MINUTES OF THE SENATE COMMITTEE ON COMMERCE AND LABOR Sixty-eighth Session June 14, 1995 The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 5:30 p.m., on Wednesday, June 14, 1995, in Room 227 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Senator Randolph J. Townsend, Chairman Senator Ann O'Connell, Vice Chairman Senator Sue Lowden Senator Kathy M. Augustine Senator Raymond C. Shaffer Senator John B. (Jack) Regan Senator Joseph M. Neal, Jr. GUEST LEGISLATORS PRESENT: Peter (Pete) G. Ernaut, Assembly District No. 37 Lynn C. Hettrick, Assembly District No. 39 Richard (Rick) D. Perkins, Assembly District No. 23 STAFF MEMBERS PRESENT: Scott Young, Senior Research Analyst Vance Hughey, Senior Research Analyst Molly Dondero, Committee Secretary A discussion was held on amendments proposed by the Assembly to Senate Bill (S.B.) 458. SENATE BILL 458: Makes various changes to provisions relating to industrial insurance. Peter (Pete) G. Ernaut, Assembly District No. 37, discussed Exhibit C. He stated the majority of the language in S.B. 458 will remain in as it was proposed with a few minor and a few major changes illustrated in Exhibit C. Mr. Ernaut discussed three-way insurance. Lynn C. Hettrick, Assembly District No. 39, discussed group-self insurance. He stated the Assembly, in their proposals, have permitted bonding for solvency issues if desired. He stated this is not "bonding for the solvency of the State Industrial Insurance System (SIIS), but was bonding for the solvency of the companies which will be involved in group-self [insurance]." Senator O'Connell questioned if the fiscal prospectus includes what the commissioner of insurance wants requiring a fiscal audit of each of the members of a group. Mr. Hettrick stated there is language being drafted which refers to the auditing requirements and financial statement language requiring certified financial statements for the association, only. The certified audit will be for the association, not the individual groups. Senator Regan commented if an insurance company in Nevada was run as SIIS was run during the past 15 years, the insurance company would have been out of business long ago. He stated he is concerned about the difference between a certified public accountant (CPA) review of the books versus an audit. Mr. Hettrick stated an independent CPA will do the study producing a certified financial statement for the association. He stated it will not be a certified audit, which is very expensive. He stated those may cost, up to, $40,000 per company. He stated to do that on an annual basis will be prohibitive. He said there will be adequate controls over the associations. Mr. Ernaut stated there is a consideration of risk versus return. He stated the risk is smaller in the smaller company. He stated a certified audit on a small company is too great a burden. Senator Regan asked if the Oklahoma problems have been considered. Mr. Ernaut stated they had studied those problems. He did not feel their problem will happen here, because Nevada has too many safeguards in place to allow the same situation to develop. Senator O'Connell stated she has checked into the Oklahoma situation and information has been shared about the situation in Oklahoma with the commissioner of insurance. She stated previous testimony on this issue had been misrepresented in some areas. Mr. Hettrick stated some of the information which had been shared with the committee in previous hearings, ". . . much of what was characterized as bankruptcy was actually [a] deficit at a given time, not a bankruptcy . . . it was not a situation where we had 80 percent of the self-insureds in the state of Oklahoma going down to bankruptcy." He stated the structure for group, self-insurance will be, the assessment, excess insurance, secondary excess insurance as an option, fall back on the assessment if there is a need, then to the insolvency fund, and, finally, to assets which are jointly and severally liable of each company involved. Mr. Ernaut stated group, self-insurance is a promise which should be kept to the companies within reason. He stated Exhibit C is a compromise with adequate safeguards for the state. He explained there is a unique aspect to three-way insurance. He stated there are three major questions in SIIS reform. He stated: Do we have adequate cash flow reserves to cover the debt which has been built up . . . do we, also, have adequate cash reserves and cash flow to handle present claims and do we have that in the long haul? If we allow three-way [insurance] and if we allow group-self [insurance], undeniably, there will be a premium loss . . . we believe the loss from group-self [insurance] will be minimal, but there will be some. The loss from three-way will be substantial. I think some of the numbers which have been thrown around about three- way [insurance] are not, exactly, relevant. Mr. Ernaut stated the insurance premium tax will go to SIIS for as long as needed to reach the level of solvency. He stated a tax of 3.5 percent is not a tax loss to the state, because the state is not receiving that tax now. Senator Shaffer pointed out the insurance premium tax is less than 3.5 percent. Mr. Hettrick stated there is a home-base office credit. He stated they have looked at other funding processes and he feels the premium tax will assist in reserving dollars. This is a funding mechanism, because if we are going to spread this out to three-way and allow private carriers to come in, we may want to dedicate any premium tax which would pay, regardless, back to the debt . . . so we are not creating any new tax, and not taking anything out of the General Fund. We feel it is important that SIIS participate, because if we were to do that, we also see the creation of an assigned risk pool, while all carriers providing private insurance including SIIS, at that point, would be a member of the assigned risk pool. One of the concerns for SIIS is, if three-way [insurance] comes, all the good business [will] go to the private carrier, they [SIIS] are stuck with all the bad accounts. If we have an assigned risk pool, and all the carriers are equal, then SIIS can turn away accounts just as could any three-way carrier. Those accounts will be spread out on a percentage basis back to all carriers, including SIIS. SIIS will, therefore, if there are 10 carriers, have 10 percent of the claims . . . From SIIS's standpoint, it is a left-pocket, right-pocket transaction. While it comes out of their cash flow in terms of being a premium base which is equal for all, because there is an advisory rate counsel which sets the rates, it will go back into their reserve. They will have the benefit of it. The other companies will have the same thing, it will go out of their cash-flow, it just will not go into their reserve. Mr. Hettrick stressed his point, "We are looking at other funding sources when three-way insurance [comes], realizing it is going to pull premiums, and, therefore, [the earning] reserve dollars away from SIIS." Mr. Ernaut stated it will reserve $17 million to $25 million per year against insolvency. Senator Townsend asked if this proposal will be in an Assembly bill. Mr. Ernaut asked if the group-self provisions can go into Assembly Bill (A.B.) 498. ASSEMBLY BILL 498: Makes various changes to provisions relating to industrial insurance. Mr. Ernaut stated the three-way provisions will go into A.B. 552. ASSEMBLY BILL 552: Makes various changes to provisions relating to industrial insurance. Senator Shaffer expressed his concerns that the Governor may not approve of the three-way provisions and the bill might fail. Mr. Ernaut stated he feels confident the provision will survive. Mr. Hettrick stated if the provisions for group self-insurance are carved out of S.B. 458 and A.B. 498 then the provisions revert back to the regulations currently in statute. He stated he feels the Governor will prefer the newer provisions. He commented he feels A.B. 498 is a much better bill than the current regulations. He stated the provisions for the injured worker in A.B. 498 are identical to those in S.B. 458. Senator Neal asked if the bonding provision has been placed back into A.B. 458. Mr. Ernaut stated it is an either-or provision. They may bond or use the financial statements. He stated it may be better for a smaller company to be able to bond. Mr. Ernaut stated S.B. 458 raised the level of permanent partial disability (PPD) award from .54 to .6. He stated the Assembly would like to put it back to .54. In exchange, vocational rehabilitation will be allowed. He stated a claimant will be allowed one vocational rehabilitation program. He stated to apply for the second, there must be a reason. He stated the first program must not have worked, or the placement did not work in the opinion of the insured. He stated SIIS stated there are many times when it makes sense to do a second vocational rehabilitation program. The truly injured worker should not have the opportunity removed to complete vocational rehabilitation. He stated the person who uses vocational rehabilitation as a monetary compensation or as a way to draw out their claim and to draw out the total temporary disability (TTD), should not be allowed continuation of vocational rehabilitation. Senator Neal asked why there must be a connection between changing the PPD from .54 to .6 and replacing vocational rehabilitation. Mr. Ernaut stated the connection is simple, it is a compromise. The Assembly did not want to "budge" on their feelings that the PPD award should not go to .6 and the labor organizations would not "budge" on their stance that there must be vocational rehabilitation. Senator Neal asked if the vocational rehabilitation equates out to the $22 million per year which will be taken away in PPD awards. Mr. Hettrick stated it will be closer to $32 million this year for vocational rehabilitation. Mr. Ernaut pointed out there will be rare occasions when a worker may have a third vocational rehabilitation, but it is only at the discretion of the insurer and it is non-appealable. He stated he feels that nothing the Assembly has done will impede the descending costs of vocational rehabilitation. He stated it has gone from $52 million to a projected $28 million. He stated if the intent is not carried out during the next 18 months, then the system will have to be fixed again. He stated he hopes SIIS and the administrators will hold to the letter of the intent of what is being passed in these bills. Senator Regan asked who will handle vocational rehabilitation. He asked if it will be privatized or will the system be the same as it has been. Mr. Hettrick stated he hoped the system will privatize a great deal of the vocational rehabilitation. He stated privatizing it will cut it in half which will save $5 million to $7 million per year. Mr. Ernaut stressed it was the Assembly's impression that the Senate wishes SIIS to be run like an insurance company by allowing the administrator flexibility to do what is necessary to run the system. He said it is the Assembly's intent to have SIIS privatize as much as it can because it makes little sense to spend $12 million administering a $28 million program. He expressed his confidence in the administrator's ability to run the system. Mr. Hettrick explained section 105 of S.B. 458 is the key to the real problems within SIIS which is to bring managed care to those injured before S.B. 316 of the Sixty-seventh Session. SENATE BILL 316 OF THE SIXTY-SEVENTH SESSION: Makes various provisions relating to industrial insurance. Mr. Hettrick stated managed care organizations (MCOs) are very important to the success of the system. He stated the goal is to put managed care into the system for those injured prior to the passage of S.B. 316 of the Sixty-seventh Session with no change in compensation or benefits. He stated it is stipulated the worker may keep their current doctor, with the understanding that SIIS will contract with MCOs to provide the managed care within the area where it is provided. He stated in the areas where managed care is not provided, there is an exception. He stated the injured workers may keep their doctor unless the doctor refuses to participate in managed care. Senator O'Connell pointed out that issue was addressed in S.B. 458. Mr. Ernaut stated the Assembly bill drafters reviewed the language and felt it did not do what the committee intended it to do, so they redrafted some of the language to accomplish the intent. Mr. Ernaut read Exhibit D. He stated the Division of Industrial Relations (DIR.) will set the policy for the entire system including all insurers and SIIS. He stressed the intent is to provide as many safeguards as possible to the system. Mr. Hettrick stated the Assembly removed the board as regulators and gave control back to the Governor for the time being. He stated SIIS indicated one of the things which had helped them the most to turn the system around was the flexibility to make management decisions. He stated it was expressed that a board will not allow the same flexibility as having one person in control. Mr. Ernaut expressed the need to reinstate the 20-mile rule. He stated if Tahoe-Carson Hospital is not an awarded bidder, the hospital will have great trouble in existing. He stated Carson City needs the hospital. Senator Regan expressed his concern about how to get DIR's attention so that they may better understand its function. He expressed his concern that DIR will be able to take its position of major guidance and leadership. Mr. Ernaut stated it will not be DIR in that position. It will be the Governor in control. Senator Regan stressed it is the people who the Governor puts in charge who can make or break the system. Mr. Ernaut commented it is the way the system works. It is the Governor's responsibility. Senator Regan stated he hears from his constituents who are unhappy with the way they are treated because "it is in the law." He pointed out the system needs to be run like a business to succeed. Mr. Hettrick stated using a board as the head of the system instead of the Governor will add to the problems of the system, because there will not be the flexibility having just one person in charge will give. The board may not agree on a decision which will make changes take longer to implement. He stated the Governor will be able to make changes in DIR if those changes are needed. Senator O'Connell asked if there were any guarantees from the Governor if management will stay the same at SIIS during the next 2 years. Mr. Ernaut stated it is assumed, but there was no direct discussion of the issue. Senator Neal expressed his support for the compromises reached by the Assembly. Mr. Hettrick commented the bill gave them a good foundation to work from to reach the compromises needed. Richard (Rick) D. Perkins, Assembly District No. 23, expressed his faith in the bill as amended. Senator Townsend asked if the fraud issue will be dealt with as an independent bill. Mr. Perkins stated A.B. 587 will address that issue. ASSEMBLY 587: Revises provisions regarding workers' compensation fraud. With no further business, the hearing was closed at 6:30 p.m. RESPECTFULLY SUBMITTED: Molly Dondero, Committee Secretary APPROVED BY: Senator Randolph J. Townsend, Chairman DATE: Senate Committee on Commerce and Labor June 14, 1995 Page