Calif. Legislature Settles on Workers’ Comp Reform Package

With the lawmakers facing the most serious pressure in years to do something about California’s broken workers’ comp system, the state legislature earlier last month passed a six-bill armada designed to reign in system costs, drive down prices and attract more insurers into the marketplace. It is the most serious and far-reaching effort at workers’ comp reform in a decade.

Although the legislature tried to get promises from the industry to reduce their rates in response to the legislation, insurers are taking a wait-and-see stance to see how new laws play out. Their attitude was partly in response to the state rating bureau’s preliminary estimates that cost savings may not be as great as touted, partly in response to language in the bills, and partly in anticipation of unintended consequences that might arise from the laws.

They’re also holding out hope that the legislature next year will tackle other outstanding issues like the state’s inconsistent permanent disability rating system and laws governing penalties for late payment of benefits.

The final package—mainly through Assembly Bill 227 and Senate Bill 228—repeals vocational rehabilitation, limits chiropractic and physical therapy visits to 24 for each claim, creates fee schedules for pharmaceuticals, outpatient facilities, and increases penalties for fraud among many other provisions. But the bills also include cost drivers, including requirements that insurers review their insureds’ injury and illness prevention plans, something that Cal-OSHA already does.

Gov. Gray Davis is expected to sign the bills, which could shave $5.3 billion in one-time savings and annual, ongoing savings between $4.8 billion and $5.5 billion, according to estimates made by conference committee consultants.

At the high end, that would constitute an 18 percent decrease in system costs in what’s been labeled a $29 billion system. (The insured market is expected to grow to $20 billion in gross premiums this year, there’s an additional $3 billion in the private self-insured market and an estimated $6 billion that public and state agencies will pay out this year, according to the Workers’ Compensation Insur-ance Rating Bureau).

The Bureau is in the midst of analyzing the bill. Even if the Rating Bureau agrees with original estimates, insurers are wary. They warn that there won’t be a flood of new competitors entering the market and that they won’t reduce rates until they see clear signs that reforms are working.

“There is a definite possibility that the numbers are overly optimistic,” said Nicole Mahrt, spokeswoman for the American Insurance Association. “Obviously insurers want to see how things are implemented and how it all develops. Rates are not going to go down overnight.”

Some insurers said privately that they think savings will be half of what has been projected.

One of the problems, according to Mark Webb, state relations manager for American Insurance Group’s western region, is that there seem to be a number of loopholes and mistakes in the way the bills were written. He said many provisions could eventually be decided by the Workers’ Compensation Appeals Board, which resolves disputes in the system. That, of course, makes for more uncertainty.

“It’s hard to say if the savings can be achieved,” Webb said. “There are a profound number of questions about the language as well as inconsistencies in the language in major areas that the Legislature sought savings.”

Webb said that due to the tinkering with the system last year via Assembly Bill 749 and now this year’s bills, insurance companies’ claims adjusters will be challenged to properly pay claims since procedures will now vary for claims depending on the date of injury. He said they have to be mindful of laws affecting pre-2003 injuries, which will differ from pre-2004 claims and now there will be different laws affecting injuries that occur on or after Jan. 1, 2004.

In addition, Insurance Commissioner John Garamendi recently said reform efforts are not finished. He wants to see the state’s highly inconsistent permanent disability rating system overhauled so that injured workers’ impairment ratings will be more consistent. If he gets his wish next year, that would paste yet another set of regulations to the books for injuries occurring in 2005.

Last week, the Rating Bureau responded to the legislation by proposing a decrease of 2.9 percent in next year’s average pure premium rates. It also plans to continue looking over the language in the measures over the next month to see if a retroactive change to pure premium rates is necessary. That could affect the 7.2 percent increase that took effect July 1.

State Compensation Insurance Fund said recently that it would follow the Rating Bureau’s recommendations before taking any action on its own rates. But it was more positive than other insurers.

“We anticipate that these measures will result in system savings and a return rate stabilization,” said Diane Oki, State Fund’s president. The legislation “addresses a number of the system’s cost drivers and brings the first true systemic reform of the system in a decade.”

Topics California Carriers Legislation Workers' Compensation