A Review of the Current Problems in California's Workers' Compensation System

-15- A review of the Bureau's operations and records indicates that there are no firm written guidelines or criteria for determining which potential fraud cases should be investigated. This process has resulted in only 17 cases being opened for investigation out of the 160 cases reported. As of January 14, 1988, only three cases remain open and one case has been prosecuted. The single case being prosecuted began preliminary hearing on January 14, 1988. According to personnel of the Fraud Bureau, the quality of evidence provided by both the insurance carriers and the self-insured employers is very poor, which makes a subsequent investigation very difficult. However, insurers have stated that the Fraud Bureau has discouraged the filing of workers' compensation fraud cases due to the Bureau's lack of resources and reluctance to prosecute such cases. Most carriers and self-insured employers do not maintain staff primarily responsible for fraud detection nor do they train their workers' compensation personnel to detect fraud. The insurers' important determinations are whether the claim justifies payment and, if so, what amount of payment is due. If the claim is denied, further investigation does not appear to be encouraged. In addition, many insurance companies keep only the necessary data to process the claims. Information concerning past claims, doctors, attorneys, types of claims and other date useful for determining fraud are not generally maintained. This situation, combined with carriers' concerns about bad faith lawsuits should they report a potential fraud, and the discouraging reception given workers' compensation fraud cases previously submitted, has probably limited the number of fraud cases reported to the Fraud Bureau. Further, in some counties, the District Attorney's fraud investigative unit will not take a case that is under a given dollar amount, or will not prosecute a case because they believe that other legal remedies exist. Since most workers' compensation fraud would tend to be in smaller dollar amounts, this limits the possibility of prosecuting the individual. According to Fraud Bureau personnel, workers' compensation cases are the least popular type of insurance case with both the District Attorneys and the investigators of the Bureau. A review of the closed case files of the Fraud Bureau provide a range of examples of case closures. In one case, the county District Attorney refused to prosecute a case referred by the Bureau because "adequate civil remedies" existed. In another case, a Workers' Compensation Judge in a case decision stated that, "this is one of the clearest cases of fraud and perjury that has been presented to this trier of fact in many years." At the hearing, the carrier had introduced as evidence undercover films of the alleged blind injured worker loading a truck with building materials and then driving the truck. The case was referred directly to the local District Attorney, who referred it to the Fraud Bureau. After review and preliminary investigation by the Bureau, the case was closed with the statements that "case would require a significant investment of time to determine worthiness for prosecution" and "Bureau has several cases more deserving of investigative hours than this one." -20- Increased Litigation Uncertainty regarding an injured worker's right to compensation has also led to increased litigation. The insured employer generally relies on the insurance carrier to provide information to the employee and is, therefore, not always responsive to the employee's questions. The CWCI in 1974 commissioned a study of employees who had filed an Application for Adjudication of Claim. This application is the first point at which an applicant's attorney becomes formally involved in the process. The research organization found that 73 percent of the employees had negative feelings about the employer's responsiveness to their questions. In addition, 80 percent were referred to an attorney by their union. More than 90 percent of the employees in the study sought legal assistance because of their unfamiliarity with workers' compensation law and claims procedurei4 and felt that settlement would be too difficult without an attorney. This uncertainty, together with the open advertising of the legal profession found in various media, leads the employee to seek legal advice at no risk to himself. As employees become more aware of injuries that may be compensated under the law, there is a greater tendency to consider filing an application for benefits. The adjudication process is also delayed by increasing caseloads within the Workers' Compensation Appeals Board (WCAB) system. In 1970, the WCAB had approximately 69,000 cases filed. The WCAB has 105 hearing officers, and it took an average of 3.5 weeks to bring a case to hearing. In 1986, approximately 186,000 cases were filed, with 130 hearing officer positions established to review them. The minimum average time needed to schedule a case now varies from seven weeks to ~re than a year, based upon the individual appeals office's operations. These delays may be caused by several factors. The number of judges has not proportionally kept pace with the number of cases filed, nor has the administrative structure of the WCAB been significantly updated. Although there exists a uniform procedures manual for judges, system administration is still carried out by the presiding judges of each of the regional offices. These presiding judges in effect set the workload and administration standards, while at the same time hearing cases themselves. No central court administration or administrator exists, although the WCAB in 1986 had a civil court caseload larger than any of the State's superior court systems, with the exception of Los Angeles. Much of the WCAB's workload also consists of approval of case compromises worked out by the various parties prior to hearing. Approximately 80 14''Litigation in Workers' Compensation - A Report to the Industry," California's Workers' Compensation Institute. 15Senate Rules Committee Hearing, August 26, 1987-Confirmation Hearing of Barry Carmody, Administrative Director, Division of Industrial Accidents. -21- percent of 1tses filed are settled by a Compromise and Release (C&R) prior to hearing. The various judges will routinely review and certify such C&Rs as a part of their workload, rather than having a central office, or designated judges in each office. for such a duty. FINDING #4 - EMPLOYERS WHO DO NOT REPORT ACCURATE WAGES TO INSURANCE CARRIERS EFFECTIVELY RAISE PREMIUMS RATES FOR OTHER EMPLOYERS Some employers successfully reduce their premium payments by either not reporting all wages to their insurance carrier or by inappropriately classifying employees to get the benefit of reduced rates. These employers force other employers to carry a heavier burden of the losses through increased rates. While the extent of such inaccurate reporting is not known, no central organization is focusing significant attention on locating and penalizing employers who do not accurately report wages or inappropriately classify employees. Limited information is available regarding the incorrect reporting or lack of reporting of payroll by employers. Carriers and the WCIRB both believe that the practice of not reporting all payroll or misclassifying personnel to obtain lower premiums is somewhat widespread. An employer may pay an employee in cash and not report a portion of that employee's wages to the carrier. Since premiums are based on total wages payable, the employer can reduce the premium through the lower-than-actual reported payroll. Another way for employers to inappropriately reduce their premium is to classify employees working in higher rated jobs to lower rated job categories. The employee's chance of being injured remains higher and the carrier is obligated to compensate any injury. Some employers looking for ways to reduce their expenses do not fully report their entire payroll thereby avoiding the employer's cost for social security, disability insurance and workers' compensation insurance. These employers are difficult to locate since they may be reporting sufficient amounts of payroll to reduce their overall expense. In addition, carriers do not normally maintain large audit staffs to seek out employers avoiding the appropriate premium. One indication of the impact of uninsured employers is the number of claims made by inj ured workers to the State's Uninsured Employers Fund. These claims are filed by workers whose employers have no workers' compensation insurance coverage. The fund, administered by DIA, extends needed benefits and then attempts to recover costs from the employer. Exhibit 111.3 shows the changes for this Fund over the last several years. 16California Workers' Compensation Institute, Bulletin, June 3, 1987. -- -22- EXHIBIT III. 3 CASELOAD AND BENEFITS PAID UNINSURED EMPLOYERS FUND Average Fiscal Year Cases Opened Cases Closed 0Een Case load Claims Paid 1981/82 1,809 1,412 4,366 $ 4.8 million 1982/83 1,406 1,125 4,935 $ 6.4 million 1983/84 2,392 1,587 5,415 $ 6.9 million 1984/85 3,196 3,193 5,123 $ 8.0 million 1985/86 2,678 1,274 6,160 $ 8.9 million 1986/87 2,996 2,473 7,201 $10.1 million Source: Department of Industrial Relations; Division of Industrial Accidents Exhibit III. 3 shows that during the period from fiscal year 1981/82 to 1986/87, the number of new cases opened increased from 1,809 to 2,996, an increase of 65.6 percent. The benefits paid for the same period increased from $4.8 million to $10.1 million, an increase of 110 percent. Underreporting of payroll by some employers drives up the premium rates for all other employers. The total cost of all compensation payments used to derive the premiums must be allocated over the total reported payroll for all employers of that category. This results in higher premiums than would be necessary if all payroll was reported by all employers. The total effect on premiums cannot currently be ascertained because information is not available on the total amount of unreported payroll. In addition, classifying employees in an inappropriate job category will distort the premiums in those categories thereby also forcing other employers to bear the premium load for other employers. FINDING #5 - THE ESCALATING USE OF EMPLOYER LIABILITY INSURANCE HAS SIGNIFICANTLY RAISED THE COSTS OF EMPLOYERS AND CARRIERS The California workers' compensation system has authorized carriers to provide employer liability coverage since its inception in the early 1900s. Prior to 1979, claims made under the employers' liability portion of the workers' compensation policy have been extremely rare. However, since 1979 there has been a dramatic rise in the number of civil suits by employees against their employers. The increased number of civil suits in this area have raised the costs for employers and carriers and have caused some carriers to modify their employer liability coverage. The workers' compensation system in California was designed to be the exclusive remedy for work-related injuries. When the system was -23- established from 1913 to 1916, the Legislature also authorized carriers to offer companion employer liability coverage, the "part B" of workers Y compensation policies, to cover any potential liability not anticipated in the basic policy. For more than 60 years, claims made under the employer's liability portion of a workers' compensation policy were extremely rare. As intended, work-related injuries were covered by the primary portion of the workers' compensation policy. Since 1979 there has been a dramatic rise in the number of civil suits by employees against their employers. Employees and their attorneys are currently successfully using the employer liability section of the workers' compensation coverage to file personal grievances and termination injury claims. One carrier, the State Compensation Insurance Fund, stated in testimony at the Commission's August 1987 public hearing that it currently has 300 open employer liability claims, and is receiving new claims for benefits under the employer's liability sections of policies at the rate of 30 to 40 per month, twice the rate of past years. More than $1 million in defense costs have been incurred, and SCIF estimates future liability at $8.7 million. Since the premium rates are established using cost and frequency data from the past, when such claims were very infrequent or nonexistent, the effects of these claims are only now beginning to be felt by the employers. However, the limited number of claims that have been filed indicate an escalation in defense costs. Exhibit 111.4 shows the results of 440 open employer's liability cases reported to CWCI in a 1985 survey. EXHIBIT II!. 4 EMPLOYER'S LIABILITY CLAIMS REPORTED CALENDAR YEAR 1985 Number Average of Incurred Claim Type Claims Percent Loss Wrongful Termination 204 46 $ 18,512 Discrimination 64 15 23,049 Power Press 26 6 61,919 Dual Capacity 47 11 49,628 Other 99 22 56,303 Total 440 - 100 $ 33,512 Source: California Workers' Compensation Institute Average Incurred Expense $ 8,402 10,901 4,509 5,072 9,923 $ 8,524 . Exhibit 111.4 shows that 268 of the 440 employer's liability claims reported in 1985, or 61 percent, alleged wrongful termination or discrimination. These types of cases were virtually nonexistent in 1979. -24- During the same period of time, insurance carriers reported that 85 cases were closed with a~7average incurred loss of $16,941 and average incurred expenses of $3,643. Workers' compensation was intended to be an exclusive remedy for the injured employee. Work-related injuries logically should be subject to a single source of remedy. In 1982, an exception to the exclusive remedy allowed workers injured by a power press to sue the employer for civil damages. This set a precedent for other potential employment law damage suits. These expanding areas of civil liability coexisting with workers' compensation have prompted insurance companies to support legislative repeal of the "power press" exception. Insurance companies are taking different approaches to handling the issue. Some are specifically excluding coverage for wrongful termination from new policies. Others are determining that these cases fall under workers' compensation and are not using the employer liability coverage. The State Fund has responded by establishing an employer's liability claims unit to handle the processing requirements generated. To date, there is a lack of clarity in this area by the courts or the regulatory agencies. FINDING #6 - THE INCREASE IN SUBJECTIVE CLAIMS FOR PSYCHOLOGICAL DISABILITY HAS HAD A NEGATIVE IMPACT ON THE WORKERS' COMPENSATION SYSTEM During the period from 1980 to 1986, claims for mental stress injuries increased by 531 percent. Such claims, because of their subjective nature, result in more frequent litigation. Claims alleging mental stress or psychiatric injury comprised less than two percent of all injury claims filed in 1986, but accounted for more than seven percent of all claims litigated. Such litigation drives up administrative costs, increases administrative hearing backlogs and further delays payment of benefits to injured workers. California is almost unique in its treatment of claims based upon job-related stress. All work is to some degree stressful. Such stress may occur in a variety of forms and may be handled differently by different people. During the last five to eight years, an increasing number of claims for job-related stress have been filed in California. These claims are often based on the concept that stress like some physical injuries, can be cumulative, and that such stress need only be perceived by the worker in order to be disabling and compensible. This interlocking set of doctrines, i.e., the concept of cumulative psychiatric injury and the compensability of subjectively perceived stress, has evolved in civil case law in California during the last 10 years. Perhaps the best statement on the evolution of case law regarding psychiatric injury was presented by Bertram Cohen of the WCAB before the Senate Industrial Relations Committee in December 1987 (See Appendix I). Judge Cohen traced the evolution of case 17California Workers' Compensation Institute, "Employers Liability Survey," October 1985. -25- law in this area, and also pointed out some of the adverse effects, including the increased litigation accompanying such claims. Mental stress claims have two immediate adverse impacts on the workers' compensation system: they excessively put employers and workers against each other over subjective criteria of disability; and they are beginning to create backlogs in up the adjudication process. Because the "perception of disabling stress" is sufficient to file a claim for benefits, such subjective claims are seen by employers as a method marginal workers can and will use to claim benefits rather than working. Workers who file such claims, whether legitimate or not, will often have such claims denied, angering the worker and causing him or her to file a claim through the WCAB. Alternatively, the worker may file the WCAB application first, then notify the employers. This claim, because of the subjective standards currently used to judge "injury" is usually settled only with difficulty and bitterness on both sides. A recent draft study of mental stress claims by CWCI provides information on the growing extent of the problem. Between 1980 and 1986, mental stress claims grew from a total of 1282 to 6812, an increase of 531 percent. Seventy-five percent of all stress claims cite "job pressures" as the major stresser, with 90 percent of the stress cited being cumulative. Psychiatric injuries in 1986 comprised only 1. 7 percent of all claims filed, but 7.3 percent of all claims litigated. The insurer is first notified of a stress claim by notice of an application for adjudication filed with the WCAB in 84 percent of the cases studied. Several remedies have been proposed to deal with aspects of this problem. Several pieces of current legislation attempt to remove specified stress claims arising out of disciplinary actions or company or industry-wide changes from compensable status in the workers' compensation system. This concept is opposed by labor organizations who consider such a measure to be a limitation of legal benefits. Problems of legal jurisdiction also arise, since such claims, if blocked, may flood into the tort arena, further overburdening the already overburdened courts and possibly opening employers and insurance carriers to even greater liability. Another recent administrative measure by DIA attempts to reduce the subjectivity of medical evaluations of stress claims. The DIA in mid-19B7 established protocols and procedures for physicians to use when evaluating psychological disability claims. These protocols will hopefully make conflicting medical opinions more definitive, by specifying minimum criteria for evaluation. FINDING #7 - THE EFFECTIVENESS OF THE USE OF VOCATIONAL REHABILITATION TRAINING IN CALIFORNIA HAS NOT BEEN EVALUATED Vocational rehabilitation benefits were established by law beginning in 1975. The statutory provisions give injured workers vocational rehabilitation training and temporary disability benefits while in rehabilitation. The specifics of this benefit are provided by administrative regulations and judicial interpretations. The benefit is a relatively small but growing part of the workers' compensation benefit structure. Vocational rehabilitation costs have grown from a total of two -26- percent of all benefit costs in 1976 to approximately 15 percent of benefit costs i~8l986. The annual cost growth rate from 1980 to 1984 was 41 percent. Although vocational rehabilitation training has been shown to be cost-effective when it is used appropriately, the effectiveness of California's administration of vocational rehabilitation training has not yet been evaluated. Exhibit 111.5 shows the cost to one carrier--the State Compensation Insurance Fund--of the various types of vocational rehabilitation: Plan Type EXHIBIT III. 5 AVERAGE COST PER PLAN TYPE Calendar Year 1985 Modified Job, Same Employer Modified Job, New Employer Alternative Work, Same Employer Direct Job Placement On-the-Job Training, New Employer Formal Schooling Schooling and On-the-Job Training Self-Employment Source: State Compensation Insurance Fund Average Cost $ 3,868 1,733 4,650 9,696 14,031 18,873 17,344 20,545 While some studies have been prepared showing the cost of vocational rehabilitation, to date, there has not been a formal assessment of the effectiveness of the benefits to the injured workers. As the above table demonstrates, the cost of the different types of rehabilitation plan vary greatly. Whether the benefit of the plan types also vary has not yet been determined. The California Worker's Compensation Institute, in conjunction with the Division of Industrial Accidents and other agencies, is currently conducting a major study of the long-term effects of vocational rehabilitation programs. The study is due to be completed in April 1988, and should provide important information to assess the impact of California's administration of vocational rehabilitation training. The Rehabilitation President's Council of California, an association of rehabilitation providers, is also completing a study of the State's rehabilitation programs, due to be released in March 1988. The rapid rise in costs for vocational rehabilitation is due in large part to the increased awareness of the injured workers of the availability of the benefit. In addition, judicial interpretations have been very 18 Workers' Compensation Insurance Rating Bureau, "Report on Vocational Rehabilitation" March 1987. -27- favorable tb the injured employee in allowing them to determine their method of rehabilitation. There are also short-term economic benefits to the injured workers in enrolling in a vocational rehabilitation program. The basic benefit provided to the injured employee may be as low as $140 per week. If an injured employee qualifies for vocational rehabilitation, the injured employee's basic benefit level increases to $224 per week. Without a review of the effects of the dfffering types of vocational rehabilitation, the injured worker may not be getting the best benefit possible to insure future compensation. In addition, the carriers and employers may be unknowingly paying for training that is not cost-effective. FINDING #8 - OPPORTUNITIES EXIST TO BETTER CONTROL THE COST OF VOCATIONAL REHABILITATION PROGRAMS One of the major factors which increase the cost of California's vocational rehabilitation program is the delay and disruption in commencing and completing such plans by qualified workers. Employers, insurance carriers and injured workers each have minimal incentives to promptly commence and complete rehabilitation programs. Although systems may differ, other states have taken measures to track and control vocational rehabilitation costs and results. Such measures may be applicable to California's program. The prompt beginning and completion of a vocational rehabilitation plan by a qualified injured worker is a major component in both returning workers to employment, as well as limiting program costs. According to a CWCI study completed in 1986, nearly half of the total cost of vocational rehabilitation case costs consists of the temporary {\.Ji.sability benefits paid while the plan is being developed and implemented. Referral to a rehabilitation program is mandatory as soon as it is known that a worker cannot return to his or her original job, or at 180 days after being disabled. Mandatory referral can be delayed beyond the l80-day period if the injured worker has not yet been determined to be medically stable, Le., permanent and stationary, and so potentially eligible for benefits. There are currently no requirements or incentives for workers to begin vocational rehabilitation programs promptly, and there are, in fact, disincentives in some cases. Workers in the midst of litigation over the amount or extent of permanent disability compensation may find it more advantageous to delay vocational rehabilitation until the litigation is completed. The basic incentive of employers and insurers is to provide legally mandated rehabilitation services at the lowest possible cost. If such costs can be delayed or reduced through the litigation process, there is little incentives to commence plans on the part of employer or insurer. 19California Workers' Compensation Institute, Research Notes, Vocational Rehabilitation: 1985 Costs and Results, November 1985. -28- The February 1986 draft staff report by the Legislature's Joint Study Committee on Workers' Compensation recognized this dilemma, and recommended that eligible workers "should have an obligation to commence vocational rehabilitation as soon as the possible need for these services is identified." This recommendation is similar to the prompt commencement requirement in force in the State of Michigan and which was cited in a recent study of proprietary sector vocational rehabilitation programs done for the U.S. Department of Education by Berkeley Planning Associates. Selection of vocational rehabilitation providers and periodic monitoring of progress is also vital for successful program completion and cost control. Currently, rehabilitation plans are developed by individual rehabilitation counselors or firms under contract to the carrier or self-insured employer. These plans are reviewed and approved by the Rehabilitation Bureau of the DIA; however, there is no regulation of the counselor or firm. Such regulation, or at least registration along with associated information on the qualifications, experience and prior performance of the counselor or firm, would be useful to insurers, employers and workers in selecting a competent. Similar systems are in use in other states; New York's voluntary system refers eligible workers to either the State Office of Vocational Rehabilitation or a screened group of non-profit vocational rehabilitation programs. Michigan's mandatory system also gathers data and tracks the performance of various vocational rehabilitation counselors and firms. Michigan also requires the service provider to submit progress reports periodically so that progress can be assessed in comparison with state guidelines. One other cost control idea which has been used in several states is a limitation on the length of time vocational rehabilitation services may be provided. Such an idea was considered in the February 1986 draft staff report of the Joint Study Committee on Workers' Compensation. Michigan's mandatory vocational rehabilitation programs have a similar provision, with retraining limited to a total of 52 weeks, with an additional 52 weeks possible by order of the State Director after an administrative review. -29- IV. CONCLUSIONS AND RECOMMENDATIONS This section presents the conclusions and recommendations of the Commission's review of selected areas of concern in the California workers' compensation system. CONCLUSIONS California has the largest workers' compensation system in the United States. The amount of direct written premiums has increased from $2.9 billion in 1982 to $5.3 billion in 1986, an increase of 83 percent. Although the amount of direct written premiums is significant, the weekly benefits paid out to injured workers in California are among the lowest for urban industrialized states. The cost of California's workers' compensation system has also increased rapidly in recent years, from $1.2 billion in 1980 to $2.3 billion in 1984. These increased costs reflect an increase in the number of persons in the workforce and a rise in the cost of claims. It is not due to an increase in the rate of claims being filed, because such claims have actually declined from an average of 39.17 per 1,000 workers in 1979 to 35.89 in 1986, a decrease of 8.4 percent. While it is difficult to make direct comparisons between workers' compensation costs and benefits in different states, several recent studies indicate that in certain categories California's premium rates for coverage are among the highest in the country. Moreover, California's premium rates have been increasing faster than those in other states. The high cost of workers' compensation insurance coverage in California have had a negative impact on the perception of the State's business climate. The State of California and private insurers are not actively encouraging the investigation and prosecution of cases of fraud and abuse in the workers' compensation system. Private insurers have referred only 160 cases of suspected fraud and abuse in the workers' compensation system to the Fraud and Abuse Bureau of the Department of Insurance during the last eight years. Only 17 of these cases have been opened for investigation by the Department and only one of these cases has been prosecuted. The delays in payments in injured workers combined with the increased forensic medical costs and litigation costs have dramatically increased the administrative overhead costs of delivering workers' compensation benefits. In 1986 it cost 52 cents in direct overhead to delivery one dollar in benefits as compared to 32 cents 10 years ago. The escalating use of employer liability insurance has significantly raised the costs of workers' compensation insurance in California. Since 1979, when the first civil suit was filed under the employers' liability section of a workers' compensation policy, employees have been successfully using this section of workers' compensation coverage to file personal grievances and termination injury claims. The increase in subjective claims for psychological disability also has had a negative impact on the workers' compensation system. Between 1980 and -30- 1986, the number of mental stress claims grew from a total of 1,282 to 6,812, an increase of 531 percent. Such claims, because of their subjective nature, result more frequently in litigation and highest costs. While these claims filed in 1986, they accounted for more than seven percent of all claims litigated. The effectiveness of vocational rehabilitation in California has not been evaluated. These benefits were established by law in 1975 and they represented 15 percent of benefit costs in 1986. Al though vocational rehabilitation has been shown to be cost-effective when it is used appropriately, the effectiveness of California's administration of vocation rehabilitation training has not been evaluated. One of the major factors that increases the cost of California's vocational rehabilitation program is the delay and disruption in commencing and completing vocational rehabilitation plans. Currently, there are minimal incentives for employees, insurance carriers and injured workers to promptly commence and complete rehabilitation programs. Other states have taken more stringent measures to track and control vocational rehabilitation activities and costs which may be useful in California. RECOMMENDATION S The Commission believes that the following actions should be taken to address the problems that the Commission identified in the State of California's workers' compensation system and to control the rising costs of those benefits: 1. The Department of Insurance Fraud Bureau should establish, written criteria for opening and closing workers' compensation fraud and abuse cases. In addition, the Department should encourage carriers to report potential fraud and abuse and should itself actively prosecute such cases. or cause them to be prosecuted. 2. The Governor's Multi-Agency Task Force on the Underground Economy should specifically establish a method to identify employers who intentionally fail to report wages or misclassify employees, in order to reduce workers' compensation premiums. 3. The Insurance Commissioner and the Workers' Compensation Insurance Rating Bureau should establish a policy and method to identify employers who change business or corporate identities in order to avoid being properly rated based upon prior claims experience. 4. The current allowable vocational rehabilitation services should be modified by the Legislature based upon the evaluation of results of the study currently being performed by the Division of Industrial Accidents in cooperation with the California Workers' Compensation Institute and other studies of the long-term effectiveness and control of vocational rehabilitation programs. Specifically, there should be uniform standards for vocational rehabilitation programs. -31- 5. The Governor and the Legislature should provide the Division of Industrial Accidents with the authority to identify insurance carriers for audits based on poor performance, including untimely payment of benefits, and to specify the necessary audit procedures. The Department of Insurance should be required to report to the Division of Industrial Accidents the results of those audits. 6. The Department of Insurance should require the Workers' Compensation Insurance Rating Bureau to collect information on the carrier's employer liability policy sections and to recommend a standardization of policies. The Department of Insurance should use this information to establish industry standards and actuarially determine if a premium is needed for this section and its specific coverages. In addition, the information on each carrier's policies should be provided to the public. 7. The Department of Industrial Relations should consider the use of professional court administrators to assess and manage the ongoing administrative systems and calendars of the Workers' Compensation Appeals Board Offices. 8. As an interim measure, the Department of Industrial Relations should consider assigning Motions and Settlements Judges to review only Compromise and Release agreements as a method of expediting the adjudication process. 9. The Governor and the Legislature should enact legislation to require a single and final "agreed upon third party" medical report when the results of two previous reports do not provide agreement on the nature or extent of injury to the worker. 10. The Governor and the Legislature should enact legislation to repeal the "power press" exception to general workers' compensation coverage. 11. The Department of Industrial Relations should examine the impact of recently implemented regulatory examination protocols on the evaluation of claims for psychological and stress-related injuries. If the results of this review indicate that minimum standardized examination procedures are of value in assessing 1nJury, the Department should work to establish examination protocols for other injuries not covered by current protocols. 12. The Governor and the Legislature should consider adopting legislation to clarify and strengthen the Insurance Commissioner's and Director of Industrial Relations' powers to assess penalties upon carriers and self-insured employers for delaying payment to the injured employee as an incentive to reduce litigation. 13. The Governor and the Legislature should consider requiring employers to provide employees with a thorough description of the full spectrum of benefits available through the workers' compensation insurance program when an employee is hired. -32- A P PEN D I X WORKERS' COMPENSATION PSYCHIA TRlC CLAIMS IN CALIFORNIA Address to the Senate Industrial Relations Committee, 12/2/87 Bertram Cohen, Workers' Compensation Judge A BRIEF HISTORY The concept of adverse emotional consequences, that 1s, psychiatric disability, arising in an industrial context is as old as the California workers' compensation system itself. Our system dates back to 1912, and beginning with the very first year after creation of the system the Industrial Accident Commission was called upon to consider allegations of post-traumatic emotional disability. In a couple of cases in the very early years the lAC displayed considerable skepticism when confronted with the idea that for psychiatric reasons a worker not otherwise organically impaired should be entitled to compensation, expressing the opinion that such mentally-based illnesses were virtually akin to malingering. However, not long afterward, as early as 1915, the lAC in Finley v. U.S. Fidelity & Guar. Co. (2 lAC 195) did award compensation to a worker with a traumatic neurosis, 'and although some skepticism continued to prevail, as early as 1922, in an opinion remarkable for its approach that presaged doctrines to be expressed by the courts decades later, the lAC held, in the case of a worker with a back injury who was afraid to return to work for fear of further injury, that the employer took the worker as it found him, neurotic tendencies and all, and that even though a more normal worker probably would not have experienced such a reaction, it was precipitated by the injury and had a cause-and- -33- effect relationship to it. The case was Bethlehem Shipbuilding Corp, v. Kostrekin (9 lAC 97). Although most of the early cases dealt with emotional reactions to specific physical injuries, the idea of an injury caused by events over time, psychiatric or otherwise (legally termed a cumUlative injury) has been ingrained in the law since the landmark 1959 decision of the California, Court. of Appeal in Beveridge v, lAC. 24 CCC 274, in which Justice Tobriner opined that al~hough the effect of a single bit of work strain may not be disabling in and of itself, the combined result of such strains over time can be destructive and produce compensable disab1l1ty, Labor Code S3208.1. enacted 1968, now defines a cumulative injury as "repetitive mentally or physically traumatic activities occurring over a period of:time, the combined effect of which causes any disability or need for medical treatment." The cumulative injury doctrine was first applied to psychiatric injury in Baker v, WCAB (1971) 36 CCC 431, in which a firefighter claimed that over a period of time he developed cardiac-like symptoms after exposure to fumes and smoke, increasing progressively thereafter. No heart trouble was found, but he was medically determined to have a "cardiac neurosis" of emotional origin, related to the dangers of his job. The Court of Appeal concluded that such a psychoneurotic injury caused by the job environment is compensable, finding no difference between cumUlative physical and emotional injuries, the latter being every bit as real and disabling as the former. But what about the amount of work stress necessary before a -34- reaction may be deemed compensable} Again, a considerable body of doctrine has developed over the years. As far back as 1946, in the case of Liberty Mutual Ins. Co. v. lAC (Calabresi) 11 CCC 66, the Court ot Appeal, per Just1ce Peters, dealt W1th the case ot an elderly laborer who suffered a heart attack while lifting sacks of peanuts, a normal requirement of his job. The court referred to the line of cases holding that the employer takes the worker as it finds him, and went on to declare that. where work strain exists, even though the strain 1s usual to that type of employment, injury resulting therefrom is compensable so long as a causal connection is shown by substantial evidence to exist between the strain and the disability or death. Many cases since then have reconfirmed and refined that doctrine. For example, in the leading case of Lamb v. WCAB (1974) 39 CCC 310, the California Supreme Court pulled the threads together in the case of a machinist found dead of a heart attack beneath his gear-cutting machine. On a record that included existence of certain deadlines and a history of the decedent expressing worry about performing the job well, the Court reiterated the doctrine that the e~ployer takes the worker as it finds him, and held further that it is not the amount of stress inherent in the job that is relevant in stress cases, but the stress that the jo~ has in fact exerted on that particular worker. Thus, by the early 1980's, the basic doctri.nes were all in place: the concept of cumulative psychiatric injury was well established, as was the doctrine that the employer takes the worker as it finds him. It was clear under the leading cases that the job need not entail an unusual amount of stress, so long as it 1s stressful to the particular worker, causing disability. It remained for a case to come along that dealt with a frank situation of cumulative -35- psychiatric injury caused by allegations of perceived stress. SUBJECTIVE PERCEPTIONS OF STRESS That case was Albertson's v, WCAB (Bradley), 47 CCC 460, in which the Third District Court of Appeal was confronted with a supermarket worker who alleged that difficulties with perceived harassment by a manager were the ca\lse of her psychiatric disability and need for medical care. The employer's psychiatrist stated that the worker had a preexisting and nonindustrial progressively deteriorating mental condition of many years duratIon, but that she did subjectively perceive job harassment, and the claimant's evaluator felt that she had an obsessive- compulsive personality that hypersensitized her to the stresses at work. The Court of Appeal affirmed a WCAB decision in favor of the claimant, in a landmark 1982 unanimous opinion. The court noted that job harassment is a type of work stress, like other stressful factors such as numerous deadlines, repetitive tasks, etc., and that the cumt.:.lative effects of stress and strain can cause compensable d1sabil1ty. No basis exists for separating psychoneurotic injuries from others in that regard. Since the employer takes the worker as it finds him, the proper 'test in cases such as this is a subjective one. To quote the court: "The proper focus of inquiry, then, is not on how much stress should be felt by an employee in his work environment, based on a "normal" reaction to it, but how much stress is felt by an individual worker reacting uniquely to the work environment. His perception of the circumstances (e .g., crowded deadlines, mountains of paper, a too-fast assembly line) is what ultimately determines -36- the amount of stress he feels." The court did, however, agree with the WCAB that no compensable psychiatric injury would exist where the work Is a mere passive element that a nonindustrial condition happened to focus on, i. e., simply a stage upon which a nonindustrial problem is played out, or the allegations of work stress are merely after-the fact rationalizations. The Albertson's decision is the law at the present time with respect to causation, but a great many questions have arisen about its application to specific situations. Where, for example, does subjective perception leave off and pure imagination begin? What constitute active stressors in the employment as opposed to mere passive factors? These are evidentiary questions that must be addressed on a case-by-case basis. It must be remembered that the burden is on the worker to prove his or her case by a preponderance of the evidence, and in psychiatric cases both competent lay testimony and accurate medical reportage are the determining factors. If a preexisting problem or abnormality combines with perceived stress to cause disability, who should bear the burden of paying compensation? The law of apportionment in this area is no different than in any other type of industrial injury (Callahan v. WCAB (1978) 43 cce 1097). Apportionment may be appropriate if the worker had a preexisting disability (not simply a pathological yet nondisabl1ng condltlon)(Labor Code 54750) or an underlying disease that was aggravated by the industrial exposure (to the extent that the work injury "lights up" the disease process and renders it -37- disabling, the employer 1s responsible for pa ymen t of compensation - Labor Code S4663). Although the worker bears the initial burden of proof in his claim, the burden is on the employer to prove apportionment (Pullman Kellogg v, WCAB (Normand) (1980) 45 CCC 170) and this can only be done with factually and legally accurate medical reports. The only type of disability that can be so apportioned is permanent disability~ neither TD nor medical treatment are apportionable as to the worker, although liability for these benefits can be shared as among carriers in cumulative injury cases. As the California Supreme Court held in the leading case of Granado v. WCAB (1968) 33 CCC 647, payment of such benefits should not have to await determination of the complex legal issues involved in apportionment. The employer is therefore responsible for the entire award of TD and medical treatment if the industrial exposure contributed to the disability. This also applies to the vocational rehabilitation benefit, under Labor Code S139.5. SPECIAL SITUATIONS The courts have ruled in many special areas in psychiatric cases, but for the sake of brevity I shall only cover a couple of them. One is that of psychiatric disability resulting from criminal activity. In its 1980 opinion in Pac. Tel. & Tel. v. WCAB (Blackburn) 45 CCC 1127, the Court of Appeal held that disability caused by stress .occasioned by the worker's criminal activity is not compensable. The employer must, however, prove all the elements of the crime by a preponderance of the evidence. This rule has been extended to situations in which the worker was engaged in activities prohibited by the employer's rules, thus outside the course of employment. -38- The area of psychiatric injuries suffered as a result of Job termination is a confusing one that has generated much controversy. To be compensable, an injury must arise out of and occur in the course of employment, and be proximately caused by the employment (Labor Code S3600). In the 1983 case of Georgia Pacific Corp. v. WCAB (Byrne) 48 CCC 443, the 2d District Court of Appeal held that an injury arising out of termination of employment does not meet those criteria, and is therefore not compensable within the compensation system.. This view is consonant with the recent California Supreme Court decision in Cole v. Fair Oaks Fire Prot. Dlst. (1987) 52 CCC 27, in which the Court appeared to hold that the exclusive remedy rule in workers' com pens a tion precludes an employee from seeking civil damages against the employer for disabling intentional infliction of emotional distress if the employer's actions relate to normal aspects of the job, such as criticism, demotion, etc., however outrageous. No reference is made in the Cole decision to termination, thus the court's opinion does not run contrary to Georgia Pacific. However, in a line of cases beginning in 1978 with Renteria v. City of Orange (43 CCC 899), the courts had held that an employee could avoid the exclusive remedy rule by asserting that the mental distress was not accompanied by physical injury or disability. The Cole court recognized the anomaly here, stating that intentional infliction of emotional distress causing physical injury is worse than that which does not, but a civil suit is precluded in the latter case. In 1987 the Third District Court of Appeal confused the issue further in Shoemaker v. Myers (192 CA3d 788), by holding that termination is one of the normal employment risks envisioned by Cole, thus a claim for damages resulting from disabling intentional infliction of -39- emotional distress by wrongful termination is subject to the exclusive remedy rule. This area is presently in considerable dispute, but the Supreme Court has granted review in Shoemaker and we are currently awaiting the outcome. SOME GENERAL COMMENTS I would like to conclude with a few general comments, spoken from personal perspective, and not as a representative of the Administration. I am aware that a number of bills are presently proposed that would make certain changes in how we deal with claims of psychiatric injury. It is not my place to state what the law should be regarding such matters; as a workers' compensation judge, it is my task to apply the law as it is, and it is up to the Legislature to state the law and the courts of appeal and Supreme court to interpret it for me, my colleagues and the lawyers who litigate before me. Without overstepping my bounds, however, I would respectfully submit a few general comments. First, it is quite true that there has been an increase in the number of claims of psych1atric 1njury in the workers' compensation system in California in recent years, especially since the Albertson's case. While I do not have the numbers, this fact is very apparent to any WCJ now on the bench. That does not tell the whole story, however; such claims are matters of very high profile compared to other claims, for several reasons, including the fact that a much smaller proportion of such claims are adjusted informally than is the case with other types of injury. In the majority of cases the employer or carrier will deny the claim based on little more than the fact that it is psychiatric in nature. We therefore see a greater portion of them going through the formal litigation process. -40- Another factor is that psychiatric claims are generally more complex and people-intensive than other injury cases, arising often as they do out of failed interpersonal relationships. This leads to extended proceedings and production of a lengthy record, all of which generates a heavy drain on a system that is presently attempting to operate with severely limited resources, but must at the same time afford all parties full entitlement to due process of law. However, I would respectfully urge the Committee to proceed with caution in analyzing any proposed legislation that would change the standards for dealing with psychiatric injury cases. The problem is not simple, and any simplistic solutions must be viewed with caution. Psychiatric injuries are seldom clearly discrete; they are more often part and parcel of injuries to other parts of the body, such as the cardiovascular system, gastrointestinal system, etc., and treating the psychiatric aspect differently can raise substantial questions of equal protection. Moreover, stress can manifest itself in ways other than psychiatric~ do we afford different treatment to one worker who suffers emotional problems as a result of work stress than to one whose symptoms from the same stress appear organically? In addition, workers with clear- cut, unquestionably valid organic injuries often suffer emotional consequences from such factors as depression caused by the economic loss during disability or the pa1n of the injury. Do we wish to set different criteria for compensating those aspects of the worker's problems simply because they are branded psychiatric? Finally, as you have seen from the foregoing summary, the legal concepts presently used to determine compensability of -41- psychiatric cases did not arrive with a. single, cataclysmic proclamation from on high, but are the results of many years of evolving doctrine going back to the beginnings of our compensation system. I would respectfully urge the Committee to look with great care at any legislation that would abruptly alter these standards, all of which were developed through painstaking analysis by some of our very best appellate justices. Thank you.