Workers’ Compensation Advisory Council October 8, 2003 Minutes

Voting Members: Paul Bailey Wayne Ellefson David Olson Susan Olson for James Cavanaugh Reed Pollack Brad Robinson Gary Thaden Ray Waldron Voting Members Absent: Mike Hickey Voting Members Excused: Stan Daniels Julie Schnell Glen Johnson Non-Voting Members: Representative Dan Dorman Senator Linda Higgins Representative Joe Mullery Non-Voting Members Absent: Senator Geoff Michel Staff: David Berry Scott Brener Debbie Caswell Jim Feckey Beth Hargarten Sandy Keogh Nancy Leppink Cindy Miner Phil Moosbrugger Grace Schwab Omar Syed Jim Vogel Jana Williams Visitors: Craig Anderson; MWCIA Barbara Baum; MNAPTA Ray Bohn; WCRA Colleen Colburn; MN Chiropractic Assn Buzz Cummins; WCRA Dianna Edwards; SEIU 113 Jennifer Dunn; MARP Kevin Gregerson; Wilson-McShane Judy Hawley; MN APTA Mike Johns; RTW Todd Johnson; WCRA Larry Koll; Koll, Morrison, Charpentier & Hagstrom Lousie Montague; MOTA/North Memorial Andy Morrison; Koll, Morrison, Charpentier & Hagstrom David Kunz; MN Chiropractic Assn Tom Lehman; MN Hospital Assn Tammy Lohman; Commerce Mike KcKenna Sandy Olevtel; PNC Robin Peterson; MN APTA Mark Pixuer; Medical Advanced Pain Specialists Jim Sieben; Metro Anesthesia Network Erin Sexton; MN Medical Assn Scott Sexton; Corvelle Marshal Thiel; Medical Advanced Pain Specialists Anna Thomspon

Commissioner Scott Brener called the meeting to order at 9:38 a.m. Roll was called. A quorum was not present on the employee side.

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III. A. Commissioner’s Update Commissioner Scott Brener asked members to review their information on the alternate list in the meeting materials, make any corrections needed and return it to Deb Caswell. The Department of Labor and Industry (DLI) is trying to emphasize the importance of alternates so that a quorum can be assured. Brener noted a variety of stakeholders have asked about the status of the Office of Administrative Hearings (OAH) and whether its timelines have been extended due to some layoffs that took place there last spring. Brener met with then Chief Administrative Law Judge Ken Nickolai about three weeks ago about this issue. According to Nickolai, there are two principal jurisdictional areas; the seven-county metro area and Duluth. The metro and most of the out state runs at traditionally a 12 to 14 month time period. In Duluth they went from three judges, down to one and have since gone back up to two. They also installed some video conferencing equipment in Duluth so they can interact with the Minneapolis judges. Therefore, Nickolai reports they have gone from a traditionally 12 to 14 month track to a 14 to 16 month track. However, with the video conferencing, they expect that time period to be back down to the traditional 12 to 14 month period by February. Although there is a lot of “static” out there, the timelines at OAH have not altered. Brener reported that Ken Nickolai is now serving as the commissioner at the Public Utilities Commission and Bruce Johnson is the Acting Chief Administrative Law Judge. Brener announced the merger of the department’s Investigative Services Unit and the Special Compensation Fund. That merger will take place in the next couple of weeks. DLI hopes this merger will better integrate its fraud services with its Special Compensation Fund activity. III. B. Rate Oversight Commission Craig Anderson, the actuary from the Minnesota Workers’ Compensation Insurers’ Association (MWCIA), presented their 2004 Ratemaking Report. An Executive Summary of this report was in the meeting materials. The report contains average indicated workers’ compensation pure premium base rates from loss experience in Minnesota only. The report was prepared in compliance with Minnesota Statutes § 79.55 and § 79.61and various related regulations. This report was made available on the MWCIA Web site in August. The full report is available in a ring binder, upon request. Anderson gave the background for the ratemaking report. The pure premium base level is an arbitrary level defined by statute and it may, or may not, impact an insurance carrier’s bottom line premium and the prices they quote in the market place. This is because the pure premiums do not include several factors such as reserves for claims still in the system after eight years, changes in claim payment patterns between the time the MWCIA collected the data and the time that rates or prices may be in effect, Minnesota-specific taxes or assessments including the Special Compensation Fund assessment, carrier expenses such as claim adjustment expenses, general expenses and commissions are not included in the MWCIA rates. Anderson reported that the Assigned Risk Plan adjusts the base rates by a factor of 2.2 or they increase its rates by 120 percent to get the filed rate level it produces. He also noted insurance companies utilize a variety of pricing resources to develop their final costs for their employers. The

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insurers employ rate deviations, experience for other merit rate plans, schedule rating plans, retrospective rating plans, premium discount deductibles, dividend plans and other pricing options that are available to various employers. Anderson said the 2004 ratemaking report reflects an overall decrease of 0.3% from the January 1, 2003, pure premium base rates. The MWCIA looked at policy years 2000 and 2001and the two most recent accident years of claims experience and that indication generated a 0.5% decrease. They also did an analysis of the automatic increase in the permanent total minimum benefits and Anderson thinks this went from something around the neighborhood of 456 up to 467 and was an increase of 0.2%. The combination of the 0.5% decrease and the 0.2% increase yielded the 0.3% decrease that was the overall average. Anderson pointed out that the executive summary shows how this has been distributed among the various industry groups. He reported the base rate level has decreased in seven of the last nine years. The pure premium level is about 9% lower than it was prior to the start of competitive rating in 1983, 20 years ago. More importantly, the overall rate level change since 1998 has been fairly stable. It is down a little less than 5% in the last five years and there is a primary reason for this; basically, because the voluntary market’s frequency of claims has been holding fairly steady over the last five years. They saw a significant decrease in case frequency throughout the 1990s but in the last four to five years that has been fairly stable and their rates are much more sensitive to frequency than they are to severity, to the average cost per case. Anderson thinks, barring law changes and holding all other things constant, if case frequency stays fairly stable the rates that they produce at MWCIA are not going to change much either in the short or long term. He said he would be remiss if he did not comment a little bit about case severity and about medical costs, in general, and gave some aggregate statistics. Medical benefits continue to increase at levels that outstrip inflation. The overall Minneapolis-St. Paul medical CPI has increased about 30% in the last six years. However, Minnesota workers’ compensation medical payments have increased 65% over that same time period. Minnesota workers’ compensation medical payments were about $180 million in 1996 and in calendar year 2002 were up around $300 million. That is an increase of about twothirds. Anderson thinks this shows itself in various case reserves as well. These are reserves that the insurance company must set on known cases. Case reserves on the books at the end of 1996 were a little less than $350 million. At the end of 2002, we are closing in on $600 million and are at about $590 million. Again, it is an increase of about two-thirds and those are fairly good indicators of what might cause the carriers to look toward increasing rates, dropping people into the pool or eliminating schedule rating programs or other things like that. Anderson reported the frequency of injuries has leveled off but medical costs continue to be something that the insurance companies will be looking at as they set their prices for premiums. III. C. Workers’ Compensation Reinsurance Association Rates Carl Cummins, president of the Workers’ Compensation Reinsurance Association (WCRA), presented an overview of that organization. He provided information about the rate increases that were approved by their board, then were approved by the commissioner and will go into effect in 2004. Copies of the overheads used during the presentation were in the member’s folders. The presentation consisted of a general overview of what the WCRA is, the 2004 rate increases and the Reinsurance Association of America’s (RAA) interest in the Minnesota workers’ compensation market. All workers’ compensation insurance companies admitted in Minnesota and

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all organizations that are self-insured for workers’ compensation are required by law to buy reinsurance from the WCRA at one of three retention limits determined by statute. A low retention is $360,000, a high retention is $720,000 and a super retention is $1,440,000. Cummins reported that those retention limits are established according to a formula that is in statute so they tend to increase from year to year although they are not changing in 2003 to 2004. Basically, what the WCRA does is pay all the benefits forever if an injury is serious enough to have indemnity and medical benefits that exceed the chosen retention limit. If the WCRA has a very serious accident where multiple employees are involved, the liability could run to $5 million, $10 million, $15 million or $20 million and the WCRA would pay the greater percentage of all those benefits. Cummins explained why we have the WCRA in Minnesota. The WCRA was created a quarter of a century ago when the global commercial reinsurance markets were very hard and reinsurers were reluctant to write workers’ compensation in Minnesota because of the complexity of Minnesota’s workers’ compensation law. The legislature came up with the WCRA in 1979 as an exclusive provider of reinsurance coverage in the State of Minnesota to ensure the availability of commercial reinsurance and to help reduce workers’ compensation costs for Minnesota employers and insurers. The Board of Directors is a mix of people. The commissioner of DLI appoints or approves most of the members of the Board of Directors, approves the WCRA rates, the surplus distributions and changes in the WCRA Plan of Operation. Since 1979, more than 17,000 claims have been filed with the WCRA on behalf of seriously injured workers. More than $450 million in claim dollars has been paid. The WCRA has assets of more than $1 billion, and these assets are invested to meet projected claims payments for injuries that have already occurred. The dollars they collect in premiums this year are intended, along with the investment earnings, to pay all of the claims that might occur this year. WCRA rates have been very stable over the last 10 years. This year, however, for 2004, the WCRA is raising its rates by about 30%. Some of the same factors that drive workers’ compensation costs also affect the WCRA rates. Rising medical costs and increases in life expectancy have driven up the WCRA rates for this year. In addition, last year the WCRA purchased a $50 million terrorism policy at a cost of about $2.5 million a year. Cummins noted that this increase should be put into context with commercial workers’ compensation reinsurance rates. According to insurance industry publications, commercial reinsurers have raised their rates in the last two years by 100% to 2000% while at the same time reducing the coverage they make available. Pollack commented the WCRA’s 30% rate increase is not acceptable. Cummins responded that WCRA members understand the reasons for the increase and recognize that the WCRA continues to be a stable, reliable, reasonably priced reinsurer for Minnesota. Cummins then reported that the RAA would like to either change the WCRA or abolish it and take over its customers in Minnesota. The RAA represents 29 commercial reinsurers, half of which are foreign companies and none of which are based in Minnesota. Every four years the WCRA retains an independent outside actuary to take a look at their reserves. The actuary is to determine whether the WCRA has enough money to meet its long-term obligations and report its findings to the board of directors and the commissioner of Labor and

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Industry. This year they retained Milliman USA, which is a highly respected international actuarial consulting firm. Milliman USA issued a report to the WCRA, which was filed with the Department of Commerce and the Commissioner of Labor and Industry. The report basically said that the WCRA’s reserves are more than adequate. Therefore, Cummins thinks that the RAA is simply wrong when it asserts that the WCRA does not have the ability to do what it is charged with doing. He concluded that the WCRA has been here for a quarter of a century, doing what the legislature intended them to do, which is to ensure the availability of workers’ compensation reinsurance in Minnesota, provide low cost reinsurance to protect Minnesota employers and Minnesota employees, and provide stability for the workers’ compensation system here in the state. Assistant Commissioner Beth Hargarten and Pollock asked Cummins for a clarification about terrorism and whether or not there is language in the terrorism policy that WCRA has purchased that requires a government declaration of a terrorist act. Cummins responded it does not. Hargarten asked if the requirement is part of the federal government insurance but not the insurance policy that WCRA purchased and Cummins said that was correct. He said the definitions are not given in a reinsurance policy and it does cover domestic terrorism, which is not covered at all by the Terrorism Insurance Act. Representative Joe Mullery asked about the reserve and said that a few years ago someone from the Department of Commerce approached him with concerns that their statistics showed the WCRA might not have enough reserves to pay its claims. Cummins responded that the WCRA was set up not to be a traditional insurance company. It was set up to be less expensive. They are taxexempt, non-profit and do not have any marketing and sales expenses so it can operate more cheaply than a commercial insurance company. In addition, the WCRA is not governed by the investment restrictions that insurance companies are operating under. Insurance companies have a statutory discount rate of 4% on their liabilities. The WCRA has a 7% discount rate because it is free to invest over a much longer time frame than most insurance companies. The actual returns have been more than 10% per year over the last 25 years. If it were to be regulated like a regular insurance company, it would have to nearly double its reserves and double or triple its rates to Minnesota insurers and self-insurers. Therefore, with the repeated assurances from the actuaries that have reviewed the WCRA’s reserves, Cummins is very comfortable that the WCRA has sufficient assets the way they are constructed right now. Cummins agreed the WCRA does not have the kind of reserves a traditional insurance company has but noted they are not a traditional insurance company. Mullery asked about the payouts of surplus to the insurers and characterized them as windfalls. He said the legislature tried to get the reimbursement paid back to Minnesota businesses and it was found by Federal Court that the statute would have to be changed. Mullery asked if that was ever corrected so that the “windfalls” would go to Minnesota employers. Cummins responded that what has happened since then is, as a result of the Federal Court decisions in 1994 and 1997, the WCRA developed a formula as to what percentage of surplus payments go to employers and what percentage goes to self-insured employers and insurance companies. As time goes by, an increasing percentage of any future surplus distributions will go directly to employers. Cummins reported that the system is in place now, the previous two commissioners have approved surplus distributions, and it seems to be working reasonably well. III. D. Exemption Discussion Brener stated that the Amish request to be exempt from Minnesota’s workers’ compensation laws is still an unresolved issue and it would help DLI if the Workers’ Compensation Advisory

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Council (WCAC) came to a decision about how it wants this request to be treated. The litigation the department is involved in with the Amish is on hold until the WCAC decides what to do. Brener said Omar Syed from the Attorney General’s office would give an update and clarify where we are at this time. Assistant Commissioner Hargarten and Syed researched how other states have handled this issue. Brener suggested the WCAC try to seek some resolution on this issue. Hargarten referred to her January 30, 2001, memo regarding religious exemptions in Wisconsin, Pennsylvania and Kentucky. This issue arose in early 2000 after DLI’s Investigative Services unit received a complaint, investigated Yoder Construction and found it to be uninsured. Yoder and his employees are Old Order Amish, a religion that prohibits insurance and requires its followers to rely on their own community for aid. The DLI litigated the case before the OAH and Ramsey County District Court, then settled it pending an opportunity for the WCAC to address the issue. Before the WCAC are different options to structure an exemption. Syed presented information about religious exemption provisions from the workers compensation laws from the states of Wisconsin, Pennsylvania, Mississippi, Ohio and Kentucky. Each of those states exempts religious employers or employees whose religious beliefs preclude participation in workers’ compensation. Kentucky and Mississippi have the broadest provisions. Mississippi’s provisions are broader because it does not require forms to be submitted to verify employees’ beliefs. To be exempt in Ohio, an employer submits an affidavit stating that he/she belongs to a religious sect and affidavits from the employees whom he/she intends to exempt. The employees and employer must belong to a sect that existed since December 31, 1950. In Ohio, the state determines whether such employers can provide reasonable wage loss and medical cost benefits for injured employees and whether the sect existed since 1950. Finally, Ohio may remove an exemption if an employee stops adhering to the religious teachings. Pennsylvania only differs in that the employee submits a written waiver of benefits otherwise payable under workers’ compensation. Wisconsin’s law is the most detailed. It allows employees whose religious beliefs preclude insurance to opt into an “alternative benefits system.” An employer must submit affidavits and written waivers that include information similar to that required by other states and the sect’s representative signs an agreement stating that the sect would provide a reasonable standard of living to its members in place of workers’ compensation benefits. The state also conducts a hearing if an exempt employee alleges that he or she did not receive the standard of living owed by the sect. After the hearing, the commissioner decides whether the benefits provided were reasonable. If they were not , the employer must pay those benefits. Syed offered this information to the WCAC for comparison as it decides what to do. Thaden asked what happens in Wisconsin if the commissioner decides the benefits are not adequate. Syed responded that the employer is considered not to have an adequate benefit system and is liable for that employee from that point forward. Thaden asked what fallback exists if the employer goes out of business. Syed said Wisconsin’s law does not default financial responsibility to anyone, but the written agreement signed by the sect provides a clue as to what might happen.

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Paul Bailey referred to Hargarten’s January 30, 2001, memo. He said complaints from competitors are a concern and asked if that remains true. Syed said he did not know. Hargarten reported she spoke to counterparts in Wisconsin a month ago and nothing had changed. She specifically asked them if they had any challenges to their law and they had not. Hargarten did not think Wisconsin has used its hearing process and Wisconsin does not anticipate using it because the affected sects do not believe in seeking help outside their communities. Thaden stated he has concerns that employers such as Yoder are competition. He is also concerned that, even though they take care of their own, people do leave the religion and we need a fallback position if that happens. Mullery asked whether requiring all employees to be members of that sect would violate our Human Rights Act because of religion. Thaden said religion is a “protected class” for human rights purposes. David Olson asked whether there was a DLI staff recommendation. Brener stated there is no per se staff recommendation, but there are two courses of action: DLI can continue the litigation process or the WCAC can draft a legislative recommendation on this issue. Based on Supreme Court decisions, it is unclear whether DLI would prevail in litigation. If it does not prevail, the court will dictate to us how to treat employers such as Yoder. Brener stated that he would prefer to solve the problem rather than have the court tell him what to do. That is ultimately the WCAC’s decision. Thaden is concerned the DLI will lose in court. He moved that the DLI draft language like Wisconsin's, requiring an application by the employer documenting that the employer and employee are members of the same organization that has a long-standing history and that also contains an agreement with the sect, a provision for a hearing, a fallback provision, and a requirement that the department have the ability to revoke the exemption. Discussion followed. Reed Pollack asked whether proposed legislation would impact other insurance coverages, since the Amish would need general liability coverage to build a barn and auto insurance to drive a truck. Pollack suggested the Amish become self-insured for all of their losses, which would keep the WCAC from having to decide. Syed noted that DLI explored self-insurance as a settlement strategy, but Yoder Construction’s employees are opposed to self-insuring or reinsuring through the WCRA. They consider such steps to be insurance in a different form, which still violates their religion. Brener stated the WCAC’s jurisdiction is under Chapter 176 only, so any legislation would focus exclusively on workers' compensation. Wayne Ellefson noted his philosophical problem with requiring a group of people to purchase insurance they will never use. He is also sensitive to the competition issue. Bailey commented that we have “beat this thing to death,” and are opening a big hole because applying this to workers’ compensation will open the door to other areas. Brener said he

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understands that and that the DLI can still take this to court. He does not, however, think the outcome will be favorable, plus we will have no control over it. Brad Robinson asked which constitutional provisions support Yoder’s argument. Syed said that the Minnesota and U. S. Constitutions have “free exercise of religion” clauses permitting persons to freely exercise their religion. The Minnesota Constitution contains a “Liberty of Conscience Clause” that affords greater protection to religion than the U.S. Constitution. Robinson asked what court cases support the Amish position. Syed said Minnesota courts have not considered this precise issue on workers’ compensation, but there are cases in Yoder’s favor and DLI’s favor in both the Minnesota and federal courts. Ray Waldron asked what will happen if the WCAC supports Thaden’s solution. Brener said DLI would then draft something and bring it back for discussion and a decision. David Olson agreed DLI should present a draft for review at the December 10, 2003, WCAC meeting. David Olson made a motion for the department to draft a proposal based on Thaden’s suggestion. Bailey seconded the motion. All voted in favor of the motion. Dan Dorman asked if other states had problems with persons who stepped through the “open door” and sought exemptions from other insurance. Brener said DLI would find out. Susan Olson addressed Dorman’s concern, saying that if the WCAC does not propose legislation, a court decision will create an “open door.” The advantage of addressing something legislatively is that you limit its scope. Anything else must be done legislatively. The courts will not necessarily apply legislation to other areas and say they ought to be the same. III. E. Medical Costs Task Force Update Brenner stated he appointed a Task Force in July to look at medical costs in the workers’ compensation system and that there would be a series of six meetings. They have now held four meetings. The Task Force focused on particular medical issues each day. They will have a wrap up meeting to formulate outlines for a report the department will draft, hopefully, by the December 10, 2003, meeting with at least some fairly detailed information for the WCAC. All the information presented at the meeting is on the department’s Web site at http://www.doli.state.mn.us/medcost.html. The WCAC must now determine how it wants to deal with the medical costs issue legislatively and in the bill for the 2004 session. The legislature asked for the Task Force because medical costs are skyrocketing in Minnesota and all over. Brener noted that in 2003, for the first time in history, we are paying more in medical benefits than indemnity benefits and we need to put in some cost controls on the medical costs benefit side. This issue was addressed fairly in an open forum. He anticipates significant discussion by the WCAC at the next two meetings. Bailey asked what is driving the costs at 35% and Brener said the department could tell him what it is in workers’ compensation. There is an analysis with all that information on the Web site at http://www.doli.state.mn.us/medcost.html. It will clearly demonstrate where those cost drivers are and what is causing them. He noted a lot of time was spent and a lot of data went into these meetings and onto the Web site and the arguments are pretty clear.

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III. F. Legislative Update Brener stated the WCAC’s 2003 legislative bill never passed. The department will have a list for next meeting to work thorough the legislative process as it has in the past. Many of the items on the list are not significant. Brener said the primary base of discussion would be medical cost containment and possibly the Amish situation. David Olson made a motion to adjourned at 11:10 a.m. Thaden seconded the motion. All voted in favor of the motion. Respectfully submitted,

Debbie Caswell Executive Secretary dc/s