ANALYSIS OF FLORIDA 1st DISTRICT COURT OF APPEAL DECISION IN BRADLEY WESTPHAL V. CITY OF ST. PETERSBURG

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1 NCCI estimates that the decision of the Florida 1st District Court of Appeal in Bradley Westphal v. City of St. Petersburg, if upheld, would impact overall workers compensation costs in Florida by approximately +2.6% ($65M) 1. This analysis only addresses the expected increase in Florida workers compensation system costs for accidents occurring on a prospective basis. However, the decision in Bradley Westphal v. City of St. Petersburg is also expected to impact claims for accidents occurring in the past that are still outstanding. Therefore, it is expected that a significant unfunded liability would be created due to the potential impact of the case on claims outstanding as of the date of the decision, if upheld. At the time this analysis was completed, a Motion for Rehearing en banc (full court) was granted and the case will be reheard before the 1st District Court of Appeal. The case ultimately may be ruled upon by the Florida Supreme Court. NCCI may reassess this analysis if the decision is modified or for other reasons such as if updated data becomes available. Once the case is final, NCCI will evaluate the outcome and determine whether a proposal to adjust Florida workers compensation rates is warranted. Summary of Court Decision On February 28, 2013, the Florida 1st District Court of Appeal (DCA) issued an opinion in the case of Bradley Westphal v. City of St. Petersburg ( Westphal ). The 1st DCA concluded that the 104-week maximum duration of temporary total disability (TTD) benefits defined by Florida statutes is unconstitutional. Westphal was a firefighter who suffered severe injuries in the course of his employment and began receiving indemnification benefits. Under section (2)(a) of the Florida statutes, Westphal was entitled to TTD benefits for a duration no greater than 104 weeks. At the time Westphal s entitlement to TTD 1 Overall system costs are based on NAIC Annual Statement data as provided by A.M. Best including an estimate of self-insured premium. The estimated dollar impact is the percentage impact(s) displayed multiplied by A.M. Best 2011 written premium (preliminary) of $1,794M for Florida plus an estimate of the self-insured premium from the Florida Division of Workers Compensation for 2011 of $692M. This figure does not include the policyholder retained portion of deductible policies or adjustments for subsequent changes in premium levels. The use of premium as the basis for the dollar impact assumes that expenses and other premium adjustments will be affected proportionally to the change in benefit costs. Page 1 of 8

2 benefits expired, he was incapable of working or obtaining employment. However, Westphal had not yet reached maximum medical improvement (MMI). As a result, he was denied permanent total disability (PTD) benefits due to the uncertainty of whether he would be found totally disabled when MMI was reached in the future. According to the DCA, Westphal was ineligible for benefits under Florida s Workers Compensation law but yet he remained totally disabled and incapable of engaging in employment. This statutory gap was determined by the DCA to violate Westphal s constitutional right to receive justice without denial or delay 2. The impact of the DCA s decision is to strike the 104-week limitation on temporary total benefits and to re-establish the limitation of 260 weeks previously in place prior to the 1994 amendments to the Florida Workers Compensation Law. Actuarial Analysis NCCI has analyzed the impact of the DCA s decision in the Westphal case. The following summary of our analysis is broken up into four sections: A. Impact on temporary disability claims B. Impact on permanent disability claims C. Impact on medical benefits D. Additional considerations E. Impact Summary This analysis is based on data from various sources, including NCCI (Workers Compensation Statistical Plan, Detail Claim Information, and Financial Call data) and the Florida Division of Workers Compensation (FDWC). In addition, NCCI conducted interviews with system stakeholders. In addition to direct cost impacts, this analysis also gives consideration to indirect cost impacts (such as changes in claimant behavior that could result in increased utilization of workers compensation benefits) as a result of the Westphal decision. Studies have shown these indirect cost impacts could be as high as 50% (or more) of the direct impact 3. 2 The court references Florida Constitution, Article I, Section For example: Moss, Robert., Pistole, Ashley., Ritter, Bruce. Impact on Utilization From an Increase in Workers Compensation Indemnity Benefits (National Council on Compensation Insurance, 2009); Brooks, Ward. A Study of Changes in Frequency and Severity in Response to Changes in Statutory Workers Compensation Benefit Levels. (Workers Compensation Information Rating Bureau, 1998); Page 2 of 8

3 A. Impact on Temporary Disability Claims The Westphal decision declared the 104-week maximum duration for TTD benefits unconstitutional because of the statutory gap that occurred. Although this particular case involved an injured employee who would likely be permanently disabled (either totally or partially), the decision increased the TTD benefit duration maximum from 104 weeks to 260 weeks for all claimants due TTD benefits. Therefore, the change impacts both the healing period portions of permanent claims as well as purely temporary claims. For the remainder of this section, TTD refers to claims where only temporary disability benefits are paid (i.e. where no permanent disability exists). In order to estimate the potential impact on TTD claims, we reviewed average TTD durations in other states using data licensed to NCCI. We compared the average TTD duration (based on the difference in dates between the first and last TTD benefit payment) limited to 104 weeks to the average TTD duration limited to 260 weeks. We also reviewed FDWC data for lost-time claims with no permanent disability benefits paid. Claims used in this analysis included those with accidents occurring during 2007 through We assumed that claims receiving at least 98 weeks 4 of temporary disability benefits would be directly impacted by the increase in the maximum duration. These claims represent approximately 7% of TTD indemnity benefit costs in Florida. Based on these analyses, NCCI estimates that the average duration of TTD claims currently receiving at least 98 weeks of benefits would increase by approximately 70% as a result of the increase in the maximum duration of TTD benefits. Therefore, the impact on indemnity costs for all TTD claims is expected to be an increase of approximately 5% (= 7% x 70%). The impact estimated above does not reflect potential indirect impacts, including changes in claimant behavior as a result of the longer duration of TTD benefits. For example, injured workers currently receiving less than 98 weeks of benefits may 4 According to Florida Statutes, Section (3)(d), an injured employee is to be evaluated by a doctor for the purpose of assigning an impairment rating when the employee reaches maximum medical improvement or six weeks prior to the expiration of temporary benefits, whichever occurs earlier. Since temporary benefits expire after 104 weeks, all claims with at least 98 (= 104 6) weeks of benefits could be directly impacted by extending the maximum duration of temporary benefits. Page 3 of 8

4 delay returning to work since TTD benefits would no longer be terminated after 104 weeks. In future negotiations of claim settlements, even those less severe TTD claims (that currently would not be subject to the 104-week maximum duration) may receive greater total benefit awards. Therefore, a potentially significant number of settlements for TTD benefits could be impacted. To account for these indirect factors, NCCI used a utilization adjustment of 50%, which results in a final impact on TTD indemnity costs of +7.5% (= +5.0% x 1.50). Since TTD indemnity benefits make up 49.5% 5 of indemnity benefits and indemnity benefits make up 31.5% 6 of total system costs in Florida, this translates to a +1.2% (= +7.5% x 49.5% x 31.5%) or +$30M impact on total Florida system costs. B. Impact on Permanent Disability Claims Florida law currently provides injured employees with TTD benefits during the continuance of the disability, not to exceed 104 weeks. When total disability is determined to be permanent in nature and the injured employee is unable to engage in at least sedentary employment, the claimant may be eligible for PTD benefits payable until age An employee who is ineligible for PTD compensation, but still permanently disabled to some degree, may be eligible for permanent impairment benefits. In either case, the period during which TTD benefits are paid is referred to as the healing period (HP). If the Westphal decision is upheld, the expiration of HP benefits would be extended from 104 weeks to 260 weeks. Stakeholder feedback highlighted the uncertainty with regard to the impact of Westphal on PTD claims. If the Westphal decision causes a delay in determining a claimant s permanent impairment due to extending the duration of temporary benefits, it may increase the potential for complications to arise or a claimant s condition to deteriorate, which may result in more PTD claims. On the other hand, it is also possible that delaying the determination of permanent impairment for some cases may result in more time for the claimant to heal and possibly return to employment. Consequently, some claims previously adjudged to be PTD might instead receive permanent impairment benefits, which are generally less costly. Delaying the MMI decision may also decrease PTD costs as a result of the comparatively lower benefit payable during the HP. After the HP has expired, PTD 5 Based on NCCI Workers Compensation Statistical Plan (WCSP) data for Florida policies with effective dates between January 2007 and December Based on NCCI Financial Call data for policy years 2009 and 2010 projected to 7/1/ In some cases, PTD benefits can be extended beyond age 75. For example, for injuries suffered after the employee is age 70, PTD benefits may be payable for up to five years. Page 4 of 8

5 claimants are eligible for supplemental benefits equal to 3% of their weekly compensation rate multiplied by the number of years since the date of injury, payable until age 62. If the HP were extended in cases of PTD, the payment of these supplemental benefits would not be required for up to an additional 156 weeks. NCCI estimates that the impact of the Westphal decision on PTD claim costs would be minimal. Cases involving PTD are rare and typically involve only the most severe injuries. Therefore, HP benefits constitute a small portion of total costs for PTD claims. To estimate the impact on the HP for permanent impairment benefit (PIB) claims, NCCI analyzed HP duration in a manner similar to the analyses performed for TTD claims. Using data licensed to NCCI, we reviewed HP duration on PIB claims for Florida and permanent partial disability (PPD) claims for other states. Once again, the duration of HP benefits for each claim was limited to 104 weeks and 260 weeks, and the resulting average durations were compared. As with TTD claims, we assumed that the Westphal decision would directly impact those PIB claims with at least 98 weeks of HP benefits. Based on data provided by the FDWC, HP benefits for these claims make up approximately 16% of total HP benefits for all PIB claims. Similar to temporary disability claims, NCCI estimates that the average duration of HP benefits on PIB claims currently receiving at least 98 weeks of benefits would increase by approximately 70% as a result of the increase in the maximum duration of TTD benefits. Therefore, the impact on indemnity costs for all PIB claims is expected to be an increase of approximately 11% (= 16% x 70%). This impact is also subject to the same indirect costs that were discussed earlier in the section regarding TTD claims, such as claimant behavior and increases in negotiated claim settlement amounts. Therefore, NCCI applied a utilization adjustment of 50% to arrive at the expected impact on HP benefits for PIB claims of +16.5% (= +11% x 1.50). The HP portion of PIB claims in Florida makes up approximately 56% 8 of the total indemnity PIB claim costs, so the impact on indemnity PIB claim costs is approximately +9.2% (= +16.5% x 56%). Since PIB indemnity benefits make up 8 Based on data licensed to NCCI. Page 5 of 8

6 36.1% 9 of indemnity benefits and indemnity benefits make up 31.5% 10 of total system costs in Florida, this translates to an impact of +1.0% (= +9.2% x 36.1% x 31.5%) or +$25M impact on total Florida system costs. C. Impact on Medical Benefits The statutory gap described in the Westphal decision only applies to indemnity benefits; reimbursement for medical expenses does not expire under the Florida workers compensation system. Since there is no change to the duration of medical benefits as a result of the Westphal decision, there would be no estimated direct impact on medical costs should the decision be upheld. However, there is the potential for an indirect impact on medical costs as a result of the Westphal decision. As discussed in previous sections, claimants may alter their behavior and attempt to delay reaching MMI in order to continue receiving temporary total benefits. To the extent that the claimants are successfully able to accomplish this delay, this could increase medical costs. Before a claimant reaches MMI, much of the medical care they receive is remedial in nature, meaning that the goal is to treat the underlying cause of the injury and improve the claimant s condition. Once MMI is reached, the bulk of medical care a claimant will receive should be palliative, meaning that the medical treatments will be focused on alleviating symptoms and not necessarily treating the underlying cause. Remedial care costs are generally greater than palliative care costs because of the types of medical treatment used. To the extent that the Westphal decision results in delayed MMI and the period of remedial medical care is extended, medical costs could increase. NCCI expects this medical cost increase would most likely relate to some portion of medical services provided during the healing period in cases of permanent impairment. To estimate the impact on medical costs for permanent impairment claims, we reviewed FDWC data for PIB claims for accidents occurring during 2007 through 2009 that had reached MMI. NCCI assumed that procedures performed at hospitals or ambulatory surgical centers, and procedures involving surgery, anesthesiology, radiology and pathology would not be impacted. It is expected that the remaining medical costs, which represent approximately 20% of medical PIB claim costs, could be impacted as described above. 9 Based on NCCI Workers Compensation Statistical Plan (WCSP) data for Florida policies with effective dates between January 2007 and December Based on NCCI Financial Call data for policy years 2009 and 2010 projected to 7/1/2013. Page 6 of 8

7 The direct impact on the duration of HP benefits for PIB claims estimated in a previous section was +11%. Assuming that 20% of medical PIB claim costs would also increase by 11%, NCCI estimates that the impact of the Westphal decision on medical PIB claim costs would be +2.2% (= +11% x 20%). Since PIB medical costs make up 28.3% 11 of total medical costs and medical costs make up 68.5% 12 of total system costs in Florida, this translates to a +0.4% (= 2.2% x 28.3% x 68.5%) or +$10M impact on total Florida system costs. D. Additional Considerations Highlighted below are a number of additional considerations as a result of the Westphal decision: 1. At the time of this analysis, the Motion for Rehearing en banc (full court) was granted and the case will be reheard before the DCA. As such, this decision could be altered, perhaps materially so, from the current Westphal decision. 2. It is possible the rationale used in the Westphal decision concluding that the temporary total disability duration cap was unconstitutional could be used to find the 260 week TTD duration maximum unconstitutional as well, since the possibility of a claimant falling into the statutory gap is only reduced and not eliminated by the extended duration. NCCI s analysis does not reflect this or any other such future court decision due to the uncertainty of how or even if such findings would occur. 3. There will likely be an increase in litigation following this decision as both employers and claimants seek to gain clarity on any potential ambiguity arising from the Westphal court case. This will result in additional impacts on the workers compensation system other than those outlined in this analysis, such as increased administrative costs, higher insurers loss adjustment expenses (LAE), and likely delays in reaching settlements and the determination of awards to claimants. 4. Due to the sliding scale of claimant attorney fees defined by Florida statutes, the direct impact on these attorney costs from the Westphal decision may be 11 Based on NCCI Workers Compensation Statistical Plan (WCSP) data for Florida policies with effective dates between January 2007 and December Based on NCCI Financial Call data for policy years 2009 and 2010 projected to 7/1/2013. Page 7 of 8

8 slightly less than the impacts provided in this analysis. However, NCCI expects that additional claimant attorney involvement, in conjunction with the direct increase from increased indemnity awards, will increase total claimant attorney fees. As these considerations are offsetting in nature and difficult to quantify, the impacts calculated in this analysis are applied to indemnity benefits in total, which include claimant attorney fees. E. Impact Summary The estimated impacts are summarized in the table below: (1) Impact of Westphal on Temporary Disability Benefit Costs +7.5% (2) (3) (4) (5) (6) (7) Temporary Disability Benefit Costs as a Percentage of Indemnity Benefit Costs in Florida Impact of Temporary Disability Benefit Change on Indemnity Costs in Florida = (1) x (2) Impact of Westphal on Permanent Impairment Benefit Costs Permanent Impairment Benefit Costs as a Percentage of Indemnity Benefit Costs in Florida Impact of Permanent Impairment Benefit Change on Indemnity Costs in Florida = (4) x (5) Impact of Westphal on Indemnity Benefit Costs in Florida= (3) + (6) 49.5% +3.7% +9.2% 36.1% +3.3% +7.0% (8) (9) (10) (11) Indemnity Benefit Costs as a Percentage of Overall Workers Compensation Benefit Costs in Florida Impact of Westphal on Medical Benefit Costs in Florida Medical Benefit Costs as a Percentage of Overall Workers Compensation Benefit Costs in Florida Total Impact on Overall Workers Compensation System Costs in Florida = (7) x (8) + (9) x (10) 31.5% +0.6% 68.5% +2.6% Page 8 of 8