Courts Have Their own Take on Legislative Reform

Published on 12/9/2014 by WorkCompCentral, authored by Sherri Okamoto

Editor's note: Three WorkCompCentral reporters devoted at least one week each in the past several months to tell the story behind the story about the dysfunction of California's workers' compensation system. This is the second of six stories in our special report, which was distributed in print form at the Third Annual Comp Laude Awards Gala in Los Angeles on Saturday.

The cycle of reform has become a tired refrain in the California workers' compensation system. The Legislature passes a bill to reduce costs. The courts make rulings that reduce the anticipated savings. The process repeats, again and again and again.

California has been through this dance at least five times in the course of the past 25 years, most recently in 2012. In each instance, lawmakers promised that the reforms would reduce frictional costs and improve the overall functioning of the work comp system. But in all of the previous cases, court rulings have unraveled much of the cost savings – and they could be threatening to do so again.

How did reform become such a broken record? Our story begins in the early 1990s, when the number of stress claims exploded.

The Claims Mill Era

Back then, the workers' comp system was far different than it is today. “A new client would came in and you'd send him to a doctor, and that was all there was to be done,” recalls Alan Gurvey, an applicants' attorney with Rowen, Gurvey & Win. He said it was so easy to represent workers that many lawyers with general practices would "dabble" in workers' compensation – something that rarely happens anymore.

But, Gurvey concedes, it also was an environment in which fraud flourished.

So-called “claims mills” were prevalent in Southern California – these were businesses that solicited disgruntled workers to file stress claims and amassed large profits by providing treatment and medical-legal evaluations to these workers, at the expense of their employers.

At the time, claimants needed to prove only that 10% of the cause of the psychiatric injury was related to employment, and this low threshold of proof made it easy for the mills to churn out claims.

In 1981, 1,844 stress claims were filed in California, according to the Department of Industrial Relations' Division of Labor Statistics and Research. By 1990, that number had increased ten-fold, to 10,444. The following year, 15,688 stress claims were filed.

Meanwhile, the cost of the comp system was ballooning, from $4 billion in 1981 to over $10 billion in 1991. But little was being done about the obvious problems in the system. Workers' compensation fraud was hardly recognized, much less prosecuted, by law enforcement, before 1991.

Then Gov. Pete Wilson signed into law Senate Bill 1218, establishing a specific felony for workers' compensation fraud and providing a dedicated source of funding for fraud investigation and prosecution. That same year, he also signed Assembly Bill 971, which barred workers from bringing work-related stress injury claims if they had been on the job for less than six months.

Costs Drop ... Temporarily

With those bills, the governor had addressed two of the biggest issues driving workers' comp costs. But yet, insurance premiums continued to rise. Ironically, California employers were paying some of the highest rates among the states for coverage, while the indemnity payments paid by the carriers to their employees were among the lowest in the nation.

California lawmakers responded with a slew of legislation in 1993, and AB 110 was the flagship measure. AB 110 established the Employer Bill of Rights, increased temporary and permanent disability benefits and extended injury-prevention efforts. The bill also provided the opinion of a worker's primary treating physician with a presumption of correctness in legal proceedings regarding permanent disability.

According to the Department of Industrial Relations, the combined effect of the 1993 legislative reforms would reduce workers' compensation expenditures by about $1.5 billion annually.

And at first, the number and cost of workers' compensation claims dropped significantly. Preliminary data released by the department indicated the number of indemnity claims per $1 million of payroll declined by more than 31% between 1991 and 1994. The average cost of indemnity claim also dropped from a high of $13,285 in 1991 to $12,261 in 1994 – a reduction of nearly 8%.

But the savings didn't last long. In 1996, the en banc Workers' Compensation Appeals Board took on the task of interpreting the 1993 reforms, and the treating doctor presumption, in Minniear v. Mt. San Antonio Community College District. In Minniear, the appeals board decided that the presumption of correctness applied to a worker's primary treating physician against all other opinions when the issue was medical treatment.

Applicant attorney Julius Young of Boxer Gerson says he remembers the Minniear decision as being “a big deal.” Since the primary treating doctor's opinion was presumably right on everything, Young said, that made “controlling medical care a very appealing strategy,” as whoever had control over the selection of the PTP would have a “big advantage.”

One Step Forward – Two Steps Back

After the Minniear decision, the average cost of medical treatment in workers’ compensation claims began to increase at rates exceeding 15% annually. The average estimated medical cost per indemnity claim soared from $12,292 in 1996 to $42,320 in 2003, according to the Commission on Health and Safety and Workers' Compensation.

This increase in costs spurred the Legislature to take action again, and, by a stroke of Gov. Gray Davis' pen, AB 749 passed into law in 2002.

The commission predicted that AB 749's repeal of the treating doctor presumption would provide “a quick reduction in expected medical costs for a substantial savings of $370-$820 million.” However, this was offset by significant increases in the benefits payable for temporary total and permanent disabilities that were scheduled to take effect during the next four years. The Workers' Compensation Insurance Rating Bureau estimated that the increased benefits provided by AB 749 would increase total annual benefit costs by 17.8%, or $3.2 billion, by 2006.

Arnold's Law

Gov. Gray Davis signed two workers' comp reform bills (AB 227 and SB 228) just before he was ousted by voters in a recall election and replaced by Gov. Arnold Schwarzenegger. Schwarzenegger had made reform of the state's workers' comp system a top priority during his campaign, and under his watch SB 899 also became law.

The Workers' Compensation Insurance Rating Bureau predicted that AB 227 and 228 would yield savings of $3.5 to $4.2 billion through its revisions to the medical fee schedule and utilization-review process, as well as the elimination of vocational rehabilitation. The measures also capped a worker's ability to receive chiropractic care and physical therapy at 24 visits per industrial injury.

Later, SB 899 ushered in more drastic changes to the comp system, placing restrictions on a worker's ability to select a treating doctor and/or medical expert and on the doctor's ability to determine the level of a worker's disability. The reform also limited temporary disability benefits to 104 weeks and changed the way permanent disability could be apportioned between industrial and nonindustrial causes.

The bureau estimated that these changes would cut costs by $3.3 billion by limiting the things that the parties could fight over, but SB 899 wound up spawning even more litigation.

Much of the initial fighting centered on SB 899's attempt to promote consistent permanent disability ratings by having doctors evaluate an injured worker using the American Medical Association Guides to the Evaluation of Permanent Impairment. Under the system created by SB 899, the impairment rating assigned by the Guides would then be modified in accordance with a permanent disability rating schedule developed by the Department of Industrial Relations, which accounted for the worker's diminished future earning capacity, occupation and age.

Defense attorney Gerald Lenahan of Lenahan Lee Slater & Pearse says he thought the motivation for this procedure was to generate ratings that were “consistent, uniform and objective.” This was a welcome idea for members of the defense bar, since ratings tended to be very inconsistent depending on the doctor.

According to a Division of Workers' Compensation report on SB 899, the problem had been that two workers with the same type of injury could receive entirely different permanent disability ratings because there was so much subjectivity in the way impairment was evaluated and in the way it was converted into a disability award.

But applicant attorneys chafed at such restrictions, arguing that a narrow focus on objective medical conditions and empirical wage loss data didn't always result in a disability rating that accurately reflected the limitations their clients actually had. The en banc WCAB then ruled in the consolidated cases of Almaraz v. SCIF and Guzman v. Milpitas Unified School District that a rating under the AMA Guides could be rebutted by a showing that it would produce an “inequitable” or “disproportionate” impairment determination. If the application of the Guides didn't produce an accurate rating, the board said a doctor could use any chapter, table or method in the AMA Guides to reach a rating that “most accurately reflects the injured employee's impairment.”

While the appeals board was dealing with Almaraz-Guzman, it also was wrestling with whether the Permanent Disability Rating Schedule should be rebuttable as well. The en banc board decided in Ogilvie v. City and County of San Francisco that the schedule was also rebuttable if its modifiers wouldn't fully account for a worker's future lost wages from an injury.

Reforming Arnold's Reforms

Gov. Jerry Brown in 2012 signed SB 863, which tinkered with the medical provider networks established under Schwarzenegger's legislation. Arnold's bill allowed employers and carriers to set up networks of care providers that workers would be required to use. But it also put in place a multi-level process for an injured worker to change physicians within an employer's network and obtain an independent medical review to dispute a treatment of diagnosis.

Workers almost immediately began looking for ways to stay out of an employer's medical provider network. The WCAB in 2006 published an en banc decision in Knight v. United Parcel Service telling employers they’re on the hook for medical treatment obtained by workers who are not properly notified about the employer’s medical provider network.

The board then followed that decision up with two en banc decisions in Valdez v. Warehouse Demo Services, saying that reports obtained from a doctor outside of the employer's MPN could not be used as evidence to support her claim for benefits.

However, the 2nd District Court of Appeal annulled the board's decisions in 2012. While the case was up for review by the California Supreme Court, Brown signed SB 863 into law.

The latest reform amended the Labor Code to state that any report prepared by an out-of-network doctor whom a worker has elected to see cannot be used as the sole basis of an award for compensation. The Supreme Court acknowledged that the law had changed while the case was pending, but it said neither the amended version of the Labor Code post-SB 863 nor the prior version of it completely barred the admissibility of out-of-network reports.

Latest Reform Attempt

That said, SB 863 changed enough of the system that the Workers' Compensation Insurance Rating Bureau predicted that it would produce an overall cost savings of $1.1 billion.

The bureau anticipated that the addition of a lien filing fee for new claims and an activation fee for existing claims, would save $480 million by cutting down on the number of claims being pursued. Meanwhile the elimination of the Ogilvie litigation and challenges to the ratings schedule were expected to save $210 million, and $390 million was supposed to come from the reduction disputes about medical treatment due to independent medical review.

In the first two years since SB 863 took effect, it seems to have had the desired result of reducing the number of lien filings. Last October, the bureau reported that the number of lien filings was down 60%.

Based on this dramatic fall, the bureau's Chief Actuary and Chief Operating Officer Dave Bellusci testified at a Department of Insurance hearing in October on the 2015 advisory pure premium rate that the savings from the lien provisions in SB 863 could be as much as $680 million.

But there is still an open question as to whether the lien fees will remain a part of the comp system.

A group of service providers in July 2013 filed a complaint in federal trial court asserting that the $100 activation fee for liens that pre-date SB 863 is unconstitutional.

U.S. District Court Judge George H. Wu tentatively agreed, and he issued a preliminary injunction last November prohibiting the Division of Workers’ Compensation from enforcing the activation fee provisions from SB 863.

The administration is contesting Wu's order, and the dispute in Angelotti Chiropractic v. Baker is pending before the U.S. 9th Circuit Court of Appeals.

While employers may not have gotten everything that they wanted through the various legislative reforms, applicants' attorney Bernardo de la Torre in Whittier said that is not the judicial branch's role.

"It is not the courts’ job to save money for employers and insurers. It is their job to examine the legislation against the voter-passed constitutional mandate to provide medical care and disability compensation," he said.

"If legislation helps insurers avoid the reasonable costs of the results of work injuries, that cost doesn’t magically disappear, but is simply shifted to employees, their families, group health plans and the taxpayers through other programs to address medical care and disability support."