California: Legislature Passes SB 863

The State Legislature passed and forwarded to Governor Brown a historic workers’ compensation benefit increase and reform package on Friday, August 31, 2012 Presumably signing by the Governor is a certainty as the Governor’s office was reportedly closely following SB 863, strongly supported same at the Legislature and provided encouragement to the legislative leadership to complete the package this legislative year.

The package involves several major and many minor workers’ compensation reforms, a substantial increase in permanent disability benefits and brand new indemnity package for more seriously disabled employees More on all this later.

The central agreement in this package involves an increase in permanent partial disability benefits phased in during 2013 and 2014 in return for a series of reforms that are intended to provide result in reduction of litigation costs and hopefully increased predictability in system costs The reforms include substantial alterations of the process for resolving medical disputes, for increased more reliable medical control by employers and much stricter litigation procedures and time frames for lien claims The medical dispute resolution process in Labor Code § 4610 is replaced with an independent medical review (IMR) process which removes the dispute resolution process decision making power from workers’ compensation judges on questions involving medical treatment and put them into the hands of IMR companies contracted by the Administrative Director to address medical necessity issues Additionally there are multiple reforms targeting reduction in litigation and frictional expenses for both medical care and permanent disability The goal is to provide savings through increased medical control, reduction of litigation expenses for both PD and medical disputes in return for the permanent disability benefit increases and a new benefit package, administered by the DWC, for employees whose permanent disability benefits are disproportionately low in comparison to their earnings loss. As expressed in multiple places in the legislative package it is intended to foster the goal of “produce the necessary uniformity, consistency, and objectivity of outcomes, in accordance with the constitutional mandate to accomplish substantial justice at all cases expeditiously, inexpensively and without encumbrance of any character…”

Given the tightness with which some of these provisions are written it seems likely that at least to some extent the Legislature’s goal of reducing litigation and creating a system which is more consistent and uniform (i.e. less complex and less litigious) is likely to be met I say this with some degree of trepidation as many expected exactly that result as a result of SB 899 However it seems clear that many of these provisions are directed at some of the consequences of SB 899 which had outcomes unanticipated by those parties who put together that package.

A full discussion of this bill (160 pages of legislative verbiage) is not possible in a single email message Over the next several days I will provide summaries and comments on the provisions of SB 863 along with comments on the minor provisions of SB 863 along with commentary on the rationale and hopefully the impact the legislative changes are likely to have The first subject I will tackle is the changes that affect Permanent Disability.:

Permanent Disability Benefits:

The permanent disability aspects of SB 863 moved substantially away from the initial proposal for a revamping of the PD rate structure to a modest modification of the existing structure The original proposals for permanent disability would have eliminated not only the FEC modifier (which ended up being eliminated in the final bill) but also the modifier for age in the permanent disability rating schedule In return employees would have received a new permanent disability structure which was substantially more confusing but resulted in significantly higher rates, more weeks of benefits at the lower ranges but fewer weeks at the higher levels of PD For high wage earners the new structure would have been a bonanza of increased permanent disability benefits particularly at the lower rating ranges This was accomplished principally by dramatically increasing the permanent disability rates and including various “kickers” which would be stacked on top of the permanent disability ratings at various levels.

All of that process however was eventually dropped in return for simply increasing partial permanent disability rates initially at a targeted level of 55% and thereafter in 2014 for a full benefit increase across the board Additionally Labor Code § 4660 is being replaced with Labor Code § 4660.1 for injuries occurring on or after January 1, 2013 More on that below.

The permanent disability benefit structure beginning for injuries after 1/1/2013 results in the following changes in benefits:

  • Effective for injuries on or after 1/1/2013:
    • For permanent disability between 1% and 54%, maximum benefits remained at $230.00 per week (These employees get a boost in permanent disability benefits by increased ratings as a result of a change in the Permanent Disability Rating Schedule [PDRS] rather than increase in benefits as will be discussed below.)
    • The Permanent disability rate between 55% and 69% is increased to $270.00 per week.
    • The Permanent disability rate from 70% to 99% is increased from $270.00 per week to $290.00 per week.
  • Effective 1/1/2014 benefit structure is changed to provide for all permanent disability benefits to be paid at a maximum rate of $290.00 per week.
  • Effective 1/1/2013, the minimum rate for PD benefits is raised to $180.00 per week from $130.00 This is effective for all permanent disability ratings regardless of the percentage of partial permanent disability.

In the last draft of SB 863 the provisions of Labor Code § 4658(d) which provided for a 15% bump up (but no 15% reduction in permanent disability which had been removed from earlier versions of the bill) were retained The draft provisions made it easier for employers to make a job offer to employees by triggering the 60‑day timeframe for an offer from date of receipt of a permanent and stationary report which included limitations on activity sufficient to allow the employer to make a job offer.

The 15% bump up provision which has overwhelmingly been provided to employees by employers (compared to the 15% reduction) was jettisoned in its entirety in return for a completely new benefit contained in new Labor Code § 139.48 That section takes the dollars which were targeted for the 15% increase and creates a new fund of 120 million dollars from the non-general funds of the Workers’ Compensation Administration Revolving Fund (contributed to by employers) “for the purpose of making supplemental payments to workers whose permanent disability benefits are disproportionately low in comparison to their earnings loss.”

The section designates Administrative Director to adopt regulations to determine eligibility for payments and the amount of payments based upon findings from studies conducted by the Director in consultation with the Commission on Health Safety and Workers’ Compensation Determinations of the Director shall be subject to the review of the WCAB on the same grounds as prescribed in a petition for reconsideration.

Permanent Disability Rating Schedule:

The PDRS for injuries prior to 1/1/2013 are unaffected by any changes to the labor code and the existing schedule, including the DFEC issues remains in place However for injuries after 1/1/2013, a new Labor Code § 4660.1 will be effective with both obvious and subtle alterations to Permanent Disability ratings.

The language of Labor Code § 4660.1(a) substantially alters the description of PD in a fashion that may have far reaching consequences:

(a) In determining the percentages of permanent partial or permanent total disability, account shall be taken of the nature of the physical injury or disfigurement, the occupation of the injured employee, and his or her age at the time of injury.

Completely missing from this verbiage is the requirement to take into consideration the employee’s diminished future earning capacity or from the 1997 PDRS, diminished ability to compete in the open labor market These two phrases have been the cornerstone of may attacks on the PDRS for purposes of rebuttal tying the PD rating to one of the two standards. In the Court of Appeal decision in Ogilvie, the Court held that a mismatch between the employee’s diminished future earning capacity and the PD rating was the basis for rebuttal This was much the same in the historic LeBeouf v W.C.A.B. decision that allowed consideration of an employee’s diminished ability to compete in the open labor market as the standard for identification of PD While it seem clear the legislature intended to make diminished future earnings a modifier in the PDRS by defining the term, the Courts have had a difficult time separating out the language in paragraph a of Labor Code § 4660 with the prior language.

The new Labor Code defining PD resolves this issue by simply removing language that can be used to provide a basis for rebuttal Without a standard to consider, the PD benefit will become much closer to the language of the Supreme Court in Brodie v W.C.A.B. in its footnote 4:

“Notably, however [t]he percentage level of permanent disability represents only a point on a relative scale.” (1 Hanna, Cal. Law of Employee Injuries and Workers' Compensation (rev. 2d ed. 2007) § 8.02[2], p. 8-6.) Thus, a rating of 50 percent has no real world significance, other than to indicate that the injured worker is more disabled than someone with a 45 percent rating and less disabled than someone with a 55 percent rating.”

Since PD is no longer tied to a consideration outside of the employee’s impairment, age and occupation, it should be difficult to rebut the rating by considerations other than these factors Interestingly 4660.1 also provides specifically that the Legislature does not intend to repeal the holding of Milpitas USD v W.C.A.B. (Guzman) and therefore rebuttal to the WPI in the AMA Guides remains a viable consideration in identifying the WPI standard.

The PDRS to be used after 1/1/2013 retains the age and occupation modifiers of the current schedule but drops the “diminished future earnings capacity” factor entirely Instead of a floating modifier for DFEC, all Standard WPI ratings will receive the same multiplier of 1.4 (the highest FEC adjustment in the 2005 PDRS) The legislation directs the AD to draft a new PDRS but until that is done; we are to use the age and occupation modifiers from the 2005 PDRS A rating string under the new system should look something like this for a 45 year old warehouseman with a low back strain:

15.03.01.00    8% (x1.4)  11 360G  13  14%

The crux of the rating will be in the standard WPI before adjustment.

Labor Code § 4660.1(c)(1) excludes, with some limitations, the ability to obtain increases in “impairment ratings for sleep dysfunction, sexual dysfunction, or psychiatric disorder, or any combination thereof, arising out of a compensable physical injury” Subsection 2 provides exceptions for psychiatric injury where the employee is a victim of a violent act or direct exposure to a significant violent act within the meaning of Section 3208.3. or the result of catastrophic injury, including, but not limited to, loss of a limb, paralysis, severe burn, or severe head injury.

The addition of sleep and sexual dysfunction as additional impairments have become popular add ons to impairment ratings with little or no support for any actual medical condition but simply as a factor of the employee’s description of pain Since pain was limited to a 3% add on, many physicians simply described additional impairment for sleep and sex dysfunctions which were clearly pain related but described separately I have seen some physicians that appear to have the language increasing ratings by 3% for each in their word processor’s standard report format The language on such impairments will no longer be permitted However, presumably for injured workers who have injuries which qualify for a medical diagnosis that includes sleep disorder or sexual dysfunction, there may be ratings for those conditions Spinal injuries with nerve damage can include sexual dysfunction as a component of the neurologic condition for cortispinal tract impairments and it is unclear if the intent of the legislation is to preclude consideration of such impairments which are directly related to the injury as opposed to being considered a consequence However for sleep disorders which arise from conditions such as increased weight gain after an injury would seem to fall into the compensable consequence category and be covered by the exclusion

We will have some sorting out to do on these issues but by and large, the language will prevent simply adding on 3-5 points for each condition because the employee has complaints about being able to sleep or engage in sexual activities.

The psychiatric limitation is much more pervasive as there is a much longer history of compensable psychiatric conditions in WC Sleep and sex dysfunction are a byproduct of the use of the AMA Guides but psychiatric injuries have been with us for a much longer time and have a much longer history in CA workers’ comp. We also already had significant limitations on the ability to claim a psychiatric injury These included requirements for predominant causation, 6 months of employment and exclusions for lawful good faith personnel actions all in Labor Code § 3208.3 and all of which apply to compensable psychiatric injuries With Labor Code § 4660.1(c) we will no longer be concerned with such issues where the claim for psychiatric injury arises from a physical injury.

The section does specifically provide the exclusion affects only the ability to obtain PD and not medical treatment for any of these conditions, a late addition to the legislative scheme undoubtedly intended to keep Labor on board with the elimination of those impairment conditions An employee can still claim injury for these conditions and presumably obtain other benefits such as medical care, TD and even dependency benefits.

An additional significant new section in 4660.1 is subsection (g):

(g) Nothing in this section shall preclude a finding of permanent total disability in accordance with Section 4662.” 

Labor Code § 4662 defines specific conditions as qualifying for permanent total disability regardless of how the condition would be rated under the PDRS With the removal of the language in paragraph (a) that in the past has been used to rebut the PD rating to get to higher levels including Permanent Total, it seems clear that the drafters were concerned the change in that paragraph could have been interpreted to make use of Labor Code § 4662 more difficult It may be that the only viable rebuttal to the actual rating (as opposed to components of the rating) is to fit into Labor Code § 4662.

Commentary:

At first blush it appears that at least for injuries from 1% to 55% there is no change in permanent disability benefits at all effective 1/1/2013 However as noted above there is an alteration in the permanent disability rating schedule which will provide for most employees a slight increase be replacing the floating DFEC modifier with a fixed multiplier at the highest DFEC modifier.

Intense criticism was levied by opponents to SB 863 to the restructuring of permanent disability as originally proposed arguing that lower earning workers did more poorly under the system While it is true that some lower paid workers did more poorly under the system the lowest paid workers (those making less than $240.00 per week) did significantly better with the $50.00 increase in the partial permanent disability minimum rate There were certainly some employees between $240.00 per week and perhaps $400.00 a week who would not have done quite as well but overwhelmingly most employees probably would have done better under the proposed system Nonetheless the drafters of SB 899 were sensitive to this issue in the restricting of the permanent disability and keeping a more conventional format.

However the elimination of the age factor in the rating schedule while likely well intended provided another avenue of attack for the opponents of the legislation An additional round of criticism was levied the removal of the age adjustment discriminated against older workers While certainly older workers who receive a bump up (and the older one becomes the bump up gets more significant) would have done somewhat more poorly under the schedule as far as rating is concerned the proposed never mentioned that younger employees would have done substantially better Younger employees would have not had permanent disability ratings reduced sometimes dramatically if they were under 21 years old As with any such change in the rating schedule, there is going to be give and take Somebody is going to come out better and somebody is going to come out poorer However rather than continue to face that argument the proponents of the bill simply reinserted the age factor and then provided that the Administrative Director is entitled to re‑visit issues involving age and occupation and create a schedule It is certainly possible that the Administrative Director after reviewing some of the studies on age and occupation may decide to modify the schedule by increase by the modifications for occupation and decreasing the modifications for age, or visa versa There was even some consideration with the schedule to be adopted after SB 899 to reversing the impact of age and making younger employees receiving the bump up based on the projections that diminished future earning capacity losses were greater at younger ages Certainly if studies support such a determination, the Administrative Director is empowered to make that modification There is nothing in the schedule that dictates whether ratings increase with age or decrease with age.

However at this point, the only part of the PD system that will even address the effect of injuries on loss of earnings is the new benefit created in Labor Code § 139.48 which is to be administratively handled and will be outside the traditional litigation system in WC Benefits for employees with disability benefits that are disproportionately low compared to their PD will have to seek a remedy with the AD based on a system she will have to put into place The enabling provision also allows appeal of the AD’s determinations to the W.C.A.B. on the same basis as a Petition for Reconsideration so it is entirely possible the applicant’s bar will become actively involved in pursuing claims for this limited fund benefit Defendants however will not be involved in this process as liability will be directly with the State as opposed to the employer, much like claims against the Subsequent Injuries Fund or Asbestos Workers’ Account.

The drafters of SB 863 left intact for injuries prior to 1/1/2013 the provisions of prior rating schedules Therefore there will be no elimination of the diminished future earning capacity litigation for cases in the window period prior to 1/1/2013 where the 2005 permanent disability rating schedule continues to apply (As a side matter given the legislatively-imposed obsolete date for that schedule it seems unlikely that the Administrative Director (given the rather overwhelming set of new rules, regulations, policies and procedures that need to be implemented as a result of 863 is going to spend a great deal of time on amending the 2005 permanent disability rating schedule although the requirement still exists Certainly if enough work has already gone into this work and the schedule making the modifications can be provided without a great deal of additional time and effort it is possible we may see the schedule which was statutorily required to be provided as of 1/1/2010.)

As noted above effective 1/1/2013 the permanent disability rating schedule will not include an FEC factor However all ratings will be multiplied by the maximum FEC factor contained in the 2005 schedule i.e. 1.4 This change results in a 40% increase on the impairment rating derived from the AMA Guides for Evaluation of Permanent Impairment Fifth Edition for all whole person impairment Under the 2005 permanent disability rating schedule the number of cases which received an increase in the whole person impairment based on the 1.4 modifier was very limited The 40% increase in the WPI applied to only psychiatric injuries and hearing loss All other injuries received in lower impairment rating adjustments Therefore common injuries involving spine (1.2714 DFEC multiplier), knees (1.1429) and elbow (1.1429) will receive the larger multiplier resulting in higher ratings

The following are some samples of common ratings with the impact of the new dollar schedule along with the FEC modification factor:

Example 1: Lumbar spine DRE III 12% WPI (assume neutral impact for Occ and Age adjustments for all ratings)

2005 Value:  12% WPI  [5] or 1.2714 = 15% -             $11,615.

2013 Value:  12% WPI x 1.4 = 17% -                           $13,915.00

2014 Value:  12% WPI x 1.4 = 17% -                           $17,545.00

Net increase 2013 $2,300.00: Net increase 2014 $5,930.00

Example 1: Cervical spine DRE IV 27% WPI

2005 Value:  27% WPI x [5] 1.2714 = 34% -                $36,570.00

2013 Value:  27% WPI x 1.4 = 38% -                           $43,010.00

2014 Value:  12% WPI x 1.4 = 38% -                           $54,230.00

Net increase 2013 $6,440.00; Net increase 2014 $17,660.00

Example 3 Knee Injury 10% whole person impairment

2005 Value:  10% x 1.1429 = 11% -                             $7,877.50

2013 Value:  10% x 1.4 = 14% -                                   $10,637.50

2014 Value:  10% x 1.4 = 14% -                                   $13,412.50

Net increase 2013 $2,760.00; Net increase 2014 $5,535.00

As can be seen based on figures for fairly standard ratings (the kind that unrepresented injured workers would receive from panel QMEs or treating physicians) shows there are significant increases in the permanent disability benefits in both 2013 and 2014 The DRE III rating for 2013 represents an increase of just under 20% and in 2014 just over 50% over the 2005 schedule numbers The DRE IV rating increase for 2013 represents a 17.5% increase and in 2014 a 48% increase The rating for a knee injury, which is one of the most complained of impairment ratings under the AMA Guides because of the very low ratings for conditions such as meniscus surgery, knee reconstruction procedures et cetera, results in increases of 35% in 2013 and 70% in 2014.

While not addressing all of the frequently commented upon deficiencies of the AMA Guides for describing whole person impairments, the new structure in SB 863 certainly does increase benefits even without a specific rate increase in 2013 for ratings under 55% On average it appears that spinal injuries are likely to increase for ratings below 55% somewhere in the range of 15% for injuries in 2013 with further increases as the new PD rates go into effect in 2014.

Tomorrow I will cover some of the changes to the medical system including MPN’s IMR and some of the new limitations on claims for medical treatment.

© Copyright 2012 Richard M. Jacobsmeyer. All rights reserved. Reprinted with permission.

Shaw Jacobsmeyer Crain Claffey LLP

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