MINUTES OF THE
SENATE COMMITTEE ON COMMERCE AND LABOR
Sixty-seventh Session
January 19, 1993
The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 8:00 a.m., on Tuesday, January 19, 1993, in Room 227 of the Legislative Building, Carson City, Nevada. Exhibit A is the Meeting Agenda. Exhibit B is the Attendance Roster.
COMMITTEE MEMBERS PRESENT:
Senator Randolph J. Townsend, Chairman
Senator Sue Lowden, Vice Chairman
Senator Ann O'Connell
Senator Mike McGinness
Senator Raymond C. Shaffer
Senator Leonard V. Nevin
Senator Lori L. Brown
STAFF MEMBERS PRESENT:
Brian Davie, Senior Research Analyst
Linda Krajewski, Primary Secretary
Denise Pinnock, Committee Secretary
Sheri Asay, Committee Secretary
Dr. Frank Krajewski, Senior Research Analyst
OTHERS PRESENT:
Don Jayne, General Manager, State Industrial Insurance System
Dale Ogden, Actuary, KPMG Peat Marwick
Beverly Maison, Senior Manager, KPMG Peat Marwick
Terry Rankin, Commissioner of Insurance, State of Nevada Department of Insurance
Senator Townsend opened the meeting by introducing Senators McGinness, Brown and Lowden. He welcomed Senators O'Connell, Shaffer and Nevin back. The committee's support staff were introduced along with Dr. Frank Krajewski, Legislative Counsel Bureau, who assisted the committee during the interim.
Senator Townsend announced the committee's intention to adopt the standing rules of the committee.
SENATOR NEVIN MOVED TO ADOPT THE STANDING RULES.
SENATOR O'CONNELL SECONDED THE MOTION.
THE MOTION CARRIED. (SENATOR SHAFFER WAS ABSENT FOR THE VOTE.)
* * * * *
Senator Townsend explained he would send around a sign-up sheet (Exhibit C) for subcommittees. Each senator would chair one committee and be a member of two others. He stated Exhibit D (original in Research Library) was a compilation of most of the requests Senator Shaffer, the interim committee, or himself had asked the Research or Legal Divisions to do on the topic of worker's compensation. Senator Townsend said there were three bills which had been drafted and would be available within the week. They were as follows: a consensus bill, which took the business plan put forward by the State Industrial Insurance System (SIIS) and had all parties negotiating to come to a consensus; a second bill would address the remaining portion of the business plan that was not agreed to; and a third bill which would cover the more controversial issues not dealt with by the business plan. Also, to be discussed in the following weeks would be the Governor's proposal on worker's compensation. He informed the committee they would be voting on this topic following the interim meetings in Las Vegas.
A discussion followed regarding the advisability of teleconferencing all the meetings with Las Vegas. It was decided to do so only if the committee's colleagues from southern Nevada requested it, and when the committee voted on the worker's compensation issues.
Senator Townsend requested Brian Davie, Senior Research Analyst, inform the committee what he would be doing regarding the worker's compensation issue. Mr. Davies explained Exhibit E was a letter from Senator Townsend which was being delivered to all the legislators requesting they all share information on worker's compensation. Included with the letter were lists which Mr. Davies described as a bibliography of the research requests from the interim committee meetings, SIIS memos, and general references from the Research Division. He stated his intention to update the list on a weekly basis.
Senator Townsend praised the interim committee for all they had accomplished. He also said:
I would like to get on the table the following statistics from which this committee should base almost all of it's decisions. In 1992 the system expended approximately $440 million. Of that, $220 million was for compensation, including rehabilitation maintenance. One hundred forty-five million dollars included... and that was medical, including about $9 million for chiropractic. Lastly, was $75 million for rehabilitation. The second [of the] two figures, the $145 million, is critical because in a 10-year time frame we went from nine weeks of lost time claims to 23 weeks, which also drove up the first figure, which was $220 million. The last figure, which was $75 million of rehab, went from $15 million four years ago....We know what the basic problem is because as the last time I looked and, Don [Jaynes], correct me did you not have a premium of approximately $350 million? So we have expenses of $440 million and premiums of $350 million. So, you know number one that our cash flow is substantially short, and number two that that's where our potential unfunded liability crisis may lay. In order for us to help offset the unfunded liability long-term, we obviously have to stop the cashflow problem first and, therefore, create a positive cashflow in order to offset some of the long-term liability. That is worker's comp., in this state, in a nutshell. There's no other way to look at it. You can't fancy the numbers or dodge the issues. So, when you're looking at the basic problems, you're looking at medical, you're looking at rehabilitation, you're looking at lost time, and you're looking at premiums.
Don Jayne, General Manager, State Industrial Insurance System, explained the problems plaguing Nevada's worker's compensation system are nationwide. He stated the money received into the system was, in retrospect, not enough to cover claims which ultimately developed. Mr. Jayne said permanent partial disability (PPD) and rehabilitation benefits were two of the most dramatic changes and increasing factors. Senator Townsend asked for a breakdown of the increases in rehabilitation benefits. Mr. Jayne agreed to supply one. He spoke of the difference between claims processing and claims management and said the stress is now on management.
Senator O'Connell wondered how far the agency had come on setting up their new computer programs and how much time they anticipated saving with the programs. Mr. Jayne explained the Price Waterhouse Claims Rewrite would be on-line July 1, 1993. He said the actual computerization of a function does not reduce the time involved, but would allow the claims teams to become more efficient and bring the average lost time period down.
Senator Nevin asked how many people in the existing organization would be qualified to be claims managers as opposed to claims processors. Mr. Jayne stated that a claims manager is a claims examiner. A claims examiner is the head of a team of six persons comprising a claims team. He stated the object was to become more proactive instead of reactive.
Senator Shaffer inquired whether all the personnel authorized in the Sixty-sixth Legislative Session had been hired. Mr. Jayne replied in the affirmative.
Senator Nevin wanted to know how much training is involved for a claims examiner. Mr. Jayne answered six to nine months.
Senator O'Connell asked for an update on light duty work assignments. Mr. Jayne stated the system intends to return the injured worker, if appropriate, to a light duty assignment that is temporary in nature. He spoke of the need to contact the doctor, the injured worker, and the employer in order to secure authorization to return to light duty work during recuperation. Senator O'Connell expressed concern about the worker feeling he was not ready to return to light duty or not liking the light duty assignment. Senator Lowden pointed out larger companies have the option of finding a second or third or fourth job if the first is not acceptable to the injured worker. She said smaller companies do not always have that option. Senator O'Connell asked if pooling for smaller employers would be possible. Mr. Jayne suspected pooling like businesses would have the same difficulty finding light duty assignments. Senator O'Connell requested Mr. Davie do research on the subject to see what is being done in other states to accommodate the smaller employer.
Beverly Maison, Senior Manager, KPMG Peat Marwick, an accounting firm, stated she and Dale Ogden, Actuary, KPMG Peat Marwick, were present to answer any questions the committee had regarding their audit of the SIIS. She supplied the committee with Exhibits F & G. Ms. Maison explained the differences between their figures and those of the examiner were due to the fact the examiner had more extensive access to information. She said Peat Marwick had finished their audit before the examiners and had shared their figures and information with the examiners. She also stated different accounting methods were employed. Senator Townsend asked for clarification of which method of accounting would be used in the future and how their figures would change now that Peat Marwick had the benefit of seeing the examiners' work. Mr. Ogden explained the difference between the methods of accounting which caused the discrepancies in figures in Exhibit G. He said statutory financial statements are filed with the insurance regulators and Generally Accepted Accounting Principles (GAAP) are filed with shareholders and other public entities. He also stated it was a matter of difference in the conservatism of the individuals making the estimates.
Senator O'Connell wondered about the fact that self-funded companies have limits on reopening cases where there are none in the SIIS. Mr. Ogden stated the propensity to reopen claims had been considered in their figures.
Mr. Jayne pointed out both audits forecast the bankruptcy of the system regardless of the method of accounting used.
Senator Nevin asked why it had taken so long to decide the system was heading for bankruptcy. Mr. Jayne acknowledged the problem had not "happened overnight". He stated SIIS had started taking a more aggressive approach in how they account for and record the unfunded liabilities and recognize the trends that exist.
Senator Shaffer asked whether Mr. Jayne would be asking for another increase in staff. Mr. Jayne said he did not anticipate doing so.
Terry Rankin, Commissioner of Insurance, State of Nevada Department of Insurance, introduced Exhibit H, Summary of the Examination of the State Industrial Insurance System. Senator Townsend asked Ms. Rankin which accounting method would be used in the future which would be common and understandable to everyone, and for a basic range of numbers for unfunded liability. Ms. Rankin replied:
As you know, we had a rate filing sent to us by the manager of the system on June 30, 1992, requesting an overall rate increase of 9.2 percent. By the end of July that rate increase was indicated to an overall rate increase of 10 percent. It also included a $60 million increase for the rateable payroll, a change that had been made by the statute. The department held rate hearings in August and in early September we issued our order on the rate hearing. In that order, which I also commend to you, we note specifically that there is statistical and actuarial data that was deficient in SIIS and made our ability to evaluate the rate filing, and the affect [was] very very limited. In addition we were starting to uncover very troubling information regarding the contingency fund which we had asked questions on since 1989. It's documented in hearings, it's documented in requests, and it's documented in an order to show cause issued to SIIS in the 1991 rated hearing that they failed to respond to. Until they responded to that order to show cause, we refused to proceed with the rate hearing. So there was in fact information that we had been given indicating the financial difficulty. The Governor also expressed a concern and directed our office then, in addition to the actuarial studies we proposed under the rate order, to do a full examination of SIIS including financial, actuarial, and two sets of claims review. The department used certain claims and contract examiners to conduct that, and the report you've been given is the result of that. It was not our intent in the claims review to duplicate any effort of the Department of Industrial Insurance Regulation, or the Coopers & Lybrand study, and that's clearly set out in the examination report. We had an examiner in charge who reported directly to me. We did use statutory accounting principles for much of our review because Nevada Revised Statutes (NRS) 616.1701, subsection 1, says that SIIS must be actuarially funded. To apply that principle you must use statutory accounting principles and not GAAP or GASB (Governmental Accounting Standards Board). In the past, SIIS has used GAAP and GASB for their financial reports which is the practice of other insurance companies. However, when conducting a financial examination in an actuarial review we applied the principles common to insurance companies and required by NRS 616.1701, subsection 1. The claims examiners reviewed the Coopers & Lybrand report but they were specifically required to interview the employees in the trenches. You will see in SIIS's response to that examination that they feel that management was not interviewed on the changes that the claims teams were given or that, in fact, the claims teams were not using specific desk procedures which they attached to their response. You will see in reading the Rector [& Associates] report that, in fact, the people in the trenches do not have those desk procedures and they were the ones interviewed for those comments. Each examiner was given a specific outline of questions and areas to be reviewed. The department's normal examination procedures for insurance companies were followed. The examination report is published pursuant to Chapter 280 of NRS with the comments of the insurer attached. They had ten days to respond to the examination report. The only deviation from our normal system of examination is that we were unable, due to the pressure of time, to do an exit interview with the management of the system. Their actuarial report was released by SIIS on November 24 [,1992], and we need that, plus their financial statements, to finish our examination. Given the press of time and that we wanted to get this out before session, we were not able to do an exit interview. Obviously then, some of their comments were addressed to what would normally be covered in an exit interview. Because some of you have questioned the cost incurred we had approval from the Board of Examiners and the interim Finance Committee to spend up to $376,000. Most of the bills are in. I signed the last of them on the 5th. I expect just some stragglers. It's coming in at $265,000 so we have come in under budget. I wanted to let you know that. The report itself is public. Any member of the public can request a copy from the department. We do charge $15 for our copying costs. I can go over, briefly, the report to the Governor on the deficiencies but I think what I'd rather do, rather than read some of this text to you, you've asked specific questions on discounting and on the premium deficiency. I thought I'd address those. Real quickly, on premium deficiency, if you look at SIIS's own numbers they show a deficiency of $200 million. That means that the rate increase they filed with me in September, representing that it in fact was a cash-flow rate increase to meet current year obligations and not unfunded liabilities, is short by $200 million. In answer to Senator O'Connell's question, I came to the interim committee and told you they were losing a million a week. That was when I thought they were short about $50 million, $52 million, something like that. If you accept their number it's $200 million a year. If you accept our number it's $394 million a year. That is over $1 million a day. At the $200 million it's a little bit less. So the week number was a little bit short. I apologize. I didn't know that number at the time. On the reserving and the discounting practices, first of all, yes we did apply statutory accounting principles based on the statute you had given us for the actuarial funding of the system. In addition, you can have, for worker's compensation, pursuant to Title 57 of NRS, discounted reserves for worker's compensation. However, those are for long-term liabilities not short-term medical and they must, in fact, be funded with investment income behind them and investments to back them. As you've seen from both the SIIS numbers and our numbers, SIIS does not have investments or investment incomes to sustain any discounting of reserves. However, interestingly enough, when we went and asked KPMG and Tillinghouse why they were discounting - they were not using statutory accounting principles for discounting. They were using some bizarre thing on savings to be realized and some other items that are specifically listed in the summary of the report. They assume that investment income of $77 million would be there for the period of 4 years. We feel that they are cashing out not only their investment income, but their investments, so quickly, that discount should not be used. In addition KPMG, felt that there was an overstatement of the reserves by Tillinghouse, the actuary for SIIS, and that [the actuary] was somehow not conservative enough by $220 million. We put that number back in. Eighty million dollars of savings expected from potential legislative reform to occur this fiscal year, not the fiscal year being evaluated was also part of the discounting, which is not part of statutory accounting principle or GASB or GAAP. So, we did throw out $377 million worth of discounting and added that back in. I would indicate to you that, overall, when we're talking about billions of dollars, to talk percentage of savings from a two week savings in reduction from 22 weeks to two weeks, at $30 million, is a drop in the bucket. You need lots more of those $30 million to beat the date of the end of the fiscal year in 1995, or beginning of 1996, that is projected for the total implosion of the system. Yes, we would say that SIIS is a troubled company. We have a manual on that for insurers. Every one of the items listed in this document applies directly to SIIS whether you look at management, claims, financial, actuarial. If they were an insurance company, as I told you in December of 1990, I would have had them in supervision at that time. I certainly would have them in liquidation at this point. I do not have that statutory authority at the present time under Chapter 616 of NRS. I guess I've addressed the specific questions you had rather than go through the summary, which, I'll refer to you if you don't want to wade through the whole report. I do commend the report to you in terms of claims questions you're asking about, on the changes for Coopers', the prototype teams, the timing of those are specifically addressed. I know that we're several months ahead of that now on the prototype teams, but you can look at how they're proceeding in there. There's a good description of the history, the differences between the southern and northern offices, there's excellent statistics that C D S of Nevada [a third-party administrator] did on the claims filed themselves, you'll see numbers in there where they do not contact physicians, they do not contact the claimant, and the rehab numbers are over and above the 22 weeks that they are counting when they give those numbers to you. So I do commend the report to you.
Mr. Jayne objected to Ms. Rankin's use of the term "bizarre methods". He said it was merely a difference of methods and professional opinion. Mr. Ogden stated he would not say it was a difference of opinion, just a difference of methods, and defended Peat Marwick's method.
Senator Townsend expressed his desire that Ms. Rankin establish a line of communication regarding accounting principles. He stated improved dialogue was a real need.
There being no further business, Senator Townsend adjourned the meeting.
RESPECTFULLY SUBMITTED:
Denise Pinnock,
Committee Secretary
APPROVED BY:
Senator Randolph J. Townsend, Chairman
DATE:
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Senate Committee on Commerce and Labor
January 19, 1993
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