MINUTES OF MEETING

      ASSEMBLY COMMITTEE ON LABOR AND MANAGEMENT

 

      Sixty-seventh Session

      March 2, 1993

 

 

 

The Assembly Committee on Labor and Management was called to order by Chairman Chris Giunchigliani at 3:30 p.m., Tuesday, March 2, 1993, in Room 321 of the Legislative Building, Carson City, Nevada.  Exhibit A is the Meeting Agenda, Exhibit B is the Attendance Roster.

 

 

COMMITTEE MEMBERS PRESENT:

 

      Ms. Chris Giunchigliani, Chairman

      Mr. Bernie Anderson, Vice Chairman

      Mr. Douglas A. Bache

      Mr. John C. Bonaventura

      Mr. John C. Carpenter

      Mr. Tom Collins, Jr.

      Mr. Peter G. Ernaut

      Mr. Lynn Hettrick

      Mrs. Erin Kenny

      Mr. John B. Regan

      Mr. Michael A. Schneider

 

 

COMMITTEE MEMBERS ABSENT:

 

      None

 

GUEST LEGISLATORS PRESENT:

 

      None

 

STAFF MEMBERS PRESENT:

 

      Mr. Donald Williams, Principal Research Analyst, LCB

 

OTHERS PRESENT:

 

      Mr. Kevin Johnson, Legal Counsel, Reynolds Electrical and

            Engineering Co., Inc.

      Ms. Janice Ketchum, Administrator, Reynolds Electrical and

            Engineering Co., Inc.  

      Mr. Jerry Fransen, Director, EG & G Special Projects

      Mr. Charles Nort, Nevada Administrators, Inc.

      Mr. Tom Nelson, W.R. Gibbons, Inc.

      Ms. Theresa Rankin, Insurance Commissioner

      Mr. Larry Zimmerman, CVS of Nevada

      Mr. Marc Hechter, Assistant General Manager, State

            Industrial Insurance System

      Mr. Donald Jayne, General Manager, State Industrial

            Insurance System

      Mr. Robert Ostrovsky, Nevada Resort Association

      Mr. Ray Bacon, Manufacturers Association

      Mr. Sam McMullen, Nevada Self Insurers Association

 

 

Before hearing testimony on AB 287, Chairman Giunchigliani explained the proposed legislation was not an attempt to entirely stop companies from going self-insured, but was the first of many radical steps necessary to help rectify the current crisis of the State Industrial Insurance System (SIIS).  She explained the committee would entertain the idea of excluding from the moratorium businesses which were relocating to Nevada from other states where they had been self-insured.

 

Assembly Bill 287 -     Prohibits temporarily commissioner of insurance from certifying employers as self-insured employers.

 

Mr. Kevin Johnson, Legal Counsel, and Ms. Janice Ketchum, Administrator, Reynolds Electrical and Engineering Company, Inc., testified in opposition to AB 287.  Ms. Ketchum explained Reynolds Electrical was an ex-medical employer, meaning the company currently handled its own medical expenses.  Mr. Johnson maintained the company already monitored its workers' compensation claims closely and believed it could administer its claims more efficiently and cost effectively than SIIS.  He noted concern with the proposed legislation as the company was in the process of becoming self-insured at the present time.  Ms. Giunchigliani stated it was not the committee's intent to prohibit those companies already involved in the process from becoming self-insured.  She directed attention to Section 5, noting some provisions were necessary to rectify this concern.

 

The intent of AB 287, Ms. Giunchigliani explained, was to get a handle on companies leaving the System, otherwise the cost of the current crisis would be borne with only those employers left within SIIS.  The second component of the bill was to provide a base, or floor to measure accountability against.

 

Mr. Jerry Fransen, Director, EG&G Special Projects, understood if, under the corporate umbrella, his parent company was allowed to proceed with the process of becoming self-insured, his company would also.  However, he noted the committee was "missing the boat."  He opined to be fair, those with high accident accountability should be penalized, not all companies across the board.  Mr. Fransen pointed out most public entities were self-insured, therefore questioned why the private business man would not be afforded the same opportunity.

 

Ms. Giunchigliani contended the legislation was not intended to hit private versus the public sector.  It was the mere numbers of employers presently bailing out of SIIS.

 

Mr. Fransen observed self-insureds made money with workers' compensation.  He theorized if both self-insureds and SIIS operated under the same set of laws, the problem was with the management of SIIS, not the laws.  Therefore, he offered the laws should be changed to address the System, not the businessmen. 

 

Ms. Giunchigliani viewed this legislation would have a direct effect on premiums which those who stayed with the system would have to bear.  She suggested maybe those leaving to become self-insured needed to deal with the liability which they would leave behind with the State Industrial Insurance System.

 

A discussion developed between Mr. Carpenter and Mr. Fransen on the subject of unfunded liability left behind when corporations left the System to become self-insured.  Mr. Fransen suggested perhaps the committee ought to consider a type of risk pool aimed at those companies.

 

Mr. Charles Nort, Nevada Administrators, Inc., verbalized his concerns with AB 287.  He perceived if the proper premiums had been charged the liability would have been funded.  He was of the opinion the situation would not be corrected by the proposed moratorium if the cause was not also treated simultaneously.  Mr. Nort observed the committee had made concessions for out-of-state employers relocating to Nevada who had been previously self-insured, but questioned how many other corporations would decide against relocating to Nevada because of the current workers' compensation situation.  One enticement offered to corporations relocating to Nevada was the ability to self-insure.  Mr. Nort believed Nevada's potential growth and development would be hindered with the passage of AB 287.

 

Ms. Giunchigliani acknowledged Mr. Norts concerns, reiterating the claim's management issue would be addressed as well as various other factors contributing to the current crisis.

 

In response to Mr. Nort's testimony, Ms. Kenny asserted she did not regard the moratorium as an anti-business move.  She surmised a base had to be established as a starting point to resolve the overall crisis.

 

Mr. Tom Nelson, W. R. Gibbons, Inc., submitted additional concerns regarding the proposed bill.  He stated this legislation would place capable employers who were denied the ability to go self-insured at a strict competitive disadvantage.  He also maintained out-of-state companies allowed to self-insure upon relocation would have the competitive advantage over existing Nevada companies who might also wish to convert to self-insured coverage.  Mr. Nelson opined the number of employers qualified to become self-insured was not significant.  It was also his belief the moratorium would not help the current problems of the State Industrial Insurance System.

 

Mr. Carpenter inquired how third-party administrators, such as W. R. Gibbons, managed self-insured's cases.  Mr. Nelson maintained third-party administrators had to adhere to the same laws as SIIS.  He explained the claim must first be either accepted or denied.  If accepted the claim was monitored, verifying and approving medical treatment, paying medical bills, etc.  Generally speaking, Mr. Nelson stated self-insured employers were quicker to return the injured worker back to light duty jobs because the company was paying actual dollars going out on each claim.  Therefore, he believed the third party administrator (TPA) had more control.  He noted, however, the injured worker would not be deprived of any benefits which he would be entitled to under the state's system.

 

Mr. Nelson explained the form of payment varied with different contracts.  Some were bid on a per claim basis while others were bid on payroll.  When asked for a cost comparison to SIIS by Mr. Carpenter, Mr. Nelson was unable to pinpoint a cost per claim for his services because SIIS did not break down its charges to reflect administration costs.

 

Mr. Carpenter expressed frustration with third-party administrators for not providing information on how they were able to administer workers' compensation cases at a profit.  He asked them to provide insight into areas where SIIS might be improved.  In response, Mr. Nelson theorized it was claim's management and better trained personnel with significantly lower caseloads.  When asked for caseload comparisons, Mr. Nelson determined the private sector ranged from 500-600 per claims examiner compared to as many as 2,500 per examiner at SIIS before the November 1992 reorganization. 

 

The average number of days to become self-insured from the completion of the application averaged between 60-90 days per Terry Rankin, Insurance Commissioner, Insurance Department.

 

An observation by Ms. Kenny was those testifying appeared to think the moratorium was presented as a cure to the SIIS problem.  She stressed the purpose of the legislation was merely a step toward getting a handle on an out-of-control situation.  Ms. Kenny did agree, however, with Mr. Nelson's concern relative to the competitive advantage which would be given to relocating out-of-state employers who were able to self-insure.

 

Mr. Nelson contended the moratorium would also place employers inside the state who wanted to go self-insured at a competitive disadvantage.

 

Ms. Kenny questioned if employers were able to go self-insured why had they not already done so.

 

In response, Ms. Rankin pointed out most companies were not aware they had the option to become self-insured. 

 

Reference was made by Ms. Rankin back to Mr. Carpenter's question on third-party administrator costs.  She stressed TPAs were prohibited by chapter 683A of the Nevada Revised Statutes (NRS) from charging a percentage on the claims, in terms of claims denied.  In other words, they could not be paid a bounty on denied claims, therefore, there were prohibitions on how third party administrator's fees were structured.  In trying to breakout TPA costs she pointed out the TPA handled only a portion of SIIS' responsibilities.  The employer did his own investing, reserving, purchasing of excess coverage, etc., where the third party administrator handled the claim management functions.  Therefore, as an insurance company SIIS would have a higher overhead from handling all the functions which were split between the TPA and the self-insured employer.

 

A fact was brought to the attention of those present by Mr. Regan.  He noted TPAs could "pick and chose" clients.  If an employer had a high risk factor TPAs could easily reject their business, yet in comparison the State Industrial Insurance System was mandated to cover all risks. 

 

Mr. Larry Zimmerman, CVS of Nevada, estimated self-insured employers' costs were perhaps 35 to 50 percent of what employers insured by SIIS paid.  He questioned if there would be a  methodology where companies under the moratorium could still become competitive in the marketplace by going with SIIS on a cashflow basis and opt to have a third party administrator manage their claims.  Mr. Zimmerman questioned if employers would be able to file applications for self-insurance up to the time the proposed bill went into effect.  He also proposed a shorter period of time for the sunset on the moratorium.

 

Ms. Giunchigliani asked Mr. Zimmerman's opinion of a fair timeframe for the moratorium.  His suggestion was implementation be made concurrent with other corrective SIIS legislation passed by this session, thus initiating the level-base playing field all at once.

 

A question was directed to Ms. Rankin by Mr. Ernaut relative to the number of current self-insured employers.  Ms. Rankin submitted, excluding subsidiaries, the number was 132, with an additional 22 companies currently under application.  Mr. Ernaut inquired how many applications had been requested in the last quarter of 1992.  Ms. Rankin did not have the figures broken out but asserted the numbers would be provided for reference.  She did, however, supply the number of applications requested in the first two months of 1993 as 67, with 9 already received for processing.  For comparison in calendar year 1992, 265 applications were requested with a total of 56 received for processing.  Ms. Rankin theorized the substantial increase was due in part to greater knowledge of the option of becoming self-insured along with the pressure of the rate increase.

 

Mr. Marc Hechter, Assistant General Manager, State Industrial Insurance System, in response to Ms. Giunchigliani stated SIIS had done a rough analysis which could provide an estimate of the number of employers who potentially could go self-insured.  He reiterated the number would be an estimate, however, as SIIS was not provided policyholder's net worth.  Mr. Hechter stated the conclusions could be drawn from total premium dollars and reported gross payroll.  He theorized the actual number of potential candidates would range from 41 upwards to 2,000, dependent upon the accurateness of the System's drawn conclusions.

 

Other considerations played into whether a company went self- insured.  Mr. Hechter surmised some types of classification risks would be in a worse economic situation if companies took their claims on a pure cash basis. 

 

Ms. Giunchigliani directed a question to Mr. Jayne, General Manager, State Industrial Insurance System, with regard to Mr.   Zimmerman's point of processing claims outside of SIIS if the moratorium was enacted.  In answer, Mr. Jayne remarked he would like to converse further with Mr. Zimmerman and report back to the committee at a later date.  However, he questioned the private sector's ability to manage claims better than SIIS.  He maintained the System had only recently been given the opportunity to work within practicable and acceptable work load levels, therefore, he too would like the opportunity to operate the claims area in the same vein as the private sector.  If Mr. Zimmerman's proposal was to sell SIIS his services, Mr. Jayne conveyed he would prefer to staff his agency properly and handle the job in-house.

 

The Chairman inquired what the liability was when employers left SIIS to become self insured. 

 

First, Mr. Hechter explained the two different types of pay plans offered by the System.  He defined the guaranteed cost plan as a basic premium paying plan whereas, the retrospective rating plan was similar to self-insurance in that at the end of a rating period SIIS examined claims costs and charged employers the difference between their deposit and actual costs.  He submitted employers on the retrospective rating plan who left SIIS to become self-insured maintained an ongoing liability for two succeeding policy years.  However, the majority of policyholders fell within the guaranteed cost plan where the second they became self-insured SIIS held all claims left behind.  He agreed with earlier testimony in which SIIS was risk-based premium financed, noting rates were supposed to be set adequately to accumulate the necessary reserves to pay claims for any given policy year.  However, Mr. Hechter pointed out SIIS has not had adequate rates for many years which resulted in unfunded liabilities when employers left SIIS to become self-insured.  He emphasized the rates were not adequate to cover the risks over the past several years.  In other words, he maintained those who left the System early, left without having paid the full cost of their liability.

 

When pressed again, Mr. Hechter concluded preliminary work had been done to the unfunded liability left company-by-company of those who have left the System.  However, the statistics were very rough and he was unable provide those figures at this time. 

Mr. Ernaut questioned Mr. Hechter's statement of companies leaving the system "early."  He believed an analysis would show many companies who had left the state's system had paid far more into the pool than they had received in benefits.  Mr. Hechter stressed he felt comfortable stating, because of the inadequate rates, the later candidates to go self-insured probably left the System owning more than what had been paid in premium.

 

Ms. Giunchigliani asked Mr. Hechter to explain the inadequate claim reserves.  Mr. Hechter revealed SIIS' claims were under- reserved in regard to the kinds of loss trends which had occurred since the mid to late 1980s.  It appeared prior consultants inadequately identified developing trends to begin adjusting rates in a fashion to stabilize what had become a tremendous cash drain.     

 

Responding to Ms. Giunchigliani, Mr. Jayne explained SIIS claim team work loads were measured in loss-time claims, or those actively receiving compensation.  SB 7, of the 1991 legislative session, mandated less than 200 loss-time claims per claims team.  However, each team additionally handled medical only claims and prior loss-time claims.  He noted the numbers referenced earlier of 2,500 claims and up were a combination of medical only and loss-time claims.  As of November 1992, loss time claims had been reduced to that mandated by the last legislative session.

 

Mr. Schneider inquired how SIIS could be undercharging when he personally knew of a mining company who expected to save $800,000 in the coming year by going self-insured.

 

In theory, Mr. Jayne promoted, rates for a given year should generate enough premium income to cover all claims through to closure.  The cash flow impact for a self-insured on a year-to-year basis would be less than forecasting from an actuarial standpoint what would be necessary in rates to carry out claims to finalization.  The difference with self-insureds for a given year would be the cash flow hit of each year for claims as they began to compound and stack up for each successive year. 

 

Mr. Hechter added this particular company might save $800,000 the first year, and perhaps save a portion of that money in the second and third years, but eventually around the seventh or eighth year the cash flow for claims would catch up and might even surpass the $800,000, at which time the company might realize a savings by returning to SIIS.

 

In closing, Mr. Jayne submitted for committee review information on the guaranteed versus retrospective rating pay plans (Exhibit C), and various analyses of potential companies going self-insured (Exhibits D, E & F).

 

Mr. Robert Ostrovsky, representing the Nevada Resort Association, testified his unequivocal opposition to AB 287.  He agreed the State Industrial Insurance System would realize a fix from this legislative session, however, there were certain large employers in Las Vegas who were building major casinos which ought to have every right to compete with other casinos on a level playing field.  Mr. Ostrovsky reported the committee would be hard pressed to find a major casino which was not self-insured.  He further maintained only those employers for whom self-insurance made financial sense would apply as "bad" employers could not accept the risk.

 

Ms. Giunchigliani conveyed her understanding of the level playing field concept expressed by Mr. Ostrovsky.  However, she noted at some point a level playing field had to be dealt with for the smaller sized businesses which were left carrying a liability and a risk factor.  She asked if Mr. Ostrovsky knew the current number of self-insured gaming establishments. 

 

Mr. Ostrovsky indicated he did not have this information but the Insurance Commissioner would be able to provide it.  He determined there were self-insured employers who would return to the state's system if it was corrected and made economic sense.  He explained being self-insured was a risk which had to be weighed by each individual employer.

 

In reply to a question by Mr. Carpenter, Mr. Ostrovsky stated comparison studies of costs by self-insured gaming industry employers had been performed.  Those figures would be solicited and provided to the committee for comparison.  In conclusion Mr. Ostrovsky revealed his willingness to work with the committee, providing whatever information he could to help "fix" the system.

 

Mr. Ray Bacon, Manufacturers Association, suggested several ideas for committee consideration which might alleviate the need for the proposed moratorium.  One proposal was to increase the tangible net worth requirement to qualify for self-insurance.  He explained the $2.5 million requirement had been in effect for over 12 years and might be reconsidered in light of recent inflation.  Mr. Bacon's second suggestion was to have employers leaving the System provide a bond for the potential claim's tail they left behind.  Additionally, the idea of pooling small employers for light duty positions to help return claimants to the workplace as soon as possible was detailed.

 

Mr. Bacon estimated about half of his 90 member association was qualified to become self-insured, although only 5 had already done so.  He also maintained about 75 percent of Sparks area warehouses could qualify should their corporate structure pursue it.  Therefore, he believed the potential number of companies which could leave SIIS to become self-insured was closer to the 2,000 figure quoted by Mr. Hechter. 

 

Referencing the out-of-state exemption on employers relocating to Nevada, Mr. Bacon argued that although many of those businesses were potential members of his organization, the number two issue of concern by the Economic Redevelopment Commission was retention of existing business.  At present he contended ten members of his association were ready to "roll right out of here" if the workers' compensation problem was not corrected soon. 

 

Mr. Bacon pointed out the typical savings realized by employers of his association who became self-insured was about 40 percent across the board.

 

Mr. Anderson inquired if the 40 percent savings was over a long period of time or only the initial short-term savings realized by companies going self-insured. 

 

In reply, Mr. Bacon referred to Mr. Hechter's prior testimony which inferred employers with bad experience factors either eventually returned to the state's system when their cashflow exceeded the cost of premiums, or they instilled an active safety program and aggressively managed their claims.  His association members, however, had been out of the System for a long period of time and were very successful. 

 

Presenting testimony in opposition of AB 287 was Mr. Sam McMullen, representing the Nevada Self Insurers Association.  Attention was called to several "hurdles" of the proposed bill.  Mr. McMullen surmised past issues needed to be removed and discussed separately.  Such issues included past premiums paid, adequate reserves and companies who had already left the State Industrial Insurance System.  Further, he concluded if SIIS was collecting premiums for not only current year claims, but actually reserving to cover costs of those claims in the future, there should not be an issue with self-insureds currently leaving the System.  Additionally, Mr. McMullen believed the legislative body must grapple with its responsibility, not only to fix the problem, but to understand the history of what has happened.  He believed decisions were being made on an emotional level, instead of by the most sophisticated of analyses.   Mr. McMullen maintained the committee had a responsibility to decide this issue on an informed basis, after the legislative session, based on the fix put in place by the legislative body.  He believed for the committee to move prematurely at this time was very imprudent. 

In conclusion, he opined AB 287 should not be passed in its present form, noting the committee needed to first overcome several technical questions.  He noted an entity change from a partnership to a corporation might force the revoking of certificates.   Further, he questioned whether new additions or acquisitions would be allowed under an existing certificate.  Mr. McMullen identified the two issues SIIS must address as cost and quality of care.  He determined injured employees whose cases were handled by self-insured employers were much happier with treatment and the results they received than those who were handled by the System.

 

Ms. Giunchigliani asked if Mr. McMullen was suggesting the committee explore assessing company-by-company those who chose to leave the System in order to make the reserve whole.  Mr. McMullen asserted if the committee wanted to discuss the past, he would do so at the appropriate time.  He proclaimed if the System was presently reserving its claims in an appropriate manner, it should not be affected by companies leaving to become self-insured. 

 

Ms. Giunchigliani indicated the committee would set aside time at a future date to review how claims were presently reserved by SIIS.  However, she had not actually heard a rational reason as to why the moritorium should not be set.  She reiterated the purpose of the proposed legislation was to initiate a level-playing field.  Premiums and costs would continue to be affected as long as SIIS faced the flight of those leaving to become self-insured. 

 

Mr. Collins indicated the testimony he heard was comparable to "my kids aren't in school no more, so I don't want to pay school taxes." 

 

In rebuttal, Mr. McMullen questioned whether workers' compensation was supposed to be an insurance or a cashflow network.  He maintained if SIIS was the latter, then all costs ought to be charged back to the employers the claims were assessed against.  In theory, if an employer was only in business one month and incurred a $300,000 claim with only having paid $80 in premium, the remaining $299,920 cost would be socialized across the rate structure.  It was Mr. McMullen's opinion the question was whether SIIS was to go back to all employers and request they "pony up" the difference paid in premiums over that which was paid out in claims.  He questioned if that was the case, would SIIS also refund money to those who had overpaid? 

 

In response to questioning by Mrs. Kenny, Mr. Ostrovsky maintained the committee did not have enough factual information to make this particular policy decision at the present time.  He resolved the committee would hear testimony over the next few months which would enable them to make a qualified decision based on "fixes" the legislative body put in place to help rectify the current crisis.

 

Ms. Giunchigliani asked the Commissioner of Insurance, Ms. Rankin, to explore potential language regarding those who were already in the process of applying for self-insurance.  Secondly, language was requested for new businesses coming into Nevada which were previously self-insured in other states.

 

An announcement of the passing of a former legislator, Mr. Jim Joyce, was made by the Chair.  Information was provided pertaining to the various services to be held in his honor.

 

There being no further business to come before committee, the meeting was adjourned at 5:40 p.m.

 

      RESPECTFULLY SUBMITTED:

 

 

                             

      BARBARA DOKE

      Committee Secretary

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Assembly Committee on Labor and Management

March 2, 1993

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