KAISER FOUNDATION HOSPITALS v. WORKERS COMPENSATION APPEALS BOARD (1978)

We have consolidated these cases for hearing and decision because, except for some subordinate procedural issues, they involve common problems as to the interpretation of section 4903.1 of the Labor Code.^[FN1] That section, added by chapter 1109, Statutes of 1975, provides as follows:

“The appeals board, before issuing its award or approval of any compromise of claim, shall determine, on the basis of liens filed with it, whether any benefits have been paid or services provided by a health care service plan, a group disability policy, a self-insured employee welfare benefit plan, or a hospital service contract, and its award or approval shall provide for reimbursement for benefits paid or services provided under such plans as follows:

“(a) When the referee issues an award finding that an injury or illness arises out of and in the course of employment, but denies the applicant reimbursement for self-procured medical costs solely because of lack of notice to the applicant's employer of his need for hospital, surgical, or medical care, the appeals board shall nevertheless award a lien against the employee's recovery, to the extent of benefits paid or services provided, for the effects of the industrial injury or illness, by a health care service plan, a group disability policy, a self-insured employee welfare benefit plan, or a hospital service contract.

“(b) When the referee issues an award finding that an injury or illness arises out of and in the course of employment, and makes an award for reimbursement for self-procured medical costs, the appeals board shall allow a lien, to the extent of benefits paid or services provided, for the effects of the industrial injury or illness, by a health care service plan, a group disability policy, a self-insured employee welfare benefit plan, or a hospital service contract.

“(c) When the parties propose that the case be disposed of by way of a compromise and release agreement, in the event the lien claimant does not agree to the amount allocated to it, then the referee shall determine the potential recovery and reduce the amount of the lien in the ratio of the applicant's recovery to the potential recovery in full satisfaction of its lien claim.” (Emphasis added.)

Petitioner Kaiser Foundation Hospitals and its affiliate, Southern California Permanente Medical Group (Kaiser) are admittedly the kind of provider of medical services referred to in that section. They provided medical and hospital services to the individual workmen involved in these four cases. In all of the cases the employer and its compensation insurance carrier resisted the payment of workers' compensation benefits, in part or in whole, on the ground that the injuries involved in those cases were not industrially connected.^[FN2] In all four cases, the injured workmen and their respective employers (and the employers' carriers) agreed to settle the claims of the workers. Kaiser had filed liens in each case for its services and the Workers' Compensation Insurance Board had reduced the amount of those liens in reliance on subdivision (c) of section 4903.1.^[FN3]

Kaiser contends that section 4903.1: (1) Denies it equal protection of the law; (2) is vague and ambiguous and operates to deny Kaiser due process of law; (3) may not be retroactively applied to medical services provided prior to the effective date of the statute; and (4) the particular manner in which section 4903.1 was applied in this case denied Kaiser due process of law.

We hold that there is no constitutional equal protection or due process infirmity to section 4903.1 itself as applied to the facts of these four cases.^[FN4] We hold also that section 4903.1 applies to those classes of liens specified by said statute even where the medical services or payments were provided before effective date of the statute provided the settlement was reached after the effective date of the statute; such an application of the statute is not, in fact, retroactive. However, for reasons stated herein, the court finds that Kaiser was denied due process by the manner in which section 4903.1 was followed in this case.

Background of Section 4903.1

Sections 4904^[FN5] and 4903.1 share somewhat of a common history. In order to fully understand section 4903.1, one must review part of the history of section 4904.

Section 4904 was amended in 1957 to change the rulings in Bryant v. Industrial Acc. Com. (1951), 37 Cal.2d 215, 231 P.2d 32 and Aetna Life Ins. Co. v. Industrial Acc. Com. (1952), 38 Cal.2d 599, 241 P.2d 530, regarding liens filed by the Employment Development Department for unemployment compensation disability (hereinafter “U.C.D.”) benefits paid to an injured. (California-Western States Life Ins. Co. v. Industrial Acc. Com. (Baird) (1963), 59 Cal.2d 257, 262, 28 Cal.Rptr. 872, 379 P.2d 328.)

Bryant involved a findings and award of the Industrial Accident Commission (now called the Workers' Compensation Appeals Board) that a U.C.D. lien covered both the temporary and permanent disability allowance of the award. The court in Bryant held that, since the U.C.D. lien by the language of section 4904 applied against amounts paid as “compensation” and since “compensation” includes permanent disability payments, the lien properly attached to the entire workers' compensation award for disability benefits paid during the uncertain period pending final determination by the commission.

In Aetna, supra, the commission denied a U.C.D. lien stating that the amount payable under a compromise agreement to the disabled employee was not “workers' compensation” subject to the lien. The court in Aetna held the employee was not entitled to U.C.D. benefits for a period of employment caused by a disability for which he is entitled to workers' compensation, and, accordingly, held that, where the disabled employee and the employer settle the claim by compromise and release, the commission should determine the period of disability for which the employee is entitled to compensation and allow the claimed lien for the amount of unemployment disability benefits paid during that period.

In 1957, the Legislature amended section 4904 and altered in substance the holding of Bryant and Aetna. (Stats.1957, ch. 1977, p. 3524, s 2.) Also, the amendment manifested the Legislature's purpose to distinguish between the method of disposition of liens for unemployment compensation disability benefits in cases in which findings and an award are rendered and those in which compromise agreements are effected. (Baird, supra, 59 Cal.2d at p. 264, 28 Cal.Rptr. 872, 379 P.2d 328.) Under the amendments, where the board finds the injury industrial, the U.C.D. lien is honored to the extent that the temporary disability from the injury coincided with the dates U.C.D. benefits were paid. However, in cases of disputed injury, where there is a settlement by compromise and release, the 1957 amendments allowed the reduction of the U.C.D. lien in relation to the settlement. (Ibid.)

In Baird, the Supreme Court held that section 4904 as amended in 1957 did not deprive the lien claimant of procedural due process since the lien claimant has the right to seek reconsideration and judicial review. (Baird, supra, 59 Cal.2d at p. 266, 28 Cal.Rptr. 872, 379 P.2d 328.) The court in Baird also noted that the lien claimant was notified of the hearing at which the adequacy of the allowance on its lien was determined. (Ibid.)

In Kaiser Foundation Hospitals v. Workmen's Comp. Appeals Bd. (Keifer ) (1974), 13 Cal.3d 20, 117 Cal.Rptr. 678, 528 P.2d 766, the court was faced with the question of whether the board had authority to reduce the size of an otherwise proper medical or hospital services lien (see Lab.Code, s 4903, subd. (b)) upon an injured employee's compensation recovery (a settlement) on the ground that such reduction would be “fair and equitable” in light of a compromise and release of the employee's compensation claims with the employer and his insurer. The board held that the 1957 amendments to section 4904 gave the board an implied authority to reduce the liens in question. The court concluded that, in the absence of the lienholder's consent, the board has no authority to reduce a valid lien for proper medical or hospital services solely to accommodate such settlement. (Keifer, supra, 13 Cal.3d at p. 23, 117 Cal.Rptr. 678, 528 P.2d 766.)

In 1975, the Legislature enacted Labor Code section 4903.1, which permitted that which Keifer ruled improper.

At the outset of this court's analysis of the effect of subdivision (c) of section 4903.1, we note that substantially similar questions as presented by Kaiser here were made by the petitioners before the First Appellate District in Kaiser Foundation Hospital v. W. C. A. B. (Souza ), 42 Cal.Comp. Cases 512, where a writ of review was denied by the First Appellate District and the Supreme Court denied a hearing. The denial of a petition for writ of review and/or the denial of hearing by our Supreme Court do not necessarily indicate the appellate courts' agreement with the board's decision regarding the issues presented. (Cf. Prescod v. Unemployment Ins. Appeals Bd. (1976), 57 Cal.App.3d 29, 39, 127 Cal.Rptr. 540.) Thus, we must undertake an independent review of the issues presented by Kaiser.

I

Section 4903.1(c) Does Not Deny Kaiser Equal Protection

Kaiser contends that section 4903.1 denies equal protection of the laws, is arbitrary and does not bear a rational relationship to any legitimate state purpose.

Section 4903.1 does not apply to all lien claimants that have provided or paid for medical services to an injured for workers' compensation benefits but only applies to such lien claimants who are a “health care service plan, a group disability policy, a self-insured employee welfare plan, or a hospital service contract.” In order to evaluate whether section 4903.1 has any equal protection infirmity we must explore the meaning of these terms.

A

While neither section 4903.1 nor any other part of the Labor Code defines the terms “health care service plan,” “group disability policy,” “self-insured employee welfare benefit plan” or “hospital service contract,” the legislative history of section 4903.1 demonstrates the Legislature's intended meaning of these terms. As originally introduced Senate Bill No. 573, which became section 4903.1, would have added sections to the Government Code regarding “health care service plans” and added sections to the Insurance Code regarding “group disability policies,” “self-insured employee benefit plans” and “hospital service contracts.” While these additions to the Government Code and Insurance Code were deleted from the final enactment of Senate Bill No. 573, these proposed additions to the Government Code and Insurance Code demonstrate the Legislature's intended meaning of the various terms. Review of the relevant portions of the Government Code and Insurance Code where these eventually deleted additions were to be made reveals that the terms in question are clearly defined. By reference to the Government Code, Health and Safety Code sections 1340-1395 define and cover “health care service plans.” Insurance Code sections 10270(c)(3), 10270.5, 10270.505, and 10270.57 delineate “group disability policies.” Insurance Code section 10121(c) defines “self-insured welfare benefit plan.” A “hospital service contract” is covered in Insurance Code sections 11491-11516.5. Thus, the terms “health care service plan,” “group disability policy,” “self-insured employee welfare benefit plan,” and “hospital service contract” (hereinafter collectively called “Group Health Care Plans”) are not vague terms but are precisely defined by statute.

B

Kaiser's equal protection argument stems from the fact that section 4903.1 obviously treats the Group Health Care Plans dramatically differently from other medical lien claimants.

Categorization of Group Health Care Plans differently from other medical lien claimants cannot be said to create a suspect classification invoking the strict scrutiny doctrine. (See Meredith v. Workers' Comp. Appeals Bd. (1977), 19 Cal.3d 777, 780, 140 Cal.Rptr. 314, 567 P.2d 746; see also, Arp v. Workers' Comp. Appeals Bd. (1977), 19 Cal.3d 395, 138 Cal.Rptr. 293, 563 P.2d 849.) Therefore, in determining the equal protection challenge to section 4903.1, the rational relationship test is to be applied. This is the same test that has been applied by the courts in determining equal protection challenges to benefit classifications under the Workers' Compensation Act. (Meredith v. Workers' Comp. Appeals Bd., supra, 19 Cal.3d 777, 781, 140 Cal.Rptr. 314, 567 P.2d 746; Mathews v. Workmen's Comp. Appeals Bd. (1972) 6 Cal.3d 719, 738-740, 100 Cal.Rptr. 301, 493 P.2d 1165; Western Indemnity Co. v. Pillsbury (1915), 170 Cal. 686, 702-703, 151 P. 398; Saal v. Workmen's Comp. Appeals Bd. (1975), 50 Cal.App.3d 291, 300, 123 Cal.Rptr. 506; but cf. Arp. v. Workers' Comp. Appeals Bd., supra, 19 Cal.3d 395, 138 Cal.Rptr. 293, 563 P.2d 849.)

Wide discretion is vested in the Legislature in making the classification and every presumption is in favor of the validity of the statute; the decision of the Legislature as to what is a sufficient distinction to warrant the classification will not be overthrown by the courts unless it is palpably arbitrary and beyond rational doubt erroneous. A distinction in legislation is not arbitrary if any set of facts reasonably can be conceived that would sustain it. We presume the legislative classification is valid and will sustain it unless it is manifestly without support in reason. (Meredith v. Workers' Comp. Appeals Bd., supra, 19 Cal.3d 777, 781, 140 Cal.Rptr. 314, 567 P.2d 746; Mathews v. Workmen's Comp. Appeals Bd., supra, 6 Cal.3d 719, 738-740, 100 Cal.Rptr. 301, 493 P.2d 1165; Saal v. Workmen's Comp. Appeals Bd., supra, 50 Cal.App.3d 291, 300, 123 Cal.Rptr. 506.)

The classification of Group Health Care Plans cannot be said to be arbitrary. The inclusion of all medical lien claimants in section 4903.1 would undoubtedly result in the reluctance by many physicians and hospitals to treat any cases where there is any possibility of industrial injury. Group Health Care Plans are in a different position. Generally, Group Health Care Plans are in the position of having no discretion to deny treatment to a person covered under its medical plan while the question of industrial injury is being litigated. (See Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, 113 Cal.Rptr. 711, 521 P.2d 1103.) Further, Group Health Care Plans are a distinct group. They operate under agreements to provide or pay for the medical services required by the insured or subscriber for a periodic premium paid by or on the behalf of the injured. They can exclude from coverage treatment for injuries that are compensable under the workers' compensation laws. While they have the right to file a lien in workers' compensation cases for the reasonable value of the medical services provided or paid for by them for the industrial injury (Lab.Code, s 4903(b); see also Silberg v. California Life Ins. Co., supra, 11 Cal.3d 452, 113 Cal.Rptr. 711, 521 P.2d 1103) just as can any physician or hospital, unlike the doctor or hospital that charges an injured directly for the value of services rendered and can still seek payment from the injured in the event the injured turns out not to be entitled to workers' compensation benefits, Group Health Care Plans cannot proceed against the injured personally in the event the injury is not compensable under the workers' compensation laws.

Kaiser argues that section 4903.1(c) has no rational relationship to a legitimate state purpose. The court's language in Baird, supra, 59 Cal.2d 257, 269, 28 Cal.Rptr. 872, 879, 379 P.2d 328, 335, answers this contention:

“The Legislature has encouraged compromises. (Lab.Code, s 5000.) Now to permit a third party, a lien claimant who could assert no right to recoupment at all in the absence of a workmen's compensation proceeding, to interfere with the settlement and force the rendition of findings would be to nullify the procedure for compromise. (P) . . . A submission to the (appeals board), for its final determination, of a proposed basis for settlement is highly desirable, and the Legislature had manifested its intent to implement it. . . . ”

Kaiser ignores the valuable role of settlements. Not all claimed injuries are compensable. The obvious reason for permitting settlements is to give the injured the opportunity of receiving some “payment” for his or her claimed injury when otherwise if he or she went to a hearing benefits might be totally denied by the board.^[FN6]

In case the hearing results in a total denial of benefits to the workman, the Group Health Care Plan will be without recourse for the medical services provided, since its contract with the workman requires it, in consideration of the premium charged, to absorb the entire cost of its services. The other providers of medical and hospital services, however, may, at their option, either refuse to provide services without prior payment or (if they regard the prospective patient as financially responsible) rely on payment from him (or on his account) if they do not recover out of his workers' compensation benefits. The effect of the approval of a compromise and action by the board under subdivision (c) is, thus, to give the Group Health Care Plan, like the workmen, some payment.

C

Kaiser also contends the board will simply “rubber-stamp” settlements. A similar contention was made in Baird, supra. No compromise and release is valid unless it is approved by the board or the judge. (Lab.Code, s 5001.) In enacting section 5001, undoubtedly the Legislature was primarily concerned with protecting workmen who might agree to unfortunate compromises because of economic pressures or lack of competent advice. (Johnson v. Workmen's Comp. App. Bd. (1970) 2 Cal.3d 964, 972-973, 88 Cal.Rptr. 202, 471 P.2d 1002; Chavez v. Industrial Acc. Com. (1958) 49 Cal.2d 701, 702, 321 P.2d 449; see also WCAB Rules of Practice and Procedure section 10882 which mandates the board or the judge “to inquire into the adequacy of all compromise and release agreements.”)

II

Section 4903.1(c) Is Not Vague and Ambiguous and Does Not Operate to Deny Kaiser Due Process of Law

In arguing that section 4903.1 is ambiguous and hence denies due process, Kaiser raises the following questions:

(1) By what mechanism, at what level, and on the basis of what evidence does the appeals board make the determination?

(2) What procedure must a lien claimant follow to register his disagreement with the “allocation” to him in the proposed compromise and release?

(3) Does the lien reduction procedure apply in all cases?

(4) At what point in the proceedings is “potential recovery” to be determined?

(5) How is the reduction formula to be calculated and what express findings must the board make to arrive at “potential recovery”?

Since each of these “questions” is interrelated, they can be best answered by a unified analysis of the procedures under subdivision (c) of section 4903.1.

Subdivision (c) of section 4903.1 explicitly states:

“When the parties propose that the case be disposed of by way of a compromise and release agreement, in the event the lien claimant does not agree to the amount allocated to it, then the referee shall determine the potential recovery and reduce the amount of the lien in the ratio of the applicant's (injured's) recovery to the potential recovery in full satisfaction of its lien claim.”

Complementary to subsection (c) is section 10886 of the Workers' Compensation Appeals Board Rules of Practice and Procedure (Cal.Admin.Code, tit. 8, ch. 4.5, s 10886), which provides:

“Service on Lien Claimants. Where there is on file with the Appeals Board a claim of lien and a compromise and release agreement is filed which proposes the disallowance of the lien in whole or in part, the Appeals Board or referee will either take off calendar and suspend action or disapprove the agreement unless it is accompanied by proof of service of a copy of the compromise and release agreement upon such lien claimant.

“The lien claimant shall have ten days after service upon it of a copy of the compromise and release agreement within which to file and serve upon the parties a protest against the proposal, supported by copies of medical reports, documentary evidence, or offers of proof.”

From a practical viewpoint, the parties submitting the settlement will prepare and attach to the settlement papers documents which compute the lien reduction in accordance with subdivision (c). There is nothing improper with the parties doing so. For the employer (or his carrier) and the injured to prepare the formula saves needless delays; if the settlement papers set forth an arbitrary figure without any explanation the medical lien claimant will undoubtedly always object to the amount of the proposed lien reduction. By supplying the suggested formula to the judge, the lien claimant can determine if the suggested reduction complies with section 4903.1. If the lien claimant objects to the suggested reduction, then the judge can compare claimant's suggested reduction with that proposed by the settling parties. In issuing his decision on the lien reduction, the judge may simply incorporate by reference the formula suggested by lien claimant or the settling parties if he is satisfied that the formula computations prepared by the parties are correct. However, the judge may only so incorporate one of the submitted formulas if it fully complies with the requirements of subdivision (c) of section 4903.1.

The Gregory formula for reduction of Kaiser's lien was correctly determined by the board to be:

As to how “potential recovery” is calculated, we note that similar problems with determining the proper formula for the calculation for reduction of U.C.D. liens under section 4904 were confronted by the court in Baird, supra, 59 Cal.2d 257, 28 Cal.Rptr. 872, 379 P.2d 328. The court in Baird approved the computation of “total value” to be the sum of permanent disability (plus life pension, if applicable), temporary disability, past medical treatment and estimated future medical treatment. The court noted the “total value” of the injured's claim was computed “as if (the injured) were to prevail in all her contentions.” (Id. at pp. 260-261, 28 Cal.Rptr. at p. 874, 379 P.2d at p. 330; see also Oliver v. North Kern Hospital (en banc commission decision, 1964) 29 Cal.Comp. Cases 243, 244.)

We do not interpret “all . . . contentions” to mean bare assertions unsupported by medical reports or other information available to the parties. In this respect, the “potential” reflects what might be awarded if the claimant prevails on all fairly arguable contentions of fact and of law.

Kaiser argues that “potential recovery” must be measured by what the injured can reasonably expect to receive and that therefore a determination must be made as to the merits of the case to avoid the parties' exaggeration. Kaiser's argument ignores the function of settlements in workers' compensation cases. A compromise and release in a disputed compensation claim is a contrasting situation from a findings and award. In the special procedure of compromise, the board's role only involves the determination of the overall adequacy and general fairness of the settlement to all parties. (Baird, supra, 59 Cal.2d 257, 267, 28 Cal.Rptr. 872, 379 P.2d 328.) Where there is a reduction of a lien pursuant to section 4903.1(c), the board need only determine the “potential recovery.” To require the board to determine the “merits” of a case destroys the advantage of settlement.

However, where the parties prepare the Gregory formula in the hope the judge adopts it, they must set out in some detail those parts of the record which support the computation of the “potential value” of the matter. The simple statement in the formula as to dollar amounts of temporary disability, permanent disability, etc., is inadequate; should the judge adopt such an undocumented Gregory formula it would not be in compliance with the requirement of section 4903.1(c) that the judge “shall determine the potential recovery.” Unlike section 4904 for the reduction of U.C.D. liens, section 4903.1(c) has a specific requirement that the judge make such a determination of “potential value.”

Without the inclusion of such supporting data, neither the board, nor this court on review, can intelligently determine the correctness of the reduction included in the order approving the compromise.

Thus, in proposing the Gregory formula, the computation should include: (1) the percentage of disability; (2) the adjustments; (3) the dates of temporary disability; (4) the medical expenses to be reimbursed; and (5) the value and duration of future medical care. These items should be set forth in sufficient detail to assist the lien claimant, the board, and a reviewing court in determining whether the assumed potential value of the claim has been exaggerated.

If the parties fail to provide such an analysis, the judge, if the lien claimant objects to the lien reduction suggested by the parties, must take a similar computation of the Gregory formula.

In this case, the board, in computing the formula for the reduction of Kaiser's lien, relied upon figures supplied by the parties in the original settlement papers. Neither the board nor the parties provide the full details as to how such figures were computed. For example, in the Gregory case, there is no indication of how the figure of $6,500 in estimated future medical expense was arrived at or how the amount of the temporary disability was computed.

We also feel it is fundamental that, before any lien be reduced under subdivision (c) that the Group Health Care Plan lien claimant be served with all medical reports and other evidence which are before the board in the matter being settled. A Group Health Care Plan is entitled to be advised of the evidence supporting the basis for the reduction of its lien. Otherwise, a lien claimant's right to object to the computation of the reduction of its lien is meaningless.

Since the board has the power to adopt reasonable rules of practice and procedure (Lab.Code, s 5307), the board may promulgate reasonable regulations providing for the service of medical reports and other evidence upon lien claimants prior to reduction of their liens pursuant to section 4903.1. It would seem unreasonable for such reports and evidence to be served upon the lien claimant at the time the settlement papers are forwarded to the board for approval in light of the fact that section 10886 of the WCAB Rules of Practice and Procedure permits the lien claimant only ten days after service of the settlement papers upon him to object to the lien reduction.

The lien claimant has ten days after the settlement papers are served upon him within which to file with the board and serve upon the parties a protest regarding the settlement (WCAB Rules of Practice and Procedure, s 10886) and has the right to request a hearing on the reduction of his lien. (Baird, supra, 59 Cal.2d 257, 268, 28 Cal.Rptr. 872, 379 P.2d 328.) However, the board may properly ignore objections to the settlement and requests for hearings by the lien claimants where they are undocumented as required by WCAB Rules of Practice and Procedure section 10886. The requirement of documented objections prevents lien claimants from attempting to use the delay of approval of the settlement as a negotiating technique.

Our analysis of subdivision (c) of section 4903.1 leads to the conclusion that it is not vague and ambiguous. Further, section 4903.1 significantly does not contain any criminal standards or prescribe any duty or standard of conduct for covered lien claimants. (See Katz v. Department of Motor Vehicles (1973) 32 Cal.App.3d 679, 682, 108 Cal.Rptr. 424.)

“ In order to be valid, a legislative standard for administrative action need be sufficiently definite only to provide directives of conduct for the administrative body in exercising its delegated administrative or regulatory powers (In re Marks, 71 Cal.2d 31, 51, 77 Cal.Rptr. 1, 453 P.2d 441). Accordingly, legislative standards for administrative acts may be expressed in general terms and need not precisely detail the factors that are to govern the administrative agency and its employees (Sunset Amusement Co. v. Board of Police Commissioners, 7 Cal.3d 64, 73, 101 Cal.Rptr. 768, 496 P.2d 840).” (Katz, supra, 32 Cal.App.3d 679, 684, 108 Cal.Rptr. 424, 427.)

III

Application of Section 4903.1(c) to Medical Services Provided Prior to January 1, 1976

Kaiser contends section 4903.1 does not apply to medical services provided before the effective date of the statute, January 1, 1976. Kaiser argues that the retroactive application of the statute violates due process and would be an impairment of contract.

The board's view is that Kaiser's lien was not a “vested right” since the board had not approved the lien at the time the statute became effective; therefore, there was no due process objection to section 4903.1(c) being “retroactively” applied. Further, relying chiefly on Harrison v. Workmen's Comp. Appeals Bd. (1974) 44 Cal.App.3d 197, 118 Cal.Rptr. 508, the board found that subdivision (c) was intended by the Legislature to have retroactive effect in order to effectuate immediate legislative reversal of the court's decision in Keifer, supra, 13 Cal.3d 20, 117 Cal.Rptr. 678, 528 P.2d 766.

The question of the constitutionality of retroactive legislation and the question of retroactivity are distinct. (Aetna Cas. & Surety Co. v. Ind. Acc. Com. (1947) 30 Cal.2d 388, 393-394, 182 P.2d 159.) Thus, the initial issue is whether section 4903.1 is retroactive and, if so, whether it can constitutionally be retroactive. Once that is determined, the intent of the Legislature must be examined on whether it was desired to make section 4903.1 apply to medical services provided prior to January 1, 1976.

In Lohman v. Barker Bros. Corporation (1957), 22 Cal.Comp. Cases 247, 248, the board was faced with the question of whether the 1957 amendments to Labor Code sections 4903 and 4904 were retroactive and permitted the reduction of U.C.D. liens for benefits provided before the effective date of the amendments. In Lohman, the board stated:

“The Commission, en banc, has concluded that the statutes which have been amended are procedural and therefore apply to existing causes of actions and defenses. We are of the opinion that the right of the petitioner to a lien did not attach until the employee effected a recovery. See Record v. Industrial Indemnity Company (sic) (1951), 103 Cal.App.2d 434, 229 P.2d 851, 16 Cal.Comp. Cases 132. The petitioner had no lien rights until they became fixed as of the date of the original decision herein on September 20, 1957. On that date the petitioner's lien rights extended to temporary disability indemnity only. The applicant was awarded temporary total disability indemnity for a period that began February 22, 1955 and ended July 31, 1955. The Department of Employment will be granted a lien for the payments they made during that period. . . .”

Record v. Indemnity Ins. Co., supra, 103 Cal.App.2d 434, 229 P.2d 851, cited in Lohman, involved the Legislature's 1949 amendments to section 3856 which provided that in a third party action brought by the injured where the employer has a lien for workers' compensation benefits provided to the injured and the employer has not joined in the action and is not represented by an attorney, the court shall fix an attorney's fees payable by the employer to the injured's attorney out of the employer's recovery on his lien. Prior to 1949, there was no such provision regarding attorneys' fees. In Record the injured's attorney sought a fee out of the employer's recovery regarding a settlement reached after the effective date of the amendments. The court reasoned there was no retroactive application since the amendments were applied to a settlement made after the amendments became effective. In Record the respondent, who was the employer's carrier, made arguments of unconstitutionality and impairment of contract. (Record v. Indemnity Ins. Co., supra, 103 Cal.App.2d at p. 443, 229 P.2d 851.) At page 444, 229 P.2d at page 857, the court stated:

“This law does not give a previous transaction some different legal effect from that which it had under the law when it occurred. It does give a different effect to a future failure to join in or contribute to the employee's action but this new obligation is not based on a past transaction but rather on a future omission. Such a statute is necessarily prospective in its operation. (See City of New York v. Foster, 148 App.Div. 258, 133 N.Y.S. 152, 155.)

“Furthermore, . . . (i)n California the liability under the Workmen's Compensation Act is incident to the status of employment and is neither in tort nor in contract. (Quong Ham Wah Co. v. Industrial Acc. Com., 184 Cal. 26, 192 P. 1021, 12 A.L.R. 1190.) Regardless of what this basic relationship is termed, the employer's right to reimbursement, credit, or lien does not attach until the employee effects a settlement or recovers a judgment against a third party. Until then any theoretical contingent ‘rights' are at best inchoate. It is the recovery which fixes the employee's obligation to reimburse and, under the situations described in the amendment, the employer's duty to contribute just as . . . it is the date of injury which fixes and defines the employer's obligation to compensate.” (Emphasis added.)

Applying Record here it would appear that Kaiser's liens are merely “theoretical contingent rights” which are “at best inchoate.” Here it is the date of the settlement which determines whether a lien may be reduced, just as in Record it was the date of the settlement that determined whether the employer's lien was subject to Labor Code section 3856 as in effect at the time of settlement.

Similar in effect is Jenkins v. Workmen's Comp. Appeals Bd. (1973), 31 Cal.App.3d 259, 107 Cal.Rptr. 130. There the injured sustained an industrial injury on February 19, 1971. On March 3, 1972, the board awarded the injured temporary disability. On March 4, 1972, Labor Code section 3716 became effective. Labor Code section 3716 established a state approved fund (the Uninsured Employers Fund) which was to provide immediate compensation benefits if the employer failed to pay an award. The court held the payment of benefits from the Uninsured Employers Fund was in order even though the date of injury was before the effective date of the statute. The court stated: “The provision (Lab.Code, s 3716) does not create a new right having its origin in the initial injury. Rather, the right created is based upon the fact of nonpayment of an obligation already in existence, i. e., the award of compensation. It is this time (nonpayment within 10 days of entry of award), and not the time of injury, that effectuates section 3716. For this reason, the section is not, in effect, applied retroactively when an employee, whose award is subsequent to its effective date, is given the benefit of the statute.” (Jenkins v. Workmen's Comp. Appeals Bd., supra, 31 Cal.App.3d 259, 263, 107 Cal.Rptr. 130, 132.)

The court in Jenkins went on to say that the injured prior to March 4, 1972, only had an “inchoate right to compensation” and “(o)nly when the award of compensation was made . . . did a vested right to collection and payment accrue.” (Jenkins v. Workmen's Comp. Appeals Bd., supra, 31 Cal.App.3d at 264, 107 Cal.Rptr. at 133.) Thus, the court reasoned “it cannot be argued that the law is being applied retrospectively.” (Ibid.)

Thus, subdivision (c) of section 4903.1 when applied to all cases where settlement was not reached prior to January 1, 1976, is not being unconstitutionally retrospectively applied. Such an application of the statute is actually prospective from a constitutional point of view since Kaiser had no vested rights until a settlement was reached.

Nothing in Keifer, supra, 13 Cal.3d 20, 117 Cal.Rptr. 678, 528 P.2d 766, establishes that Kaiser had a “vested right” prior to settlement. In Keifer the Supreme Court concluded that the lien in question could not be reduced once the lien claimant had established a “prima facie” case. (Id. at p. 28, 117 Cal.Rptr. 678, 528 P.2d 766.) A “prima facie” case was stated to be sufficiently established “by submitting evidence that the lien arose by reason of services rendered the employee in connection with an injury or event for which the employee claimed and is awarded compensation under a compromise agreement.” (Id., p. 28, fn. 8, 117 Cal.Rptr. p. 683, 528 P.2d p. 771.) Thus, Keifer does not support the view Kaiser's lien was vested prior to the time settlement was effected. Of course, where settlement had been reached prior to January 1, 1976, section 4903.1(c) may not constitutionally apply.

We now turn to the issue of whether section 4903.1(c) was intended by the Legislature to apply only to medical services provided after January 1, 1976. That is, while section 4903.1 can be constitutionally applied to Kaiser's lien, the question is whether the Legislature so intended it to apply.

In determining how the Legislature intended section 4903.1(c) to apply, we are mindful of the rule that, in this regard, a statute must be interpreted so as to effectuate legislative intent. (Mannheim v. Superior Court (1970) 3 Cal.3d 678, 686-687, 91 Cal.Rptr. 585, 478 P.2d 17; Harrison v. Workmen's Comp. Appeals Bd., supra, 44 Cal.App.3d 197, 204, 118 Cal.Rptr. 508.)

In Harrison v. Workmen's Comp. Appeals Bd., supra, 44 Cal.App.3d 197, 118 Cal.Rptr. 508, it was held that Labor Code section 5500.5, as amended effective January 1, 1974, could be applied to claims arising out of injuries before the effective date of the amendment even though the Legislature used no language manifesting such an intent. Prior to the amendment, effective January 1, 1974, Labor Code section 5500.5 codified the rule announced in Colonial Ins. Co. v. Industrial Acc. Com. (1946), 29 Cal.2d 79, 172 P.2d 884, which allowed an employee in continuous trauma or occupational disease cases to recover against any one of many employments even though many employments may extend into the past for several decades and in allowing contribution and apportionment among such employments. (Harrison v. Workmen's Comp. Appeals Bd., supra, 44 Cal.App.3d 197, 199, 118 Cal.Rptr. 508.)

The board in Harrison noted problems which developed under the Colonial rule and these were noted by the court in its opinion:

“For example, the serious difficulties encountered by the parties in complying with the requirements of former section 5500.5 whereby employees and their attorneys were frequently compelled to expend much time, effort and money in tracing the applicant's employment history over the entire course of his adult life. Fading memory, bankrupt or dissolved firms, and record destruction would often make this job difficult if not impossible. Untoward delay would result in attempting to secure such records. Likewise, even where some records were available from the Social Security Administration, such records would often be incomplete, and substantial delay would invariably result while awaiting federal administrative response to requests for additional information.

“Preparing the application in compliance with such requirements became a difficult chore. When the employment history was collected, the applicant and his attorney then faced the difficult and expensive task of describing the names and addresses of the employers, the places of employment and the periods of employment in the application form. Further, the expense of reproducing the application forms and serving them by mail upon scores of employers was often placed upon the employee, constituting an additional burden upon the litigation of these claims.

“Tracing insurance coverage for the many employers who might be involved in such claims presented a virtually impossible task for the agency and for the parties involved in the claims. When a claim involving multiple employers and carriers finally reached the hearing stage, proceedings were often grossly encumbered by milling numbers of attorneys in the corridors and hearing rooms representing the numerous carriers and employers in the suit, each of whom had a right to appear and cross-examine the applicant and his witnesses. . . .” (Harrison, supra, 44 Cal.App.3d at p. 200, 118 Cal.Rptr. at p. 509.)

Labor Code section 5500.5, as amended effective January 1, 1974, limited liability to employers who employed the injured during the five-year period preceding the date of injury or the last date of occupational exposure to the hazards involved, whichever occurred first. In Harrison the court noted that the amended legislation was designed and introduced for the purpose of ameliorating the procedural morass which faced the board in multiple defendant cases. The court found it was “evident that the object of (the) legislation will not be effectuated unless the board is permitted to apply the amendment retrospectively as well as prospectively.” (Harrison, supra, 44 Cal.App.3d 197, 205-206, 118 Cal.Rptr. 508, 513.)

Here, the board argues Harrison is analogous to the passage of section 4903.1. In its Opinion and Decision After Reconsideration, the board points out the purpose of section 4903.1 was to alleviate an immediate situation caused after the Keifer decision similar to that in Harrison :

“Faced with a situation in which the law did not provide the Board with this power and considering the overriding intent of the workers' compensation laws to provide proper benefits to an injured worker as quickly and inexpensively as possible, the Legislature in its next session passed 4903.1. This legislation was meant to facilitate and provide for the expeditious handling of workers' claims, by stopping lien holders from thwarting the efforts of both applicants and defendants to compromise. Without Section 4903.1, lien holders could force cases to trial where both parties were in agreement and desirous of settling. The Legislature, faced with Keifer and aware of the adverse effect on workers' rights due to that decision, quickly passed curative legislation to rectify the problem.”

As did the court in Harrison, regarding section 5500.5, we can appropriately rely upon the board to advise on the procedural problems sought to be cured by legislation. We find the board's analysis persuasive and we hold that section 4903.1(c) was intended to have immediate effect and apply to liens where settlements were not reached prior to January 1, 1976.

The record before us in these four cases shows that there were defects in serving notice of the proposed compromise in some of the cases, in others that action was taken prior to the expiration of the time in which Kaiser was allowed to object; in all of the cases the documentation served on Kaiser did not comply with the due process requirement that we have set forth in this opinion and in all of the cases the Gregory formula did not contain in the supporting data that we have held must be included.

It follows that, although we conclude that subdivision (c) of section 4903.1 is constitutional as applied to the four cases now before us, and that it may constitutionally be applied in these four cases, the procedure followed by the board did not comply with the due process requirements herein prescribed.

In all four cases, the Opinions and Decisions of the board are annulled and the cases are remanded for further proceedings consistent with this opinion.

I concur in the results reached by the majority but I disagree with the majority's conclusion that Labor Code section 4903.1, subdivision (c), contains no constitutional equal protection or due process infirmity.

I agree with Kaiser's contention that section 4903.1, subdivision (c), denies to Kaiser equal protection of the laws, is arbitrary and does not bear a rational relationship to any legitimate state purpose. The majority finds that, by using the rational relationship test, there is a legitimate state purpose to sustain the legislation involved because of the policy to encourage compromises and settlements.

I do not consider the language used in California-Western States Life Ins. co. v. Industrial Acc. Com. (Baird) (1963), 59 Cal.2d 257, 28 Cal.Rptr. 872, 379 P.2d 328, as controlling in the case at bench, to preclude a finding that section 4903.1, subdivision (c), is invalid. I readily concede that compromises and settlements in the workers' compensation field play a valuable role in the system of providing adequate and expeditious compensation to injured workers. But, in my view, the policy cannot be used to justify an arbitrary deprivation of the rights of a lien claimant.

Thus, my major constitutional criticism of Labor Code section 4903.1, subdivision (c), is that it promotes settlements between an injured worker and the employer's compensation carrier without providing adequate protection to the lien claimant. I start with the premise that, in negotiations looking toward a compromise and release agreement, the applicant worker seeks to obtain the highest amount possible and the carrier seeks to pay the lowest amount possible. Therefore, a lien claimant's full claim represents a property interest which is adverse to both the injured worker and the employer's compensation carrier.

The amount of the reduction of the lien claim will either benefit the worker by increasing the amount he will receive in settlement or benefit the carrier by decreasing the amount the latter has to pay. In agreeing to a settlement, the applicant worker is concerned with the net amount he will receive after a lien claim has been satisfied. On the other hand, in agreeing to a compromise settlement, the carrier is interested in paying the lowest amount which includes both the net amount to the injured worker and the amount that will go to the lien claimant.

Under Labor Code section 4903.1, subdivision (c), the lien claimant does not come into the negotiating picture until the injured worker and the employer's carrier have reached a proposed settlement and set forth a reduced amount allocable to the lien claimant without any input from the claimant. Under subdivision (c), if the lien claimant does not agree to the amount allocated to the claimant, the referee is given the responsibility of determining the appli cant-worker's “potential recovery” in an adversary contested proceeding. The amount of the claimant's lien is then reduced in the ratio of the applicant's (injured worker's) settlement recovery to the “potential recovery.”

This formula of using the “potential recovery” of the applicant-worker against which is measured the applicant's settlement amount constitutes an arbitrary and capricious method of reducing the lien claimant's lien. The concept of “potential recovery” constitutes the highest possible amount of recovery which the applicant could obtain in a contested proceeding. This is completely different from a determination as to the amount of recovery which is reasonably probable in a contested proceeding between the applicant-worker and the employer's insurance carrier.

The factor of “potential recovery” ignores completely a determination of the reasonable amount of the value of the applicant worker's case, which takes into consideration the validity of the various contentions of the applicant and the employer or his carrier and the likelihood of each prevailing on such contentions.

Of necessity, the use of the potential-recovery formula works to the advantage of the applicant, or to the advantage of the employer's carrier, or to the advantage of both, since it will require a greater reduction in the amount of the claimant's lien than would the use of a realistic formula which would determine the estimated amount of the applicant's recovery reasonably probable in a contested proceeding.

Labor Code section 4903.1, subdivision (c), encourages the applicant-worker and the employer's carrier to use an inflated, arbitrary, potential-recovery formula for reduction in the amount which these two parties propose the lien claimant should receive, since the section requires the referee to adopt this formula in the event the lien claimant does not agree to the amount of its allocation.

I can find no rational state interest in promoting compromises and settlements that use the potential-recovery formula a formula which is speculative, arbitrary, and unrealistic, and that is purposely designed to work to the detriment of the lien claimant.

The majority points out that regulations of the Workers' Compensation Appeals Board require a service on lien claimants of the proposed compromise and release agreement reached by the applicant and the employer's carrier, and give a lien claimant ten days after such service to file a protest against the proposal to trigger the referee's employment of the “potential-recovery” formula. But these regulations do not, in my opinion, save Labor Code section 4903.1, subdivision (c), from being arbitrary, capricious and, hence, a denial to Kaiser, as a lien claimant, of its equal protection and due process rights.

A fair reading of Kaiser Foundation Hospitals v. Workmens' Comp. Appeals Bd. (Keifer) (1974), 13 Cal.3d 20, 117 Cal.Rptr. 678, 528 P.2d 766, compels the conclusion that Labor Code section 4903.1, subdivision (c), which was designed to correct the result which Keifer ruled improper, must be held to be constitutionally invalid.

I would annul the decisions of the Workers' Compensation Appeals Board on the ground that Labor Code section 4903.1, subdivision (c), is invalid as constituting a violation of a lien claimant's constitutional due process and equal protection rights.

FOOTNOTES

1.  Unless otherwise specified, all references herein are to the Labor Code.

2.  To the extent that a claim for medical services is resisted by the employer and its carrier under the circumstances set forth in subdivisions (a) and (b) of section 4903.1 and such position is sustained, a lien for medical services is allowed in full.

3.  In acting on the proposed compromise the referee had used a formula which the board, on reconsideration, found to be erroneous. The board adopted a different formula which we discuss later in this opinion. No objection to the board's formula (which we later refer to as the “Gregory” formula) is here made insofar as the mathematics involved are concerned. As we point out later, the Gregory formula is defective by omitting essential subordinate detail.

4.  On the records before us we need not, and do not, consider the application of subdivision (c) of section 4903.1 to cases where industrial causation is admitted and the only issue between the employer and its carrier is over the amount of the award.

5.  Section 4904:“If notice is given in writing to the insurer, or to the employer if uninsured, setting forth the nature and extent of any claim that is allowable as a lien, the claim is a lien against any amount thereafter payable as compensation, subject to the determination of the amount and approval of the lien by the appeals board. In determining the amount of lien to be allowed for unemployment compensation disability benefits under subdivision (f) of Section 4903 the appeals board shall allow such lien in the amount of benefits which it finds were paid for the same day or days of disability for which an award of compensation for temporary disability indemnity is made. In determining the amount of lien to be allowed for unemployment compensation benefits and extended duration benefits under subdivision (g) of Section 4903, the appeals board shall allow such lien in the amount of benefits which it finds were paid for the same day or days for which an award of compensation for temporary total disability is made. In the case of agreements for the compromise and release of a disputed claim for compensation, the applicant and defendant may propose to the appeals board, as part of the compromise and release agreement, an amount out of the settlement to be paid to any lien claimant claiming under subdivision (f) or (g) of Section 4903. The determination of the appeals board, subject to petition for reconsideration and to the right of judicial review, as to the amount of lien allowed under subdivision (f) or (g) of Section 4903, whether in connection with an award of compensation or the approval of a compromise and release agreement, shall be binding on the lien claimant, the applicant, and the defendant, insofar as the right to benefits paid under the Unemployment Insurance Code for which the lien was claimed. The appeals board may order the amount of any lien claim, as determined and allowed by it, to be paid directly to the person entitled, either in a lump sum or in installments. . . .”

6.  While section 4903.1(c) has been interpreted to mean the employer and the injured can settle around the Group Health Care Plan lien claimant (Permanente Medical Group v. Workers' Comp. Appeals Bd. (1977) 73 Cal.App.3d 135, 140 Cal.Rptr. 612), employers are often reluctant to settle cases piecemeal.

KINGSLEY, Associate Justice.

FILES, P. J., concurs.