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1 Meeting Minutes Date Time Location Staff Contact November 4, :30 AM WCIRB California David M. Bellusci 1221 Broadway, Suite 900 Oakland, CA 1221 Broadway, Suite 900 Oakland, CA Fax Released: November 19, 2015 Members Rose Barrett* Steve Belden* Carolyn Bergh James Gebhard Joanne Ottone Jill Petker Mark Priven Kate Smith Bryan Ware Representing American International Group Meadowbrook Insurance Group Hartford Insurance Company Farmers Insurance Group of Companies Berkshire Hathaway Homestate Companies Liberty Mutual Group Public Members of Governing Committee State Compensation Insurance Fund Employers Insurance Group California Department of Insurance Patricia Hein Giovanni Muzzarelli WCIRB Participants Bill Mudge Tim Basuino David Bellusci Ward Brooks Greg Johnson Tony Milano * Participated via teleconference The meeting of the Actuarial Committee was called to order at 9:30 AM, with Mr. David Bellusci, Chief Actuary, presiding. * * * * * Approval of Minutes The Minutes of the meetings held on August 6, 2015 and September 2, 2015, were distributed to the Committee members in advance of the meeting for review. As there were no corrections to these Minutes, motions were made, seconded and unanimously approved to adopt these Minutes as written. 1

2 Released: November 19, 2015 Notice The information in these Minutes was developed by the Workers Compensation Insurance Rating Bureau of California (WCIRB) for the purpose of assisting the WCIRB Actuarial Committee. The WCIRB cannot make any guarantees if this information is used for any other purpose and the WCIRB shall not be liable for any damages, of any kind, whether direct, indirect, incidental, punitive or consequential, arising from the use of or reliance upon this information for any other purpose Workers Compensation Insurance Rating Bureau of California. All rights reserved. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including, without limitation, photocopying and recording, or by any information storage or retrieval system without the prior written permission of the Workers Compensation Insurance Rating Bureau of California (WCIRB), unless such copying is expressly permitted in this copyright notice or by federal copyright law. No copyright is claimed in the text of statutes and regulations quoted within this work. Each WCIRB member company, including any registered third party entities, (Company) is authorized to reproduce any part of this work solely for the following purposes in connection with the transaction of workers compensation insurance: (1) as necessary in connection with Company s required filings with the California Department of Insurance; (2) to incorporate portions of this work, as necessary, into Company manuals distributed at no charge only to Company employees; and (3) to the extent reasonably necessary for the training of Company personnel. Each Company and all agents and brokers licensed to transact workers compensation insurance in the state of California are authorized to physically reproduce any part of this work for issuance to a prospective or current policyholder upon request at no charge solely for the purpose of transacting workers compensation insurance and for no other purpose. This reproduction right does not include the right to make any part of this work available on any website or on any form of social media. Workers Compensation Insurance Rating Bureau of California, WCIRB, WCIRB California, WCIRB Online, X-Mod Direct, escad and the WCIRB California logo (WCIRB Marks) are registered trademarks or service marks of the WCIRB. WCIRB Marks may not be displayed or used in any manner without the WCIRB s prior written permission. Any permitted copying of this work must maintain any and all trademarks and/or service marks on all copies. To seek permission to use any of the WCIRB Marks or any copyrighted material, please contact the Workers Compensation Insurance Rating Bureau of California at customerservice@wcirb.com. 2

3 Item II Working Group Meeting Summaries The summaries of the Medical Analytics Working Group meeting held on September 29, 2015 and the Actuarial Research Working Group meeting held on October 5, 2015, which were included in the Agenda materials, were accepted by the Committee. 3

4 Item AC SB 863 Cost Monitoring The Committee was reminded that in March of 2013, the WCIRB submitted a comprehensive plan to monitor the emerging cost impact of Senate Bill No. 863 (SB 863). Staff presented information on emerging post-sb 863 costs based on the most current data available. Among the items discussed were the following: 1. The impacts of increases to weekly permanent disability (PD) minimums and maximums for 2013 and 2014 injuries are emerging consistent with initial projections. 2. Data on early 2013 and 2014 PD ratings from the state Disability Evaluation Unit (DEU) showed increases to PD ratings generally comparable to prospective estimates of the SB 863 changes to PD ratings related to the elimination of the future earning capacity (FEC), the addition of a 1.4 adjustment factor to each impairment, and the elimination of PD add-ons. It was noted that changes in average PD ratings for 2013 and 2014 injuries based on unit statistical data showed declines at early report levels. The Committee discussed the differences in the two sources of average PD ratings. Staff noted that inasmuch as unit statistical data typically reflects claims adjuster estimates of PD ratings that may or may not be changed over time in later unit statistical reports compared to the final ratings issued by the DEU, the WCIRB has typically relied more heavily on the DEU data for evaluating changes in average PD rating. 3. Analysis of early 2013 and 2014 ratings from the DEU showed decreases in the prevalence of PD add-ons but suggested that some PD add-ons remain. However, the prevalence of PD add-ons in ratings issued within 15 or 27 months of the injury is very small inasmuch as PD add-ons are typically added to a claim much later. As a result, a retrospective assessment of the impact of the PD add-ons eliminated by SB 863 as well as an assessment of potential increases in other addons could not be made at this time. It was noted that the prevalence of PD add-ons had decreased for the more recently issued PD ratings including those for older accident years. A Committee member suggested looking at the prevalence of dental add-ons in future cost monitoring analyses. 4. The changes to PD related to FEC were estimated to eliminate any increases to PD for the Ogilvie decision and included significant savings to frictional costs resulting from the elimination of Ogilvie. While specific information related to Ogilvie adjustments to PD ratings is not available, average PD ratings from WCIRB unit statistical data, the estimated proportion of claims involving Almaraz/Guzman 1 adjustments based on DEU information, and changes in total indemnity costs per claim did not suggest any significant post-sb 863 increases to average PD ratings beyond what was initially projected by the WCIRB. However, since the implementation of SB 863, average allocated loss adjustment expense (ALAE) costs per claim have not declined and, in fact, have increased significantly, suggesting no savings to ALAE from the elimination of Ogilvie are emerging. 5. Indemnity claim frequency was projected to increase modestly from 2012 to 2014, in part due to SB 863 changes to indemnity benefits. Indemnity claim frequency for accident years 2013 and 2014 was emerging generally consistent with projections. Although indemnity claim frequency did increase significantly in 2012, it had been increasing prior to the enactment of SB 863 in the third quarter of Almaraz v. Environmental Recovery Services/Guzman v. Milpitas Unified School District. 4

5 6. The number of lien filings was initially projected to decrease by approximately 41% as a result of the SB 863 lien filing fee and statute of limitations on lien filings. Although filings in 2013 and 2014 decreased by approximately 60% annually when compared to 2011 levels, the number of liens filed increased significantly in 2015 and are projected to be only 20% lower than 2011 levels. A Committee member noted that some of this increase may be a result of temporary increases in lien filings due to the transition of the statute of limitations on filing liens from three years to eighteen months for dates of service on or after July 1, As a result, the consensus of the Committee was that it is not clear at this time whether the SB 863 lien provisions will produce savings more or less than originally projected. 7. SB 863 s elimination of the duplicate payment for spinal surgical implants was estimated to save approximately $20,000 per procedure, while WCIRB Medical Data Call (MDC) data showed a decrease of over $25,000, or 28%, reduction in the average cost of these procedures since SB 863 s reduction in maximum ambulatory surgical center (ASC) facility fees was estimated to reduce those costs by 25%, which was consistent with the reductions observed based on WCIRB MDC data. In addition, the proportion of post-january 1, 2013 services performed in outpatient hospitals compared to ASCs was consistent with pre-reform levels, suggesting no cost-shifting to outpatient hospitals is occurring. 9. The frequency of independent medical review (IMR) requests through the third quarter of 2015, even after eliminating duplicate and ineligible requests, was far above the levels initially projected. As a result, fees paid for IMRs are expected to increase ALAE costs by more than two times greater than projected. 10. Expedited hearings related to medical treatment disputes were expected to be substantially eliminated by the new IMR process. However, approximately 5,500 more expedited hearings have been held per year since the implementation of SB 863, which has contributed to increased LAE costs. 11. While average unallocated loss adjustment expenses (ULAE) declined from 2012 to 2014, medical-legal costs, utilization review (UR) costs, and litigation costs have continued to emerge at pre-reform levels and average ALAE costs increased significantly through 2014, suggesting the prospectively estimated reductions in frictional costs resulting from IMR and other SB 863 provisions are not materializing. It was noted that after reflecting the most current cost estimate of the impact of SB 863 and projected severity trends, average ULAE costs are emerging significantly lower than projected while average ALAE costs are emerging significantly higher. In total, staff noted that average LAE costs are emerging somewhat higher than projected. 12. Temporary disability (TD) duration was projected to decrease by 5% as a result of SB 863 provisions related to IMR and medical provider networks (MPNs). California Workers Compensation Institute (CWCI) information on average TD duration for accident year 2013 showed an increase of approximately 2% at 12 months and average TD duration for accident year 2012 also showed an increase. However, other measures of TD did not suggest an increase in TD duration. Staff noted that it would review the CWCI s estimate of accident year 2014 TD duration once it became available to assess if any decrease in average TD duration is apparent. 13. Preliminary estimates of MPN usage through 2014 showed that network utilization in 2013 and 2014 is continuing at pre-reform levels. 2 A Committee member asked if the date of service is included in the quarterly lien extracts provided by the Division of Workers Compensation and staff has subsequently confirmed that it is not available. 5

6 14. The changes to convert the physician fee schedule to a Resource-Based Relative Value Scale (RBRVS) basis were estimated to increase physician costs by 2.4% for services provided in 2014 and by 1.6% for services provided in WCIRB MDC data suggested an over 4% decrease in physician payments per claim for the 2014 service year, which was largely being driven by a decline in the number of special services and reports transactions. Preliminary information for the first half of the 2015 service year suggested an increase greater than prospective estimates, which was largely being driven by a greater utilization of physical medicine services. Staff noted that this increase may be offset by a significant decrease in pathology and laboratory services, which was observed in 2015 and is currently under review and therefore was excluded from the information presented at the meeting. The Committee was advised that staff is continuing to investigate this issue and will provide an analysis of the changes in the upcoming cost monitoring report. The Committee then reviewed a preliminary analysis of changes in medical treatment levels after the enactment of SB 863 based on WCIRB MDC data. Among the findings based on medical payments through the first six months of 2015 were the following: 1. Rather than increasing at anywhere near the pre-sb 863 rate of inflation, medical costs per claim have generally declined from the pre-sb 863 levels. 2. The decline in medical costs per claim in 2013 was driven by the reductions in the average cost of procedures as many of the SB 863 reforms impacting the average cost of medical procedures took effect. However, with the implementation of IMR on a broad basis as well as RBRVS in late 2013 through 2014, the continued reduction in medical cost levels was driven by significant reductions in the number of procedures per claim. 3. This pattern was generally consistent for most components of medical treatment. For pharmaceuticals in particular, which had been growing at a double digit annual rate of inflation prior to SB 863, there were significant reductions in the average cost per claim in 2014 and the first half of 2015 driven by significant reductions in the number of pharmaceutical transactions by claim. The Committee was advised that while it is very difficult to attribute changes in medical treatment levels to specific components of SB 863 such as liens, IMR, independent bill review, MPNs, and the new RBRVSbased fee schedule, declines in overall medical severities were observed from 2012 to Staff noted that even after reflecting the most current cost estimates of SB 863 provisions that can be directly assessed and projected medical severity trends, medical severities were emerging approximately 5% to 6% lower than projected for accident years 2013 and After discussion, the consensus of the Committee was that the difference between the projected change in average medical costs after reflecting the updated cost estimates of SB 863 for 2013 and 2014 and what has actually emerged is a reasonable approximation for the overall impact of SB 863 on the utilization of medical services. Staff noted that the approach to reflect these estimates in the Committee s review of on-level medical severity trends will be discussed at future meetings. After discussion, the consensus of the Committee was that the 2015 retrospective cost evaluation of SB 863 as discussed at the meeting should be finalized and released as soon as practical. (The 2015 Cost Monitoring Report was released on November 16, 2015.) 6

7 Item AC /30/2015 Experience Review of Methodologies Discussion of this item was deferred to the Committee s next meeting, scheduled for December 7,

8 The meeting was adjourned at 12:00 PM. Note to Committee Members: These Minutes, as written, have not been approved. Please refer to the meeting scheduled for December 7, 2015 for approval and/or modification. 8