Insurance Litigation & Regulatory Law Blog : California Insurance Lawyer & Attorney : Barger & Wolen Law Firm : CA Insurance & Bad Faith Litigation

This week, the Administrative Director of the Division of Workers’ Compensation of the California Department of Industrial Relations (“DWC”) proposed a regulation, California Code of Regulations, title 8, Section 9789.70(c), that would completely exempt air ambulance companies from the Official Medical Fee Schedule (“OMFS”) that applies to all other providers who furnish medical services under the California workers’ compensation system.

The DWC’s purported impetus for this abrupt action was “to avoid the hazards and cost of litigation against the Division,” as stated in the DWC’s Initial Statement of Reasons. That Statement further advised that the DWC based its proposed regulation on the contention that the OMFS may likely be preempted by the Airline Deregulation Act of 1978, which it says “prohibits states from adopting or enforcing regulations which have any effect on airline rates of air carriers.”

This issue of preemption by the Federal Aviation Act of 1958, as amended by the Airline Deregulation Act of 1978 (“FAA/ADA”), was asserted in a lawsuit filed last year by California Shock Trauma Air Rescue (“CALSTAR”), an air ambulance company rendering services primarily in California. That action, filed in federal court in Sacramento against more than 75 workers’ compensation insurers and self-insured employers, is entitled California Shock Trauma Air Rescue v. State Compensation Insurance Fund, et al.  This blog reported on that case on July 30, 2009, after the federal district court dismissed the case, finding that the federal court lacked subject matter jurisdiction over CALSTAR’s claims.  

CALSTAR then appealed the action to the Ninth Circuit Court of Appeals, where the case is now fully briefed and awaiting oral argument.

Apparently not satisfied with the court's decision in its federal court action, CALSTAR threatened to sue the DWC unless it did something to offer relief to CALSTAR and other air ambulance companies.  In an article posted on workcompcentral.com, the president and chief executive officer of CALSTAR stated that, after having the federal trial court dismiss his company’s action, “we went back to the DWC and said, ‘We’ve been instructed to sue you,’ is what brought this action on their part.” It is clear that the threat of a lawsuit prompted the DWC to issue the proposed regulation and completely exempt CALSTAR and other air ambulance companies from the ambit of the OMFS.  

The defendants in the pending federal court action contend that the FAA/ADA does not preempt the OMFS as it applies to the medical services that air ambulance companies provide in California, and indeed exempting such companies from the scope of the OMFS on preemption ground is anathema to the legislative goals and purposes of the FAA/ADA. Larry Golub and Sandra Weishart of Barger & Wolen LLP represent a number of the defendants in the litigation.

The DWC will be holding a full-day hearing on the proposed regulation in Oakland on Tuesday, April 13, 2010, to receive statements and argument from all interested persons.

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As referenced in our February 23, 2010 blog, "Reprieve for Insurers: Medicare Secondary Payer Reporting Requirements Delayed," the CMS recently published several important alerts, including the latest version of the User Guide (3.0). A brief summary of the alerts and changes to the User Guide are described below. The documents are also linked in pdf for easy reference.

NGHP RRE Compliance Alert (2/24/2010): Specifies what CMS will consider to "be in compliance" with Section 111. Basically, compliance equals: (a) Registering with the CMS Coordination of Benefits Contractor ("COBC"); (b) Engaging in data exchange testing; (c) Beginning and continuing regular Section 111 production data exchanges with the COBC. In its 2/25/2010 Teleconference for NGHP Policy Questions and Answers, CMS emphasized that they are "not interested in civil monetary penalties but a good data exchange." The CMS Alert alleviates concerns over the $1,000 per day penalty provision.

NGHP RRE Who Must Report Alert (2/24/2010): Clarifies multiple scenarios in which questions have arisen as to who is an RRE, including corporate structure issues and siblings; deductibles versus self-insured retentions, self-insurance pools, subrogation, and workers compensation, among several others.

NGHP User Guide (Version 3.0) (2/22/2010): In connection with the first production of Claim Input Files for the first quarter of 2011, TPOC reporting begins 10/1/2010; ORM reporting goes back to 1/1/2010.  CMS provides a  summary of changes to the User Guide, which is set forth in Section 1 of the User Guide.

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by Steven Weinstein & Marina Karvelas

The U.S. Department of Health and Human Services (“HHS”) announced on February 16, 2010, that it will extend the deadline for reporting requirements under the Medicare Secondary Payer Act from April 1, 2010 to January 1, 2011. The news provides welcome relief for property and casualty insurers who have been working diligently to meet the new reporting requirements amidst significant uncertainties in implementation.

In addition, the HHS promised it will release during the week of February 22 the next version of its User Guide as well as provide an alert that describes the steps that reporting entities can take to assure their ongoing compliance with the new reporting requirements. 

The Medicare Secondary Payer Mandatory Reporting Requirements

Over two years ago, Congress passed the Medicare, Medicaid and SCHIP Extension Act of 2007 (“MMSEA”) 42 U.S.C., § 1395y(b)(7)(8). Section 111 of MMSEA added new and significant mandatory reporting requirements for liability insurance (including self-insurance), no-fault auto insurance and workers’ compensation (collectively “NGHPs” or non group health plans) as well as group health plans (“GHPs”). Every settlement, judgment, award, or other payment from insurers to a Medicare beneficiary must be reported to the HHS through its Centers for Medicare & Medicaid Services (“CMS”). Likewise, individuals who receive ongoing reimbursement for medical care through no-fault insurance or workers’ compensation must be reported to CMS.

The new MMSEA reporting requirements do not change existing rules that determine whether Medicare or another payer is the primary or secondary payer with respect to the Medicare beneficiary. The goal behind the new reporting requirements is to enable the HHS through CMS to better obtain necessary information to determine when Medicare’s financial responsibility is secondary, and if so, reduce Medicare payments, or if already paid, recoup them. In this regard, Medicare may recover any conditional payments it has made that should have been paid by the primary insurance plan.

Take for example, an auto accident where the injured party is a Medicare beneficiary. If that Medicare beneficiary has available auto liability or no-fault auto insurance to cover medical expenses, payments under those policies are primary to any Medicare payments for such expenses. In fact, Medicare is always a secondary payer to liability insurance (including self-insurance), no-fault insurance, and workers’ compensation.

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Insurance Commissioner Steve Poizner today once again rejected a rate application from the Workers’ Compensation Insurance Rating Bureau (WCIRB) to raise the Workers’ Compensation Claims Cost Benchmark. After rejecting a slightly larger increase request in July of this year, the Commissioner this time rejected a proposed hike of 22.8% in the cost benchmark.  This was yet another blow to the hopes of workers’ compensation insurers for an increased cost benchmark anytime soon.

The Commissioner explained:

One in eight Californians is unemployed. Countless others are also suffering and have either given up looking because they cannot find work or have taken part-time jobs while they seek full-time work. Any increase in costs for employers will only make our already dire economic situation worse.

Given these harsh economic realities, I refuse to rubber stamp double-digit increases to the Workers Compensation Claims Cost Benchmark, especially when I see clear evidence that the cost control reforms from 2003-2004 have yet to be fully implemented,”

…

These increases requested by the WCIRB give insurers an excuse to raise rates in concert without fully utilizing all of their cost containment tools or increasing efficiency. I will not consider an increase in the Claims Cost Benchmark until I see substantial efforts being made by insurers to use all available tools to constrain costs and improve efficiency.

With regard to the controlling of costs, in the Commissioner’s prior July denial of a request by the WCIRB to raise the Workers’ Compensation Claims Cost Benchmark, the Commissioner issued a 27 point outline of means in which costs can be trimmed by workers’ compensation insurers. Commissioner Poizner’s remarks seemed to indicate that he was disappointed by insurers’ efforts to curb costs. More specifically, the Commissioner stated, “I will not consider an increase in the Claims Cost Benchmark until I see substantial efforts being made by insurers to use all available tools to constrain costs and improve efficiency.”

This denial of the cost benchmark is the latest in a long string of decisions by the Commissioner that have been stringent in their treatment of the cost benchmark, despite the WCIRB’s repeated requests for significant increases. We expect Commissioner Poizner to continue to reject any attempt to raise the cost benchmark until there is significant improvement in California’s unemployment rate (as of last check unemployment in California is a stifling 12.2%, 4th highest among states in the country).

November 9, 2009 WC Benchmark Decision and Order

November 9, 2009 Department Press Release

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Effective immediately, insurers may offer a verified actual mileage option instead of, or in addition to, the estimated mileage program that traditionally has been used in determining automobile insurance premiums in California.

Specifically, for purposes of determining the number of miles driven annually by the insured, as required under the Second Mandatory Rating Factor, insurers can either: (a) switch to the new program; (b) offer both the verified actual mileage program and the traditional estimated mileage program; or (c) stick with the traditional program. Insurers that offer both programs must make participation in the verified actual mileage program voluntary. 

The underlying impetus behind the new regulations is the Commissioner's environmental push to reduce CO² emissions and gasoline consumption by incentivizing drivers to drive less. "The Commissioner finds that basing the Second Mandatory Rating Factor on verified actual miles driven, rather than on estimated miles driven, may enable policyholders to reduce their premiums by driving less and create incentives for innovation in insurance rating in California with numerous attendant benefits." 10 CCR, § 2632.5(c)(2)(F); ("Commissioner Poizner Announces Final Approval of Pay-As-You Drive Regulations.")

Under the new option, an insurer may require an insured who chooses the verified actual mileage option for one vehicle to choose that option for all vehicles insured under the same policy.

The new option allows for a variety of different verification methods.  An insurer may select one or more of the following:

1. odometer readings which are read by the insurer or its agent or insurer's third-party vendor;
2. odometer readings read by auto repair dealer in servicing the vehicle or by a vendor retained by the insurer;
3. odometer readings obtained by government licensed smog check stations or any other government agency that maintains public records of odometer readings;
4. odometer readings reported to the insurer by the insured or the insured's agent;
5. by a technological device provided by the insurer or otherwise made available to the insured that accurately collects vehicle mileage information. Such a device can only be used by the insurer to collect information for determining actual miles driven and not to collect or store information about the location of the insured vehicle, with the following caveat: "nothing in this section shall prevent a motor club or insurer from using a technological device to collect information about the location of the insured vehicle as part of an emergency road service, theft service, map service or travel service."
6. any other method approved by the Commissioner.

The verification methods selected by the insurer must be made available to all insureds equally. For example, if the insurer permits its insureds to self-report odometer readings, it must uniformly offer that verification method to the public.

In addition, by utilizing the new program, insurers are permitted to do the following: 

• retroactively or prospectively adjust premiums based on actual miles driven provided the insurer gives notice to the policyholder prior to the effective date of the policy;
• where both a mileage estimation program and a verified actual mileage program are offered, the insurer may provide a discount to a policyholder who participates in the verified actual mileage program. Such a discount, however, must be actuarially supported. Specifically, in order to use the discount, the insurer must demonstrate "cost savings or actuarial accuracy associated with obtaining and using actual miles driven rather than estimated mileage." In addition, the discount must be applied to all policyholders in the verified actual mileage program, regardless of the method of verification used.
• offer the option to purchase coverage for a specified price per mile – "Price Per Mile Option." The regulation, however, offers no guidance in setting that "price per mile," other than making it subject to compliance "with all applicable laws." (This provision of the new regulation will likely require further clarification by the Commissioner or the courts).
• combine Percent Use, Academic Standing, Gender, Marital Status, and Driver Training with the Second Mandatory Rating Factor. If so, the insurer must demonstrate in its class plan that the rating factors used in combination, when considered individually, comply with the weight ordering requirements of 10 CCR § 2632.8.

Lastly, where an insurer utilizes both programs, they must be included in one class plan.

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An amendment introduced by Sen. Jay Rockefeller, D-W.Va. to require “24-hour health coverage”* has drawn industry fire, according to an article, Another Health Care Amendment Draws P&C Industry Fire, by Arthur D. Postal.

In a letter to the Senate Finance Committee, which was not expected to take up the amendment today, the p&c industry argues that, “the amendment would upend the systems now in place to protect injured workers, drivers and passengers.”

The insurers added that the 24-hour coverage concept “would destroy the healthy and competitive auto insurance marketplace.”

According to a lobbyist for the American Insurance Association, the amendment is not likely to be taken up by the committee, although it has been officially filed.

In a bulletin to members, the Independent Insurance Agents and Brokers of America said the work on language in the legislation in the Senate panel was supposed to be completed this week, but “the markup could very well slip into next week and potentially beyond.”

The letter, delivered to all members of the Senate Finance Committee was signed by:

• American Insurance Association
• Council of Insurance Agents and Brokers
• Independent Insurance Agents and Brokers of America
• National Association of Health Underwriters
• National Association of Mutual Insurance Companies
• Property Casualty Insurers Association of America

* Twenty-four hour health coverage typically refers to a coordinated system of health care delivery, whereby a person receives all medical care for injuries and illnesses from a single health care provider.

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Certain producer group representatives have publicly criticized the current version of the proposed Producer Compensation Transparency Regulation (the “Proposed Regulation”) that was forwarded recently by the New York Insurance Department (“NYID”) to the Governor’s Office of Regulatory Reform (“GORR”) for review. As discussed in our September 14, 2009, Client Alert, if the Proposed Regulation becomes effective it will apply to all insurance producers that transact business in New York. 

In a September 15, 2009, P&C National Underwriter article N.Y. Comp Regulation Proposal Unacceptable, Says IIABNY, the Independent Insurance Agents & Brokers of New York  objected, among other things, to the Proposed Regulation’s requirement that producers explain to their customers whether they are functioning as an agent or a broker and how these legal classifications affect the producer’s compensation, saying such a technical discussion would engender confusion amongst consumers. Representatives of IIABNY have also criticized the Proposed Regulation’s ambiguity regarding the disclosure rules that apply to policy renewals.

The spokesman for IIABNY raised the possibility that producer groups might institute legal action if the State did not agree to make necessary revisions to the Proposed Regulation.

In addition to IIABNY, spokespersons for the Independent Insurance Agents & Brokers of America, the National Association of Professional Insurance Agents and the Council of Insurance Agents & Brokers have also criticized certain aspects of the Proposed Regulation.

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On September 10, 2009, the New York Insurance Department (NYID) announced that it had sent the long anticipated Producer Compensation Transparency Regulation (the Proposed Regulation) to the Governor’s Office of Regulatory Reform (GORR) for review. Following GORR approval, the Proposed Regulation will be published in the New York Register and will be subject to a forty-five day period of public comment. After reviewing any comments received during such public comment period, the NYID may adopt, revise or withdraw the Proposed Regulation.

Assuming the current form of the Proposed Regulation becomes effective, it would require insurance producers selling or renewing an insurance contract in New York to make certain mandatory disclosures to purchasers regarding the compensation the producer will receive related to the sale of the insurance. Such disclosures are required to be provided to the purchaser no later than the time the application for insurance is submitted.

More notable among the various required disclosure items are the following:

• The producer must disclose to the purchaser that the purchaser has the right to obtain information about the compensation expected to be received by the producer for the sale and for any alternative quotes obtained by the producer by requesting this information from the producer.
• If the purchaser, in fact, requests more information regarding the producer’s compensation, the producer is required to provide, among other mandatory disclosures, a description of any alternative quotes obtained by the producer, including the coverage, premium and compensation that the insurance producer or any parent, subsidiary or affiliate would have received based, in whole or in part, upon any such alternative quotes.

In addition, the Proposed Regulation would require that insurance producers maintain records evidencing that they have provided the disclosures required by the regulation for a period of three years subsequent to the date of such disclosures.

In anticipation of the likely adoption of the Proposed Regulation, insurance producers may wish to begin developing a compliance process, including the preparation of disclosure forms, which is designed to satisfy the regulation’s requirements.

If you have any questions regarding the Proposed Regulation, please contact Dennis C. Quinn at (212) 655-3878 or dquinn@bargerwolen.com.

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by Robert W. Hogeboom

On September 4, 2009, Harvey Rosenfield submitted the Stop Insurance Overcharges Act (pdf), a proposed state-wide ballot measure, to Attorney General Jerry Brown.

The initiative would:

• limit all insurance broker fees charged if brokers also receive a commission;
• mandate that all other fees, including installment fees billable to a policyholder, is premium subject to prior approval;
• seek to eliminate the absence of prior insurance as a criteria for automobile and homeowner rates or insurability;
• preclude use of claims experience in calculating discounts or surcharges for automobile insurance. 

We anticipate that insurers, managing general agents, brokers and trade associations will be establishing a strategy to contest the proposed initiative.

I look forward to your comments and/or thoughts regarding this significant issue as I will be coordinating our efforts to defeat this initiative. Please contact Robert W. Hogeboom at rhogeboom@bargerwolen.com and/or (213) 614-7304.

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The California Department of Insurance has established the filing deadlines (September 18, 2009, or, in the case of holding company applications, October 30, 2009) in order to obtain year-end approval of 2009 transactions.  For details, please see the attached notice. 

If you require assistance with these submissions, please contact Michael Rosenfield (213-614-7321) or mrosenfield@bargerwolen.com).

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Earlier this year, California Shock Trauma Air Rescue (“CALSTAR”), an air ambulance company rendering services primarily in California, filed an action in federal court in Sacramento against more than 75 workers’ compensation insurers and self-insured employers. CALSTAR’s lawsuit, California Shock Trauma Air Rescue v. State Compensation Insurance Fund, et al., argued that, as a result of it being certified by the Federal Aviation Administration to operate as an air carrier, any claims for payment it submitted to workers’ compensation insurers and self-insured employers in California should not be limited to those amounts set forth in the Official Medical Fee Schedule for ambulance services, California Code of Regulations, title 8, section 9789.70.  

Rather, as a federally certified air carrier, CALSTAR asserted that the Fee Schedule is preempted by the Federal Aviation Act of 1958, as amended by the Airline Deregulation Act (“FAA/ADA”).  In other words, CALSTAR sought to avoid the limitations on payment that would apply to all other medical providers and even ground-based ambulances set forth in the Fee Schedule.  CALSTAR’s complaint alleged causes of action for declaratory relief and a number of state law claims.

The defendants filed motions to dismiss on a variety of grounds. Prominent among the bases for the motions was the claim that the federal court lacked subject matter jurisdiction over CALSTAR’s action.  Another basis for the lack of federal court subject matter jurisdiction was that CALSTAR’s claims are subject to California’s exclusive workers’ compensation system and which claims can and should be resolved through lien requests by CALSTAR at the Workers’ Compensation Appeals Board. 

In a detailed ruling issued July 24, 2009, the federal court granted the motions to dismiss on the basis that the court lacked subject matter jurisdiction over CALSTAR’s claim. The fact that CALSTAR sought to use a federal statute, the FAA/ADA, to claim that certain state laws were preempted was inadequate to support jurisdiction in the federal courts under well-established case law.  The court also observed that CALSTAR had not sued the State challenging its power to enforce the Fee Schedule, but rather only sued third parties (i.e., insurers and self-insured employers) who have neither “the ability to enact or enforce state laws.” In short, CALSTAR was asking the federal court for an advisory opinion as to the preemption of the Fee Schedule, something it lacked the power to do.

Barger & Wolen represented a number of the defendants in the litigation.

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Insurance Commissioner Steve Poizner today rejected a rate application from the Workers’ Compensation Insurance Rating Bureau (WCIRB) to raise the Workers’ Compensation Claims Cost Benchmark by 23.7 percent. This was contrary to what was hoped for by workers' compensation insurers.

Based on testimony received in June hearings, the Commissioner noted that he believes that an increase in the cost benchmark would lead to increased worker’s compensation premiums for small business. More specifically, the Commissioner sternly noted,

[m]y response to this requested record increase by workers' comp insurance companies is this – no. I will not include avoidable costs in the Benchmark.

The Commissioner further explained,

[b]ecause of the faltering economy, record unemployment levels, and objections to the proposed increase from employers, I have focused on whether insurers and other parties in the workers' comp system are exhausting every available avenue to control costs before granting any increase to the Benchmark.

With regard to the controlling of costs, following hearings last month, the Commissioner issued a 27 point outline of means in which costs can be trimmed by workers compensation insurers. That outline can be found here. The Commissioner further noted that he expects insurers to implement the efficiency procedures he outlined before a re-application for a cost benchmark increase.

Today’s denial of the cost benchmark is consistent with the Commissioner’s recent treatment of such requests over the past several years – as he has routinely either denied the requests outright or allowed for a minimal increase, despite much larger requests.

2009 WC Benchmark Proposed Decision and Proposed Order

2009 WC Benchmark Addendum Report

2009 WC Benchmark Decision and Order

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