahoma. She stated the administrator of the program reported of the existing associations, 14 of the 18 were in a deficit, meaning insolvent, postion. Oklahoma has had difficulties but there are other states which have not had major impairments. Ms. Molasky noted Nevada is the only state in which associations are to be implemented and yet does not allow private insurance. In all other states which allow associations, three-way or insurance by a private insurer is available. The one exception is Washington which does allow public entities to form associations. She informed the committee she does not have statistics with her for the surrounding states but she would be willing to provide them to the committee. Mr. Carpenter then questioned what is the amount of excess insurance that must be obtained. Ms. Molasky replied the minimum required is an attachment point of $100,000. The limit of liability which is the extent that the coverage would provide is determined on an individual basis. Mr. Carpenter pointed out last session this was authorized but they never got "into the nitty gritty" of the situation. He expressed his belief the associations are a good idea but he is concerned with the minimums being set at an appropriate level in order to be able to cover the claims. A short discussion developed between Ms. Molasky and Mr. Carpenter in regards to how the assessment is determined. Ms. Koenig clarified the $2.5 million is the "premium" the association will be collecting from the members. It is the minimum base that can be created and without it they can not establish an association. The assessments are based on their rates and classifications multiplied by their payroll amount which is the same as their premium is figured to SIIS. Ms. Koenig offered clarification of the other fees which the members would be responsible for. Chairman Nolan asked if there were any others who wished to testify on this section of the bill. There were none. He explained the committee would be addressing the rest of the bill on Tuesday. Ms. Koenig continued her presentation referring back to Exhibit E, page 8. She summarized the different aspects of joint/several liability and excess insurance. Her presentation concluded with a few hypothetical examples of the operation of an association's claim process. Being there was no further testimony, Chairman Nolan reiterated the committee would continue discussion of A.B. 498 on Tuesday. He adjourned the meeting at 5:13 p.m. RESPECTFULLY SUBMITTED: Jennifer Carnahan, Committee Secretary APPROVED BY: Assemblyman Saundra Krenzer, Chairman Assemblyman Dennis Nolan, Chairman Assembly Committee on Labor and Management April 27, 1995 Page