Author: WorkCompAcademy

The Los Angeles Times recently published a scathing article about claims of excessive executive salaries and nepotism at the State Fund, a quasi-governmental agency that is one of the largest providers of workers’ compensation coverage in the state.

The Orange County Register response to this report was “Maybe it’s time give the State Fund its wish and privatize it.” Here is the logic behind the newspaper’s suggestion:

At first glance the story seemed like business as usual: more waste, fraud and abuse of taxpayer money. A deeper read actually suggests a less serious problem.

But it is still time for the state to consider the very future of this agency that’s spent much of its history engulfed in controversy.

As the Times reported, salaries for seven executives at the State Fund exceeded $500,000 annually, making them some of the highest-paid public employees in California. By contrast, the governor gets paid $210,000 a year.

Throw in some light claims of nepotism, critics calling the salaries “beyond the pale” and a lawmaker calling for an oversight hearing and you have the makings of a standard Sacramento scandal.

Looking deeper though, we find the salaries are not paid by the government, which lets some air out of the outrage balloon. As far as the nepotism was concerned, one son of the CEO was making $50,400 annually as an underwriter and another son had previously made $16 an hour as an intern.

Inappropriate? Probably, but as far as scandals go, it lacks the criminal investigation that serves as the State Fund-scandal benchmark. It’s doesn’t even come close the scandals surrounding Ricardo Lara, the state’s insurance commissioner. But it does raise a good question about why the State Fund is still attached to the government in any way.

The State Fund is considered quasi-governmental because its board is publicly appointed (it’s often a cushy landing spot for former lawmakers and other well-connected types) and because it has a mandate to provide insurance no matter what, a market of last resort.

The State Fund exists because California is a no-fault state where employers must pay workers’ comp claims and, in exchange, workers can’t sue the employer for fault. Someone needed to insure the previously uninsurable.

But times have changed. There are other options. West Virginia, for example, moved to a competitive market with an assigned-risk pool and it seems to be working fine. And that’s a state that was previously dependent on coal mining. In other words, an expensive place to provide coverage.

The State Fund wants to pay its executives like executives in the private market and has asked for waivers from certain civil service requirements. Perhaps it’s time to reconsider its quasi-governmental status and privatize this agency, which really wants to be private. This would give lawmakers one less cushy place to go after life in the Legislature, but the state would survive.

Public employee unions would have a fit because State Fund’s approximately 4,200 employees are eligible for public pensions, but the state would survive that, too.

Lawmakers would argue that the State Fund’s quasi-governmental status makes it subject to scrutiny, like legislative oversight and sunshine laws. But if there’s one thing both the Times story and recent history have shown, it’s that oversight isn’t really happening and if it is, it’s not effective.

The the Los Angeles County District Attorney’s Office announced that the founder of Community Recovery Los Angeles, a drug and alcohol treatment facility, pleaded no contest to running a $175 million fraudulent healthcare billing scheme.

Over the years, Community Recovery grew into a veritable empire, comprising more than 20 sober-living houses and outpatient clinics in Anaheim, West Adams, Calabasas, Malibu, Woodland Hills, Hollywood and Colorado.

The owner, 58 year old Christopher Bathum, entered the plea this week to 14 felony counts: seven counts of grand theft, five counts of insurance fraud and one count each of identity theft and money laundering.

The California Department of Health previously issued a number of cease-and-desist letters against CRLA houses, accusing them of being unlicensed drug and alcohol treatment centers. At one point, a judge granted an injunction against two CRLA facilities – on Melrose and in Calabasas – which ordered them to stop providing treatment.

Around 2016, Bathum publicly stepped down as head of his own company, which then changed its name to Commonwealth Global.

Sentencing is scheduled on Feb. 14 in Department 105 of the Foltz Criminal Justice Center. Bathum faces 20 years in state prison as a result of the plea.

Co-defendant Kirsten Wallace was sentenced in 2018 to 11 years in state prison after she pleaded no contest to 46 felony counts related to the same healthcare billing scheme.

The two defendants obtained multiple health care insurance policies for their clients, using their personal identifying information and falsified the clients’ circumstances to obtain the policies. The patients were unaware that policies had been issued in their name, the prosecutor said

Bathum and Wallace also billed for former clients after their treatment ended while those clients were still working at CRLA and no longer receiving treatment.

Between June 2012 and December 2015, Bathum and Wallace fraudulently billed an estimated $175 million. In most instances, bills were sent for services never provided. About $44 million was paid out by five insurance companies, the prosecutor added.

Additionally, Bathum was convicted last year of 31 felony counts for sexually assaulting seven women at his rehab facilities in case BA451669. Sentencing in that case also is scheduled on Feb. 14.

The cases were investigated by the Los Angeles County Sheriff’s Department, the Los Angeles County District Attorney’s Bureau of Investigation and the California Department of Insurance.

The Risk Management Division of the City of Santa Monica compiles its Workers’ Compensation Annual Report every year in an effort to provide local stakeholders with information and statistics related to the city’s medical and indemnity payments, claim settlements as well as general claim and cost trends.

As it has every year since 2009, the city’s Workers’ Compensation Program once again saw an increase to its total program liabilities, according to a report recently presented to City Council.

“In summary, in FY 2018-19, medical and indemnity payments increased 23% from the prior year, claim settlements were up 53% over the prior year and total program liabilities – the total value of all open claims from 1979 forward – grew to $32.6 million by June 30, 2019,” Risk Manager Oles Gordeev said in the report. This was an 8.3 percent or $2.4 million increase from the prior year.

“The lion’s share of this increase was attributable to the Police Department and reflects the impact of an aging workforce,” Gordeev said. “Fortunately, first-quarter data from (this fiscal year) shows that total liabilities are again on the decline,” and staff is hopeful this trend will continue.

The city settled 150 claims with a total value of about $4 million during the 2018-2019 fiscal year, which was up from the 98 claim settlements that were worth a total value of $2.3 million the year before. City staff said the increased number of settlements in FY 2018-19 represented an improvement over the past year and reflects the city’s commitment to resolving claims in a timely manner.

“Further, there were two significant and positive trends that emerged in FY 2018-19,” the report states, before addressing the “impressive results” of the Big Blue Bus’ Third-Party Administrator pilot program.

“In short, the TPA’s efforts have resulted in a significant reduction in BBB’s total program liabilities – the single most important financial performance measure for a workers’ compensation program,” Gordeev said in the report, describing how the three-year pilot program came to fruition back in 2017. Despite a 28% increase in claim frequency since its inception, the pilot has resulted in a reduction of total program liabilities from $7.44 million to $6 million.

The key challenges the City faces are steep increases in pension costs over the next seven years as the effects of the California Public Employees’ Retirement System (CalPERS) discount rate decrease from 7.5% to 7.0% impact pension contribution rates starting in FY 2018-19, and continued increases in workers’ compensation costs and healthcare costs, all of which are outpacing revenue growth.

Even without an economic downturn in the next two years, the report warns that the “City will face increasingly hard choices in the next budget cycle.”

The State Compensation Insurance Fund has recruited a high-priced team of former executives from the private sector to turn it around after years of scandal and financial problems.

But MSN reports that the hires are earning six-figure salaries that dwarf others in state government, drawing concerns from some in the state Capitol who question the cost as the agency rebuilds following investigations in years past that led to the removal of top managers and mass layoffs forced by loss of business.

The State Fund, has also been criticized for hiring the spouses and adult children of agency managers. Its 11-member board of directors, which is appointed by the governor and legislative leaders, has become a soft landing spot for former lawmakers and other political insiders.

Bonuses and incentives awarded by State Fund’s board have boosted compensation to more than $500,000 each for its seven top managers including its CEO, whose annual pay is some $732,000 – more than three times the $210,000 salary of the governor. The salaries have prompted some lawmakers to call for an oversight hearing to determine whether the compensation is justified.

Agency officials including Board Chairman David M. Lanier say the compensation is warranted because of the unique mission of State Fund, which was created by the Legislature in 1914 to provide workers’ compensation insurance to businesses in the state, including those who can’t afford coverage from the private sector.

“The challenge we have is it’s a billion-dollar insurance company,” Lanier said. “There’s not another one of those in state government, so we need and value talent and expertise from the insurance industry.”

The agency’s biggest troubles began in 2007, when State Fund’s board fired its president and vice president after an audit found questionable financial practices involving the sale of discounted policies through outside associations linked to some board members. The scandal also resulted in the resignation of two board members whose private companies collected at least $265 million over 10 years from State Fund for administering group policy programs.

In 2011, State Fund laid off 25% of its 6,800 workers in response to its loss of market share. And its workforce has continued to drop, sitting now at 4,270 employees.

In the years after the scandal, the board of directors sought to expand its powers by persuading the Legislature to increase from one to 16 the number of executive positions exempt from civil service rules and pay scales.

In 2014, the board appointed Vernon Steiner as president and CEO of State Fund, who touted his 30 years of experience in the insurance industry. He received a base salary of $450,000 as well as various performance-linked bonuses.

In November, the State Fund board approved raises in base salary, bonuses and incentive payments for 17 managers, including Steiner, whose base pay this year has been increased by $36,000, or 7%, to $544,450. By comparison, State Fund’s then-CEO was paid $273,000 in 2007.

A federal judge in California has temporarily halted the start date of AB-5, a law that would potentially change how independent truck drivers are classified. The TRO will remain in effect until Jan. 13, the date of a hearing on a plaintiff’s motion to seek a preliminary injunction against the law.

Judge Roger Benitez from the Southern District Court of California on Dec. 31 issued a temporary restraining order against the implementation of California’s Assembly Bill 5. The legislation, which was set to take effect Jan. 1, potentially would reclassify tens of thousands of independent contractors as employees. Trucking industry officials fear that the law would remove opportunities for drivers to own their own businesses and work as independent owner-operators in California.

The Temporary Restraining Order – which pertains exclusively to the trucking industry – was issued in response to a Dec. 24 request from the California Trucking Association seeking a delay in the law’s implementation.

In November, CTA filed a lawsuit challenging AB 5 in which the group argued that many of the drivers it represents want to remain independent contractors, as this permits them the ability to set their own schedules and otherwise profit from owning their own vehicle. The association said enforcing AB 5 would force these drivers to be treated as employees and forfeit those benefits.

CTA argued that the “B” prong of the ABC test is pre-empted by the Federal Aviation Administration Authorization Act of 1994, which prohibits any state from “enact[ing] or enforc[ing] a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier – with respect to the transportation of property.”

Judge Benitez said that CTA’s contention warranted further consideration. “Plaintiffs have shown that AB 5’s Prong B is likely pre-empted by the FAAAA because AB 5 effectively mandates that motor carriers treat owner-operators as employees, rather than as the independent contractors that they are,” he wrote.

In his order, Benitez wrote, “The court finds that a temporary restraining order is warranted. At this early stage of the proceedings and within the brief amount of time available, plaintiffs have carried their burden for purposes of emergency relief to show (1) that they are likely to succeed on the merits, (2) likely to suffer irreparable harm in the absence of relief, (3) that the balance of equities tips in their favor and (4) that their requested relief is in the public interest.”

California Attorney General Xavier Becerra and the International Brotherhood of Teamsters are the defendants in the case.