Legislature Committee Looks for Answers in Calif. Workers’ Comp Crisis

Trying to bring rate relief to California’s employers, the Legislature’s special Workers’ Compensation Conference Committee recently focused its reform aims on a magic number of $3.5 billion in savings.

If they can achieve that much in savings in the system, that would only stave off an expected 12 percent increase in rates at the start of 2004 and not actually reduce rates. To achieve just another five percent savings, researchers told the committee, it would have to cut another $1.5 billion from the system. With that daunting task before them the bicameral committee of four Democrats and three Republicans launched three days of hearings.

The committee, clearly under pressure to bring down spiraling rates in California, delved into serious reform ideas, including capping visits to chiropractors and physical therapists, instituting a pharmaceutical medical fee schedule, making new fee schedules to cover medical procedures not currently covered by existing schedules and repealing the presumption of correctness for treating physicians in all claims even on a semi-retroactive basis. They also discussed other reforms that could result in administrative efficiencies followed by reduced administrative and frictional costs.

To achieve these reforms the conference committee brought in 20 existing workers’ comp bills from which they would meld a reform product that they hope will curb the eye-popping growth workers’ comp claims costs have exhibited since the mid-1990s. While the conferees, including co-chair Sen. Richard Alarcon (D-San Fernando Valley), clearly were hoping for immediate rate rollbacks in the wake of any reforms they passed, the state’s insurance commissioner, John Garamendi, advised a more cautious approach.

“(This reform plan) is by no means the final solution,” he said last week. “This problem was years in the making and we cannot fix it overnight.”

And what’s not yet clear is if some of the lofty savings figures the committee is aiming for actually play out the way the legislators and researchers anticipate. After all, warned one industry lobbyist, the devil is in the details and legislators must codify reforms with care.

“We are approaching workers’ compensation reform from a direction it’s never been approached from before,” said Mark Webb, head of government relations for American International Group in California. “We have a target number. The problem is that it creates a greater opportunity for unintended consequences after the reform is done.”

Here’s a list of some of the more substantial reforms bandied about during three days of conference committee:
• Create an outpatient facility fee schedule: Would save $3.35 billion in one-time costs and $931 million annually.
• Creating a pharmaceutical fee schedule: Could save up to $407.4 million next year.
• Create an official utilization schedule that would limit the amount of visits per procedure: Could reduce medical costs by 50 percent and shave $1.9 billion annually from the system.
• Impose a cap on visits to chiropractors and physical therapists: Depending on the cap, these provisions could save an estimated $989 to $1.16 billion a year.

The committee also looked at limiting tying all existing and future fee schedules to a so-called Relative Value Based and tied to 120 percent of Medicare. The provision would not save money on the surface, but would create a more predictable and easy to administer medical payment system.

Other likely reforms presented focused on reducing the time that claims adjuster have to pay medical bills, increasing penalties for late payments, and establishing a certification or continuing education system for claims administrators.

The cadre of bills that were sent to the conference committee contained most of the reforms that the committee hashed out. Many of the bills were endorsed by Garamendi and Gov. Gray Davis. Herb Schultz, acting secretary for the Labor and Workforce Development Agency presented the package on Davis’ behalf, but the committee pooh-pooed the largest part of his proposal—inserting a managed care model into the workers’ comp system. Alarcon and co-chair Juan Vargas, (D- Chula Vista), both pressed Schultz on research to back up his claims that including independent medical review of medical treatment would cut costs by $1.9 billion. Schultz couldn’t cite any research to back up the administrations expected savings claim.

In a gallery stacked to the rafters with fine-pressed suits containing lobbyists, corporate officials, politicians and their staff, the committee members said they understood that they have to take action to patch up the system’s tattered seams. As a backdrop for spiraling premiums and out-of-control claims cost inflation they were regaled with tales of woe from government officials and system stakeholders who have been warning them of these stormy times for three years. They were told of the 30 insurance company failures that have taken place since 1999, a vetting that’s led to a lack of carriers to write business in the state. Employers told them about premium increases that are forcing them to scale back operations or consider moving out of state. And they were told of State Compensation Insurance Fund’s problems, its dispute with Garamendi over reserves and its continuing efforts to raise capital by boosting rates and to stabilize the amount of business on its books.

“We are solvent and cash flow is good,” said Pat Quintana, government relations officer for State Fund. “Our surplus should be stronger and we have premium to surplus issues. The only way to relieve the pressure is for the national carriers to write more business.”

State Fund has sued to keep Garamendi from taking over the quasi-governmental insurer of last resort. Garamendi asserts that the company is under-reserved by $1 billion and that as a result State Fund’s surplus stands at about $500 million, rather than the $1.44 billion the insurer claims in its financial statements.

“I assure you that I have no desire or intention to take over the State Fund as they allege, and I have publicly stated that I want to work cooperatively to help it address its difficulties,” Garamendi told the committee. “But make no mistake. There are only two ways for State Fund to recover: raise premiums to even higher levels or benefit from real reform by this legislature.”

Also, Garamendi said, national carriers would start writing business again if claims costs were more predictable.

But the one thing Alarcon could not extract from the industry and State Fund were any promises that they’d immediately reduce their prices if the Governor signs substantial reforms into law. Judging from his tone, Alarcon could be pondering how he could mandate that insurers drop rates to match reform savings.

Topics California Carriers Claims Workers' Compensation