Calif. Workers’ Comp: The Road to Rehabilitation

We all know what the problems are in the California workers’ compensation market, and now it’s time for the solutions. With the upcoming election well underway, California will soon see a new Insurance Commissioner who will hopefully shine the light towards a vibrant, healthy insurance market in the state of California, starting with workers’ comp.

Of course, the new Commissioner cannot solely bear the brunt of the industry’s troubles. A key piece to finding a solution to the crisis will be by introducing new legislation to address issues that need to be reformed, said Kathy Marlon, president of California Indemnity Insurance Company (CIIC).

“Probably one of the biggest things we’d like to see change in the California market is medical control. We operate in a number of states, and… our costs, from a carrier standpoint, are much more predictable, not necessarily always lower, but they’re much more predictable. Carriers [in California] can’t get a good handle on what their costs are going to be, so they continue to raise rates,” said Marlon.

“One of the things we think would be helpful in bringing some predictability of costs for carriers is having a standardized, uniformed fee schedule, not just for medical services, but for all services—any services connected with the workers’ comp system,” said Jim Zelinski, spokesperson, State Compensation Insurance Fund. “By putting cost predictability back, we think that would help encourage other carriers to enter or re-enter the system. That alters competitiveness in the system.”

Candidates’ get the last word
At the most crucial point in their respective campaigns, the two forerunners of the Insurance Commissioner race took some time to address the state of the workers’ comp market, perhaps the most troubling aspect of California’s insurance market.

“I will first get the Department more focused on cracking down on workers’ comp fraud,” said Republican nominee Gary Mendoza. He also stated that he will “undertake a comprehensive review of the financial status of the State Fund; make every effort to attract new entrants into the state’s workers’ comp market; and begin to develop the political will to make the systemic reforms that will ultimately be necessary to pull the current system out of crisis.

“When I am Insurance Commissioner, I will fight to protect two interests—the interests of legitimately injured workers and the interests of the employer community that is paying the bills,” continued Mendoza. “Right now, these are the two interests most poorly served by the current system.”

Democratic nominee John Garamendi held other sentiments: “We must work to bring insurers back into California to broaden the market. The first thing I will do is use the power of the Department to gather information about the medical and other cost drivers which contribute so much overhead to the system. Once the Department has that information, I will create a task force to develop strategies to address the inefficiencies in the system, so that we can bring down costs, which are in the top tier across the nation, and provide adequate and timely benefits. The Department of Insurance must also work closely with the Department of Industrial Relations and private carriers to promote workplace safety, which will prevent claims in the first place and reduce rates.”

State Fund looks to simplify
California’s State Compensation Insurance Fund has taken several steps in recent months to alleviate concerns over the company’s financial stability. In September, Aon Re Worldwide, (the global reinsurance intermediary of Aon Corporation), completed a $1.45 billion reinsurance program, reinsuring all losses incurred from 1980 through 1998 up to the $1.45 billion limit.

“We’re going to continue to educate the legislature about market conditions, continue to offer suggestions to simplify this system,” said Zelinski. He also noted that the company has worked closely with the Commissioner’s office, the legislature and employers to inform them of the condition of State Fund via participation in meetings and reports.

Additionally, State Fund president Kenneth Bollier met with senators and their staff in Washington D.C. earlier in the year to urge the passage of federal terrorism backstop legislation. “That was designed obviously to protect the workers’ comp safety net for millions of employees and hundreds of thousands of employers across the nation,” said Zelinski.

Just last month, Bollier announced his resignation as president of State Fund effective Jan. 1, 2003. Taking his place will be Diane Oki, who currently serves as executive vice president of State Fund. “Ms. Oki has 34 years of experience and she knows the inner-workings of the legislature and the various changes and watershed events in the workers’ comp system,” said Zelinski. Bollier’s departure presents the unique opportunity for Oki to take the reins and steer State Fund in a direction that is most positive in ensuring the company’s stability.

Can open rating ever work?
Some critics have encouraged the Insurance Commissioner to get rid of the open rating system in California, which was implemented in 1995, saying that the system was the cause for the intense competition and severe under-pricing between private carriers in the late ’90s, many of whom subsequently became insolvent. The current crisis has left many to question the viability of open rating.

“To make open rating successful, the Department must strengthen its financial oversight and make an affirmative effort to attract more market participants,” said Mendoza.

“It can be successful if the Department of Insurance does what the Quackenbush administration failed to do—review the solvency and financial strength of the insurance companies and require adequate pricing levels,” said Garamendi. “By preventing the type of foolish action that insurance companies took after the minimum rate law was repealed, causing 13 companies to go bankrupt and several others to teeter on the edge, an open-rating system can work.”

“I think open rating could work, I think it would work better if the costs were a little bit more predictable. The thing that’s driving the costs right now is the runaway medical,” said Marlon.

Eliminating litigation in the system
A catalyst for the workers’ comp crisis was the increased litigation imposed by trial lawyers in the past, a problem that continues today, despite California’s no-fault system. “It’s too easy to litigate a workers’ compensation claim in California,” said Kyle Fritzfinger, vice president of Claims, CIIC. “The attorneys are very aggressive in representing the injured workers. They’re allowed to advertise, they’re fees are based on the amount of disability that an injured worker gets—it’s all to their benefit to litigate. And the injured workers feel that they need to litigate because they have no other recourse.

“So, we don’t have a very good system in place to allow injured workers to come to an arbitrator if you will, or a commissioner or representative of the DWC; and state their case, and then have a representative from the insurance carrier or the employer there to state theirs, and have an arbitration of sorts on those issues without attorneys being involved. In Texas, it’s a two-tiered system—and their first tier does not allow attorneys to be involved. I would like to see that happen—more advocacy maybe for the injured worker, without an attorney,” added Fritzfinger.

Garamendi acknowledged the excess amount of litigation in the system. “My Workers’ Compensation Task Force will address that issue,” he said. “Because the Department of Insurance will be policing the insurance industry to insure that insurance companies are properly dealing with claims, there will be fewer issues to litigate, and that will lower costs.”

Mendoza offered this suggestion: “We need to look for ways to streamline a system that is much too complicated and includes too many incentives for litigation. Alternative dispute resolution mechanisms also need to be an increasingly important part of the system.”

Fighting fraud; firming permanent disability
Fraud has long been a problem in the insurance industry as a whole as more and more people succumb to criminal activity with hopes of never getting caught.

“Fraudulent claims are a major problem, and as the recession deepens, they will become a bigger problem as people seek to take advantage of the system,” said Garamendi. “As California’s First Elected Insurance Commissioner, I initiated a fraud unit where the sworn police officers in the Department of Insurance worked with local law enforcement agencies to root out organized criminal activity that set up fraudulent claims and vigorously prosecuted fraud claims. We will re-invigorate that system, working with carriers’ fraud units to crack down on fraud to protect insurers, employers, and legitimate claimants.”

“This must be a major priority,” said Mendoza. “The perpetrators of fraud must be criminally prosecuted, and I intend to work with county DAs to bring this about. Where appropriate, fraud participants should have their professional licenses suspended or revoked.”

The permanent disability rating system is a major target of criticism due to its lax rating guidelines and has become a hotbed for fraud perpetrators.

“In California, we have a very elaborate, permanent disability rating system, and it could be simplified,” said Fritzfinger. “It is very subjective. [I think we should] simplify the ratings that we have for the objective findings and the work restrictions. It’s a very complicated process to go through and evaluate a medical report and come up with a rating. The state has raters, and if you give each of the raters the same medical report, it’s very likely that each one of them will rate it a little differently. There’s no consistency.”

“If we could, we’d probably follow the permanent disability guidelines that other states have adopted, which would be the AMA guidelines,” added Marlon. “That’s a simpler process with less subjectivity to it.”

To comment on this story, e-mail cbeisiegel@insurancejournal.com

Topics California Carriers Fraud Workers' Compensation Market