Title: Chairman, President & CEO, Pacific Compensation Insurance Company
Resume: Mr. Little has more than 40 years of experience in the workers’ comp industry. PacificComp (formerly Employers Direct Insurance Company) is his second start-up in the workers’ comp insurance industry. Little co-founded Pacific Compensation Capital Corporation in 1979, the parent of the first Pacific Compensation Insurance Company, a California workers’ comp insurance company. Pacific Comp was rated A Excellent by A.M. Best after five years of operating history. Fremont Compensation Insurance Group acquired Pacific Comp in 1990. Mr. Little served as president and CEO of Fremont Comp from 1990 until his resignation in June 1998.
Commissions and Boards: Little is a member of the California Business Roundtable, a former chairman of the California Workers’ Compensation Institute, and three-time member of the WCIRB Governing Committee, among other former association and committee memberships. He is also a former gubernatorial appointee to the California Workers’ Compensation Fraud Assessment Commission
Inspirations: Don Marken, the original founder of EBI Company, was a great motivator. Ray Johnson, president and CEO of Republic Indemnity for many years, provided a good example of how to run a successful company.
Favorite Book: Favorite Book: From a business standpoint, his favorite book is Management by Peter Drucker. Little’s favorite quote from that book is “all results are on the outside.”
What are the top three issues in California workers’ comp today?
I think there are four issues: it’s hard to separate them into three. Of the three top issues, the first is Medicare secondary-payer issues. That’s a time bomb that’s getting ready to blow up. Second are the Almaraz/Guzman and Ogilvie cases and how that all evolves—not only currently but as court decisions ultimately resolve fundamental issues regarding permanent disability and the SB 899 reforms. The third issue is the whole lien problem. Shortly after reforms, the lien problem started to moderate itself, likely because of the short-lived filing fee, but it has accelerated again. Last, and it might be surprising for an insurance executive to say this, we think benefit adequacy is a major problem in California workers’ comp. They’re not adequate enough, which drives all this other peculiar behavior… like claiming sleep dysfunction, psychological problems, etc., after the claim for their actual injury has been accepted. These are all done to increase the ultimate award to the worker because the benefit is not adequate for someone who cannot work and needs to support their family. The maximum weekly wages for which PPD benefits are based (not life pension or permanent total) is $345. The most recent statewide calculation of weekly wages is $980 per week. You can see that there appears to be a level of inequity. Two thirds of that $345 is the maximum that someone can earn, depending on their wages before their injury. You can see that, by at least that standard, there is a real deficiency. In part, that could drive these other behaviors, which drive up operating costs and frustrate everybody to no end. As far as the Medicare Secondary Payer Act (MSPA) is concerned, we are already seeing this driving settlement costs higher and causing delays in getting cases closed. In January, mandatory-reporting requirements of claims involving Medicare beneficiaries will start, with potential fines of $1,000 per day per claim being levied if reporting is not accurate. As our working population gets older, this will continue to drive medical severity and add further delays in settlements unless Congress intervenes.
Are we headed for a hard market, and if so, when will it come? How long should we expect it to last? What are the repercussions?
Yes. First, I think we need to differentiate California workers’ comp from the national property and casualty business. Pretty consistently across the nation, in most lines of insurance, it’s a soft market. Most industry observers indicate that this is going to continue for some time. Here in California, if we look at workers’ comp, there are a number of distinguishing factors – the primary of which is that we are seeing the 2003-04 reforms erode, driving up both costs and uncertainty. As far as a hard market, we hope that we don’t have the kind of market that we had in the late 1990s and early 2000s. Currently, underwriting standards are tightening up… We expect that to continue into 2011.
It’s no longer a question of if but when we enter a hard market, so what is in the future of State Compensation Insurance Fund? Will its market share climb back to historic levels? Do you think that further reforms are needed for the governance of State Fund, for example, does it make sense to have Senate confirmation for board members?
We think the State Fund today has demonstrated significant improvement in its governance. We don’t think further intervention by the legislature is needed. We expect that the State Fund will continue to be faithful to its historic mission. If there is a significant shrinking of availability in the California workers’ comp system, then the State Fund will be able to step in and pick up the slack.
Are medical provider networks a help or a hindrance? How should they be improved?
It’s clear that medical provider networks are a critical tool to make sure that evidence-based medicine is delivered to an injured worker on a timely basis. That said, however, both the laws and the regulations need to be reexamined to make these networks simpler for injured workers and for insurers. There has been a lot of dialog as it relates to self-insureds and large employers on how effective medical provider networks are. If you step away and look at the majority of employers who are buying insurance policies, because of the competitive market, it’s going to be difficult to implement these regulatory requirements because… every time employers choose to change workers’ comp carriers they have to go through the process all over again. Especially for small employers, it’s really not cost effective for them to have a significant education process to learn how to deal with complex notice and posting requirements, etc. We think that further review and regulations to make this easier for business and for carriers to use would be very helpful. The concept itself is fantastic and where it’s implemented appropriately it works very well.
How should utilization review be improved?
Prior to the reforms of 2004, workers’ comp had the distinct burden of being the last bastion for fee for service medical treatment reimbursement in California. Since capitated fee arrangements really don’t work for workers’ compensation, the focus on medical cost containment needs to be on utilization review and billing and coding issues. Utilization review in workers’ comp is here to stay. The providers need to be more responsive in order to make the timeframes for approval or modification of requests for authorization work and be more willing to document the medical necessity of their requests. I think claims administrators and networks need to be responsive to what is helpful in utilization review and not waste time and create friction on requests that should not require the utilization review process. It comes to this: the Workers’ Comp Appeals Board needs to enforce utilization review decisions and evidence-based medicine standards from treaters, AMEs and QMEs both in disputed cases and at the lien stage of a claim. Unfortunately that’s not occurring. We can have the best intentioned modifications to the system, but when it gets down to when the rubber hits the road and the judges and QMEs just ignore it we’re not going to get what [utilization review is] used for. One of the biggest cost drivers today are all the new rules and regulations, but unfortunately the Workers’ Comp Appeals Board are not enforcing them; they’re downright ignoring them.
What needs to be done to improve return-to-work?
Right now, the biggest challenge to effective return-to-work programs is the California economy. Prior to 2008 as the economy was booming in this state, most employers were active in providing modified duty and return-to-work because they saw savings and that it was just good business. When people go out on workers’ comp today the job they could come back to may no longer exist. One of the things that could help to improve this is to provide of job placement services similar to those provided by the Department of Rehabilitation. The Department of Rehabilitation tries to send the worker to someone who needs employees not just the employer who employed the worker at the time of injury. For small employers in this economy jobs just don’t exist, especially when it takes years to resolve a workers’ compensation claim. If we had an expansion of some of the existing job placement programs in other areas of the state and federal governments to allow workers to seek out this kind of service when they can’t return to their job because their disabilities are too extensive or the employer doesn’t have the position any more then we could start to improve the outcomes from injuries that occur on the job. The concept of return-to-work has been a core issue of workers’ comp nation-wide for decades. It really kind of goes to the basic job that we have here and we see our responsibility as getting the worker back to the best medical condition possible in order to get back to work. But we don’t create the jobs, we only try to encourage employers to have a strong return-to-work program. No one wins if we wind up with someone who can’t work and they become a member of this long-term disability system.
What do you see, other than medical, as the next big cost driver?
It falls into the category of medical. It’s hard to say there are any other cost drivers as impactful as medical treatment and this is true across the nation and not just workers’ comp either. We see a freight train headed towards the wallets of California employers in Medicare set-asides. If you have someone injured on the job and they are 62 or older or close to that, we have a responsibility now under workers’ comp to fund their existing treatment. When they become medically stationary, we can’t close the claim until we send it to Medicare and they get back to us and let us know how much we have to pay in the life of the worker. This person will be in the Medicare system and we’ll have to pay residuals but it’s not our responsibility. You can’t settle this. You need to pay for their residual injuries up front. That’s a major, major change in the direction of Medicare. Even though these regulations have been around for a decade, it’s only in the last few years that they’ve been enforced. We have huge penalty as part of the reporting requirements effective January 1, 2011 - $1000 per day per claim if we don’t get the information to Medicare that they want. 35% of the population is in the Baby Boomer generation. I think it’s safe to say that 35% of the workforce is in that generation and they are moving to that category that if injured on the job they’re close to Medicare exposure. [In one case, the Medicare request for workers’ comp coverage included an assumption that at age 85 a worker would need his knee, already replaced as part of the workers’ comp claim, replaced again.] These are exposures that have never previously existed in workers’ comp. It doesn’t take a lot of actuarial expertise to figure out what’s going to happen going forward. Another thing that’s happening is that Medicare is finding a lot of old records from sources that they won’t share and going to claims that have been closed for 15-20 years. The person is retired and on Medicare, and they’re finding medical treatment that could be from an old workplace injury. They’re opening up these cases and seeking workers’ comp coverage. That far outweighs any problem we have currently in the California workers’ comp or national workers’ comp system. A lot of people are asleep at the wheel about this issue coming up.
Is it realistic to deal for more cost-cutting reforms in exchange for increasing PD benefits?
No, if the paradigm remains dollar-for-dollar saving. The basic structure of AB 227/SB 228/SB 899 is sound. It’s the administration of the system that has done more to frustrate reforms than any inherent flaw in them. That goes back to my answer about utilization review. The continued urge to score changes prospectively delays much needed permanent disability benefit increases and creates unreasonable expectations of how the system will respond to change. The regulators need to apply the rules and regulations consistently with legislative intent and not just increase permanent disability benefits that drive costs up and leave everything else the same.
Where do you see applicant attorneys focusing litigation in the future?
I think most people agree that until there is clarity on the Almaraz/Guzman and Ogilvie cases, the CAAA will continue as they are currently doing and the workers’ comp judges will abet their efforts. We think there will continue to be add-ons to certain injuries, like sleep disorders and psychological claims. The efforts to insure vocational testimony into the calculation of the diminished future earnings capacity modifier will keep litigation costs unnecessarily high. It’s a wide-open field for applicant attorneys.
Now that the federal health care bill has become law, what impact, if any, do you see that having on workers’ compensation and do you have any concerns?
I think there is an increasing concern that there will be unintended consequences for the workers’ comp system. From our perspective, if you add a significant number of people into the insured system you’re not going to have the same increase in providers. There’s going to be a significant increase in demand for primary care physicians which will make it difficult to get treatment in a timely fashion and difficult to get more claims through to resolution. The second is, as the Division of Workers’ Compensation moves to an RBRVS system for compensating doctors, will cuts to Medicare reimbursement rates kick in and either cause an exodus of providers from workers’ compensation medical treatment or put considerable pressure on claims administrators to renegotiate reimbursement rates at higher levels? If there are fewer doctors it will slow the process down even more. It has the potential to drive up comp costs in the medical arena, but we have to wait and see. On the positive side, this Administration has been committed to reversing the trend of obesity and its attendant health-related problems. If these programs are implemented on national level, we may see a decrease in medical and disability costs, but that’s a long-term objective. The Center for Disease Control and Prevention reports that 30% of California is obese, which is up from 25% 10 years ago and 15% 20 years ago. It’s a national problem as well. What we find in the workers’ comp system is that, on average, when we’re dealing with an injured worker who has an obesity issue, and maybe hypertension and diabetes, the cost of resolving those claims is anywhere between 5 to 7 times more than an injured worker who is not obese. What we see at the federal and state level is a new focus on obesity and lack of exercise, which could have a long-run positive effect on workers’ comp and health care in general.
What is the effect of more than $1 billion in payroll being absorbed by the self-insured groups?
I think the quick answer is we don’t know. If we look at New York where there’s been a massive failure of self-insured groups, leaving the system with somewhere around $350 million of unfunded liabilities. Certainly, if we have that same problem here in California—and there have been some early indicators that we may have—it could be a very large burden on the system and on those employers who remain standing and have joint and several liability for all claims within the group. They may find they have huge exposures to pay for the members who are no longer in business but were participating in the group. With the Contractors Access Program self-insured group, which collapsed recently in California, there was a lot of dialog in the legislature and the insurance industry about what to do with these programs. There’s an increasing concern that there’s a huge exposure that has not been recognized.
Are loss adjustment expenses leveling out or are they still climbing? What is the cause?
Loss adjustment expenses are expressed as a percentage of premium. As premiums drop, that doesn’t mean that loss adjustment expenses drop with them. Recent action by the Department of Insurance taking medical cost containment expenses out of medical loss and into ALAE will affect the loss adjustment expenses numbers but should not be viewed as indicating actual increases in loss adjustment expenses. If you look at the last 5 years’ exposures have not changed, but premiums have dropped. Costs have not gone up, but as a percent of premium, they are increasing.
Is medical severity going to continue to climb or is it just a blip?
We need to remember that claims that are left within the system are much more severe than what we’ve seen in the past. Research strongly indicates a problem with co-morbidities, which increase the severity of claims. Based on reports around the nation, you would be led to believe that it will cost you 5 to 7 times greater than what you would expect because of the effect of non-industrial conditions such as diabetes, hypertension, and obesity. We see in the short term that these conditions will continue to cause costs to increase. If changes being recommended by the Division of Workers’ Compensation are implemented, we should see a leveling out, or potentially a decline, in medical severity because of the implementation of an up to date fee schedule and limiting the costs of implantable hardware – part of the DWC’s 12-point plan to reduce workers’ comp medical costs. That being said, we continue to be concerned about what we view as an overuse of pain medication and the associated costs with administering these drugs. Also you have the Medicare set-asides, which wind up being, which are not lost time, but are future medical treatment, and that’s going to drive it up as well.
Are there any changes to claims frequency?
No, not a perceptible one. But if you look deeper into this, I would guess that there are a lot of workers’ comp injuries that are not really being reported in the system. As employers face all kinds of economic difficulties, not the least of which is workers’ comp, it’s safe to assume that many employers may not report these injuries and try and treat them themselves and depress their costs. We start to see more and more employers dropping out of the workers’ comp system altogether and handling claims on their own. These also don’t get into the frequency calculation. Frequency seems stable but may not accurately reflect what’s going on in the workforce. It may be a manipulation based on under reporting or employers not buying workers’ comp coverage any longer.