MINUTES OF THE

      ASSEMBLY COMMITTEE ON LABOR AND MANAGEMENT

 

      Sixty-seventh Session

      April 21, 1993

 

 

 

The Assembly Committee on Labor and Management was called to order by Chairman Christina R. Giunchigliani, at 4:42 p.m., on Wednesday, April 21, 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. Christina R. 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                       Excused

      Ms. Lynn Hettrick

      Ms. Erin Kenny

      Mr. John B. Regan

      Mr. Michael A. Schneider

 

 

STAFF MEMBERS PRESENT:

 

      Don Williams, Legislative Counsel Bureau Research

      Frank Krajewski, Senior Research Analyst

 

 

OTHERS PRESENT:

 

      James Wadhams, former Insurance Commissioner

      Teresa Rankin, Insurance Commissioner, Dept. of Insurance

      Dana Wiggins, Carpenters' Local 971

      Gary Jenkins, Martin Seagel Company

      Wayne Carlson, Nevada Public Agency Insurance Pool

      Jack Jeffrey, Southern Nevada Building Trades Council

      Don Jayne, General Manager, State Industrial

        Insurance System

 

 

Following roll call, Chairman Giunchigliani opened the hearing on Senate Bill 316.  Three items were to be discussed:  1) reviewing the glossary of terms; 2) group self-insurance; and 3) the legislative commission standing committee. 

 

SENATE BILL 316 -Makes various changes to provisions governing industrial insurance.

 

The Chairman asked the committee to first consider the Glossary of Selected Nevada Workers' Compensation Terms, and drew attention to Exhibit C.  In order to establish a common understanding of terms, Chairman Giunchigliani suggested the committee pay particular attention to:  1) how a managed care organization was interpreted; 2) how "willing provider" was determined; 3) the amortization of a program; 4) solvency and insolvency; 4) dispute resolution; 5) health care providers; and 6) gross negligence.  The definition of "managed care" and its relationship to HMOs and PPOs, was discussed between committee members.  Mr. Hettrick suggested the definition seen on page 6 of Exhibit C indicated "managed care" systems were ones that ". . .integrated the financing and delivery of appropriate health care services to covered individuals by means of several basic elements:. . .".

 

Frank Krajewski, Senior Research Analyst, came forward to more fully explain the definition of managed care.  When more particular kinds of managed care organizations were discussed, such as the Preferred Provider Organizations (PPOs) and the Health Maintenance Organizations (HMOs), the finance component of the Managed Care Organizations (MCO) was seen, he stated. 

 

One of the important elements to look at, Mr. Krajewski pointed out, were med-fee schedules.  When this was considered, financing had to be a key element, whether this was financing provided by virtue of the system or by virtue of what the employer was paying.  Thus, Mr. Krajewski thought "financing" was used in a very general way.  It was not that the Managed Care Organization was doing the financing.

 

In reviewing the genesis of MCOs, Chairman Giunchigliani indicated HMOs were created by the federal government in 1973 and approximately 15 years later, Managed Care Organizations came into being as more of a concept to incorporate the management of the actual claim.  This was further discussed. 

 

Chairman Giunchigliani noted presently there was no statutory definition for a Managed Care Organization nor was a PPO or URO defined.  Within the current statutes, HMO was the only term extensively defined.  When "managed care" was dealt with, a statutory definition for potential regulatory language was necessary.

 

Mr. Regan asked Mr. Krajewski what the original "Kaiser" operation would have been called.  Mr. Krajewski indicated the Kaiser plan would be defined as a part of a "Group Model" and was probably one of the first HMOs.

 

The committee further discussed the genesis of this type of managed care.  Mr. Krajewski predicted SB 316 had been crafted in such a way as to open the "managed care" field and neither exclude or include any willing provider. 

 

Mr. Bonaventura asked if the term "any willing provider" would mean it would be an open panel or would "any willing provider" be only closed.  Mr. Krajewski opined the term "any willing provider" implied the panel was open and any one willing to provide services under a stated set of terms was eligible to participate.  Restrictions would enter when a finite number was imposed.  Discussion followed.

 

Chairman Giunchigliani pointed out in previous debates focusing on "open" versus "closed," everyone lost sight of the intent regarding managed care.  This issue, she believed, needed to be set aside while the committee considered what it wanted the care to be for injured workers, who was to receive the care and thereafter, a bill to meet those needs.

 

Continuing, Chairman Giunchigliani asked Mr. Krajewski to discuss "capitated" rates and "processing" a claim as opposed to "managing" a claim.  She believed these were two separate issues and not commingled.  Mr. Krajewski acknowledged there were some very philosophical differences between the terms "processed" and "managed."  He pointed out SIIS had been accused of simply "processing" claims rather than "managing" which implied all aspects of the claims were being carefully examined to see if there were ways to realize savings and provide better care at a lower cost.  Chairman Giunchigliani asked Mr. Krajewski to prepare a written analysis of the subject.

 

Mr. Regan asked if there was any publication or actuary other than the AMA (American Medical Association) guide to use as an authority.  Mr. Krajewski replied the Orthopedic Surgeons also had a rating manual somewhat similar to that of the AMA.  In some states the AMA guide was used only as a reference but not as the final word.  Doctors would typically rely on a number of sources with the AMA guide being only one of them.  He suggested the committee also needed to study the ways other states awarded benefits.  Nevada awarded based on impairment, but he thought there was a question of fairness involved with making awards based solely on impairment.  The original intent of workers' compensation was to pay the worker the wages he would lose while he was injured.

 

Chairman Giunchigliani noted employer deductibles, Permanent Partial Disability (PPDs) and Temporary Total Disability (TTDs) would be discussed during meetings on May 4th and 5th. 

 

Again referring to Exhibit C, the Glossary of Selected Terms, Mr. Krajewski said he would continue to amend the glossary with additional terms and concepts.

 

Group Self Insurance, dealing with Sections 25 through 51 on page 9 of SB 316 was then discussed.  Jim Wadhams, former Insurance Commissioner, came forward to offer information regarding Group Self Insurance.  Mr. Wadhams said, ". . . In regard to associations and insurance, that is a fairly common activity in insurance for associations to come together, particularly those that are of a like business or industry.  You will typically see this happen in the motel industry or the floral industry or any number of other trade associations of similarly situated businesses.  They will decide that they are experiencing the same kind of risk and seek to purchase insurance collectively.  There obviously is some value in that collective purchasing power, because you have more numbers, more individual pieces of property. . . or more typically, more individual lives involved and the more lives you have, the more instances of the risk, the greater the statistical certainty with which you can predict the cost.

 

"That being the case, it gives you a little bit of an indication of the problem with groups and insurance as well.  If the groups are too small they are not statistically valid -- they don't have enough range to have predictability.  If the groups are very large, they're typically safer.  And many cases exist today in our state of group health insurance done . . . through associations. 

 

"In more recent years there have been many attempts to bring together employers of not necessarily the same industry, and put them together in a common group just for the volume purchasing power.  That gets to be a little bit difficult because an employer running a car dealership, for example, will have a different risk than a retailer . . . or a machine shop operator.  So putting together different kinds of employers even for health insurance can change the dynamic and predictability of the outcome, and therefore, the level and stability of the premium cost.

 

"The next variation on that theme is when the group self-insures.  Self insurance is not a totally unique concept . . . when we don't buy insurance, we are, in effect, self-insuring our own risk. . . . if you have a deductible on your home-owners, on your car insurance or on your health insurance, you are, in effect, self-insuring that portion of that insurance risk. . . .

 

"In workers' compensation, as you know, we have had self-insurance authorized for certain large employers since about 1983.  Those are individual employers with individual financial statements that are analyzed by the Insurance Commissioner to make sure that that employer has the financial capacity to pay workers' comp claims when they come up.  There have been some self-insured employers for financial reasons who have had to come back and purchase insurance from SIIS again.  Some for other reasons have come back to SIIS, and I'm sure you can get from DIR or the Insurance Commissioner the numbers that have made that kind of movement. . . .

 

"When you then bring together multiple employers and they self-insure more than a small part of that risk, the dynamic becomes more like what I was describing in health insurance.  It becomes the dynamic based upon numbers.  If you have six employers running machine shops self-insuring . . . the risk can be very high because there is a relatively high frequency of injury, but maybe a relatively limited number of employees and employers that are involved in that.  So the smaller the number of employees in a group, the greater the volatility and the more uncertainty it is about how much of a loss that group could incur.  What Sections 26 and following deal with are the mechanics of putting together multiple employers, . . . I think it says you have to have at least five employers.  I don't believe it specifies a minimum number of employees, so you need to keep that in mind.  That becomes a difficult item although there are mechanical aspects in this language that allows the Insurance Commissioner to tailor the other protections. . . . but I think the important point first is that you understand the spreading of the risk and then too, the nature of the businesses over which it's spread."

 

Mr. Wadhams cautioned the committee to be sensitive to the financial connection among employers.  He said there was a specific provision in Section 26 (of SB 316) which required the individual employers who were going to participate to enter into joint and several indemnity agreements among themselves and the association itself.  The drafters purpose in this, he opined, was to tie the entities all together.  This was an extremely critical consideration because it affected the risk.  Not only did the financial strength of the individual members within the association have to be evaluated, but then their ready ability to satisfy their share of the commitment had to be evaluated.

 

Continuing, Mr. Wadhams said "joint" and "several" meant one group entered into a joint and several agreement to pay another group's workers' compensation claim; and it would mean any one of the group would be responsible for the entire amount of the claim of another group.  This raised the risk of the employer becoming insolvent or without the financial strength to participate on a continuing basis.

 

Mr. Wadhams indicated large heavily capitalized businesses presented a much different issue than a small mom and pop operation whose net worth was typically very small, if existent at all.  He pointed out there were minimum net worth requirements stated in Section 26, subsection 2 which set a minimum net worth for the collective members in the association of $2.5 million.  As an example, Mr. Wadhams said if the consideration was a group of small banks in which experience indicated the number of claims would be one or two a year among all the banks and that claim would typically be for a paper cut from processing loan documents, $2.5 million total net worth would probably be a relatively safe number.  On the other hand, in a business dealing with a lot of machinery, $2.5 million collective net worth among the association might not be enough. 

The Insurance Commissioner, he said, was given latitude to adjust other protections.  With the existing self-insurance program for individual employers, the Insurance Commissioner required they maintain "real insurance" purchased from a commercial insurance company which covered losses incurred above a certain limit.  From that dollar forward the insurance company would begin to pay the claim or reimburse the employer for the payment of the claim. 

 

Mr. Wadhams pointed out there would also be another component called "aggregate" which meant if the total claim went beyond a certain figure (say $500,000) then the insurance company would begin paying from that point forward.  Thus, where the Insurance Commissioner attached both the specific number on an individual claim and the aggregate number on all of the claims -- or all of the losses -- became a very critical decision in terms of the protection for the payment of those claims.

 

Summarizing, Mr. Wadhams stressed first, the real insurance component standing behind the group self-insurance had to be very carefully considered and secondly the net worth (or liquidity) needed to be taken into account. 

 

Chairman Giunchigliani asked Mr. Wadhams if "stop loss" was the same as "aggregate."  Mr. Wadhams replied in affirmative saying the terms -- specific, aggregate, excess, stop loss -- were not necessarily interchangeable, but stop loss covered the same area as specific and aggregate excess.  He stressed this was an important concept and also important to keep in mind the notion of specific.  The real insurance company kicked in when a specific claim went beyond a certain level.  Aggregate was when the total losses of an association exceeded a certain number.

 

Mr. Wadhams assured the committee the Insurance Commissioner's office was currently doing this kind of analysis both on self-insured employers and real insurance companies generally, but it was important for the committee to understand there was a difficult dynamic of the risk.  The Legislature, he said, needed to be certain there was an Insurance Commissioner who saw the company had the money to pay the claim the worker was entitled to be paid on when the worker was entitled to be paid on it.  Thus, solvency and financial security of real insurance companies or group self-insurance companies or self-insured employers was truly what the regulatory effort was all about.

 

Mr. Carpenter wondered if five or more employers banded together whether this would lead to the loss of better insurance risks while leaving SIIS with high risk employers.  In response, Mr. Wadhams acknowledged a certain degree of the attitude "get out while the gettin's good."  To a certain extent he thought this needed to be discouraged, however, he did not think it needed over-reaction.  A collection of employers leaving the State Industrial Insurance System did not necessarily create problems, in itself.  It was a function of how that group or individual employer sat in relationship to the losses created and the liabilities which were left with SIIS.

 

Continuing, Mr. Wadhams said the problem was the pricing or the cost of exiting the system as opposed to "good risk/bad risk."  The important thing to be remembered was if a good risk left the system it was probably more harmful to SIIS in its convalescence than if a bad risk left.  A regular insurance company charged a full premium to cover a company's losses which might occur during the period of coverage whenever the loss was reported.  Thus, the real insurance company was fully paid with the presumption its charge had been statistically based on possible claims.  However, the SIIS pricing system went back to a different pricing system than that used in competitive markets.

 

Referring to the figure of $2.5 million stated on page 10 of Section 26, line 41 of SB 316, Mr. Anderson questioned if several large businesses made up the group of five or more, would the Insurance Commissioner have the ability to create a larger fund (greater than $2.5 million) if it appeared $2.5 million was not sufficient to carry the number of employees encompassed within the group.

 

In reply, Mr. Wadhams directed attention to the text on page 10, Section 26, lines 9-13, which stated, "The Insurance Commissioner shall require that they maintain a policy of specific and aggregate excess insurance. . ."  The considerations then would relate to net worth (among other things).  This was further discussed between Mr. Anderson and Mr. Wadhams, with Mr. Wadhams pointing out language on page 11, line 4 which referred to a bond or securities.  This number could be increased, Mr. Wadhams said, to offset a relatively weak net worth.  He suggested an amendment be devised to make it clear the Commissioner could require "$2.5 million or such higher number as may be indicated by the riskiness of the business involved."  Hypothetical circumstances were discussed.  Mr. Wadhams agreed this particular issue needed to be reexamined.

 

Drawing attention to page 10, line 40 stating ". . .shall maintain a combined net worth of all the members in the association of at least $2.5 million," and following language dealing with the Insurance Commissioner, Mr. Hettrick said it appeared to him if the Insurance Commissioner was doing the job correctly there was a great deal of latitude available to assure adequate funding.  Referring to Section 5, page 11, line 4, Mr. Wadhams said this gave the Insurance Commissioner the flexibility to adjust all bond requirements.  The language on page 10, line 9 speaking to "specific and aggregate" gave the Insurance Commissioner the tools to make adjustments for the variation in risk among the associations. 

 

Mr. Wadhams clarified he was only suggesting a net worth requirement for an association might, in some circumstances, be too low or too high.  In addition to the flexibility in the other two areas, this might be an area in which the committee might want to amend the language to state, "in no event can it be less" or "in some events it must be higher."  This was a policy question for the committee to deal with. 

 

Mr. Hettrick reiterated there was adequate capability for the Insurance Commissioner to cover the risk for the association if she was fulfilling all the requirements imposed by the bill.  Referring to language on page 10, lines 23-25, Mr. Hettrick indicated as a small businessman, if he was to be bound by the requirements of this Section, the likelihood of his using this method was very slim.  In response, Mr. Wadhams said this Section needed work because the issues raised by Mr. Hettrick needed to be thought through.  Comparing language on page 10, line 22, with language on page 15, line 35, Mr. Wadhams pointed out the language on page 15 stated the annual assessment had to be calculated to be actuarily sufficient.  He further described and discussed probable scenarios. 

 

Chairman Giunchigliani asked if the length of years in business was ever considered a standard.  In looking at small businesses banding together, she said she had read statistics indicating most small businesses would succeed or fail within the first three to five years of business.  Was this a risk factor the committee needed to consider?  Mr. Wadhams said it absolutely was.  If a group of businesses had been in business for say 15 years and a new business partner in the group was new, it affected the whole group.

 

The Insurance Commissioner, Terry Rankin, came forward to answer committee questions. 

 

Mr. Anderson questioned whether the Insurance Commissioner had the ability to assure businesses which possibly needed a greater reserve than $2.5 million, could be required to increase the reserve.  He also questioned the options available to raise even a higher aggregate dollar amount. 

 

Addressing the net worth concern surrounding language on page 10, line 41, Ms. Rankin said in the regulation for the existing self-insureds, the term "tangible" net worth was used.  SB 316 stated "combined" net worth.  By regulation they specifically defined how "tangible" net worth was determined.  She described the elimination process worked and discussed an expansion of law to define "net worth" so the $2.5 million could be expanded by the riskiness of business and by considering the kinds of assets held. 

 

Additionally, Ms. Rankin pointed out, the bill used the phrase "at least $2.5 million."  This, plus some of the other standards referred to by Mr. Hettrick probably gave the Insurance Commissioner the needed flexibility.  Referring to a Delaware lawsuit, Ms. Rankin explained insurance companies had a table of capital and surplus which was used for their admission into the state for minimum licensure standards.  The Delaware Commissioner had used a table similar to that used in Nevada which said in effect, "but I believe that you, Mr. Insurance Company, have a more risky line of business you are going into; therefore, I am going to read that table as a minimum, not the only amount that you need.  I'm going to require you to have $10 million instead of a lesser figure."  The Delaware court had stated the statutory standard was an absolute and was not a minimum which could be used flexibly by the insurance commissioner.

 

Continuing, Ms. Rankin said in proposed solvency legislation some regulations were needed for insurance companies to try and address the riskiness of business with their capital and surplus.  This was different than "net worth" because a different accounting system was used.  The term "at least" she opined, might also give flexibility in a regulatory standard to define minimum, maximum and absolute in light of the Delaware case.  If this was the Legislative intent, the committee needed to so state in order to avoid being locked into a regulatory hearing.  She thought the term "at least" would allow the expansion.  Chairman Giunchigliani asked if "capital and surplus" was the same thing as "combined."  Ms. Rankin said, "No."  Line 40 referred to the association indicating all five or more of the employers "combined" together met the $2.5 million.

 

Mr. Carpenter wondered if, in actual fact, many people would take advantage of the self-insured insurance.  Ms. Rankin replied 85 or 90 percent of the provisions in Sections 25 to 51 of SB 316, with some minor adjustments for Nevada, matched the Insurance Commissioners' Model Act on group and public self-insurance.  Eleven states had adopted the model for private employers to do this.  Six states had adopted the public model.  She said there were also some pooling arrangements presently available in the state which had taken place between some disparate sized groups, and described typical businesses employing this type of insurance.  She said although the Insurance Commission did not regulate certain types of businesses and their pooling arrangements, the Insurance Commissioner was required by the Attorney General to initially inspect the documents.  In their assessment ratio they had a formula to calculate for the smaller businesses if there was a loss for the larger business.  Thus, she said, she thought there could be an interest in some types of employers willing to form groups of self-insureds; although the sums specified in SB 316 would prove beyond the reach of most very small businesses.

 

Mr. Carpenter saw pitfalls surrounding the concept and thought perhaps the Legislature might adopt something people would initially be enthusiastic about but in the long run would prove quite detrimental.  Ms. Rankin replied in risk retention groups, or purchasing groups, joint purchase was an advantage.  However, the assessment features of SB 316 for the liability of the other members was a risk for the members to assume.  Hopefully the trustees would be able to control the risk. 

 

Mr. Carpenter also asked if there was anything in Sections 25 to 51 of SB 316 which would provide for catastrophic losses.  Ms. Rankin said, "Yes," this was the specific and excess policy as delineated on page 10, line 10.  This would provide for catastrophic losses either by a single claim; by more than one person in a single accident such as an explosion at a plant; or by total claims overall for the whole group.  Also, there would be a solvency fund separate from the existing self-insureds, as seen in Sections 49 and 50.

 

Ms. Kenny asked if there would be any benefit in imposing an employee minimum between the five businesses, in order to better spread the risk.  As an example, Ms. Rankin replied some of the self-insured employers were worth millions of dollars, yet had maybe ten employees.  This had to do with corporate structure -- the kind of business or corporate ownership.  Thus, Ms. Rankin was not sure what the minimum employee restriction would accomplish.  If it was a question of risk, Ms. Rankin thought this consideration should be addressed in the bill.

 

In Section 49 dealing with the insolvency fund, Mr. Anderson asked if there was a provision for the Insurance Commissioner to conduct an audit ensuring the insolvency fund was sufficiently funded to not become a general obligation to the Nevada taxpayers.  Ms. Rankin said Section 50 explained in more detail, but currently, if SIIS had to use the insolvency fund, as they were now doing for the self-insureds, the self-insureds could be assessed for the need of the fund.  Also, she said there was an order of the Commissioner to increase the individual association's reserves stated in Section 43 by transfers or collections of additional assessments.  Thereafter, bonds and deposits were available under "specific and excess," then the overall insolvency fund could be looked to.

 

Chairman Giunchigliani asked what the process would be in cases of bankruptcy.  Ms. Rankin said Section 49 on page 19 addressed voluntary or involuntary proceedings for bankruptcies, assignments, creditors, etc., which was nearly identical language to NRS 616.294 under existing law.

 

Dana Wiggins, business representative for Carpenters' Local 971, asked the committee to include Taft-Hartley Negotiating Group Insurance in their deliberations on SB 316.  Gary Jenkins, Sr. Vice President for the Martin Seagle Company, also came forward to solicit committee consideration of the Taft-Hartley Negotiating Group Insurance.  He said collectively bargained plans were uniquely qualified to handle workers' compensation claims, but there was a need for enabling legislation.

 

Wayne Carlson, Executive Director of the Nevada Public Agency Insurance Pool, a property and liability pool for local governments, also solicited consideration.  Mr. Carlson said they had been operating since legislation was passed in 1985 to allow pooling for all insurance except workers' compensation.  In response to a crisis in public liability insurance, he said they had launched the program in May 1987 and today there were 23 local government agencies in the pooling program.  Mr. Carlson went on to describe the process of self-insuring in the pooling program; board make-up; experience; risk-reduction and loss-prevention training.  Mr. Carlson pointed out AB 326 had been drafted to extend NRS 277.055 to include workers' compensation.  If AB 326 passed, Mr. Carlson thought it would not have all the regulatory schemes built into SB 316.  SB 316, however, did not specifically address the prohibition in NRS 277.055 for local governments to pool for self-insuring, and amendments would be needed to make certain it could be done under SB 316.

 

Jack Jeffrey, representing the Southern Nevada Building Trades Council, expressed opposition regarding the formation of associations and the heavy concentration of high risk groups.  He described his various concerns and opined the concept was certainly not a panacea.

 

Don Jayne, General Manager, State Industrial Insurance System, pointed out the pertinent Sections of SB 316 were reviewed by the Board of Directors which had unanimously voted to oppose the group self-insurance portions of the bill.  He also pointed out it was a policy level decision.  He asked committee members to consider as they went through their deliberations, what the impacts would be on what was left of the system.  He predicted in the future there would be a residual market left and there would have to be a way to properly fund that market.

 

Mr. Jayne added the high risks would be left as well as the small employers.  These could not bond together and would not be able to cover the liabilities existing with the system today.  He urged the committee to make certain the proper mechanisms were established to take care of the funding necessary for those liabilities left behind, when addressing the policy issue.

 

Chairman Giunchigliani noted in the last session she had been threatened by Assemblyman Wong he would vote against all of Senate Bill 7 of the Sixty-sixth Session, if she did not put the group pooling in SB 7 of the Sixty-sixth Session.  However, she felt if it was not put in SB 7 of the Sixty-sixth Session, the flight from the system led to an additional risk factor and safeguards were needed. 

 

Mr. Jayne agreed Mr. Wadhams had quite adequately explained the pros and cons of the issues and the insurance concept.

 

There being no further business, the meeting was adjourned at 5:28 p.m.

 

 

                                          RESPECTFULLY SUBMITTED:

 

 

 

                                                                 

                                          Iris Bellinger

                                          Committee Secretary

 

 

 

 

??

 

 

 

 

 

 

 

Assembly Committee on Labor and Management

Date:  April 21, 1993

Page:  1