MINUTES OF THE ASSEMBLY COMMITTEE ON LABOR AND MANAGEMENT Sixty-eighth Session May 4, 1995 The Committee on Labor and Management was called to order at 3:30 p.m., on Thursday, May 4, 1995, Chairman Saundra 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: Mrs. 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: Joe Phillips, All Working Nevada Residents Jim Wadhams, Northwest Independent Insurance Agents Kay Armstrong, Nevada Trial Lawyer's Association Bob Gagnier, Nevada State Employees Association Nancyann Leeder, NAIW Willard Booth, Lucky "7" Limo S. Marchand, Dare to Dream B. Costello, Dare to Dream Dan William, Dare to Dream C. Janson, Dare to Dream J. Reddance, State Industrial Insurance System Paul Beski, Dare to Dream Charlee Leavald, Dare to Dream Jeanne Leavald, Dare to Dream Helen Aberle, DIR Karlin Dunlop, DIR The hearing was opened on Assembly Bill 552. ASSEMBLY BILL 552 - Makes various changes to provisions governing industrial insurance. Chairman Krenzer disclosed she is employed by Sierra Health Care Options, a wholly owned subsidiary of Sierra Health Services, a managed care organization. She stated she would abstain in the voting on A.B. 552, but would participate in the discussion. Assemblyman David Goldwater, Assembly District 10, presented an overview of A.B. 552 from prepared remarks (Exhibit C). He explained A.B. 552 deals with State Industrial Insurance System (SIIS) solvency in two ways. It allows the Governor to declare SIIS to be in such a financial state that it is "no longer a going concern" and, upon the declaration, to implement a three-way system insurance system contained within A.B. 552. Assemblyman Ernaut commended Mr. Goldwater for bringing forth the comprehensive bill to attack a major lack, that is, three way insurance. He stated it seemed A.B. 552 placed a high priority on a system to replace SIIS in the event of failure. It also aggressively protects the financial solvency of the system. In reading the bill, Mr. Ernaut claimed there did not seem to be any provision, other than delinquent premium collection, for a comprehensive package to provide a solvency safety net other than an interim study. He questioned the emphasis in the bill being placed on a backup system for failure while never addressing the issues which might cause failure of the system. Mr. Ernaut referred to these issues as "the life issues, the dollars and cents issues". Mr. Goldwater stated he felt the answer to the question lies in the duties of the legislative committee which would develop a formula to be applied by the commissioner to assess undercharged premiums of the past. It insures solvency by making sure anyone leaving the system does not leave a tax obligation behind for Nevada taxpayers. This is more comprehensive than an interim study. Mr. Goldwater's intent and interpretation was to give the insurance commissioner the ability to look back and collect underpaid premiums from those who have left the system. These issues deal with solvency and the solvency of the future by taking into account that those leaving the system will pay what they owe without burdening the taxpayer or the premium payer. He stated most solvency issues were dealt with in the 1993 Legislative session. Mr. Goldwater felt SIIS was on the road to recovery with the reforms enacted in 1993. He felt there were certain areas which need to be "tinkered" with for improvement. Mr. Ernaut stated if the 1993 reform was sufficient, why was the primary focus of A.B. 552 a contingency plan to prop up the system if it fails. Mr. Goldwater stated he did not believe the 1993 reform was totally sufficient. He stated A.B. 552 fills the gaps where the 1993 reform was insufficient. If the Legislature had examined the issue of possible insolvency years ago, the 1993 reforms would not have been needed. The bill adequately addresses the preparations which should be made in the event of SIIS failure. Mr. Ernaut agreed if the issue was addressed earlier, the massive 1993 reforms would not have been required. His point, however, was if assessments were all that is being dealt with, he is unsure it is the best, first alternative to handle the problem. He asked why the task of solvency review was being placed on an interim committee when the standing committee on Labor and Management and the Commerce and Labor Committee in the Senate are duly and appropriately authorized to do the work now. Also, Mr. Ernaut stated he did not see how A.B. 552 could be independent of the reforms coming from the omnibus bill in the Senate. Mr. Goldwater stated we were fortunate to live in a state with a bicameral legislature with each house having equal say on issues. To legislate based on the expectation of a bill from another house was not, in his view, responsible legislating. Mr. Goldwater's intent was for the Assembly to have a voice in what happens with SIIS which is a major concern to both employees and employers in the state. He did not wish to tackle the issue again in an omnibus attempt. The intent was to allow the system to continue on the road to solvency, take precautions in case of insolvency, and provide the employers and employees the surety of coverage. Mr. Ernaut agreed. He stated the major point of difference is instead of putting emphasis on what will be done if the system fails, to take the necessary steps now, instead of legislating for failure or placing responsibility with an interim committee. Mr. Goldwater stated he was missing what Mr. Ernaut felt the bill did not address. Mr. Ernaut, quoting the bill, "aggressively protects the financial solvency of the existing system", said the bill does this in two ways. These are done peripherally through delinquent premium collection, which he termed "negligible in the realm of things" and through assessment. Mr. Ernaut described assessments as "devastating" to the businesses which have left the system and would be devastating to the system. Chairman Krenzer interjected the purpose was for Mr. Goldwater to open the discussion on the solvency issue, to look at a Board of Directors, to look at a solvency surcharge in the event it becomes necessary and to put in place with enabling legislation from the next Legislature, the option of three-way insurance. All these proposals are on the table for discussion. The purpose of the committee and the Senate is to determine if these things are needed and how they are to be configured. Ms. Krenzer reminded the committee Mr. Goldwater had brought one option. Mr. Ernaut stated he felt A.B. 552 was a good attempt. Care had been taken in going over main, important issues which bear discussion. In Mr. Ernaut's estimation, the bill cannot stand independently as a measure of assuring the solvency of the system. Mr. Goldwater stated he would not disagree with Mr. Ernaut. It was not the intent for A.B. 552 to settle the solvency issue. Others involved are the insurance commissioner, the general manager and the Governor. Hopefully a Board of Directors will also be included. Chairman Krenzer reminded the committee that A.B. 552 is a committee bill. Assemblyman Anderson stated the 1993 legislation was a result of the 1991 study project put in place through the Labor and Management and the SIIS subcommittee. This was co-chaired by the Labor and Management Committee of 1993 and the Commerce and Labor Committee of 1993. Without the document prepared by the subcommittee, the work in 1993 would have been very difficult. Mr. Anderson applauded Mr. Goldwater's efforts. He noted it was "scary" to move toward the suggested type of solution. Chairman Krenzer reiterated A.B. 552 is a committee bill to provide whichever mechanisms the committee feels necessary in order to address the insolvency problem. Mr. Goldwater emphasized the financial impact of A.B. 552. In the short term the financial impact is negligible, but possibly significant in the long term. Three-way insurance will create a new base of insurance premiums and, therefore, new insurance premium tax. He felt the fiscal impact should not delay the bill in any way. Mr. Vance Hughey, Senior Research Analyst, Legislative Counsel Bureau, explained he was asked to prepare material to highlight some of the key elements of A.B. 552. He referred to a document distributed to the committee entitled "Assembly Bill 552" (Exhibit D). Page 2 shows the current organizational structure. Page 3 is the structure which will exist if the Board of Directors is put into place on July 1, 1999. The Governor would appoint the members of the Board, who would appoint the General Manager. The General Manager would run the system. On page 4 current options available to employers to meet coverage requirements under the Industrial Insurance Act are summarized. These options are SIIS and individual self insurance. On Page 5 a third option, group self insurance, scheduled to go into effect on July 1, 1995, is added. Page 6 includes a fourth option, private carriers providing worker's compensation insurance in Nevada. Page 7 discusses the proposed advisory organization which would be designated by the Commissioner of Insurance and would provide certain information to the commissioner. This information would include statistics for industrial insurance. The organization would collect and tabulate information and statistics in a uniform statistical plan and would formulate a manual of rules for recording and reporting data according to a uniform statistical plan, uniform plan for experience rating and uniform system of classification. Page 8 discusses the proposed legislative committee. It would be composed of four members of the Legislature; one member would be chosen by each of the Majority Leader of the Senate, the Minority Leader of the Senate, the Speaker of the Assembly and the Minority Leader of the Assembly. Page 9 discusses the duties of the committee. Page 10 discusses how the proposed legislative committee would develop a plan to return SIIS to solvency, including the development of a formula to be approved by the Legislature, which will be applied to calculate a solvency surcharge. The surcharge must be equal in amount to any deficiency in the cumulative amount of premiums paid by an employer to SIIS for the period during which the employer was insured by SIIS. For purposes of developing the plan the committee shall assume the Governor is authorized to declare SIIS is no longer a going concern and to require the imposition of the solvency surcharge. Page 12 discusses the proposed solvency surcharge. Page 13 states unless the Governor has declared SIIS is no longer a going concern, the surcharge will only be imposed against individual or group self-insured employers who became self-insured prior to 7/1/99 and employers who apply to leave SIIS on or after 7/1/99. Chairman Krenzer, referring to the Legislative Advisory organization, asked who the organization would be. Mr. Hughey stated these organizations exist and are similar to the National Council of Compensation Insurance. It is a company which may already exist or might form which provides advisory services to insurance departments or insurance companies. Chairman Krenzer asked if it was an organization from which services were purchased. Mr. Hughey replied the insurance commissioner would probably contract with the advisory organization. Mr. Douglas Dirks, General Manager, State Industrial Insurance System, stated the bill discusses the solvency surcharge. The overriding concern of SIIS about the future viability of the system is with a $2,000,000,000 unfunded liability today, what actions can be initiated to insure the system achieves a level of solvency and what other options can be brought into the marketplace when a viable state fund is achieved. SIIS is supportive of the provisions of A.B. 552 which would bring in a solvency surcharge. There is a permissive trigger which rests with the Governor. If the system is no longer considered a going concern, the Governor is empowered to trigger the solvency surcharge. Mr. Dirks referred to this as a "doomsday option". The formula for the surcharge will be developed by the interim committee. All employers which have been covered at any time by SIIS will have the surcharge imposed. A secondary trigger rests with the Commissioner of Insurance. This is a solvency surcharge applied against all self-insured employers, either individual self insureds or self insureds who have gone through an association, public or private. This mandatory trigger would be used in accordance with regulations to be adopted by the Commissioner of Insurance. These triggers are in place to assure, as the system transitions into a competitive environment, there are protections to insure the system is able to meet its obligations in the future. Chairman Krenzer asked if a standing Legislative committee, which develops a formula to enact a surcharge, would solve the insolvency problems. How can this be accomplished through this mechanism? Mr. Dirks stated his understanding of the bill's language is the solvency surcharge is tied to the premium deficiency of the system. Referring to the first fiscal year of SIIS, which ended June 30, 1983, Mr. Dirks stated an estimate had been calculated of the premium deficiency. The amount comes to $1.46 billion. This is a present value. No account of earnings on the money has been included had the premiums been collected each year as they should have been. If an interest factor is applied, $2,000,000,000 is the premium deficiency and the unfunded liability. If a surcharge is applied based on $2,000,000,000 the shortfall experienced by the system since 1982 will be collected. Assemblyman Anderson asked if the $2,000,000,000 included the figures on reserving funds for potential injured in existing claims. Mr. Dirks stated the numbers were arrived at by actuaries in setting the total reserve. The total reserve at this time is $2.7 billion. Assets of $7 million to offset the reserve are currently held. These are 1994 figures. If SIIS were to have closed its doors on June 30, 1994, the actuaries projected SIIS would pay out over a forty year period of time $2.7 billion. Mr. Anderson stated the question of how big the unfunded mandate really is always returns and how much of it is "paper chase" based on "the possibility of". He finds the situation intriguing and maintains a high level of disbelief when the $2 billion figure is discussed. Mr. Anderson maintained the belief was held because everyone accepts SIIS will have to pay the highest amount for all claims. Mr. Dirks declared three independent actuaries reviewed the figures over the last year. These were the system's actuary, the independent certified public accountant's actuary and an actuary hired by the Division of Insurance. All agreed the $2 billion unfunded liability or the $2.7 billion total reserve is the appropriate amount. He stated the amount is not fixed in stone. If SIIS is able to outperform the actuarial expectation, the number can come down. If SIIS under performs the actuarial expectations, the number can grow. Mr. Anderson asked if it deals, in part, with who will be running the program over the next interim period. Mr. Dirks stated it was a feature of how well SIIS manages claims, closing them either within the expectation of the ultimate cost of the claim or closing it for a lower cost. This goes to the day to day management of every claim open in the system. Mr. Anderson asked if it was a feature of the practice of delaying claim payments, or other things SIIS and other independent carriers have been held accountable for. Mr. Dirks explained it was based on historical payment patterns. Assemblyman Nolan asked why it was fair to go back to small business owners who contracted with SIIS to provide industrial insurance coverage and then left the system to be self-insured or group insured, and announce the business had been undercharged and payment, in lump sum, was now expected. Mr. Dirks said if a different course was taken, such as admission SIIS undercharged for a number of years and those who wished to leave the system could, he did not know who, at the end, would be held accountable for the deficit. The system would fail if everyone left. The surcharge can be avoided by returning to the system. He agreed under any standard insurance contract, if clear provisions did not exist providing for assessments, this could not be done. SIIS does not issue contracts of insurance. Certificates are issued in accordance with statute. Other states provide for surcharges or assessments or taxes for those outside the state instituted funds. Mr. Nolan asked if a way had been found in the last two years to financially offset this in order to prevent going back and imposing surcharges. Mr. Dirks stated there was one other statutory means available to the system and that is to increase rates between 40% and 60%. This would be done at the expense of the 44,000 smallest businesses in the state. Mr. Dirks was unsure if the businesses could absorb the amount of rate increase required. Mr. Nolan asked if this was the only concept SIIS has been able to create. He asked if anything else the Assembly has discussed is a viable alternative to help resolve the unfunded liability. Mr. Dirks stated the first obligation is to run the system as efficiently as possible and by doing so the unfunded liability could be reduced. A statutory authority exists to increase rates. SIIS has been reluctant to do so in part because of the revenue increase being experienced by current economic conditions in Nevada and the significant decrease in claims expense. He felt the rate increase should be a last resort and not a first resort. Chairman Krenzer, hypothesizing the following: if the unfunded liability did not exist, if we were facing the existing cash flow and moving forward with groups going self funded, and a three-way system being imminent, asked if a surcharge would be needed. Mr. Dirks stated he did not believe so. The purpose of the surcharge is to take care of the unfunded liability. When the claims expenses and premiums earned are examined on an incurred basis through the first nine months of the current year, Mr. Dirks felt the system was operating at least on a break even basis if not operating at a profit. If you do not have to look back at the unfunded liability, the system is clearly able to move forward. SIIS is not as competitive yet as Mr. Dirks would like it to be. Internal changes need to be made for the system to become more competitive and efficient. Chairman Krenzer stated the Governor had said by the year 2003 SIIS would move out of its unfunded liability. She asked if it was possible the imposition of a solvency surcharge was not needed. Mr. Dirks stated SIIS had lost significant premiums over the last two years. This loss was two to three times higher than in previous years. Along with losing gross premium, SIIS is also losing some of the best accounts it had. When group self insurance is compounded with the loss to individual self insurance, it is a serious threat to the financial viability of the system. If the best accounts continue to be lost, the system cannot continue forward. Mr. Nolan asked Mr. Dirks if he meant business currently filed for self insurance or group self insurance when he referred to the loss of the "best accounts". He asked how Mr. Dirks knew who was leaving and also if some of the "bad eggs" weren't leaving also. Mr. Dirks replied he was looking primarily at the past and the accounts which have left. Some of the accounts who have indicated to the insurance commission their interest in going into the group provisions have been examined. These accounts, for the most part, are the better accounts. Mr. Dirks feared the impact on the system's solvency if this occurs. Assemblyman Hettrick asked if the terminology "best accounts" meant the accounts which were the most profitable. He stated he felt those "best accounts" would be the ones who considered themselves the most overcharged by the system relative to the service they get and the coverage received. They also feel they are funding the cost for the rest of the people involved. If the system is currently breaking even and the cap is to be raised on payroll with the exact same employer base, employees and claims, which is a premium increase in total but not in rate to the businesses, it is a net profit to the system. Mr. Dirks stated if the payroll cap was increased and they collect additional revenues with no offset on the claims side, it is a net profit to the system. Mr. Hettrick noted there would be a net profit to the system, and the cap is guaranteed to go up $3,000 per year for the next three years. Mr. Dirks stated the fund caps at $36,000 next year. The current cap is at $33,000. Two years ago it was at $24,000. Hettrick stated the cap has gone from $24,000 in 1993 to $36,000 in 1996. This is a fifty percent increase in cap which employers pay in rate right now. Mr. Dirks said there was some diminishing return as you go from $24,000 to $36,000. Mr. Hettrick agreed it was a diminishing return, but when increased on existing claims and employees, it is a net profit. Mr. Dirks agreed. Mr. Hettrick explained what was being attempted to be established is whether group self insurance is a concern to solvency. Group self insurance has an estimated premium income annually of about $20 million. Approximately 70% of the premium income average for SIIS is for claims expense, according to the budget. Mr. Dirks said this may be correct on a cash basis. Historically, on an incurred basis, it has not been the case. Mr. Hettrick said, "It's lower than that. On an incurred basis you reserve and so you are reserving for more. The cash expense is actually lower because you are reserving for a future that may or may not occur but you are reserving at the worst rate. You are reserving the absolute maximum expense." Mr. Dirks said historically the system did not do that but ideally it should have been done. Mr. Hettrick asked if it was being done now. Mr. Dirks stated he trusted it was being done. Mr. Hettrick said, "so if we say 70%, a round number, and we take out the rest of our operating costs, 20%. Ninety percent of the premium is being expended for something right now in one fashion or another. Ninety percent, ten percent reduction, $2.4 million is the loss to the system for $24 million in premiums to go out. Cash lost to the system is $2.4 million. With raising the cap this year enough to increase the premiums by around $25 million. Next year it shows $84 million according to the budget." Mr. Hettrick remarked he did not see how group self insurance had any negative impact on solvency. He sees a positive cash flow no matter what is done as long as claims and medical expenses are efficiently managed. If SIIS does so as well as a private carrier could, the system should remain solvent. Mr. Dirks declared he wished to look at the issue in terms of what the loss ratios are, assuming the system would break even today. Individual accounts which have a better loss ratio than the system's loss ratio as a whole go self insured, the system, on an incurred, earned or accrual basis, would be losing money. If everything else stays the same but the accounts with the better loss ratios go self insured, it must be offset. This is Mr. Dirk's concern. If the best accounts with the lowest loss ratios go self insured, it effects SIIS like an adverse selection. They are left with the accounts with worst loss ratios. Even though a positive cash flow may continue, on an accrual basis the system is operating at a loss. The deficit will continue to grow. Mr. Hettrick backtracked to the comment "all things remaining as they are". He stated the fact is the cap will be raised and SIIS will gain the $24 million and the $84 million shown in two years of budget projections. Mr. Hettrick stated 4.8 million would be lost and $109 million would be gained. This leaves a $100 million net gain. This is with no solvency surcharge. If a clean actuarial study were done today on SIIS, without looking at the past, with $400-$500 million per year income, showing a $100 million turnaround in the last two years, growing assets and cash flow, and projections of $100 million per year more over the next two years, and showing lowered claims expense, Mr. Hettrick asked if the study would show a $2.2 billion unfunded liability. Mr. Dirks said if he started with the current fiscal year and went forward, he would have no concerns. Unfortunately he is sitting on top of a $2 billion unfunded liability which he does not have the assets to service. Mr. Hettrick agreed. He stated his point is if we continue to do no more than has been done with the system over the last two years, if we keep doing what is being done over the next five years, in 1999 an actuarial study would show the system is in better shape than a $2 billion unfunded liability. Mr. Dirks agreed. He said if we could freeze where the system is today or repeat the last fiscal year for the next four or five years, he would be comfortable. With group self insurance and with the loss already suffered to self insurance, he questioned whether the last year can be repeated for the next five years. Mr. Hettrick commented the SIIS budget better be adjusted. Chairman Krenzer asked what percentage the budget was of total operating costs. Mr. Dirks stated it depended on which part of the budget was being discussed. If claims expenses and operating expenses were a part of the budget and relative to what. Chairman Krenzer declared her question to be relative to claims. She claimed to have calculated it at one point at about fifteen to twenty percent. Chairman Krenzer stated claims management was the best way to address the unfunded liability instead of budgetary conditions. Mr. Hettrick stated he had the budget summary, which shows total income and total expense. It shows budget for 1995-1996 is $521,633,000 with claims expenses within for $307 million, reserves of $129 million, $38 million in personnel expense, and $25 million in operating expense. Mr. Carl Hess, Assistant General Manager for SIIS Administrative Division, stated he wanted to make sure the committee understood the budget information they had was a cash basis presentation and the reserve is effectively a cash surplus of resources which would become available for other things. It would be a decrease on the state budgetary system of an otherwise existing deficit. It is not an actual reserve. The claims payout is merely the cash paid out claim as anticipated. The state budgetary system does not anticipate an operating, going concern as SIIS is. As a result, it does not take into consideration accrual basis accounting. When you are on an accrual basis ultimately your cash basis will follow the accrual basis. The accrual basis anticipates the future and the cash basis merely tracks that anticipation. If accrual basis shows a loss, ultimately the cash flow will show a loss. Mr. Hettrick commented he believed when the actuary projected a $2.2 billion unfunded liability he did so on the accrual basis because he is accruing the potential liability. Mr. Hettrick stated he was looking at cash flow in terms of what would happen to the system and the reserve number. The reserve number in 1995-1996 is $129 million and in 1996-1997 is $256 million, up $130 million. This adds to the invested reserves. Mr. Hess stated the budget did not anticipate a movement to self insurance. It deducts what it would anticipate for movement to self insurance and then it is added back in the enhancement. Mr. Hettrick declared the enhancement he has had it out. Mr. Hess asked what it showed in the maintenance. The budget in the summary is neutral of group self insurance. Mr. Hettrick asked why an offset was necessary for group self. Mr. Hess stated it was a case of law. SIIS was instructed by the budget office to demonstrate what would happen if the law went into effect and the second element was to anticipate if there was going to be a change in the law. The proposal at budget preparation time indicated a potential deferral of group self. Both events were anticipated. Chairman Krenzer asked Mr. Dirks if Mr. Hettrick were correct and groups going self were neutral, could the 2003 date be met to retire the unfunded liability. Even if it is revenue neutral, there would not be the cash flow, but there would not be the expenditures either. Mr. Dirks stated he would need to rerun the numbers in his projections. He did not know what the impact of pulling $125 million of gross revenue out would be. There is also a timing difference as to when you receive premium and when you pay claim which is a factor in calculations and projections. Chairman Krenzer asked if Mr. Dirks doubted it was possible and this is the reason a surcharge is being considered. Mr. Dirks did not believe group self insurance would be revenue neutral. Over the long term it is not and over the short term, with timing differences between when premium is collected and when claim is paid, would not be neutral. Chairman Krenzer discussed the system in Oregon. She said Nevada may be instituting four way which would be group, self, SIIS and private carrier. She asked if SIIS was prepared to lose business to groups and lose business to private and stay competitive by the year 1999. Mr. Dirks answered "absolutely, putting the solvency issues aside". Assemblyman Sandoval asked how bad it has to get for SIIS to no longer be a going concern. Also language in the bill states a formula must be developed which will be applied to calculate the surcharge. He asked if Mr. Dirks had a proposal for the formula. Mr. Dirks stated the issue of "going concern" was one for the committee to consider. There are accounting definitions. Not all accounting rules apply to SIIS because of its status of a quasi-governmental agency. A going concern qualification exists in the independent certified accountant's opinion letter. The letter questions the agency's ability to be a going concern, but those opinions are driven by strict accounting rules. Mr. Dirks stated he had a hard time answering precisely what in his mind the growing concern qualification is. He encouraged committee discussion on the subject. Regarding the formula, Mr. Dirks stated he is working on an idea. He is looking back, year by year, as to what the premium deficiency was. Individual account premiums paid relative to total premium collected by the agency is examined. By taking the ratio and applying it to the premium deficiencies generates the formula. A number of different ways exist to accomplish the goal. Mr. Sandoval asked what a proposed formula would be which would be applied to calculate a surcharge. Mr. Dirks maintained it had to be tied to what the premium deficiency and, in effect, what the unfunded liability of the system are at the time the solvency surcharge is to be assessed. Each individual policyholder's share of the unfunded liability is examined as well as the year you were a policy holder and what portion of the overall unfunded liability can be assessed to each year. Mr. Sandoval questioned if SIIS would be assessing what they did not charge at the time. Mr. Dirks said it was one way of doing it. Mr. Hettrick asked if SIIS were charging enough currently. Mr. Dirks stated for fiscal year 1995 the premium is adequate. He believes it is adequate for the first time since the system was established in 1982. He will not know for certain until he has a rate adequacy study and an actuarial study. Everything which can be seen by tracking the numbers through the year indicates the premium is adequate this year. The system has never had in place the mechanism so this could be tracked through the year. Systems have been implemented, the last of which is scheduled to come on line in June, which will permit month by month determination of whether adequate premiums are being charged relative to the losses being incurred. Mr. Hettrick asked what the fiscal year was for SIIS. Mr. Dirks explained SIIS was on the July fiscal year. Mr. Jim Wadhams stated he had clients interested in the issue including the Nevada Independent Insurance Agents, the American Insurance Association, and others. He appeared before the committee to explain three way insurance. Mr. Wadhams said Mr. Goldwater's summary was fairly descriptive. Often questions exist among the public. This committee and their counterpart in the Senate essentially write the insurance contract. As Mr. Dirks explained SIIS does not deliver a contract as is purchased by a home or auto owner who purchases insurance. A private carrier would have to develop a contract. In A.B. 552 a provision exists for the insurance commissioner to approve a contract which will reflect the benefits, the payments, the time procedures, and the reporting requirements which are written into the state statute. This would appear in the form of a contract which would be delivered to any employer who chooses to buy it. Adding private insurance companies does not change benefits, delivery structure, or the dispute resolution process. Claimants who are dissatisfied would still have the opportunity to a hearing officer review, to an appeals officer and to the state courts. In a simple sense, it is another opportunity for an insured. In the design of the three way bills in 1983 and 1985 and in A.B. 552 it appears the intent was to make the kind of insurer transparent to the injured worker. The worker will have no different sense in the way they are treated because of the type of insurance purchased. Three way, or private insurance, is available in forty-six states. Many states have recently added state funds to be competitive with the private insurers, many of which have been very successful. The most recent state to convert to three way was Oregon in the early 1980's. The state fund maintains a 35-38% market share, which makes it the largest insurer in that marketplace. Addressing the issue of the advisory organization, Mr. Wadhams explained the purpose of the organization is to act as the statistical agent to gather the data and information to allow the commissioner to evaluate the system of pricing and the actual prices insurance companies would charge. This has been discussed in Nevada over several sessions. Even without three way, moving SIIS closer to a national form of a system so employers can compare how they are being priced in Nevada compared to other states is a reasonable goal. It is not a consumer group or industry group, but a statistical gathering agency. The insurance agents of employers would add this as an option for their customers to consider. The companies would have to be licensed and approved by the commissioner and their solvency verified. Twenty five to thirty carriers would be extremely active and 80 to 100 carriers would have some level of activity. The level of competition will aid SIIS in its recovery. No employer would be required to purchase the insurance. The bill specifically provides it is an option to be considered by the employer, with leaving the system not required. Assemblyman Bache asked how long it would take to enact regulations to provide for private insurers. Mr. Wadhams stated he felt the bill was fairly comprehensive. The specific regulation the commissioner would have to develop could probably be accomplished over a six to nine month period. Mr. Nolan stated three way was being proposed for 1999. The unfunded liability, under the current course of SIIS, is estimated to be resolved in 2003. Mr. Nolan asked if Mr. Wadhams felt, with another five years left to resolve the unfunded liability or with any reserve liability, if SIIS could be competitive with private industry. Mr. Wadhams replied he felt the answer was yes. The changing and efficiency of the operation of SIIS is the key to recovery. The benefit reduction accomplished by the work in the last legislative session changed about as much in terms of the dollars on a per claim basis as is necessary. He suggested the efficiencies in the organization would have developed much faster had three way been competition. Mr. Wadhams felt SIIS, under its current management, will far out perform the actuarial assumptions. Efficiency will insure the adequacy of the reserves easily by 1999 and he suggested, for safety's sake, to go to three way sooner. He reminded the committee to remember an unfunded liability is not necessarily the indication of a problem. It can be tolerated at a certain level. Mr. Nolan asked how attractive SIIS will be with an unfunded liability in later years and "dragging around the baggage of being the state's assigned risk pool for the other employers". Mr. Wadhams stated there was an issue on assigned or high risk. The bill addresses it by spreading it in a similar fashion to what is done in auto insurance which is creating an assigned risk plan for employers who cannot obtain it from the fund. In the future, when competition is in place, SIIS will be able to decline risks as well and the bill provides for a mechanism for those higher or unsatisfactory risks to find insurance. Mr. Wadhams thought the study done between the 1989 and 1991 Legislatures further underscored the efficiency difference between the self insured employers to deliver the same benefits for fifty percent of the cost. The change of the last session is precipitating the narrowing of that gap. Chairman Krenzer stated Oregon had 35%- 39% of the market. Self insured have about 50% of the workforce and SIIS has about 50% of the market. The discussion is that private carriers would come in and take a percentage of SIIS. She asked, with 25% of the market to take, or if the privates took 35%, leaving SIIS only 15%, would SIIS still be viable. Mr. Wadhams said when looking at the time when private insurance companies come in, he did not feel the portion the private insurers would take would not come out of just SIIS. It will come out of both sides because private companies will come in with differing marketing strategies and offer their policies to self insured employers as well as to SIIS insured employers. These may be the most attractive to the SIIS insured employers, but the self insured employers may be attracted because of the efficiency, the programs, the safety management programs and the economic savings. Mr. Wadhams felt the market share would come out of both segments. Chairman Krenzer asked if the advisory committee would establish pricing for private carriers. Mr. Wadhams explained it would ultimately be pricing for the entire state. Statistical information would be collected so the insurance commissioner can evaluate the pricing structure of SIIS or of one or more private carriers. Most will subscribe to this information as a data base. All insurance is based upon a system of large numbers. Data must be collected on a large number of accidents or injuries among a large number of employer types and classifications. The purpose of moving to this system is so employers, because they are classified in a group larger than it should be, are not unfairly subsidizing each other. This has been a frustration for many employers in the state over the last fifteen years. Chairman Krenzer asked if the provisions in A.B. 552 adequately provide for the implementation of three way insurance in 1999 in an appropriate manner. She questioned if the safeguards for injured workers were there and for employers who chose to go with private carriers. Mr. Wadhams said in general, the answer is yes. Changes have been developed over a long period of time with much time and effort in the way worker's compensation is dealt with. A.B. 552 puts a new form of insurance payer into the system. He felt the committee would find, as they worked through the specific provisions of the bill, it is overdone in some respects. There are things which do not need to be done which were felt to be important in 1985 at the genesis of the system. Chairman Krenzer asked for clarification of the comment "it made private carriers an equal player". Mr. Wadhams asserted an important consideration, politically and practically, is the playing field be level. Private insurance companies do not want to come in and cause a situation where the Governor has to trigger the doomsday surcharge. The level playing field is to make sure no one form, whether it be self insurance, SIIS, or a private insurer, has any particular advantage over any other. The rules for benefit delivery of medical services and claims payments are absolutely consistent from one form of insurer to the other. Mr. Joe Phillips, a Fernley, Nevada resident, stated he was not entirely opposed to three way insurance. He was opposed, however, to some items in A.B. 552. Referring to Page 5 of A.B. 552, Line 23, Section 13, the bill reads "within thirty days after the insurer shall: (a) Commence payment...". Mr. Phillips said there are many people working in the state at minimum wage or a bit higher and earn less than $10,000 per year. Those people could not wait thirty or forty days for a payment. Under the old program workers were entitled to payments after seven days. Mr. Nolan said under the current system after seven days of being off work the employee is entitled to receive compensation for time missed and for the duration of the time the employee is unable to work. There is no guarantee in the time frame in which SIIS has to begin payment. In the past there were occasions it took thirty days or more before the first compensation check was received. Now, however, with increased efficiency, this is not happening. Ms. Cecilia Colling, Assistant General Manager, SIIS, stated she believed A.B. 552 followed the statutes in place currently which allow the insurer thirty days to determine compensability. After compensability is determined fourteen days are allowed to accept the claim to pay. This process could take longer than thirty days to pay. Sometimes claims require investigation before they are accepted. Mr. Goldwater stated Mr. Phillips brought an excellent point, which is promptness of payment to injured workers. He felt it was an important issue for the committee to deal with. Mr. Phillips, referring to Page 7, Section 18, stated his concern had been answered in previous testimony regarding the $36,000. On Page 8, Section 23, Line 12, "(2) Select a physician in accordance with the provisions of NRS 616.342". He did not like being told what physician or group of doctors he had to go to. People have varying beliefs and preferences. Mr. Phillips noted there was no mention of mental health. He reminded the committee that problems other than physical ones can occur when someone incurs an on the job injury. He suggested putting "a scope around the whole picture". Mr. Phillips felt the employees were given no choices under the bill. Chairman Krenzer stated the current law provided for a variety of choices of medical treatment including acupuncture, and naturalopathy. Within those areas of specialty injured workers are limited to the physicians on the list who deal in those specialties. She agreed with Mr. Phillips that injured workers are limited to a list. By law the list does have to have each specialties. Mr. Phillips, referring to Page 19, Section 55, Line 7, Subsection 3 "If an employee files a claim with an insurer, the insurer is entitled to receive from the administrator a list of the prior claims of the employee...". He questioned what one injury has to do with another, especially if the claims occur years apart. He believes this invades the privacy of the employees, and, thereby violates the law. Chairman Krenzer stated this is existing law. She said the committee would take Mr. Phillips' thoughts under consideration. Ms. Colling explained the reason the insurer is given access to medical records and prior claims records is a compensability issue. They need to know if the injury is related to a prior claim or a pre-existing condition which was non-industrial related. The insurer needs to look at all of the facts before compensability is decided. When the claimant signs a C-36 form he agrees to release this information in order to receive compensation. Mr. Phillips, referring to Page 27, Section 75, Lines 22-46, related difficulty in understanding the section. He was especially disturbed by Line 35, "An employee in the service of any such employer shall be deemed to have accepted, and is subject to, the provisions of this chapter if, at the time of the accident...". He stated some employers and employees do not know what they have. Information is not posted for employees and, in many cases, they do not know they have workmen's compensation. He did not understand the necessity of having this in the bill. Chairman Krenzer reminded Mr. Phillips this was existing law. Mr. Goldwater stated the intent of the bill, especially when things like pre-existing conditions were being discussed, was determined when these issues were debated in the last session. What is in A.B. 552 is a result of compromises which occurred. The intent of A.B. 552 is not to rehash all the debates or to deal with benefits but to tinker and fine tune the system to be prepared to be more solvent in the future. Another resolution was introduced this session by Mr. Goldwater which urged SIIS to develop an orientation program for injured workers as well as employers to make all aware of their options. Mr. Phillips stated he felt injured workers in the state, regardless of status, should all have the same rights. He believed part of those rights have been destroyed by A.B. 552. Assemblyman Manendo commended Mr. Phillips for his interest as a citizen. He represents exactly what a citizen legislature is all about. Mr. Dan William, Dare to Dream Network, testifying from Las Vegas, stated his organization had not previously seen A.B. 552, but would study it and return with comments. Referring to Page 4, Section 7, Mr. William requested where three organized labor representatives are discussed, one of the three be an injured worker representative. Workers in the state are paying the premiums because employers take into account how much has to be paid out for premiums when wages are set. Injured workers wish to be represented. Mr. Williams referred to a Bill Draft Request from the Senate which he said "was enough to break the worker's backs in this country. We have been carrying it for a long time and I pray the Assembly does not let this go through." Due to the fading of the transmission from Las Vegas, the Bill Draft Request number was unintelligible on the tape of this meeting. The hearing was closed on A.B. 552. There being no further business to come before the committee, the meeting was adjourned at 5:45 p.m. RESPECTFULLY SUBMITTED: Jennifer Carnahan, Committee Secretary APPROVED BY: Assemblyman Saundra Krenzer, Chairman Assemblyman Dennis Nolan, Chairman Assembly Committee on Labor and Management May 4, 1995 Page