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Music Intro
[Mr. Citko] Good morning. I'm Christopher Citko,
Senior Staff Counsel with the Department of Insurance, and
I'm going to open our hearing today. This hearing is regarding
the proposed revisions to the Insurance Commissioner's
regulations pertaining to classification of risks,
recording and reporting of data, and experience rating
for workers' compensation insurance and the approval
of advisory Pure Premium Rates in the workers' compensation
claims cost benchmark. This is to be effective January 1st, 2013,
and our file number is REG-2012-00016.
We received a filing from the Workers' Compensation
Insurance Rating Bureau, an insurer rating organization,
regarding the rule changes on Pure Premium Rate adjustment.
That was amended on October 1st, 2012, and addressed the
substantial legislative reforms that were in (Senate Bill) SB 863.
We did provide notice of this proceeding through
Notice of Proposed Action and Public Hearing. It was issued
August 28th, 2012, along with Initial Statement of Reasons
for a Hearing to be Held on September 24th, 2012.
Subsequently, and as a result of the legislation
that needed to be analyzed, the hearing was canceled and the
matter continued for the amended filing from the Rating Bureau.
An Amended Proposed Action and Notice of Public Hearing was
issued on November 7th, 2012 with an Amended Initial Statement
of Reasons for today's hearing. This matter is being held pursuant to
Insurance Code Sections 11734, 11750 and 11750.3.
The record in this matter is going to be closed today,
November 16th, 2012, at 5 o'clock p.m.
In addition to the testimony being presented today,
additional written comments and evidence may be provided up until
the time that the record is closed unless further time is granted
(at the end of these) before the end of these proceedings.
Testimony today will be recorded by the reporter
who is to my right and there will be a transcription
of the testimony available. Copies of the transcript,
if anyone would like to obtain it, should be requested from
the reporter, and the reporter has cards to provide at the end of the
hearing if you would like that. Then, in addition, we'll provide
contact information later on if anybody needs that.
I would like to admonish everyone that does come forward
to testify today to please identify yourself with your full name,
and if you do represent somebody, who you represent.
If you come forward and testify, please also speak loudly and
clearly so the reporter can take down what you say.
Also, please respond, if we ask questions, respond to them
verbally. Nodding your head, shaking your head, going "uh-huh",
"huh-uh" doesn't come out on the record very well
And, we'll remind you so that we can get a clear record
of the proceedings today. Also, please do not speak too quickly.
I've told the reporter that if someone does speak too quickly,
she can tell you to slow down and I'm sure she will let you know.
With that, I wanted to let you know that the order of presentation today
is that we'll first hear from the Rating Bureau regarding its filing.
We will then hear from the public members of the
Governing Committee of the Rating Bureau and their actuary,
and then finally, we'll take in any public comment or testimony that
anyone would like to give. If you are going to provide to us
documentation, I'll receive that and we'll make sure that
we note that in the record today. And I'll try to summarize all the
documents at the end of the proceeding. The panel here today
includes myself, Ron Dahlquist our Chief Actuary,ief Actuary,
and Insurance Commissioner Dave Jones. And with that,
Commissioner Jones, if you would like to make an opening statement.
Commissioner Jones Thanks. Welcome everyone.
I want to apologize first and foremost about the venue.
I feel a little odd being up here on stage, and so,
I hope you bear with us. But we're most appreciative
that you've taken the time to attend and we're very eager
to hear your testimony as the proceeding moves forward.
As was explained a moment ago, the purpose of the hearing is to
evaluate the cost in California's worker's compensation
insurance system as laid out in the Pure Premium Rate filing
and analysis from the California Workers' Compensation
Insurance Rating Bureau or WCIRB, and we'll have a chance
to hear directly from them in a moment. I think it is important ,
though, particularly for those members of the public
who are not as familiar with this process {bold}to underscore
{plain}what exactly we mean by the term "pure premium."
Pure premium is often misunderstood by
the general public and employers who are required to have
workers' compensation insurance. Pure premium is the portion of
the premium needed to cover the insured's claims costs
and claims handling expenses. Workers' compensation insurers
are free to set their rates wherever they choose with one exception.
Those rates have to be sufficient to make sure the companies
remain solvent. And, it wasn't too long ago that over 30
workers' compensation companies in California became insolvent,
the terrible consequences for employers purchasing
workers' compensation insurance. Prices shot up, insurers that were
not insolvent exited the market, the Department of Insurance
had to take over many insurers; employers had a hard time
finding or affording workers' compensation insurance.
Again, it's important to underscore the Insurance Commissioner nor
the Department of Insurance do not set workers' compensation rates.
Anyone who tells you that the Insurance Commissioner sets
the rates is simply not telling you the truth, and it's particularly
disingenuous for publications, publishers or reporters
who report expertise in workers' compensation to tell readers that
the Commissioner or the Department sets rates.
These so-called experts know better. The law does direct
the Insurance Commissioner to issue an advisory
Pure Premium benchmark rate and rates after receiving
a recommendation from the Workers' Compensation
Insurance Rating Bureau. This is important
so that insurance carriers, and the market, and employers,
and brokers, and agents have good information about costs in
the system and to assist carriers in setting rates so as to avoid
insolvency. While no one likes increased rates,
there is something far worse, insolvency of insurers,
shortage of insurance and then prices rocket even higher
as occurred only a short time ago in California with disastrous
consequences for our economy. Indeed past Commissioners have
been hesitant to issue the advisory pure premium benchmarks
because of the misreporting that Commissioners
actually set the rates themselves. But again, the pure premium
advisory rates and benchmark are exactly that, advisory.
Insurers are free to set rates under our laws as they see fit.
Now, earlier this year the legislature and the governor enacted
an important package of workers' compensation reforms
through Senate Bill (SB) 863. These reforms had two major
components; increasing needed benefits to permanently
injured workers and cost savings. I applaud the hard work
of stakeholders which included labor and employers
in fashioning these reforms. And applaud the legislature
in passing SB 863 and the governor and his staff in supporting
the legislation. With the passage of SB 863 we need to measure
as a part of this proceeding any costs and savings for the entire
workers' compensation system associated with the SB 863
reforms as well as measure and evaluate underlying
cost pressures that are occurring in the system concomitantly.
The first major component of SB 863 provides for an increase
in permanent disability benefits to injured workers,
benefits that previously were inadequate.
Utilizing objective criteria to determine impairment in
providing limits on what can be compensated,
the permanent disability reforms also help to address areas
of potential abuse. The second major component of SB 863
provides for system reform particularly associated with the
delivery of and payment for medical treatment resulting
in projected cost savings to cover the permanent disability
increases and bring additional savings and stability to the system.
These reforms include independent review of medical treatment
requests and billing disputes. Additionally, problems that
we've seen with the filing of medical liens are also addressed
providing for more potential savings. The workers'
compensation system has struggled to stabilize rising costs
over the last few years. Particularly, medical costs.
medical costs have not been as effective as we might wish
or were underutilized in some cases. There have been
double digit annual increases in medical costs.
The SB 863 reform has put in place an opportunity for additional
decreases of medical cost inflation and further system stability.
And in turn, will assist with making the costs in the system
more predictable. After reviewing the SB 863 reforms and trends
in the workers' compensation system, the WCIRB
Actuarial Committee recommended a pure premium
benchmark of $2.61 per $100 of payroll. The WCIRB
Governing Committee instead is recommending a pure premium
benchmark of $2.38 per $100 of payroll. The purpose of today's
hearing is to take testimony and evidence with regard
to the WCIRB's recommended pure premium benchmarks
and rate filing. Based on the testimony and evidence
from this hearing, I'll then issue a pure premium
advisory benchmark. So with that, why don't we hear from our first
witnesses, the representatives from the Workers' Compensation
Insurance Rating Bureau. We want to welcome them
to the hearing and are most appreciative of their spending
time with us this morning and setting forth information
for us with regard to the rate filing. Welcome.
Mr. Mudge Thank you. Good morning.
Commissioner Jones, Mr.Citko, Mr. Dahlquist, I'm Bill Mudge.
With me is Dave Bellusci from the WCIRB. This morning we'll
provide a brief summary and perspective of the Advisory
Pure Premium Rate filing we recently submitted for your review.
We too recognize that Pure Premium Rates issued or approved
by the Insurance Commissioner are advisory only and that insurers
are not required to use them. I will make a few opening
comments and observations and then ask Dave to expand upon
our actuarial analysis of the underlying cost drivers
that have been contributing to the ongoing upward escalation
in claims costs. And we'll provide perspective on our evaluation
of the costs and savings that we have quantified to date
from Senate Bill 863. We will provide this morning some context
for our proposed January 1, 2013 Pure Premium Rates,
including our current actuarial evaluation of the impacts of SB 863.
We will touch on SB 863 provisions that remain to be
evaluated pending promulgation of regulations by the DWC
(Division of WorkerÃs Compensation)
We'll also share risks we see, in terms of potential
new consequences from SB 863's structural reforms.
And equally or maybe more importantly, our action plan
to closely monitor the cost effects and trends of the legislation
and regulations and to report our empirical observations
as quickly as practical to you. There's no question that since
the reforms of 2002 through 2004 were fully implemented
fully implemented by 2005, that since that time ultimate claims
costs adjusted for the effects of frequency in the California
Workers' Compensation Insurance system have been
steadily going up. If we look at this slide that I'm now showing
which we shared at our mid-year rate hearing, we see the context
for our concern with this ongoing upward trend in the indemnity
cost index as depicted by the green line on the top there.
This claims cost level, indexed starting at 2005, shows a
markedly higher trend than the index of average wage level
growth or the underlying exposure base in the system as shown
on the tan line. Said another way, workers' compensation
claims and resulting costs have outpaced the California economy,
and have been putting upward pressure on an indicated
pure premiums. And no doubt, this disparity in claims costs
to exposures, was a driving force for the systemic change
that we now have in SB 863. Looking at this slide a bit further,
we show the top line there (the top dotted orange line) reflects
our actuarial projection of costs for 2013 using data as of
June 30, 2012, but with no SB 863 impact. If you will,
that top orange dotted line is the world pre-863
as if the system continued the way it has. The blue dotted line
in the center shows how that cost line flattens based on our
actuarial estimate of the areas we believe are
currently quantifiable within SB 863. The bottom line,
the red dotted line, depicts a downward trajectory in costs
based on a greater reflection of savings from SB 863,
aligned with our amended filing, and is in recognition of the
unusually high level of uncertainty surrounding
yet-to-be-developed regulations and the potential for additional
savings from SB 863 beyond that, which is currently quantifiable.
Dave will provide a more detailed perspective on SB 863
in just a moment. But, if we bring, then, though
the compositive costs together with payroll,
in terms of an advisory industry pure premium benchmark,
this slide provides a relevant range of those perspectives.
Starting on the far left, $2.38, that's the insurance industry's
average, filed Pure Premium Rate as of July 1, 2012.
Moving to the right next to that, $2.68, is our indicated average
January 1, 2013 Pure Premium Rate from our original
August 21 filing based on (at that time) March 31, 2012
industry loss and loss adjustment expense experience and using
methodologies that were similar to the filing we made for
July 1, 2012. Moving across at $2.73 is an update to our
August 21 filing simply using now June 30th, 2012 industry
experience, which reflects about a two percent deterioration
from the March 2012 data. The next at $2.86 now adds in
just the permanent disability benefit increases that were
spelled-out in SB 863. So this indication at $2.86 is a reflection
of now our best experience through June of the industry
and just the benefit increases from SB 863, an indication
as if no reform savings were to occur. Now, $2.61 reflects
now the savings from the areas that we the WCIRB have
actuarially quantified at this time. Areas of SB 863 that are
dependent upon regulations yet to be promulgated and
speculating on the potential impact on costs and utilization
of medical treatment from the new Independent Medical Review
(IMR) process within SB 863 are not included in that number.
$2.38 on the red bar there reflects the amended filing
we submitted to the Department of Insurance on October 1
based on no increase in the advisory Pure Premium Rate
level for January 1, 2013. That was in recognition of the
uncertainties around the potential for additional cost savings
from SB 863. Components that have yet to be quantified
by our organization. Now clearly, several of SB 863's provisions
do aim directly at many of the key factors that have given rise
to the upward trend in lost costs since the last major reforms
of 2002 through 2004. The \magnitude of those potential
savings has been and is the focus of much actuarial debate
and professional dialogue. Finally, the last bar shown on
the chart we've appended from a preliminary estimate from the
Department of Insurance of average filed Pure Premium Rates
from a number of companies that have submitted filings
now for January 1, 2013. And, that number in aggregate is
$2.49, up about 5 percent from the July 1, 2012 benchmark.
I'm going to turn the rest of our presentation over to Dave Bellusci.
He'll provide a more in-depth analysis of our SB 863 evaluation,
and equally important as I said, our plans for ongoing
monitoring of its effects on industry lost costs. Dave?
Commissioner Jones Bill, before we do that,
I'm just wondering, just to help the thing flow,
I have a series of questions that I wanted to pose to you
and then maybe we could go to Dave's testimony if that's all right?
Mr. Mudge Sure. Dave and I might answer those
Commissioner I understand. Mr Mudge Together.
Commissioner Jones Absolutely. Absolutely.
So what strikes me, is the dramatic difference between
what the WCIRB Actuarial Committee recommended
as the actuarially indicated Pure Premium Rate considering
all of the consequences of SB 863 and what the Governing
Committee adopted and sent forward with the rate filing.
So I'm wondering if you could explain for us in general the
process that the Governing Committee uses to make its
decision about the Pure Premium Rate benchmark and
Pure Premium Rates generally.
Mr. mudge Right. I will say that the
Governing Committee meeting (some of our committee members
are here present today) , was not without significant discussion
and debate on this issue, of what are the magnitude of
potential savings from SB 863.
Commissioner Jones But let me clarify.
I'm interested in how it's done generally and then I want to , I
do want to drill down, in a moment (Mr. Mudge Right. So I...)
to what specifically happened at that Governing Committee.
Mr. Mudge Fine.
Commissioner Jones But just generally if you can
provide an overview of how it's done, that would be helpful.
Mr. Mudge Sure. So in open session, staff,
Dave, our actuaries, myself, we present the work that has come
forth from the Actuarial Committee to all of the members
of the Governing Committee. They get a detailed amount of
information in advance of our meetings, and there is
a unlimited amount of time available for committee members
to question staff, to dialogue on materials that they have
received, and to make sure that there is a understanding
from their perspective on what staff is recommending
to the committee for its consideration.
Commissioner Jones And, what did the WCIRB
Actuarial Committee recommend to the Governing Committee
with regard to this particular amended rate filing?
Mr. Mudge Right.
Dave, do you want to cover that question in as much detail as
the Commissioner would like?
(Mr. bellusci) Sure. (Mudge) And then I'll jump back in.
Mr. Bellusci Good morning, Commissioner.
Yes, the process, let me describe a little bit because this was
an unusual process given SB 863 and the enactment.
The Actuarial Committee went through a fairly detailed process.
There were two meetings held in September that were
public meetings from the entire Actuarial Committee as well as
a number of people from our claims working group, which
consists of insurers, claims personnel, legal personnel,
researchers and plus a broad range of other experts
in the workers' comp system; representatives from the
Division of Workers' Comp, your own staff from the California
Workers' Comp Institute, the Commission on Health & Safety,
UC Berkeley, and others, so a very broad group. And that group,
you know, looked looked at the provisions of SB 863 very
closely and in many instances (as I'll talk about a little later)
there was, you know, informed judgments made and those
were reflected in an analysis that was presented to the
Governing Committee at their meeting and summarized as
Mr. Mudge mentioned in a fair amount of detail. The indication
based on the Actuarial Committee's evaluation of SB 863
was a net savings of about 4.4 percent when combined
(of the bill 4.4 percent from SB 863). When combined with
the latest June experience, that would produce the indication
shown up there at $2.61. The combination of the most
current loss experience reflected in the deteriorating trends that
Mr. Mudge alluded to earlier as well as the Actuarial
Committee's consensus, reflection of the impact of SB 863.
Commissioner Jones And just since we're on this point,
so over what period of time was that analysis prepared?
Mr. Bellusci Well, the analysis really
started even before the legislation was passed.
Once we were requested by yourself as well as
Director Baker of the Department of Industrial Relations
to try to assess some of the proposals that ultimately
turned into SB 863. In the latter part of August,
staff worked with it and consulted with a number
of these individuals. On an individual basis.
We didn't have an opportunity to bring the Actuarial Committee
together but we consulted with a number of experts individually
throughout that process, all through the last couple
weeks of August. Then we had an initial meeting on
September 5th shortly after the bill was passed on
August 31st that included the Actuarial Committee and the
claims working group that I alluded to earlier.
At Mr.Citko's request, we came back. There were some
open issues that we needed a little more discussion,
pull a little more data together, so we came back
and met I believe it was September 16th. I could be
wrong on that date. But we met again in September,
and then ultimately built the analysis, based on that process,
built the analysis that was presented to the Governing
Committee on I believe it was September 26th.
Commissioner Jones So about a month and a half,
maybe two months of analysis?
Mr. Bellusci That's correct. I guess from the
early staff analysis from the (middle of), the middle of
end of September. And even beyond that, as you may recall,
we made one slight amendment to it based on some new
information that we gathered, that was submitted on
October 12th. So it is. in many ways it is an ongoing process.
As regulations get adopted, estimates are going to be
evaluated. So we don't feel we're anywhere close to done.
And we won't know with good certainty for a couple years
what those real costs are.
Commissioner Jones So about three months of
analysis then all told to bring us to where we are?
Mr. Bellusci Yes.
Commissioner Jones And then, you alluded to some
of theindividuals and groups that were involved in doing
that analysis. But can you be a little more specific about
the individuals and groups that were not involved in
that sort of three-month analytical process?
Mr. Bellusci A little more sense about the
groups that were involved?
Commissioner Jones Yeah, or the individuals or,
who does this analysis, I guess, is the better way to
ask the question?
Mr. Bellusci Well, there are a number of
organizations that were doing components of analysis
independently. You know, CWCI (California WorkerÃs
Compensation Institute) published some information.
Mark Priven from Bickmore Risk Association for the
Department published a number of analyses.
The Commission on Health & Safety and Workers' Comp
have done some things in the past. State Fund I think
published some estimates. So there was a wide range of
groups that were doing work on this. We reviewed all of that
and consulted with all those parties involved. (In our)
and we brought all those parties together around the table.
As I mentioned, you know, Lachlan Taylor was involved
from the Commission on Health & Safety and Workers' Comp.
Alex Swedlow and Michael Nolan from CWCI. Mark Priven from
Bickmore Risk Associations, representatives of the
Division of Workers' Comp, some of your own staff were
involved in some of those meetings, as well as WCIRB
staff who was leading the process, as well as a number of
insurer representatives who are on our committees or working
groups, some of which come from a claims perspective,
some of which come from a legal perspective. So it was a
very broad group of experts you know, very diverse in
research, in actuarial, claims, legal. It was again, a very
broad group of experts.
Commissioner Jones And then --
(Mr. Citko) I just want to say "CWCI" means
California Workers' Compensation Institute.
Mr. Bellusci Oh, okay.
Mr. Citko I just want to make that clear
Commissioner Jones Just for the reporter's help.
Mr. Bellusci Thank you.
Commissioner Jones And then, in the course of that
analysis in that discussion/ deliberation, that broad
analysis on discussion/ deliberation that you described,
was there discussion on the part of the Actuarial Committee with
regard to the merits or dismerits of available data sources in
reaching the conclusion the committee (committee) reached?
Mr. Bellusci Ah, Yes. Very, very much so.
And (each you know,) each provision of SB 863,
each of the key provisions, (there were many diverse
provisions as you're aware) sort of had its own issues
around it. Sometimes there were very good data
and very direct data that the computation was relatively
straight forward and in other issues, (in other areas
there were), there was a consensus that , you know,
a particular provision will save costs. And I'll give one
example: The impact of Independent Medical Review
on temporary disability duration. Temporary disability duration
has been growing in California. It's well above other states
now and it's been growing -- steadily deteriorating.
I think there was agreement that part of the reason (for that)
for that deterioration over the last five years was delays
related to medical treatment disputes.
Well, independent medical review, if it works as we all hope,
should reduce those delays, should result in quicker
decisions on medical treatment disputes; that's going to have
an impact on temporary disability duration.
Exactly what that impact is, is a matter of judgement. So as a
group there was discussion. There was no way to directly
measure that, but as a group, there was a consensus about
a reasonable, you know, assumption on on what that
impact on temporary disability duration would.
That's one of the extremes where there was a consensus in terms
of savings would be materialized but very difficult to come up
with a precise estimate. In other areas, for example, benefit
increases, those are fairly straight forward. They're
very real. They don't depend on implementation regulations
for the most part. It's a fairly straight forward traditional
actuarial process to measure those. So there was less,
I guess, less discussion and less confusion. So it's a
wide range of things where the data is very solid and
very traditional, standard actuarial methods to value
the impact of those and then other areas where
there was limited data and even, no direct way to do that.
But, ultimately when there was a consensus of the group that
there would be some savings, the group built a consensus
around a reasonable estimate.
Commissioner Jones So it sounds like in the course of
reaching the Actuarial Committee's recommendation which was
essentially $2.60 per $100 of payroll, which was just recently
modified to $2.61, that the committee and the experts and
the staff weighed alternative estimates and evaluated them
and decided which ones they thought were reasonable and
which ones not so resonable in reaching their conclusion?
Mr. Bellusci Yeah, that's a fair assessment,
Commissioner.
Commissioner Jones Okay. And then I guess
with regard to estimates of cost and cost savings,
I mean, I take it that the committee operates by consensus?
Mr Bellusci Typically by consensus. Though,
ultimately the Actuarial Committee; there are issues when there's
a difference of opinion; we will take a vote.
And so, it's a combination of consensus where there's a
relative unanimity among the group. But if there's a strong
differentiation of opinion, we'll take a vote and move
in terms of majority. And, at least in one instance
and maybe two, you know, there was some differences of opinion
and there were a split vote at least in one instance
in that discussion that I recall.
Commissioner Jones And, just out of curiosity,
what were, what was the order of magnitude of differences
in cost savings associated with those two items
for which there was a split vote?
Mr. Bellusci Well, the one I recall,
and I could clarify better, was a difference in terms of the
impact of changes in claim benefits on the impact
on claim frequency. It's kind of known as the utilization factor.
There was agreement that (there is), a utilization factor is
appropriate. Some disagreement on the magnitude.
But, my recollection, (you know, it was) the differences
of the impact were very modest, you know, maybe
less than a percent on total cost. So it wasn't ...
while there was a difference of opinion and ultimately
a split vote on it, the bottom line result of the two differences
were, you know, relatively modest.
Commissioner Jones So just to be clear, the split vote
was just on those two relatively modest items. With regard to
the final Actuarial Committee recommendation of $2.60,
was there a split vote with regard to that recommendation?
Mr. Bellusci Well, just to clarify how the
committee operates a bit, the committee doesn't make a
decision about what the final rate indication is. They make a
decision about methodology. So (they) each component
of the bill we came to a consensus or a vote on
what would be the saving estimate. We didn't put the
numbers together and they didn't adopt $2.61. They looked
at each of the components and then staff put all those
assumptions together. But I would say, I think to the
substance of your question, (there, area, there wasn't)
areas where there was disagreement on the committee,
were relatively narrow and (didn't have) wouldn't have
major impact on the $2.60 and later adjusted to $2.61
indication.
Commissioner Jones Okay. And then let me if I could,
ask Mr. Mudge to come back because I just wanted to
continue some questions I had about the process then
of the Governing Committee as distinct from the
Actuarial Committee. So it's my understanding that the
Actuarial Committee then did recommend a pure premium
benchmark of $2.60 to the Governing Committee, and
I take it that the, as you explained Mr. Mudge,
the Governing Committee had that recommendation in
front of it when it took its action ultimately adopting
a recommended Pure Premium Benchmark of $2.38. So it had
the Actuarial Committee's recommendation in front of it
at that time?
Mr.Mudge Well, again, just to clarify on
what the ActuarialCommittee recommended as, Mr. Bellusci
said the Actuarial Committee recommended and had consensus
and discussion about methodology and impact of components of
SB 863, and then staff actually worked the calculations that
then resulted in the output being $2.60. So the Actuarial
Committee did not recommend a claims cost benchmark
number. They directed staff to use what they came to
And then staff worked it into that -- into that advisory Pure
Premium Rate calculation. But all of that information,
Actuarial Committee work, background and such, and then
all of staff's work around that certainly is all available
and was all available to the Governing Committee members.
Commissioner Jones And I would imagine the benefit
of doing it that way from a process standpoint is,
it at some level if you will, depoliticizes the concern
about what that ultimate rate might be if the committee
is reaching conclusions about the component-parts, and then
without having to be too concerned about what the
ultimate outcome is, and then the staff essentially does
the math, and then presents that result to the Governing
Committee; is that correct?
Mr.Mudge That's a fair summary.
Commissioner Jones Okay. And then, so I'm still
struck by the dramatic difference between what
the actuarial indicated Pure Premium Benchmark rate
would be of $2.60 or that was just recently adjusted to $2.61
versus the Governing Committee's Pure Premium Benchmark
decision of $2.38. So I'm wondering if you could
share with us what the rationale was that the
Governing Committee had for so dramatically departing from
what the actuarially indicated rate was?
Mr. Mudge Well, as you know, those are
open meetings. The Governing Committee meeting was an
opening meeting. I think the process and result of that
specific committee meeting was chronicled by the media,
and as you know and as I'll summarize for you,
it was anything but a clear bright line in terms of
what that outcome would be from the committee.
In fact, it was as close a vote as you could have.
Commissioner Jones Of the Governing Committee?
Mr. Mudge Of the Governing Committee.
Commissioner Jones Yes.
Mr. Mudge Yes Comis. Jones It was a split vote?
Mr. Mudge A very split vote. Comis. Jones Yes.
Mudge With six, four, and five against the motion that was on the
table which ultimately then did pass in vote to
make no change to the advisory Pure Premium Benchmark.
There was a lot of debate in that meeting and a lot of
discussion, but ultimately when a vote was called for
on the motion on the table by the chairman thats how
the vote came down.
Commissioner Jones So then, just to be clear
because you're right, there was a split vote. With regard
to the majority that supported the motion, what was the
rationale for so significantly departing from the
actuarially indicated pure premium benchmark?
Mr. Mudge Yeah. I think you could ask
some of them who are here today possibly. But I would say
that my take on the dialogue and discussion that led up
up to that, was a function of (1) understanding the
actuarial work that was done by the actuarial committee
and then subsequently staff and respecting that work, but also
with a belief in, I think, a lot of maybe historical expertise
and experience vis-a-vis the system when there is
major reform that there's a great degree of uncertainty
around what ultimately the savings from the system
will be. And I think there was certainly on the table
and well discussed that recent reforms -- the last set
of reforms from 2002 through 2004, that ultimately when
hind-sighted on how those reforms worked out, by far and away
the savings exceeded anyone's estimates that were made,
even the ranges of estimates that were made at the time.
And, so I think there was some sense among some of the
committee members that this set of structural reforms
could equally have (maybe not to the same degree,
but could equally have savings that would surpass what
the best estimates were at the moment in time.
I think that was probably in among their thinking. I think the
other element that was among their thinking was the fact
that we at staff and also the Actuarial Committee felt
that there are areas for potential savings within
863 that we just can't value at this point in time.
We're pending regulations to be adopted. And I think there
was significant discussion about what exactly
Independent Medical Review would do; not to the dispute
resolution and administration of benefits but what will it
do to changing medical treatment and medical utilization
patterns within the system. Medical as you know is such
a significant part of the totality of costs in comp
that even a very minor or modest movement in a
positive direction relative to medical trend can have
a significant impact ultimately in what a
claims cost benchmark number would be. So I think to sum up
without actually being in their heads and such,
that I think they were reflecting on the significant benefits
that came from the last set of reforms that far
surpassed the actuarial thinking at the time.
And secondly that thier belief, and many of them I think were
actively involved in the legislation itself, a belief
that the areas that we could not evaluate at this time
would have significant additional savings. And given
that and the uncertainty around the potential benefits,
there was a, I think a sense in ultimately a decision
among the majority that this would not be the time
to go forth with a rate increase or advisory Pure Premium
Rate increase to the system.
Commissioner Jones The cost savings delta
associated with the actuarially indicated Pure Premium Rate
coming out of the Actuarial Committee's work versus
the Governing committee's majority split vote recommended
Pure Premium Rate, what's the actual cost savings
necessarily implicated by those two different figures?
In other words, to get to the Governing Committee's
recommended Pure Premium Rate, how much additional
money would have to be saved in the system in order to
achieve that Pure Premium Rate?
Mr. Mudge Right. No, it's a great
question, Commissioner.
We've actually looked at that.
Mr. Mudge And I'll ask Dave to step back
up here and give you the specifics. We've looked
at it a couple of different ways.
Commissioner Jones Okay.
Mr. Bellusci Yeah it is a -- it is a good
Commissioner Jones I just need the number.
Mr Bellusci Pardon me?
Commissioner Jones I just need the number.
Mr. Bellusci Yeah. The number,
it's about three to one roughly. So I mentioned that
the savings we estimated were about 4.4 percent...
Commissioner Jones Can you --
Mr. Bellusci ... from the Actuarial Committee.
Commissioner Jones Can you give it to me in.
absolute numbers?
Mr. Bellusci In dollars?
Commissioner Jones Yes, sir.
Mr. Bellusci Yeah, in dollars, uh --
.. I remember my dollars, so I have a chart that will clarify it.
The savings from the reforms were about 1.7 billion that
we quantified. That would have to ...Double roughly? Tony?
Mr .Milano Yes.
Mr. Bellusci It would have to more than
double to produce the savings so we would be talking
about another $2 billion roughly in terms of savings.
Commissioner Jones Okay. So just to be clear:
So the savings identified by the Actuarial Committee's
extensive 3-month evaluation were about 1.7 billion --
Mr Bellusci Roughly it was about 1.6, 1.7.
Those were the savings of the reforms, not the net,
because there were benefit increases.
Commissioner Jones I understand.
Mr. Bellusci Right.
Commissioner Jones But the additional savings
on top of that $1.7 billion in savings as such with SB 863,
the additional savings that would have to be assumed
in order to reach the Governing Committee's adopted
Pure Premium Benchmark rate of $2.38 is roughly another --
another $2 billion?
Mr. Bellusci That's correct.
Commissioner Jones Okay. So then if I could go back
to Mr. Mudge then. So with regard to the two bases
for the Governing Committee's -- Governing Committee majority's
decision, you said one of those was what happened last time
with the reforms. Has there been any quantification
with regard to the difference in savings that were projected
by actuaries with regard to the 2002-2004 reforms and the
savings that actually resulted from those reforms? And what's
the, what's the absolute dollar figure on those savings?
Mr. Mudge I'll have Dave answer that
question as well. But I can tell you that another way of
looking at this issue of what level of savings has to occur
for the $2.38 benchmark to hold would be about a 40 percent
reduction in the increase in cost we've seen since the reforms
were fully implemented on that chart I showed from 2005 to today.
If we're able to with the reforms of SB 863 tilt that down and
reduce 40 percent of that increase over this period of time,
then that's another way of showing that that $2.38 number
could hold. And I believe we put that in the materials we
provided to you. But I'll let Dave answer --
Commissioner Jones Actually, before we go to
Mr. Bellusci, the 2002-2004 reforms though are different,
Mr. Mudge, than the reforms in 863; correct?
Mr. Mudge I don't think there's a question
that the scope and magnitude of the prior reforms were much
larger than they are within 863. That's correct.
Commissioner Jones Okay. And then on the second
point you made about why the Governing Committee majority
came out the way they did, you talked about uncertainty
associated with all of the regulations that are in process
now. But isn't it the case that all of SB 863 or most of SB 863
requires regulations that are in process right now?
Mr. Mudge I think actually a number of the
areas we looked at did not have, the things that we quantified,
did not have speculation about what regulations would be.
We were fairly clear about what, at least the intent of the
regulations were specifically around things like spinal implant
hardware and those types of things. I will say the biggest
area that we have not evaluated and the Governing Committee
is aware of this, we just felt that there was not a way for us
to do that at this point in time, is, as I mentioned,
the impact of medical as a result of the IMR process that is now
included within SB 863.
Commissioner Jones But estimates of the savings
associated with that, were a part of the actuarially
indicated rate coming out of the Actuarial Committee's
recommendation, or Actuarial Committee's work, were they not?
Mr. Mudge I'll have Dave clarify what pieces
they are, but they were not encompassing the medical
treatment component potential effect as a result of IMR.
Commissioner Jones Okay.
Mr. Mudge And we think that potentially is,
is the largest piece of IMR but remains to be seen.
Mr. Bellusci So, let me maybe address a
couple of questions that were, with respect to the evaluation of
the 2002 through 2004 reforms, which as you pointed out
Commissioner, were very different and I don't think any --
Mr. Mudge mentioned I don't think anybody's suggesting
that SB 863 has anything close to the kind of scope
that we saw in 2002 to 2004. But with that said, ultimately,
and we put a monitoring process in place as we're
suggesting for SB 863 and we regularly monitored.
Our most current estimate was at, basically at 6. You know a
two-thirds cost reductions savings; something like $14 billion
a year retrospectively. I don't precisely remember the estimate.
We certainly have the initial estimate. It's in our latest cost
modern report. I just don't have it with me. But my
my sense of it was probably less than $5 billion in terms of
estimated savings and we can confirm that and get that
information to you on that question. With respect to the
question on Independent Medical Review which was reflected in the
actuarial committee and, we looked at a number of components.
There were the frictional cost impact; essentially, replacing
higher cost liens which are very costly to process and
medical-legal reports, QME (qualified medical evaluator
reports), that again are very costly, and then an expedited
hearing process to resolve medical treatment disputes.
We looked at replacing those costs with a much lower cost
Independent Medical Review. That was one of the things
we priced. We also, as I mentioned earlier in my comments
in response to an earlier question, we also looked at
the impact of Independent Medical Review on temporary
disability duration. We priced that.
We also looked at sort of the indirect impact of Independent
Medical Review on litigation and there was a price component
built in the Actuarial Committee estimate for that.
As Mr. Mudge mentioned, the one area that there was really
no consensus about on what the impact will be, and we just --
it was on medical treatment, which potentially is very
significant as we know. Workers' comp is in large part a medical
benefit delivery system and, you know, that's where the
dollars are. But ultimately there was really even no consensus
on what the impact would be given uncertainty to the regulations,
potential legal challenges, how they're interpreted
and implemented, and how medical treatment practices
evolve given that you have Independent Medical Review.
There really wasn't, the Actuarial Committee felt there was no basis
to estimate a savings on medical treatment costs
from Independent Medical Review.
Commissioner Jones Due to the level of uncertainty?
Mr. Bellusci Due to the level of uncertainty, yes.
Commissioner Jones Okay, Then Mr. Mudge
if I could go back then to the actual process the Governing Committee
used to make this decision. I have to say I'm not persuaded
by the comparison to the 2002-2004 reforms because
those were so different in kind and in magnitude.
But, I understand from your testimony and
Mr. Bellusci's testimony with regard to the second basis,
the uncertainty associated with medical treatment.
But I want to drill down a little bit more on how the
Governing Committee went about making this decision and
were there any studies consulted by the Governing Committee
other than the report that came to them from the staffof the WCIRB
with the Actuarial Committee's work? Were there any
other studies handed out at the governing committee meeting
that they consulted in this deliberation?
Mr. Mudge Right. There were no other studies
handed out at the meeting. There was reference to the work done by
Mark Priven, at Bickmore Risk Services on behalf
of the public members of the Governing Committee.
And there was some discussion about the range that Mr. Priven had
in his analysis and some alluded to that his analysis certainly had
a range that was lower than our best estimate of $2.60 at the time.
There was no handout of materials, but there was a brief discussion
about that, that the committee was certainly aware of.
Commissioner Jones But let me just continue with ...
Mr. Bellusci (interuption) Comis Jones ...Mr Mudge if I could
before we go to Mr. Bellusci. But there wasn't any other
than actuarial study, hard copy written actuarial study or analysis,
in front of the committee other than what had been done by staff
and the Actuarial Committee at the time this decision was made?
Mr. Mudge That's correct.
Commissioner Jones And then, were there any other
hardcopy reports consulted by the Governing Committee when it made
this decision? Were there, I mentioned studies, but any other
reports other than what was coming up from staff that was available
to them at that time, that they consulted?
Mr. Mudge Well, I don't know what
would have been available to each of them as individuals before
they walked into the room. Jones But handed out at the meeting?
No, not handed out. Right? (Jones, Mudge Bellusci - voices )
Mr. Bellusci There was some discussion about
some of the results of Texas. I believe that the Texas experience
who did have an IMR process back in... went to an IMR process,
and did publish a report that indicated savings coming from --
from all their medical reforms including IMR. So there was
some discussion of that. But I don't believe any of that was
handed out at the meeting.
Commissioner Jones Not the actual, not an actual report?
Mr. Bellusci No.
Mr. Mudge No, there was no report handed out.
Commissioner Jones And then -- and so then was there
any other written analysis in front of the Governing Committee
members other than what had been provided as a result of the
staff taking the Actuarial Committee's work and making
its recommendation to the committee? Any other
written analysis at all?
Mr.Mudge The only written analysis I'm
aware of that was provided to them, in the committee,
came from us. So all of our work product that you're aware of.
Commissioner Jones Okay, And then in the course of their
in the course of their deliberations, did the Governing Committee
re-visit any of the principal assumptions made by the
Actuarial Committee or the staff with regard to the actuarially
indicated pure premium benchmark rate?
Mr.Mudge Well, there was certainly
discussion, and I'll let Dave jump in here as well, Commissioner.
There was certainly discussion about the potential magnitude
of the savings from these reforms we're speaking about how
the Actuarial Committee and staff came to their conclusions.
What was the possibility or the range of potential that one
could see from savings. So there was a lot of discussion about...
along the lines, as you've been asking us, "how did we..."
How did the Actuarial Committee do its work? How did they come
to consensus on things? What did that mean?
We provided detailed, by line item, numbers relative to the
aggregate of the reform benefit that Dave has alluded to
--or mentioned to you earlier. So yeah, there was a lot of
discussion about that. I'm not going to say that the people
that are sitting on our Governing Committee are actuaries
who are going to get into an actuarial derivation discussion,
but there certainly are long-standing professionals
who have experienced things in this industry and they asked,
I think, good questions, of our actuaries.
Commissioner Jones But other than medical,
the uncertainty associated with medical treatment cost savings:
were any of the underlying assumptions that underlay the
actuarially indicated Pure Premium Rate, were any of those criticized?
Were any of those, determined by the Governing Committee to
be incorrect? (Was there any) Was there any delving into any of
the assumptions that underlay the Actuarial Committee's indicated
rate other than the uncertainty about medical treatment?
Mr. Mudge Well, I think there was an
awareness that there's uncertainly around all of the elements
in terms of where judgment was made by the Actuarial Committee.
Good actuarially sound judgment, but there's certainly a range of
perspective around a number of those. Each item was presented.
Each item was discussed.
Commissioner Jones Were any of them rejected by
the Governing Committee?
Mr. Mudge None were rejected, no.
Commissioner Jones Okay. And then... the other question
I have then is: The $2 billion or so of additional savings
that the Governing Committee in its pure premium recommended rate
is assuming will occur on top of the savings that the Actuarial
Committee assumed could be derived on net from SB 863...
How is that figure arrived at? that additional $2 billion in savings?
Was there any math done by the Governing Committee members
in the course of that deliberation?
Mr. Mudge I think there was a question,
and I'll let Dave jump in because I think he was asked the question.
There was question of how much additional savings
would it take if we were to, right, go down the course of path
that they ultimately did. And I think Dave provided perspective,
and I'll let him speak for himself here -- provided perspective to
the committee on the magnitude of what that would mean;
similar to what he just said to you today.
Commissioner Jones But I guess what I'm --
(because you were present at the meeting as well), what I'm
trying to understand is: Was there analysis and math done
to reach a conclusion that there would be $2 billion
in additional savings; therefore, the rate ought to be $2.38?
Or did the Governing Committee just conclude that the
rate ought to be $2.38 and the savings is indicated, if you will,
as a result of deciding that the rate ought to be $2.38?
Mr. Mudge I think the decision was more
along the lines of: Given the range of uncertainty around
the potential savings from these reforms and on top of the areas
that have yet to be quantified, that ultimately the majority of the
committee made a decision to not adjust the claims cost benchmark.
There was not a math discussion about, If it was this or that,
what would that mean in terms of the number?
Commissioner Jones Okay.
Mr.Mudge I think it was more along the lines
of what I just said.
Commissioner Jones All right. And then at the time
the committee made that decision which was in early
October, I believe?
Mr. Bellusci September 26th.
Commissioner Jones September 26th. Thank you.
Mr.Mudge September 26th.
Commissioner Jones Did the committee have in
front of it the current average filed (industry filed)
Pure Premium Rates? Or asked a different way: When the committee
decided to stick with the, well, as you just said a moment ago,
the committee decided to stick with the 2.38 -- $2.38,
uh, previously adopted Pure Premium Rate, what industry
average filed rates did the committee have in front of it
when it made that decision?
Mr. Mudge That number.
Commissioner Jones That number. Okay.
But that number was, (I think as you explained in
your presentation) only good as of June 30th.
And that number -- that number reflects the industry average
filed Pure Premium Rates as of June 30th, 2012; correct?
Mr. Bellusci 7/1, yes.
Commissioner Jones 7/1?
So July 1st, 2012?
Mr. Mudge Yes.
Commissioner Jones Okay. So the meeting is in
September, but what the committee has in front of it is
the industry average filed Pure Premium Rate as of ,
as of July 1st. I think you testified a moment ago, though,
that if one were to actually update that information,
the actual industry average pure premium filed rate as of
-- as of today is $2.49; is that correct?
Mr. Mudge Actually, the number of $2.49
is not a calculation done by us. It was provided to us as a -
(I believe, my words) early indication of filings that
the Department has received from a limited set of carriers
for 1/1/13, and the Department actually did that calculation and
provided it to us.
Commissioner Jones Let me ask Mr. Bellusci then.
With regard to that figure, do you have any reason to disagree that
the industry average filed Pure Premium Rate based on
filings up to November 1st is $2.49?
Mr. Bellusci As Mr. Mudge mentioned. I think,
it's a preliminary estimate, because many insurers have not
yet submitted their filing. But in my mind, I have no reason
to believe it's not an accurate reflection of the average
Pure Premium Rates that were filed as of this date,
but could well change depending on additional filings that
are received between now and 1/1.
Commissioner Jones But it's certainly less preliminary
than the industry average filed Pure Premium Rate as of July 1st, 2012,
which is what the Governing Committee had in front of it;
right? I mean, that's a preliminary number too? That's even
more preliminary because that only has six-month's worth of
industry average filings. This number, if you don't dispute
the number, is updated to include another three or
four months or so of industry filings; right?
Mr. Bellusci Yes. I think it does reflect
additional information beyond the 2.38. And as I said,
it certainly is a preliminary indication of where the
1/1, 2013 average industry filed rate will likely be.
Commissioner Jones Is it better information with regard
to where that might be than the information as of July 1st, 2012?
Mr.Bellusci Yes. would say in that it's --
despite the fact it's preliminary, it is more current,
and does reflect additional information that wasn't
reflected in 2.38, so, yes.
Commissioner Jones And yet the Board didn't have that
The Governing Committee did not have that information in front of it?
Mr. Bellusci They did not.
Commissioner Jones Okay. And then finally, Mr. Mudge,
you've indicated, or Mr. Bellusci indicated that,
the Actuarial Committee in reaching its conclusions
with regard to the cost and savings and net savings
associated with SB 863 coupled with whatever else is going
in the workers' compensation system, spent roughly
three months working on its analysis. Can you tell me,
how long did the Governing Committee deliberate
on the pure premium benchmark rate that you adopted
and recommended to me as a Commissioner?
Mr. Mudge Well --
Commissioner Jones How long did deliberation
in that meeting on that day go on this particular item?
Five hours? Six hours? Eight hours?
Mr. Mudge No.
I would say that the basis for their knowledge --
Commissioner Jones Let me just be really clear.
The actual time that they spent in that meeting --
Mr. Mudge I would say probably somewhere ...
Probably between 30 minutes and an hour on the debate
of the discussion. Prior to that, there were probably at least
a good hour or more of presentation by staff on material
and they all had that material at least a week ahead of time
and many of them -- several of them, I believe, were also
intimately involved in the evaluations and discussions of
the legislation as it was evolving.
Commissioner Jones Fair enough.
Mr. Mudge Yeah.
Commissioner Jones So they had three month's worth
of work, and they deliberated about it for about 45 minutes?
Mr. Mudge I can't give you an exact time,
but I would say under an hour.
Commissioner Jones Under an hour. Okay.
Very good.
I really appreciate your responsiveness to my questions,
both you gentlemen. And I know Mr. Bellusci wanted to
present some more information to us so we would be happy
to receive that at this time, but thank you very, very much.
Most appreciated. (Mr. Mudge: Okay)
(pause as presenters change places)
Mr Bellusci And some of the discussion
we just had (will) touches on what I did. So in some of those I'll
I'll try to speed it up a bit if we've really talked about it.
So, really quickly, a quick summary of SB 863, we've talked
about it already but I did want to kind of highlight some of the,
some of the differences that the ... The principal part we talked about
where there were benefit changes effective both January 1, 2013
and January 1, 2014, those changes, as I mentioned,
will impact costs really without the need for
implementation regulations, or judicial interpretation.
They can be evaluated on a standard,
relatively straightforward basis. Other of the reforms,
some of which we've already talked about, require,
were quantified based on the data that was available
and in many cases judgemental assumptions.
Other provisions, and I think these are important to talk about
are not quantifiable at this time. They depend on future regulations.
Some of those have a potential to significantly impact cost.
There's a return-to-work program that's really outside the
pure premium process, so that's not, any cost coming from that
is not reflected in this. There are new medical fee schedules
for home health, for interpreters, for copy services
that remain to be adopted. The hope and intent is probably to
reduce medical costs with those new fee schedules.
However, we can't value them until such time as
we know the values; until the values are adopted and (their)
the legislation requires those adoptions -- those schedules
to be adopted sometime during 2013 or later.
And lastly, we talked about independent medical reviews and
the issues around that. (pause)
I think we really talked about already sort of the process
we went to value the legislation so I'll skip over those.
Here's a summary of the evaluation that came out of the
Actuarial Committee and, it summarizes the 4.4 that I
alluded to earlier in response to a question. This summarizes
each of the pieces of the reforms that we've valued.
And in total (there's about) if you look at the 2013 and
the 2014 pieces, there's about 1.2 billion in savings.
That's offset. I guess it's closer to 1.6 not the 1.7
I mentioned in terms of reforms coming in. The net impact
of it that reflects that not all the 2014 benefit increases
impact 2013 policies but the net impact on 2013 policies is
4.4 percent. (pause )
So let me move .. since I think we talked about those (see slide)...
Let me just kind of put a little context around it,
and really, in terms of some of the key cost drivers
that we're alluding to, that differentiation and claim cost
trend with kind of economic growth that Mr. Mudge alluded to.
So this looks at loss adjustment expense. Many of the provisions
of SB 863 were directed at frictional costs. That's been one
of the rapidly -- most rapidly growing cost components
in the system as highlighted here In 2005, we estimated
a little less than $6,000 (per) of Allocated Loss Adjustment Expense
per indemnity claim. By policy year 2013, we're projecting
that's grown more than doubled to almost 14,000.
(Pause for slide change)
While in our original filing submission made in August,
we cited several reasons for that deterioration. First and
foremost was a sharp growth in liens. SB 863 introduced a
number of provisions related to liens 5 including a filing fee,
an activation fee, a statute of limitations. We did reflect
in our estimate that there should be a significantly
reduced volume of liens filed. In addition, the IMR process
should also reduce liens. Another area we cited
were the 2009 WCAB decisions on Ogilvie and Almaraz/Guzman
which we've talked about in prior hearings at some length
and they impact the permanent disability ratings that are
produced for injured workers. SB 863, by eliminating the future
earning capacity component in the computation of
permanent disability benefits effectively eliminates the
impact of Ogilvie. However, SB 863 really doesn't do
anything to address Almaraz/Guzman directly.
Another issue, we've talked about, (that's driving costs)
in prior hearings, is the medical cost containment areas -- area.
SB 863 doesn't directly address it but its hope that the
new Independent Medical Review and the independent bill review
process will reduce some of these frictional costs
related to medical. Lastly, we have indicated in the past
that increasing volume of claims over the last couple of years
particularly with respect to claims involving cumulative injuries
and claims that involve multiple body parts have been driving
Loss Adjustment Expense costs, and these areas were not
addressed by SB 863. So in total, a number of the key
components leading to the increase and frictional costs
were addressed by SB 863, but others were not.
Our estimated 863 impact that we provided in filing materials
estimates about a 20 percent reduction shown on this slide
in Allocated Loss Adjustment Expense Cost per indemnity claim.
This reduces the policy year 2013 from about 14,000 to 11,000.
Now, assuming that the additional SB 863 savings
that we talked about earlier that were necessary to produce
a Pure Premium Rate equal to that 2.38 that we discussed
would apply proportionately to loss and Loss Adjustment Expense,
we would need another thousand dollars reduction
in loss adjustment expense coming from the reforms
to produce the kinds of savings that are reflected in the
Pure Premium Rates. Going for a similar process for medical,
we projected that medical costs for indemnity claim will
increase by almost 80 percent from accident year 2005.
That was when the reforms of 2002 or 2004 were fully implemented
to our policy year projection for 2013 prior to SB 863.
And as with ALAE (Allocated Loss Adjustment Expense), we cited
a number of factors driving that. First is the cost of medical
treatment. As shown in this slide, there were a number of
provisions of SB 863 that potentially address medical
treatment costs. Some of them we're able to quantify,
others were not quantifiable in that they depend fully on
future regulation or there was really no statistical basis
to develop an estimate. Rapidly growing lien costs
are also driving the increase in medical costs per claim.
And, as discussed a minute ago, SB 863 did make a number of
changes, and they are intended to reduce the cost of liens.
Rising medical-legal costs have also driven medical costs.
The SB 863 provisions related to Independent Medical Review
should curtail some of these. Finally, we also cited
pharmaceuticals and (medical care) Medicare set-asides as
driving increasing medical costs and these were areas
that weren't addressed by SB 863. So as with Allocated
Loss Adjustment Expense, a number of the driving
components of medical cost inflation were addressed by
SB 863 and others were not. Our estimate that's reflected in
the 2.61 average Pure Premium Rate reflected about a
5 percent reduction in projected medical costs
due to the provisions of SB 863 that we were able to quantify.
In order to produce the level of savings as reflected in the 2.38,
we would have needed another 8 percent or basically another
(four or five) $4,500 or so in savings.
(pause for slide change)
Lastly, I did want to, and we did talk about this at some length,
so I will go through this quickly. I did want to kind of highlight
some of the uncertainties and risks involved in this.
Again, this is a very atypical filing whenever you have
key changes to the benefit delivery system, and they are challenging
to evaluate, and there's a wide range of uncertainty.
So some of the key things that haven't been evaluated yet,
as I earlier mentioned, fee schedules for copy services,
home health, and interpreters. Those may produce additional
savings once they're adopted. Ultimately, there's potential
savings coming from the conversion of the official
medical fee schedule in California to a Medicare-type base,
an RBRVS basis. That's a four-year process.
So those savings, you know, are somewhat down the road
if they materialized. Some of the risks, we've identified
a number here. Some of the key component of SB 863 are
potentially subject to legal challenges and the success
of those challenges could have a big impact on the savings
that materialize. Lastly, again (the big) we discussed so much
of workers' comp as involved in medical treatment costs.
To the extent Independent Medical Review and others
impact medical treatment, there are potentially significant
cost impacts depending on what those impacts are.
And those we won't know for some time.
While given all these uncertainties, risks and
potential unintended consequences that come
with any change of this magnitude, we believe
it's critical to be very proactive in measuring those costs
specifically as we see them, and as they begin to
reflect themselves in emerging information.
We've already met a few weeks ago with our claims
working group, which is a very broad group of researchers,
claims people, legal experts, actuaries to build a plan
to say, this is what we're going to look for, to try to measure
some of these key costs. You get some quick hits on
what's happening in medical treatment area for example.
So we've started to put that plan together. We plan to
submit it to you sometime in the first quarter.
So that's basically what we wanted to present.
We're available to answer any questions you may have.
Commissioner Jones So I've asked a lot of questions.
Let me see if Mr. Dahlquist or Mr. Citko has some questions.
Thank you, Mr. Bellusci.
( Pause )
Mr. Dahlquist I really don't know that I
have much to add at this point. I guess just one question
to clarify. In discussing with the -- in the Governing Committee
meeting there was mention that possibly, ranges or, you know,
(possible) possible ranges of outcomes were discussed.
Did the actuarial staff actually present anything
with regards to a range of resonable estimates
around the $2.61 number?
Mr. Bellusci There was quite a bit of
discussion at the Governing Committee about (sort of the)
the uncertainties, and that there is a wide range.
But I don't recall that we provided any specific high
and low estimate around the best estimate of, the $2.61.
Mr. Dahlquist I think I need to ask one a,
one question, with regards to the $2.38.
Well first, (what is your), in your professional opinion,
what is the most likely occurrence here?
And secondly, what is your professional opinion as to the
likelihood that loss cost will actually reach $2.38?
Mr. Bellusci Well, let me try to characterize
that. I think the $2.61 was {bold} {plain}the best estimate of the
Actuarial Committee through a consensus. And, I concur.
Quite personally and professionally, I think
that's a good reasonable estimate. I see no reason
to deviate. With that said, there is a wide range of --
(as you know), there's a wide range of reasonableness
around that estimate. (It could like..) it's possible that
we could have overstated some of the savings.
Some of the legal challenges are successful.
Some of the regulations aren't implemented effectively.
There is some unintended consequences that
we didn't see. So, I don't want to give the impression
that it's a one-way range of reasonableness.
That 2.61 in my mind is the best estimate
and I professionally believe that. But, while there's always
a range of reasonableness, I think there's a particularly
wide range of reasonableness when you have system
changes of this magnitude and all the uncertainties
that we've talked about. In my mind 2.38 probably falls,
falls within that range of reasonableness.
There's some likelihood that it be achieved.
But again, I think there's also some likelihood
that even the savings we've estimated, doesn't materialize.
Mr.Dahlquist All right, Thanks.
With regards to the subject of the IMR, I know in the
committee discussions, or, one of the products of the
committee discussions was a decision to proceed with
a study on the subject. Can you inform us as to the
status and the time table of that study and
what it's intended to achieve?
Mr. Bellusci Yeah. It's evolving a little bit.
There was some discussion at the last claims working group
on how to kind of attack this question. And just to take
a step back, I think the question Mr. Dahlquist is alluding to is
what we discussed earlier, trying to get an early measure
on what the impact of the new IMR process will be
on medical costs. Medical treatment costs specifically
is the area where there was maybe the greatest uncertainty
and the greatest discussion about what that impacts,
impact would be. So what we're envisioning is really a
three-prong attack at it. First, to get a sense on what's
happening in the medical treatment dispute. Two,
(there are two pieces to that) We envision doing a survey
of insurers as to resolution issues on expedited hearings,
taking a random sample of hearings that go to the WCAB
on medical treatment disputes and getting a sense on how
those were resolved, was the treatment provided,
was it not, to get a sense of the current system.
Secondly, we've had some discussions with CWCI,
California Workers' Comp Institute, on using some of
their transactional medical database to follow the history
of utilization decisions -- medical treatment utilization
decisions and find out how often were those overturned
or how often was the, you know, six months down the road
or a year down the road was the) medical treatment provided.
Now, that's two prongs of the estimate, trying to get a
sense on the current system and really get a better handle
on the costs involved and the medical treatment dispute
under the current system. Alternatively, we want to see
what's going to happen under independent medical review.
And there are a number of things bounced around.
And (where we) where we ended up. is given that
we're, 45 days or something away from Independent Medical
Review being the law of the land in workers' comp,
is to work closely with the firm, the initial firm, that
likely will be doing the Independent Medical Review
as well as the Division of Workers' Comp on getting the
results, getting information from actual medical disputes
that go through the IMR process. And we had --
we just started that process. We've had some discussion
with Director Baker who's helping develop the Regs.
on what information will be provided from the
Independent Medical Review company as well as that
Independent Medical Review company and getting a sense
on what's available. The time frames we're
still working through. We hope to have some information
by the first quarter, on those pieces. And ultimately,
we'll update it as time goes by.
Mr. Dahlquist All Right. Thank you.
I have just one final question for you and we haven't really...
we've appropriately been concentrating mainly on
the impacts of SB 863. But getting back to just the basic
experience analysis that preceded that.
One of the main concerns as I see it is that there's been
adverse development. In other words, the accident
year loss ratios that the Bureau has estimated have increased
fairly consistently over recent successive evaluations.
To what extent is that a concern of yours, and what
has the Bureau done to deal with that, and how does it
impact your view of the possible (you know) I want to say the,
the possibility of experience possibly turning out to be
worse than expected?
Mr. Bellusci Yeah, a good question. Well,
first, we have seen steady deterioration. Now, some of it's
due to some refinements in the methodology but even controlling
for the methodology we've seen steady deterioration from quarter
to quarter in our projections of ultimate basically as a result
of payment patterns continuing to slow. So it is a concern.
We've done a lot of work in that area. We 5 plan to continue it.
But on top of it, we sort of have a new interlay because
(one of the) ... one of the by-products of SB 863,
if it works as intended, is to speed things up.
So one of our first challenges -- and we plan to also
look at that in the first quarter -- is try to intermix the impacts
of SB 863 with those loss development projections.
Because as you know, not only many of those provisions --
at least we believe at this time or there may be some
question, many of those provisions of SB 863 like liens --
provisions related to liens or independent medical review,
apply on a date of service basis and so that means
there will be an impact not only on future injuries,
but also impact to loss development of older years.
And with the idea that some of that deterioration,
this improvement and speeding up of the claims process
could reduce that. So our first challenge that we plan to look
at in the context of when we look -- in the first quarter
in the context of when we look at a potential July 1 filing
is to kind of analyze that interaction and see how
SB 863 interplays with the normal loss development
patterns we have. So it is something that we plan to
give a lot of attention to in the next few months.
Mr. Dahlquist Okay. Thank you. I don't have
any further questions.
(pause in proceedings)
Commissioner Jones Okay. Well, we've been at it for
some time and Mr. Mudge and Mr. Bellusci have been on their
feet for some time so why don't we take a little break and
then what we'll do is we'll reconvene, say, in 15 minutes?
And, uh, where are the restrooms in this facility?
(Inaudible response) Out the hall ....
(inaudible discussion) Okay. So everyone knows but me?
(Laughter)
I want to make sure you knew. It was kind of a test.
And so, we'll take a 15-minute break which means we'll
reconvene at 11:20 and we'll have a chance then to hear
from the public members of the WCIRB Governing Committee
and then the rest of the public as well. So we'll take a recess
at this point. Thank you very much.
(Recess taken)
Mr.Citko All right. Let's reconvene.
It's 20 minutes after the hour. I do want to remind everyone
that we have sign-in sheets out in the foyer.
That's for two reasons. One if you would like us to provide you
with a copy of the Commissioner's decisin, we have your name,
address and e-mail. We do like e-mail. It saves trees.
The other part of this sign-in is that if you would like to speak,
please make sure to mark that on that sheet and we'll have our staff
let me know who wishes to speak based on the sign-in sheet.
And with that, I think we will proceed.
Commissioner Jones So I believe next we will hear from
the public members of the WCIRB Governing Committee.
And then just so folks know what the rest of the choreography
is going to be then, we'll have a chance to hear from I believe
the Governing Committee member's actuary as well.
And so, why don't we go to the governing -- the public members.
Welcome.
Mr. Priven Thank you
Thank you, Commissioner Jones, Mr. Dahlquist, and Mr. Citko.
I'm Mark Priven. I'm an actuary with Bickmore. I sit on the
actuarial -- the Rating Bureau (WCIRB) Actuarial Committee.
Just to clarify, I'm not part of the Governing Committee.
I represent the public members of the Governing Committee
on the actuarial committee.
Commissioner Jones Just so we know where we're going,
so will be the public members be testifying too or --
Mr. Priven Yes, they're here. Three or four
are here.
Commissioner Jones Okay. So the plan is, you'll
go first and then they'll go?
Mr. Priven Correct.
Commissioner Jones Or, however you want to do it.
Mr. Priven That's the plan.
Commissioner Jones That's the plan.
Mr. Priven I'll go first and then they'll go.
Commissioner Jones Alright, I see thumbs up
from the public members. Okay. Great. You're on.
Mr. Priven As you know I've submitted written
testimony to the Department prior to this testimony
-- to this oral testimony. Two sets.
One regarding a general commentary on the rates and one specifically
on the impact of the reforms of SB 863. So, I don't have a lot
of new things to say. I'm just going to sort of summarize
what's in that written testimony quickly and then be available
for questions and comments. Overall, I would characterize
that my ,my middle projections, I give a range of projections,
a reasonable range from low, middle and high. My middle
projections are fairly close to those that were recommended
by the Rating Bureau Actuarial Committee.
Excluding the reforms, I think that the rates are going to be --
- or that the rates would have been a little bit higher
than what the Rating Bureau actuary said. Primarily,
I have a difference of opinion regarding how losses are trended
and also some of the methods used to develop the losses to ultimate.
On the other hand counterbalancing that, I believe that there will be
greater savings from the reforms than was decided on, or agreed to,
in (the actuarial), in the Rating Bureau Actuarial Committee.
And so, the net is, that the middle of my range is very close to what
was recommended by the Rating Bureau Actuarial Committee.
The reason that I believe that the reforms will result in greater
savings than what the Rating Bureau Actuarial Committee
recommended is two things. A smaller part is regarding
utilization related to the permanent disability increases.
That's a small part. But, a much greater part
is the impact of Independent Medical Review, IMR,
which has already been talked about earlier.
Specifically, where I differ is the impact on IMR on
temporary disability and on medical costs. So when we,
when the Actuarial Committee talked about the impact
of IMR on temporary disability, we talked about a few different
factors. One is that temporary disability duration has increased
over the last five years or so since the prior set of major reforms.
And also, that California's duration of temporary disability
is greater than that of Texas which has IMR and many other states.
And those were sort of used as the benchmark for how much
to reduce temporary disability duration for Independent
Medical Review. I will add that I also looked at specifically what
happened in Texas when IMR was implemented and I want to
caveat this by saying I know California is not Texas.
The systems are different. They were different when IMR --
Commissioner Jones Thank goodness for that.
Mr. Priven Yeah. (Audience Laughter) Okay.
On workers' compensation, I have to say, for example,
their results from IMR, we, you know if we could replicate those,
we would do well. What I saw on temporary disability
is that the two years prior to the implementation of IMR,
temporary disability was increasing at about 12 percent
per year for those two years. And then after IMR, it decreased
That's about at about 8 percent per year for two years.
That s about a 20 point swing per year for two years.
Now, I also want to caveat and say that when Texas implemented
IMR, they also implemented other provisions as well.
So I'm not saying that this was all due to IMR.
But there were several -- when these reforms happened
in the early 2000s, I believe they were passed in 2001 --
late 2001 and implemented in 2002, medical treatment sped up,
medical payments sped up, temporary disability decreased,
return-to-work increased, and um -- so there was --
and also medical disputes. There were more medical disputes that
resulted in denials which you would expect from IMR.
So (I) based on that big change in Texas as well as
the deterioration of temporary disability (TD) benefits or duration
in California as well as the fact that TD duration in California is
much higher than in Texas and other states, that I used that as a
basis for decreasing expected TD duration a little bit more
than the Rating Bureau actuaries did. Now, let's look at medical.
You've already heard today that the Rating Bureau actuaries
did not evaluate -- do not feel comfortable evaluating
the potential impact that IMR would have on medical costs.
The way I look at it, what's been happening with medical
is analogous to what's been happening with temporary
disability. Specifically, as was shown earlier, medical costs
just like temporary disability duration has deteriorated
very substantially in the last five to seven years since
the prior set of major reforms. Medical costs in California
are much higher than those in Texas and in other states.
And lastly, if you look specifically at Texas
when IMR was implemented, it's almost the same result.
The two years prior to IMR, medical costs were increasing
at about 12 percent per year and the two years after IMR
was implemented, medical costs decreased at about 8 percent
per year. So again, it's a 20 percent annual swing for
two years. Now, my projections don't assume anything close
to 20 percent savings or even 40 percent savings
which you could, you know, potentially talk about
if you have two years in a row of 20 percent savings.
But I did think that based on that, it's fair to assume
that there will be some decrease in medical costs
with the implementation of IMR in California. Okay.
So that covers what I wanted to talk about in terms of why
my estimates are different, or how they're similar and how
they're different than those of the Rating Bureau.
I also want to talk a little bit about the range of estimates
because you've asked a lot of questions about that
and I just wanted to give you my perspective.
First of all, I was not at the governing (laugh)
I was not at the Governing Committee meeting at the time,
so if you have questions about what actually occurred there,
I will defer to the public -- to the Governing Committee
public members who will testify after me. First of all,
I want to stress that what I gave is a range of indications.
I believe that everything in that range is reasonable.
It's a reasonable range and it's based on information and data.
Okay? It's not just that the middle of the range
is the only reasonable estimate. The entire -- the range itself
is reasonable. Okay? In addition, Mr. Mudge
mentioned earlier that one of the topics of conversation was
what happened with a prior set of reforms and I realize,
Commissioner, you didn't find that particularly valid
or persuasive, but I just want to point out that with a
prior set of reforms, the Rating Bureau was slow to
decrease the rates in relation to how fast the
cost actually decreased. And, partly as a function of that,
insurance companies were slow to decrease their
premiums in relation to their costs to the point where in
2005 over 40 cents on every dollar premium was actually
profit for insurance companies. So I just want to repeat that.
In 2005, for every dollar of premium, over 40 cents
was profit. So I'm quite sure that the representatives of labor
and business who work so *** these reforms wanted
(1) for injured workers to get better benefits and better
medical care, and (2) for there to be relief in the cost
to the employers. They're not -- they were not particularly
interested in boosting up the profits of insurance companies
and I'm sure that that weighed on their minds as they were
thinking through what appropriate benchmark would be for
the Rating Bureau. In addition, the members of
the Governing Committee -- the public members of the
Governing Committee did have my study which showed a
range which was an independent analysis on which to base their
analysis and I'll also mention that the State Fund who
was there is, obviously the largest insurer in California.
If anybody has the ability to do their own independent study
based on their own data of what would happen with
the reforms, if any insurer has that ability, it would be
the State Fund. And the information that was out at
the time was that based on much greater savings specifically
from liens, I believe. And, you know, you can even go on
on their website, and see that they're talking about decreasing
rates by 7 percent as a result of these reforms.
So we're not talking about just keeping rates the same
which was voted on by the Governing Committee.
The largest insurer is actually talking about decreasing rates by
7 percent. I also want to mention -- and this was discussed a
little bit, that there are many areas of the reforms that were
not able to be quantified. In my opinion those areas are much
more likely to decrease cost than to increase costs.
We've talked about medical care for IMR, but another big one
that has not been mentioned today is Independent Bill Review
which is referred to as IBR. I've talked to many employers who
are very excited about IBR and potential savings from IBR.
And again, that's another issue that was not quantified
that was not able to be quantified by myself or by
the Rating Bureau in general in terms of the savings. But I do
believe that if anything, that will result in savings
as opposed to additional costs. That's all I want to say about
the range. I just have two more small points I just want
to bring up and then open up for questions. One is,
I just want to go on record in recognizing that these reforms
have produced somewhat of a windfall for insurers. By that
I mean, all we're talking about right now is rates
for prospective policies but we're not talking at all about
their retro impact (the retroactive impact of)
the retrospective impact of the reforms. The costs --
the costs that will increase as a result of other reforms
for the most part are only related to injuries which
will occur after January 1st, 2013. That's where the new permanent
disability cost schedules kick in. On the other hand, some of
the savings specifically related to liens and related to IMR,
once they're implemented will affect open claims.
And so, we haven't talked about repricing old existing policies or
anything like that, but (I just) I think it needs to go on the
record that insurance companies are receiving a benefit.
And self-insured employers and employers in large deductible
programs are receiving a benefit from this reform
that goes beyond just the future cost of future policies.
The last thing I want to mention is that I believe that this reform
will also help to reduce not only the cost next year and the
year after, but, it should also slow the rate of inflation
of workers' compensation in the future. Because the areas
of the workers' comp system that have been inflating quite
quickly, specifically loss adjustment expense, medical
and (other) other expenses, are being, are decreased
as a result of the reforms whereas the area of workers'
comp that tends to inflate at a lower rate is indemnity and
that area has been increased. So the whole pie -- if you think
about how the rate at which an entire pie grows, it should
grow at a lower rate because of that factor. That's all I have
for my prepared remarks if you have any questions.
Commissioner Jones Let me start with something and
then let me go to Mr. Dahlquist.
Mr. Priven Sure.
Commissioner Jones First, I appreciate your
presentation. We have your written materials.
If you've got any slides, we can throw those up to but --
Mr. Priven I didn't bring any.
Commissioner Jones Okay. Very good.
So I was struck by a number of things that you said.
You mentioned that State Fund was at the Governing Committee.
But again, let me just pose the same question to you that I
posed to Mr. Mudge and Mr. Bellusc. Did State Fund
provide any written analysis to the Governing Committee members
in their deliberation with regard to the Pure Premium
Rate filing?
Mr. Priven I wasn't there so you'll have to...
Commissioner Jones Okay. But you're not asserting
that they did; right?
Mr. Priven No.
Commissioner Jones All right. You have no information
contrary to what Mr. Mudge and Mr. Bellusci said which was that
there was no other written report, analysis, or anything other in
writing provided to committee members other than what the
Actuarial Committee provided? You're not asserting there was
some other information in writing given, are you?
Mr. Priven Correct.
Commissioner Jones Okay then, I take your point
with regard to returns associated with 2002-2004 reforms.
The only thing I would note is, you know, I've said, publicly and
I've said to the stakeholders that were involved in this set
of reforms that perhaps the best way that they could
avoid that sort of outcome again would be to include
language in SB 863 or whatever set of reforms has done
which would essentially work to make sure that there wasn't
a windfall associated with some level of cost savings
beyond that which was projected. And for whatever reason, no one
seemed to advocate for that, but (I don't) I mean, is it your
position that I'm allowed to consider the question of
whether there might be excessive returns in the context of
deciding what the Pure Premium Rate benchmark should be?
Mr.Priven I'm trying to provide a context
within which I think some of the decision-makers were voting.
Commissioner Jones Okay. That's fair.
But I just want to point out, I'm governed by a body of law
that says that I have to do this process and cabins
what the process is And I might wish that were different,
and that I can take other things into consideration, but the law
tells me what I have to look at for purposes of making
this advisory opinions. I appreciate your point and
I appreciate you weren't -- you weren't arguing that
I can take into consideration that issue of potential windfall
in the context of setting pure premium.
Mr. Priven When I mentioned windfall,
I was talking about,-- I was talking about the impact of the
reform on, you know on claims which have already occurred.
I'm not sure if you're talking about the prior set of reforms
and the profit that was made from those as a windfall
or are you talking about -- (overlapping speach)
Commissioner Jones I'm talking about both actually.
Mr. Priven You're talking about both?
Commissioner Jones Yeah.
Mr. Priven Well, the former, in terms of
the profit from the prior set of reforms, I think that's just
a context, you know, in terms of what people are thinking
about when they're looking at what a reasonable rate is and
how to treat a range? When you have a reasonable range
in front of you, how do you consider where in that range
you want to be? Uh, you look at some prior experience
and say, Well, what happened last time? Okay? That's --
I'm just trying to give some context on that.
Commissioner Jones Sure.
Mr. Priven In terms of the retrospective
impact, yeah, no, I don't think that's (that's, that's not) I wasn't
bringing that up in the context of what a prospective rate
should be.
Commissioner Jones Okay. And as we sit here right
now, what are the combined ratios in the industry?
Mr.Priven I don't know exactly, but
in the 1.30s? Is that right?
Mr. Bellusci Our latest assessment
in the last three years at 1.38.
Mr. Priven 1.38.
Commissioner Jones Okay. So the import of that is,
is that for every dollar premium to be pulled in, the carriers
are paying out a buck 38?
Mr. Priven Correct.
Commissioner Jones Alright, I don't have any other
questions. I appreciate your testimony. Thank you.
(pause for panel discussion)
Mr. Citko Before you start on that,
let me just -- there are a couple of items with what you said.
When you talk about a range, there's probability of what may
occur within that range, and does your analysis include that?
Mr. Priven No, I didn't assign specific
probabilities to them. What I did is I looked at resnonable
methods, reasonable assumptions, and whatever
came out of those sort of defined the reasonable range.
But I didn't , it wasn't like a statistical analysis of, you know,
10 percent chance it could be at the bottom of the range,
10 percent chance at the top of the range; anything like that.
Mr. Citko But yet there's some probability
that would be attached to those items that you've noted in your
analysis whether they would occur within that range
based on some of the factors that the Rating Bureau brought up
such as litigation; is that correct?
Mr. Priven I'm sure there is a probability
but I didn't calculate it.
Mr. Citko Okay. The other thing is,
you did point out the prior reforms and the fact that
the Rating Bureau's estimates were short of what the actual
reduction in costs were from the prior reforms. But as I recall
from prior reforms, there were some studies, for example,
on permanent disability and some of them were roughly close to what
the savings was going to be.
Mr. Priven Right. Like Dr. Brigham?
Is that what you're -
Mr. Citko Yeah.
Ms. Reporter Like doctor who?
Mr. Priven Brigham, sorry.
Mr. Citko Yeah, Brigham's study.
Mr. Priven Brigham's, yeah.
Mr. Citko Do we have anything similar
to that presently that we can draw upon for, other than the
Texas example that you've cited?
Mr. Priven Right. I think (I think ,
looking), and I believe Texas is really the best example
in terms of what would, you know, if you want a case study
of what could possibly happen in California.
I haven't found any other states that would be a better example.
So you could certainly look at Texas. And in addition,
I believe State Fund would probably provide you with
some information on liens, that (might) might not be the
same as what myself, or the Rating Bureau, or the CWCI is saying.
Mr. Citko Yeah. But we don't have
the information from State Fund or from anybody else on liens
this at this point in time.
Mr. Priven Okay.
Mr. Citko Okay. All right. Well,
I didn't know. Because you were saying.
And I didn't know if there was some data out there or
some study that was being done by State Fund that
you may be aware of.
Mr. Priven No.
Mr. Citko Okay. All right. Well, thank you.
Mr. Dahlquist Okay. I would like to start
with your evaluation of the basic experience.
Mr.Priven Okay.
Mr. Dahlquist Without getting into extreme
detail but I would like to, get (some) some explanation on that.
I'm talking about the basic experience analysis that
determines the Pure Premium Rate need absent the impacts
of SB 863. Am I correct in reading your report that
your low estimate is the same as the Bureau actuarial
staff estimate?
Mr. Priven For loss, correct.
Mr. Dahlquist For loss?
Mr.Priven Correct.
Mr. Dahlquist Loss adjustment expense,
I understand it's slightly different.
Mr.Priven Correct.
Mr. Dahlquist I don't know that we need to
get into that. Can you briefly summarize why your middle
estimate is different? What are the, just briefly, what are
the major differences?
Mr. Priven Sure. As I mentioned
there's two main components. One is the method that was
used, or that's used to calculate ultimate losse for prior years.
So the projections for the future are based on two things.
(1) the projection of ultimate loss for the prior years.
And then (2) what we call a trend which is the adjustment
of how the -- how the older years are adjusted for inflation
and other factors to how they might portend for the future year.
So both of those factors are different in my --
in my middle projection. Regarding the projection of
ultimate loss for the older years, the Rating Bureau
projections are based strictly on paid losses, developed
to ultimate. In my -- what I was looking at, is that --
I think this was alluded to earlier today, that --
and you brought it up, that the ultimate loss projections
using the paid method have deteriorated over time.
Every time we get more data, we look back at those
older years and we realize that they're actually worse
than we thought they were or the costs are higher
than we thought they were And so, I looked at some of
the other methods that were calculated and provided by
the Rating Bureau and I looked at the -- specifically,
the incurred loss development method and it seemed to me
that those loss projections have been a lot more steady;
that they haven't deteriorated in the same way that the
paid loss projections have. And so, I gave those some
weight in my projections of ultimate loss. And the incurred
loss is not only more steady but they actually are higher
projections of ultimate loss. So that caused my projections
to be higher. That's the first thing. The second thing is
the trend factors which is how we get from the older
years to project for the new -- for the upcoming year.
The Rating Bureau I believe uses two methods --
50/50 weight on two methods. One is looking it at the total
cost rate; you know, the total losses, or the total pure
premium or loss rate trended with an exponential trend,
and that's given half weight. And then the other 50 percent
weight is given to an independent analysis of frequency and
and average claim size. And aIgain when I look at it
I see that there's been a big change, and this is been
reported by the Rating Bureau that there's been a change
in indemnity claims, between medical-only claims
and indemnity claims. And that -- because the
frequency in average claim size statistics are done on
indemnity claims only, that change in mix from med-only
to indemnity is kind of in my opinion wreaking havoc
with both the frequency and the average claim size statistics.
It makes it look like there's a lot more claims so the
frequency is going up, and on the other hand, they tend to be
smaller claims so it's dampening the average claim size.
So when you try to project independently frequency and
independently average claim size, you wind up with kind of a mess
because they are correlated with each other with these
small claims becoming indemnity claims or not remaining
medical-only claims. And so what I did in my projections
is not rely at all on the frequency-severity method and
relied strictly on the loss ratio method -- losses total trended
using exponential trend, and that also resulted in a higher projection.
Mr. Dahlquist All right. Thank you.
Mr. Priven Okay
Mr. Dahlquist What was the net in --
What was the combined effect then of these methodological
changes? What percentage-wise, and if you can, dollars-wise
approximately?
Mr. Priven Well, it's about a 6 percent
increase in total. I don't -- I don't know. (nervous laugh)
I don't know what the dollars are.
Mr. Dahlquist Well, six percent then?
Mr. Priven Six percent, yeah.
Mr. Dahlquist Okay. How did you arrive at
your high-end estimate for the basic loss experience?
Mr. Priven For the basic loss experience,
well, both the -- well, okay. So both the ranges,
the low and the high, were based on the projections.
But the different methods were provided by the Rating Bureau.
The Rating Bureau provides not only the two methods for
projecting ultimate loss that I've alluded to, the paid method
and the incurred development method, they provide, I don't know,
a dozen or so different, different methods of projecting
ultimate loss. And so,I looked at the range provided by
those different methods and based it on that.
Mr. Dahlquist Was that just a judgemental
selection or can you point to --
Mr. Priven I'd have to go back and look.
Mr. Dahlquist Any particular --
Mr. Priven I'd have to go back and look and
see exactly which methods I weighted together to get to that.
Mr. Dahlquist Okay. Would you say it was some --
I mean, the filing itself certainly has the results
of those methods. How would you characterize
where your high-end estimate fell within the range of those,
those estimates provided by the WCIRB?
Mr. Priven It was I guess towards the top,
but not at the top.
Mr. Dahlquist And percentage-wise,
what impact did that have?
Mr. Priven Um, about 4 percent.
Mr. Dahlquist Okay. So then you're saying -
if I -- if I'm understanding this correctly, your middle estimate
on the basic loss experience as you think it's 6 percent
worse than the Bureau actuarial estimate and your worst case
is 4 percent higher than that? I mean, your highest --
Mr. Priven I wouldn't say worst case but --
Mr. Dahlquist Your high estimate. Excuse the --
Mr. Priven Yeah.
Mr. Dahlquist Excuse the choice of words there.
Okay. Moving on to the SB 863 impacts. I was not able to see
what the basis was for your high estimate. By that, I mean
the low savings that resulted in, you know, the higher end of
estimated costs.
Mr.Priven I'm sorry. Which one?
(Dalquist clarifying over Priven) Which end of the range are you --
Mr. Dahlquist You provided, you provide an
estimated, uh -- an estimated impact --
Mr. Priven Oh, I see --
Mr. Dahlquist -- of SB -
Mr. Priven Right.
Mr. Dahlquist -- 863 in total and you--
you've got a low, middle and high, and I want to know
how you arrived at the high end.
Mr. Priven Right. So that was primarily
based on the independent medical review. I feel, and I concur with,
you know, with Mr. Mudge and Mr. Bellusci who testified earlier.
That's one of the most difficult areas of this reform to price.
And-- so I'd say the lion's share of the range that was developed
on the high end was less optimistic saving's projections
from IMR. Is that what you're asking?
Mr. Dahlquist That is -- I mean, that's a general
answer to what I was asking.
Mr. Priven I mean, I'd have to off-line just
give you, you know, X percent for medical, X percent for TD
or whatever. I don't have that handy.
Mr.Dahlquist Okay So you did, uh -
you did make some choices but you're not prepared to say
exactly where that came from?
Mr. Priven Right. But I'd be happy to
provide those to you.
Mr. Dahlquist Okay. I think I understand,
you know, what -- how you got at your middle. But
With regards to your middle estimates, you're essentially
you are essentially looking at how the Texas experience
changed when IMR was implemented and you're --
Mr. Priven Well, there were, again there
were three things and these were discussed at the
Actuarial Committee. One was, How did California
change after the prior set of reforms? And we'll use
temporary disability as an example. How much did
temporary disability benefits increase or duration increase
after the reforms? So, that was one benchmark.
Another benchmark was: How much higher is California
duration of temporary disability benefits compared to other states?
And then the third thing was looking at Texas and when they
implemented. When they implemented IMR, did they
at least see, you know, results that were at least as --
that showed at least as much savings that might be implied
by those other two?
Mr. Dahlquist But, the actual savings that you
have -- what I --
Mr.Priven Right.
Mr. Dahlquist -- read is that you observed
a 20 percent reduction -- or 20 percent savings in Texas and
you're assuming some portion of that would happen
in California? I think there's a couple of parts to that,
but is that --
Mr. Priven That's part of it. Right.
There's also -- as I mentioned, so for example, the duration
of temporary disability benefits in California I think it's like
12 percent higher in California than Texas or the median
of other states or something like that. So that was discussed
in the Actuarial Committee as a benchmark of how much
temporary disability benefits might decrease with IMR
to bring it down to the level of other states or
another state that has IMR.
Now, neither I nor the Rating Bureau Actuarial Committee
assume that temporary disability benefits would
decrease by 12 percent and didn't take all the way down there,
but that was one benchmark. Another benchmark was,
How much did temporary disability benefit's duration
increase post reform? I believe that was ...
I can't remember exactly. Maybe 25 percent?
Mr.Bellusci (In audible)
Mr.Priven Yeah. We're not sure
but it was a very substantial number. And again,
let's say it was 20 or 25 percent, none of our projections
were that temporary disability benefit's duration would
decrease by 25 percent by IMR, but we did use that
as a basis for a range.
Mr. Dahlquist With regards to the duration
issue, how muc? You've attributed some savings
specifically to that. How does your estimate compare
to what is in the WCIRB as actuarially indicated?
Mr. Priven Well, mine's definitely higher.
I assumed, I believe a 10 percent decrease. The Rating Bureau
assumed like a 7 percent? (Directed to Mr Bellusci)
Mr. Bellusci I think it's five. (barely audible)
Mr. Priven Five. Okay.
So that would mean that my estimate is roughly double
that of the Rating Bureau on temporary disability.
Mr. Dahlquist How many -- how much
would that be in dollar terms?
Mr. Priven Help.
Mr. Bellusci Um, 400. About 400 million.
Mr. Priven Four hundred million. I'll rely on --
Mr. Dahlquist The $400 million difference
or $400 million --
Mr. Priven Oh, I'm sorry.
The difference is 200 million.
Mr. Dahlquist Thank you.
Mr Priven Again, I'm relying on --
Mr. Dahlquist Okay. Okay.
With regards to the um (in audible) ... where I wanted ...
With regards to the medical cost savings --
Mr. Priven Right.
Mr. Dahlquist -- explain what you did.
You know, how you used the Texas experience?
Mr. Priven Uh, okay. So again, there's
three sort of benchmarks. You asked about the Texas
experience so I will give that as the first answer.
As I mentioned before, Texas had about a 12 percent
rate of increase in medical cost per year for the two years
prior to their reform, and then they saw on average
8 percent annual decrease after the reform. So, it was
similar to temporary disability in terms of the magnitude of
the change. As far as the second component of the decis...
-- of what I looked at is how much did medical costs increase
post the 2002 through 2004 reforms? And I think we had
a slide on that. It was about 79 percent was how much
medical has deteriorated or costs have increased post reform.
And then the third thing, then the third factor is how much --
How California medical costs compared to those of other
states? And that's -- I don't remember the number exactly
but I'm sure it's at least 50 percent higher and I'm
basing that on, I know, the Oregon study of California
rates shows it were about 50 percent higher than the
median. And I know we have a higher percentage of
our total costs are medical than most other states, so.
So, those are the three benchmarks. If I had looked at it
just like I looked at TD, I think I could have justified
a 10 percent savings because that's what I came up with TD.
But I recognize that the medical is.... it's a little bit --
there's a lot of other things going on with medical than
just IMR. And the other thing is that, I think it's about
400 million of -- over $400 million of medical costs
are under dispute, and so it didn't make sense to show
savings that were wildly higher than $400 million.
And so, I arrived at a number of 5 percent for medical
as opposed to 10 percent for temporary disability. Does that
address your question?
Mr. Dahlquist Okay. I think so. How...
How similar are the provisions of SB 863 with regards to
IMR to what was enacted in Texas? Have you
considered that?
Mr. Priven Yeah, and -- well, first of all,
we don't have the regulations for SB 863 on IMR yet.
But my understanding from the folks that I have talked
to about that is that it's meant to be pretty similar.
Mr. Dahlquist Okay.
What considerations have you given to -- I mean, how --
to the similarity -- similarities or differences between
the Texas environment and the California environment
just in terms of just the whole workers' comp system
and how that might affect how IMR plays out in the system?
Mr. Priven Yeah, it's hard for me to speak
to that. But I will say what I considered is that when,
when the reforms were implemented in Texas,
it wasn't just IMR. I mean, they kind of do
it like we did, right? I mean, we just don't implement IMR.
We implement several reforms at once; both the SB 863
and then when we implemented the prior set of reforms.
We -- we changed many parts of the system at once. And so,
when I looked at the Texas system versus the California
system and I tried to figure out what was going on with the
Texas system when IMR was implemented, I recognized that
there were several parts of the reform that would impact
medical. There were some things on spinal surgeries,
second opinions and so forth that would also impact
medical. And so,I didn't -- so when I looked at the savings
from the reform, I sort of cut those back in recognition that
there were some parts that were not directly related to IMR.
You know, I did as much research as I could on what
was going on in Texas. I couldn't find a report that
specifically broke out, you know, This is the savings
from IMR, This is the savings from spinal, second opinion,
and so forth. So I wasn't able to-- I wasn't able to
sort of isolate. So I just had to sort of judgmentally
bring it back.
Mr. Dahlquist Okay. Do you have an opinion
as to, you know, what might be the greatest IMR --
the greatest percentage of that, that might be due to
IMR reasonably?
Mr. Priven The greatest percentage
of what?
Mr. Dahlquist There's some -- I'm assuming
there's some variability in your estimates of what
the impact of IMR might be.
Mr. Priven Right.
Mr. Dahlquist And I'm asking what you
observed the 20 percent reduction...
Mr. Priven Per year for two years?
Mr. Dahlquist Per year you assume that
out of 20 percent, 5 percent would be IMR? The question is:
Did you or do you have a feel for (how) what's the largest
reasonable percentage that might be contributable?
Mr. Priven I wouldn't be surprised if it's
over 10 percent. I mean, when I looked at the different
provisions in the reform, it seemed to me that IMR
was the most -- would be the most impactful. And from
conversations with people, that was my understanding.
And so, um -- so I would say over 10 percent.
Mr. Dahlquist Okay. So you explored the --
the basis for your central or middle estimate.
What assumptions underlie how did you arrive at your
maximum, your low, your maximum savings, lowest cost
estimate? Your lower bound if you will?
Mr. Priven Right. So again,
I'll have to, you know, I'll have to give you what the exact
assumptions were. But the bulk of it was different
assumptions regarding IMR. I agree with the Rating Bureau
that, that's very difficult to project the savings from IMR,
and so the low end of my range in terms of the low-end rates
assumed a greater impact of IMR and the higher rates
assumed a l esser impact of IMR. The bulk of it. I mean,
there were other things too. But the bulk of it was
the impact of IMR both on (temporary) temporary disability
and medical.
Mr. Dahlquist Okay. I want to explore the
concept of the range now a little bit. This is a follow-up
to Chris's question earlier.
Mr. Priven Okay.
Mr. Dahlquist kay, You said earlier ...
well, I guess, could you repeat for us what you said
earlier about, um --
Mr. Priven I bet she could. (laughter)
Mr. Dahlquist Which points.. (laugthter)
Un Identified I'd feel better if she did.
(Laughter)
Mr. Dahlquist Alright I'll ask first:
What's your opinion as to what is the most likely
occurrence within your range?
Mr. Priven I'll say (if you) of those
things that we can quantify, the most likely is what's in
in the middle of my range. However, I do think that
the middle is biased upwards in terms of that the rate is
biased high because there are provisions that we
weren't able to quantify and I believe that those
provisions will on balance decrease costs in most,
particularly independent bill review, IBR.
Mr. Dahlquist Okay... I'm ... All right.
Do you think that every point in that range is equally likely?
Mr. Priven Is equally likely? Uh, no.
Mr. Dahlquist How likely do you think the...
the top and the bottom ends of the range are?
Mr. Priven Yeah. I.... Like I said to
Mr. Citko, I didn't assign probabilities to the ends of
the range so I don't have -- I don't have an answer
to that.
Mr. Dahlquist Would it be fair to say that
the likelihood of the lower end of the range -- how to put this?
You've got an entire range; right?
Mr. Priven Correct.
Mr. Dahlquist What is the likelihood --
just comparing, what's the likelihood of the lower end of
the range happening versus the likelihood of any point higher
than the lower end of the range happening?
Mr. Priven I think the lower end is more
likely, because as I mentioned, the range was developed --
the mid point was developed excluding certain provisions
which I couldn't quantify. But I believe on balance
that those provisions will end up in savings. And so,
I believe that mid point is biased high and that I
I believe that the lower end of the range is more likely to
occur than the higher end of the range.
Mr. Dahlquist Okay. But putting it another way,
$2.38 versus the other choices, $2.39 and above,
which is more likely?
Mr Priven I feel like I'm on Price is Right.
(Laughter)
Un Identified Voice Come on down.
(Laughter)
Mr. Priven Uh, 2.38 is less likely.
Is that what you're --
Mr. Dahlquist I think what I'm really
driving at is, if you were to assume that every point in the
range was equally likely --
Mr. Priven Yeah.
Mr. Dahlquist -- is it not the case that if you
choose the lower end of... the lowest point in the range that
you are assuming, something, you're implicitly setting your
choice at something which you believe is, you know, perhaps ...
Well, that it's most like, that every other point in the range is ...
Mr. Priven If you chose the lowest point
in the range which is not --
Mr. Dahlquist If you chose the lowest point
of the range, are you not -- well, let's say you had
100 points. It was discrete, not continuous.
Mr. Priven Right.
Mr. Dahlquist Everyone was 1 percent likely.
Are you not assuming a 99 percent probability that
what will actually happen will be worse than what
you've chosen?
Mr.Priven Yes. However, I just want to
point out that what was voted on and approved is not the
lowest point in my range. The lowest point in my range is
minus 2.6 percent not zero.
Mr. Dahlquist Well, minus 2.6 percent relative to ...
Mr. Priven Relative to the filed rates
as of 7/1, 2012.
Mr. Dahlquist Is that 2.38 or is that a
number higher than 2.38?
Mr. Priven The lowest side of the range?
Mr. Dahlquist Yeah.
Mr. Priven Is 2.38 the zero?
Mr. Dahlquist Okay. Yeah.
Mr. Priven Yes. So it's lower than the 2.38.
Mr. Dahlquist All right. I think I'm done.
Thank you.
Mr. Priven Okay.
Commissioner Jones I just have a couple more
questions. So do I understand you to say that in your initial
analysis prior to considering the net cost savings associated
with SB 863, that you came up with an actuarially indicated
Pure Premium Rate higher than what the WCIRB Actuarial
Committee's indicated rate was?
Mr. Priven That is correct.
Commissioner Jones And that rate is -- I'm trying to
remember from your papers -- but 2.87 per $100 of payroll?
Mr. Bellusci 2.73 I think it was.
Commissioner Jones Okay. But I want --
I got to get it from Mr. Priven because it's his testimony.
Mr. Bellusci Sorry.
Commissioner Jones That's okay.
Mr. Priven Well, I'm just going to read
it off of what they -- (laughter)
Commissioner Jones All right. But it's your analysis,
so hopefully --
Mr. Priven Yeah. So my analysis.. the
indicated -- the Rating Bureau indicated average rate excluding
the impact of the reforms, I believe was 2.73. Is that right?
Commissioner Jones But yours? What is yours?
Mr. Priven And so,mine. I don't have the
exact number but mine is roughly 6 -- 6 percent higher
than that.
Commissioner Jones Okay. Well, I think
this underscores why I'm going to ask in a moment
that one of the Department's actuaries come up and put
these various numbers up on the screen so we can
keep track of it all. But -- So you were higher than
what they were -- what the WCIRB Actuarial Committee
was indicating the rate would be prior to considering
the SB 863 reforms. But the way that you get to a
lower-middle range number is by, if I understand correctly,
considering what happened in Texas and 4 drawing from
that to conclude that both with regard to cost savings
associated with temporary disability and cost savings
associated with medical treatment,-- that those
costs savings are greater than what the WCIRB
Actuarial Committee indicated and so that's how you get
to your middle range figure of $2.61; is that correct?
Mr. Priven No.
Commissioner Jones No. Okay.
Mr. Priven First of all, my middle range
number is very close to what the Rating Bureau
Actuarial Committee number recommendation was.
Commissioner Jones Yes. But what I'm trying to
understand, again, is how you get from the higher initial cost --
Pre SB 863? You got a wider gap to bridge?
Mr. Priven Right. So, it's true
that it's primarily based on my evaluation of Independent
Medical Review but that is not based solely on Texas.
As I mentioned, that was based on how much temporary
disability and medical costs deteriorated since the reforms.
It was based on a comparison of California and other states,
and also what happened in Texas after the implementation
of IMR.
Commissioner Jones Okay. But in all three of those
areas, your conclusion is that there will be greater
cost savings associated with those things and what the
WCIRB Actuarial Committee did, because you've got to
bridge a wider gap between their pre-SB 863 actuarially
indicated Pure Premium Rate and yours.
Does that make sense?
Mr. Priven I don't know you what mean by --
(overlapping comments - inaudible)
I don't know what you mean by, Have to bridge a wider gap?
But yes --
Commissioner Jones Well, you do I guess.
Mr. Priven I am --
Commissioner Jones You do have to. But you
start from a higher --
Mr. Priven I have a higher savings --
Commissioner Jones Right.
Mr. Priven ...from the reforms than
what's implied -- than what's calculated by the Rating Bureau
actuaries primarily based on my evaluation of IMR. Correct.
Commissioner Jones Okay. And what's the total
absolute dollar value associated with those savings to get you
from where you start pre- SB 863 actuarially indicated
Pure Premium Rate to where you end up in your middle
range projection with regard to the actuarially indicated
post-SB 863 Pure Premium Rate?
Mr. Priven Okay. So, I'm not sure,
I have the exact number to answer your questions.
But I have, on my written testimony to you, I have the --
I have the exact savings from the reform for accident
year 2013; i.e., injuries which are projected to occur in 2013,
and that savings including utilization is 1.77 billion.
Commissioner Jones That's the same figure I heard
earlier from the WCIRB that they're -- they're concluding
will result from the SB 863 reforms.
Mr. Priven Okay.
Commissioner Jones That is their actuaries concluded.
The Actuarial Committee concluded would occur from their SB 863
reform. So I don't understand why your cost savings number
isn't bigger because you start from a higher point.
Mr. Muzzarelli Different law space.
Mr. Priven Yeah, that's probably true.
I mean, we're -- everything gets converted to percentages.
I have my own estimate of how I think the size -- what I think
the size of the entire workers' comp pie is, what the entire
market is. And I'm going to base my save-- I project the
savings, and then to get a percentage, I take my savings
as a percentage of the entire pie. The Rating Bureau not only
has different estimates of the savings but they also have
different estimates of what the entire pie is. So that when
you take a ratio of those two, you can end up with different
percentages. Not only because the savings estimates are
different but also because the estimates of the size
of the pie are different. Does that help?
Commissioner Jones Okay. That's helpful.
Mr. Priven Okay.
Commissioner Jones But then to get from your --
Mr. Priven Thank you.
Commissioner Jones To get from -- so what's the --
what's the additional absolute dollar value of savings
associated with moving from your middle range pure premium
indicated rate to your low range pure premium indicated rate?
Mr. Priven So it's about 12 percent and ,
what's the volume of the insured market? Is it about one - 12 billion?
Mr. Bellusci Yeah. The dollars I think...
Mr.Priven Are you talking about the
insurance world or the entire, the entire California market
including self-insurance and...
Commissioner Jones I'm trying to figure out
what additional increment of savings in the system you're
assuming to get from your middle range to your lower range
pure premium indicated rate?
Mr. Priven And when you say "system," you're
including self-insurance and --
Commissioner Jones It's your analysis. So,
I don't know what you're assuming. But my question is:
How much additional savings is associated with moving
from your middle range to your lower range?
Mr. Priven I'm going to say it's roughly
1.2 billion which would be ... it's 12 percent roughly
and I'd say that the pure premium is roughly 10 billion.
And so, I'm just -- as a rough estimate, I'll say 1.2 billion.
Commissioner Jones So, where does that come from?
Because you're already -- your analysis concludes that
there are going to be cost savings associated with SB 863...
Mr. Priven Right.
Commissioner Jones ... in addition to those that are...
Mr. Priven Right.
Commissioner Jones ...identified by the Actuarial
Committee in its analysis.
Mr. Priven Correct.
Commissioner Jones And so, you point to these three factors that you've testified to.
One of which includes the Texas experience, but now you're going
even further ...
Mr. Priven That's right.
Commissioner Jones ...to get to your low range estimate.
And so, where are those, where do those cost savings come from,
and what is the actuarial basis for concluding those cost
savings will accrue?
Mr. Priven Okay. So I realize I misspoke.
What I was comparing was the low end to the middle end
of the range including both the impact of the reforms and
the non-reform. Okay?
So if you start out with what my estimates are excluding the
reforms, as we mentioned, mine are substantially higher than
those of the Rating Bureau's. So at the low end of the range,
I'm assuming that the Rating Bureau projections excluding
the reforms are correct.
Commissioner Jones Oh, my goodness.
So you change your underlying assumptions to get to your low
end of the range?
Mr. Priven Yeah. Well -- yes,
Commissioner Jones So you have an assumption
for purposes of the high end and the middle end...
Mr. Priven Yeah.
Commissioner Jones -- that the cost and system
are going to be higher --
Mr. Priven Right.
Commissioner Jones ...over... as a starting place.
But then to get to your low range estimate, you then
assume --
Mr. Priven Correct.
Commissioner Jones -- the WCIRB's estimate...
Mr. Priven Correct.
Commissioner Jones ...for overall system costs
and take that as a starting place?
Mr. Priven Correct.
Commissioner Jones Why? I mean, if you're so,
Mr. Priven Because I think that they're,
I think it's um reasonable. I mean (I think, I don't think) personally,
I don't think that's the most likely outcome. But, I think that
what they did is reasonable and so I think it should be included
in the reasonable range.
Commissioner Jones Okay. So then, that explains then...
...so that explains then how you, ... you start from a different
starting place with regard to --
Mr.Priven Absolutely.
So that's six points right there --
Ms. Reporter (in audible discussion)
Mr.Priven I'm, Sorry.
Ms. Reporter I'm Sorry, (in audible discussion)
Mr.Priven I interrupted you (to Commissioner).
Ms. Reporter (in audible discussion)
Commissioner Jones Your doing fine, you're
(inaudible discussion / laughter ) Okay, why don't we go back on?
So, Can you read back the last question? (Laughter)
Ms. Reporter (Record read back - In audible)
Commissioner Jones All right, So the question
the question is that: With regard to your lower end of the range
you start at a different starting place? You start from the WCIRB's
starting place with regard to the state of the system
pre-SB 863 and then you apply the additional cost savings
that you concluded will occur as a result of Texas and the other
two factors that you've testified to, to get to the low end of your range;
is that correct?
Mr. Priven Correct.
Commissioner Jones Thank you.
So a moment ago.... you mentioned that this is
a little bit akin to the "Price is Right". And, it is!
I mean, the price has to be right. because if it's not right,
we got a big problem on our hands. So what happens
if you're wrong about the low end of your range? What if
the insurance carriers set their pure premium at the low end of
the range and you're wrong and it turns out to be your middle
range estimate? That actually is where we end up in terms of
the starting place for costs and the SB 863 cost savings?
What happens, if you're wrong, in the system?
Mr. Priven What happens to whom?
Commissioner Jones To the insurance carriers,
let's start there.
Mr. Priven So the insurance carrier --
the insurance carriers will likely lose money
on the policies that they write if they write them
at too low a cost.
Commissioner Jones Okay. And right now they're
losing money on the policies they write; correct?
Mr. Priven Probably, yes.
Commissioner Jones Well, didn't you testify earlier
that the combined ratios are somewhere above 120 or
130 percent at this point?
Mr. Priven Right. And I'll point out:
those are projections. But in all probability, yes,
they're losing -- they've lost money on those.
Commissioner Jones Okay. But do you disagree
with the projections?
Mr. Priven No, as I said, they probably
are losing money, yes.
Commissioner Jones Okay. So then if you're wrong.
They're losing money now, and they're going to lose more money
in the future; is that correct? If you're wrong about the low
end of the range being the right pure premium benchmark.
Mr. Priven If I'm wrong that the low end
... that cost ....
Commissioner Jones The low end of your range?
Mr. Priven ...costs are higher
Commissioner Jones Yes.
Mr.Priven Correct.
Commissioner Jones Okay. Can they continue in
business if they lose more money than they're losing now?
Mr. Priven Well, that's a question
for your Department to answer and largely depends on
their surplus as well. Right?
Commissioner Jones All Right but given...
I mean, I can't answer that question.
Commissioner Jones I understand that. But given
what you know about their surplus condition right now?
Mr. Priven I can't answer that.
Commissioner Jones All right. Okay.
All right. Thanks.
Mr. Citko All right, I have some follow-up.
The information in your submission regarding Texas,
it looks as though you've gone to the Texas Department
of Insurance website and pulled out information.
Whether these charts are in them, or you took data
from them and made these charts, I'm not sure.
But, I'm assuming since you're attributing them to
the Department of Insurance in Texas, that those charts
are from them?
Mr. Priven Correct.
Mr. Citko Yeah. But you also pointed out,
and I appreciate that you pointed out that IMR was
just one part of the reforms that Texas instituted. Similar
to what California has done at various times.
Mr. Priven Correct.
Mr. Citko So, I mean, IMR is one part,
but then, you've listed five or six other parts of treatment
guidelines, the instituting registration, and training of
doctors regarding the use of Medicare reimbursement structure;
various things, and all those could have also affected
medical treatment utilization and temporary disability.
Mr. Priven It likely did affect it, yes.
Mr.Citko Okay. But we don't,
But from the information you've been able to ascertain,
there's nothing that tells us, which part of those components
really affected those decreases?
Mr. Priven Yeah, that's correct.
And I'll give a plug to the Rating Bureau. I mean,
unlike the Rating Bureau cross-monitoring report
which did break out the savings specifically by component
as best possible, the reports that I was able to find from
the Texas Department of Insurance did not break it out in that way.
It would have made my life a lot easier if they had but
they did not. You're correct.
Mr. Citko Yeah, I think I misunderstood
earlier because I thought maybe there was a study but actually
there's been no study concerning it. It's just information from
that Department of Insurance; is that correct?
Mr. Priven I'm sorry?
Mr. Citko There's no independent study?
It's just what you looked at was information from
the Texas Department of Insurance.
Mr. Priven I'd have to look back and see
if it was done by the Department, or if they commissioned it.
I think you're right though. I think it was done by
the Department.
Mr. Citko Okay. And then, you pointed out
earlier that, you know, you don't know what their
regulations say. You estimated it to be similar to what we're
going to be, but not really gone in and looked at their laws
and their regulations to determine, you know, are we
comparing apples to apples, or apples to oranges. Is that fair?
Mr.Priven Well, we don't have our
regulations yet, so I ... so I couldn't ...
Mr. Citko Right.
Mr. Priven Right
Mr. Citko Yeah, So we're looking at
their example but it could be entirely different based on
the various components there and how they may affect the
cost in their system versus California.
Mr. Priven It could be different.
I'll just say my understanding is that, you know, the intent is
that it be similar. And that it's the best we have.
You know, there's no other, there's no other state
I could find at least that was a better example. So.
But, what you say is correct. I mean, it could be different.
Mr. Citko Okay. Thank you.
Mr. Dahlquist I think there's one follow-up here.
You indicated a willingness to provide additional information.
Mr. Priven Yeah.
Mr. Dahlquist ...as for the basis of your ...
you know, pieces of your high end, low estimates.
Can you do that, and by when? Because I believe the record
is scheduled to close at the end of 5:00 p.m. today.
Correct, Chris?
Mr. Citko Yes, that's correct.
Unless you need more time to get the information to us.
Mr. Priven End of Monday would be great.
Mr. Citko So we'll note that at the end
of the record and we'll change it to 5 o'clock on that day.
One additional.. We were provided ...
the Department was provided an analysis that was done by AON,
A-O-N, which is a brokerage. Have you seen that analysis?
Mr. Priven I've seen a bulletin from AON,
which, a couple of pages talked about the reforms. I don't know
if there's a more extensive analysis. I didn't see any exhibits
backing up their numbers or, I did see a couple , like I said,
an AON 8 bulletin which described the results.
I don't know if there's a fuller study that I didn't see.
But, I did see the bulletin, yes.
Mr. Citko But according to their study,
it seems like the impact is not as great in lessening costs to
California Workers' Compensation system. Is that correct?
Mr. Priven Can you repeat that?
Mr. Citko The impact of these reforms is
less than what you've predicted or even the Rating Bureau's
predicted with regard to the cost? In other words, decreasing
the cost of the system? I don't know. Do you
recall the numbers?
Mr. Priven I do. They, um, they project
for 2000... First of all, they don't, as far as I saw,
they don't say anything about 2013. Right? They only say,
talk about 2014 and subsequent. They do conclude, as I remember
that there will be a net cost for 2014 and subsequent.
Whereas, myself and the Rating Bureau are projecting
a net savings for 2014 and subsequent.
They're silent on 2013 at least in what I saw.
Mr. Citko But their projection is for higher,
Higher cost for actually less of a decrease in the system.
Actually, I think from what I'm looking at with that study --
and we've -- we'll put this study in the record too and
I don't mean to put you in a position.
If you haven't had a chance to look at it recently, I don't ,
Mr. Priven No, I've looked at it recently.
You can ask me about it if you would like.
Mr. Citko Oh, okay. But they're looking at,
through 2014 and on, they're looking at a 2.2 percent
industry increase,
Mr.Priven Right.
Mr. Citko versus what you've estimated, and what the Rating Bureau's
estimated, which is a net decrease. So there are some
actuarial analyses out there that are concerned that some
of these reforms will not come out in a net savings
to the system. Is that right?
Mr. Priven Correct. Are you asking for my
comment about it or, that's correct. (Citco "inaudible")
What you're saying is correct?
Mr. Citko If you want to make a comment,
you're certainly welcome to. But I'm just looking at the
numbers from this study. It's providing other information,
a difference of opinion than what you've provided and what
the rating group's provided. I guess the question I do have is:
When you saw this, did that have any effect on your opinion?
Mr. Priven No.
Mr. Citko And why not?
Mr. Priven Well, again, there was no data
in what I saw. There may be a study out there
that I haven't seen. But, in the bulletin that I saw,
there were no exhibits to go through as there is with the
Rating Bureau or what I produced or whatever.
There was no information provided that you could
actually look at and see what their assumptions were.
From the verbal description of their assumptions,
one of them was, for example, that eliminating Ogilvie
would result in no savings at all. That appeared to me to be
a biased opinion -- a biased point of view.
Another --
Mr. Citko And what was that bias?
Mr. Priven Bias towards underestimating
savings, from the reforms.
Mr. Citko In what way was that biased
in underestimating the savings?
Mr. Priven Because I believe most
observers and participants in the system think that if the
reform successfully eliminates Ogilvie cases, that will result
in some savings. And by saying that there's no savings
from Ogilvie, that's underestimating the savings.
Mr. Citko But, isn't that similar bias
in their estimation of what will occur with Ogilvie cases
as your estimation as to going to the lower end
of your range?
Priven I didn't go to the lower end
of my range. I gave a range.
Mr. Citko Yeah, but you --
from my understanding of your testimony here today is that if
you were to pick somewhere on the range, that you would be
at the lower end where public members
and the Rating Bureau Governing Committee is,
or am I misunderstanding?
Mr.Priven I don't understand how they're
similar. I mean, I have a middle estimate based on
what can be quantified. And I outline that there's
certain things that cannot be quantified that in my opinion
will cause there to be greater savings, not greater costs.
And so,I think that if you just look at the middle of the range,
it's biased high. I don't see how that's similar
to saying there's no savings from Ogilvie.
Mr. Citko So you're saying it's biased
high. Therefore, you're concluding that you don't
have a figure that you would recommend to the Department
based on your analyses?
Mr. Priven That's correct. I have a
reasonable range.
Mr. Citco Okay. So,
Ms. Reporter (Clarification requested)
Mr. Priven That's correct.
What I gave is a reasonable range.
Mr. Citko And that's why you didn't
give any probabilities to that so the selection could be
anywhere in there including where the Rating Bureau
Actuarial Committee was?
Mr. Priven Correct.
Mr. Citko Okay. Thank you.
Commissioner Jones Thanks, Mr. Priven.
Mr. Priven Thank you
Commissioner Jones Appreciate it very much.
Thanks for your testimony. So I think next we're
going to hear from public members directly and
I see Mr. Wick coming to the podium. Welcome Bruce.
Mr. Bruce Wick Thank you very much,
Commissioner Jones, Mr. Citko and Mr. Dahlquist.
Could I reasonably anticipate you want to hear how I
wrote it in the rationale?
Commissioner Jones I think I've seen the vote tally.
Mr. Wick So you want the rationale?
I will give you kind of how that happened and then I'll give
you the rationale for that. But, what I would like to do first,
if I could, Karyn Smithson-Hughes of Nestle Corp, the other public
employer appointee, could not be here today. She did give some
comments that I would like to share that are quotes from her.
Karyn is a 34-year workers' comp claims person.
She operates in multi states, so she, including Texas.
So she has a good understanding of the challenges in California
and the specifics of California. What she said is: "I did want to
state how excited the employers are on this new bill/ law.
Everyone I talked to gets even more excited as we peel back
more and more of this bill/ law meaning more understanding of it."
And these are workers' comp claims people who are excited,
which is not typically what they do. "The law shows --"
I'm continuing to quote her. "-- that someone has been
listening to the employers and understands the challenges
we face in the workers' comp process every day."
Another quote: "The new IMR process is huge to the employer."
And lastly, "The most daunting issue that has impacted
the claims world is outstanding liens. I applaud the workers
meaning of the writers of SB 863 because there was no end in
sight to the liens. Now there is." And Karen voted in favor of
the motion for 2.38.
So if I could just share kind of the process of what happened
and then I'll share with you the rationale. I've been on the
Governing Committee since 2008. Mark Priven came on in 2009.
And when Mark came on, he started providing for us a range.
Typically the Rating Bureau has a single number. Mark would
provide again his low, middle and high range. And so,
when he started doing that, a very typical pure premium vote
in the Governing Committee would be that, Dave and the
Actuarial Committee would put forth their number
which was usually towards the higher end of Mark's range,
an insurer member would motion that that number be accepted.
It would be seconded by another insurer and the eight insurers
would vote for and the four public members would vote against,
and then we would typically ask the Commissioner to consider
a number in the middle of Mark's range which was usually
10 percent or so different than the Bureau's single number
that was presented. So going into this committee meeting
that we're discussing, I had spent time reviewing Mark's
numbers, his range, and the fact that this time as he stated
his middle range could not, as the Bureau said, their number
could not yet account for savings from medical fees,
or fee schedules, and those kind of things that just couldn't be
actuarially quantified. So their number couldn't anticipate
savings that were in the bill that we knew would take place,
but trying to put a number to it. So, looking at several
different parts of Workers' Comp Rating Bureau
information, my presumption was going in that an insurer
would again recommend the 2.61, it would be seconded, and
it would be an eight to four vote, and then we would
promote to you a number but this time not Mark's
middle number because clearly he said that couldn't
contemplate the information in the savings. It could not
be actuarially justified. So my own thought -- and I'll
get to the rationale in a minute -- was, a number around 2.40
was perhaps more appropriate. And, when Mr. Row the motion
for a lower number, the 2.38 number, my thought was:
That's pretty close to my number and I thought about
it for a little bit, and decided to second that motion.
There was a significant discussion about that
as Mr. Mudge described. And at the end, the four
public members did vote in support , and one other
insurer member voted and because of an absence,
it was a six to five vote. So in that sense, it wasn't for
me, doing something out of the ordinary. SB 863 has
created out of the ordinary things for us to address.
But, the way this happened, I had never had an insurer motion
(in a Governing Committee meeting) motion for a different number
than the actuary presented by Dave Bellusci. So, I do want to
share my rationale for that. I do agree with you, Commissioner,
that (these) the reforms of SB 863 while comprehensive
and sweeping, it's different than the '03, '04 reforms.
So I did not anticipate that, in a similarity here.
I share your concern about insolvency. I saw what happened
to employers with the severe number of insolvencies.