Workers’ Compensation Legislative Reforms in California

Avoiding the Trap of Failed Promises

After four months of debate and intense pressure from the business community, the California Legislature and Governor Arnold Schwarzenegger approved a comprehensive workers’ compensation reform bill designed to reduce system costs. SB 899, authored by Senator Chuck Poochigian, R-Fresno, was signed in to law on April 19th, amid fanfare and high expectations. Like insurers, employers, nonprofit organizations, school districts and local governments have been struggling to keep up with the skyrocketing unpredictable costs of workers’ comp in California. Now that SB 899 has become law, employers are eager to see a decline in workers’ comp costs.

The good new is the actuaries at the Workers’ Compensation Insurance Rating Bureau (WCIRB) estimate that the newly approved reform measure will save approximately $3.3 billion if the bill is implemented properly and withstands court challenges. The WCIRB also reports there will be additional cost savings once the Division of Workers’ Compensation adopts a schedule for permanent disability ratings. The permanent partial disability rating schedule is required to be done by January 2005. Despite this optimism, a look at California’s past track record on implementing system reforms shows that what you see is not always what you get.

Experts hope that the 2004 reform effort will be different from previous attempts and that changes will materialize into cost savings and not become cost drivers as past reforms have done. For now, insurers are busy reviewing and implementing the major changes in SB 899. While the industry is optimistic, it will take time and new loss experience to see if SB 899 will make a critical difference in California’s struggling workers’ comp system.

This analysis takes a close look at past reform efforts and documents that prior attempts to improve California’s workers’ comp system became failed promises. A look at the past will show why there is more work to be done to protect the 2004 reforms from regulatory implementation problems, judicial challenges and unintended consequences, so that the promises of SB 899 can be fulfilled.

A look at the past
California has a history of passing workers’ compensation reforms that are touted as major cost cutters, but end up becoming cost drivers because of unintended consequences, litigation and implementation problems.

Major workers’ comp reform measures have been passed in three legislative sessions during the past decade—1993, 2002 and 2003. In each instance, the legislative reforms were touted as being significant in helping to reduce costs, particularly with medical-legal evaluations, medical treatment and litigation.

However, a close examination shows these reforms fell short of expectations because of judicial activism, budget cuts, drafting problems and the law of unintended consequences.

Well-intentioned people chose incremental, politically compromised approaches that in the end increased the complexity and cost of the system.

The facts presented below are not intended to suggest that all reforms are doomed to fail. Rather, the main lesson we should learn from these past reform efforts is that passing legislation is only the first step – effective implementation and proper interpretation are also critical over the longer term.

These experiences also underscore the importance of assuring that future reforms are comprehensive in scope and carefully woven together.

1993 Legislation
Legislation: SB 1005 (Lockyer) and AB 110 (Peace)
Intent: Contain medical treatment costs and limit the number and cost of medical-legal evaluation reports.

Failed Promises:
Introduction of managed care networks: Entities such as health maintenance organizations, preferred provider organizations and group health insurers were given the ability to seek certification from the Division of Workers’ Compensation (DWC) to become a health care organization (HCO), which is a managed care network authorized expressly to provide medical care for employees injured on the job. By contracting with an HCO, self-insured employers and insurers could extend the period of medical control from 30 days to as much as 365 days, depending on whether the employee was offered group health insurance and the employee’s personal physician was affiliated with an HCO. In the 10 years this reform has been on the books, it has never really taken hold. Today, there are 16 certified HCOs, which cover fewer than 500,000 employees.

Greater legal weight given to treating physician’s opinion: A cornerstone of the 1993 reforms was a provision giving the primary treating physician’s report a “presumption of correctness” regarding opinions on permanent disability. Legislators thought that this reform would discourage the parties from seeking rebuttal reports, thus cutting the number of medical-legal reports. In 1996, the Workers’ Compensation Appeals Board held (Minniear v. Mt. San Antonio Community College District) that: (1) the presumption of correctness applied to all medical issues, including treatment; and (2) a treating physician’s opinion must be proven to be erroneous, incomplete or legally incompetent to be rebutted. This decision made it impossible for a self-insured employer or insurer to rebut a medical-legal evaluation or terminate unreasonable, unnecessary, excessive or incompetent care. This presumption was repealed in 2003, except as it relates to opinions rendered by treating physicians who are pre-designated by employees. It is acknowledged that some physicians are using the pre-designation exception to “game” the system.

New fee schedule for hospitals: DWC was required to promulgate a fee schedule to control the unit price of hospital services. Unfortunately, as this provision was drafted, the fee schedule did not apply to hospital outpatient care, opening up a new area for abuse in terms of billings. Moreover, even though DWC is required to revise the official medical fee schedule for physicians and hospitals every two years, it has been revised by DWC only two times for physicians and three times for hospitals since 1994.

Bottom line: As these reforms took effect in the late 1990s, average medical and medical-legal evaluation payments, litigation and claim duration all increased. From 1993 to 1999, medical payments and medical-legal payments per claim tripled, and the litigation rate jumped 70 percent.

2002 Legislation
Legislation: AB 749 (Calderon)
Intent: Offset a significant portion of the cost of benefit increases through cost-cutting system reforms.

Failed Promises:
New fee schedule for outpatient surgery facilities: DWC was required to promulgate a fee schedule to control the unit price of services provided by outpatient surgery centers. An amendment to this provision required the use of data that would not have been available for several years. The anticipated savings were never realized. This reform was supposed to save $100 million.

New fee schedule for pharmaceuticals: DWC was required to promulgate a fee schedule to control the unit price of pharmaceuticals. The state budget constraints forced Governor Davis to cut DWC’s funding for FY 2002-03. This fee schedule was not promulgated. This reform was supposed to save $200 million.

New court administrator position: The governor was supposed to appoint a court administrator to oversee the adjudicatory process at the trial level to make it simpler and more efficient. The budget cuts to DWC left no money to fill this new position. This reform was supposed to save $55 million.

Bottom line: The staff analysis relied upon by the Legislature and Governor Davis opined that the benefit increases would be $2.4 billion, and that the cost savings would be approximately $1.5 billion. The Workers’ Compensation Insurance Rating Bureau estimated the cost of benefit increases to be $3.5 billion (including a factor for increased utilization of benefits due to the increased benefit amounts).

2003 Legislation
Legislation: AB 227 (Vargas) and 228 (Alarcon)
Intent: Curb rising medical costs by creating fee schedules and utilization guidelines for medical treatment.

Failed Promises:
Drafting errors: The Legislature made numerous technical and other errors that muddled the legislation’s intent. Soon after Governor Davis signed these measures, Insurance Commissioner Garamendi urged the Legislature to take immediate action and pass legislation to clean up the language in these bills: “Make the language clear and unmistakable in its intent so that all of the savings may be realized. And do this before Jan. 1 so that the benefits will be realized immediately.” The Legislature finally included most of the clean-up language to correct these errors and omissions in SB 899.

Utilization guidelines: DWC is supposed to study and adopt utilization guidelines for medical treatment. On an interim basis, self-insured employers and insurers are required to adopt utilization review systems, consistent with the American College of Occupational and Environmental Medicine (ACOEM) Occupational Medical Practice guidelines. A presumption of correctness attaches to these guidelines, effective March 22, 2004. That said, however, because there are ambiguities in the statutory language, the utility of the presumption remains questionable. In fact, a workers’ compensation judge in southern California has indicated that he will ignore the requirement that these guidelines be presumed correct. Other judges question the constitutionality and retroactivity of this law. Moreover, the local offices of DWC did not until recently even get these guidelines—because each copy costs $199. This reform is supposed to save $1.0 to $1.5 billion.

Stricter fee schedule for pharmaceuticals: To further reduce reimbursement amounts payable under the pharmaceutical fee schedule, the provisions governing its promulgation were repealed and the reimbursement amounts were pegged at 100 percent of the Medi-Cal rates. Pharmacies are claiming they cannot afford to accept this lower rate and still serve injured workers. Some pharmacies are threatening to charge full price, which would force injured workers to seek reimbursement from insurers or self-insured employers. Other pharmacies are threatening not to fill prescriptions for injured workers, or to seek legal action. Legislation introduced by Senator Bob Margett is pending to increase the pharmaceutical fee schedule. This reform is supposed to save $400 million.

Statutorily reduced fee schedule for physician services: The rates reflected in the official fee schedule for physician services, in the aggregate, were reduced five percent, so long as no reduction would fall below the Medicare fee schedule rate. Some physicians are threatening to refuse to provide medical treatment. This reform is supposed to save $100 million.

Limitation on chiropractic and physical therapy: Chiropractic and physical therapy treatments were limited to 24 visits each for the life of a claim, with provision for self-insured employers to authorize supplemental treatments. Educational programs are already being offered to teach chiropractors “how to” circumvent these visit caps. This reform is supposed to save more than $1.1 billion.

User-funding for DWC: The share borne by employers was increased from 20 percent to 100 percent to cover the cost of DWC. This funding change was made to give DWC the necessary resources to implement new fraudulent claim reporting and medical billing requirements, and to develop utilization guidelines for medical treatment. This change was “chaptered out” by budget control language in the 2003-04 State Budget Act, preventing the new user-funding formula from actually becoming law. The Legislature finally was able to fix this funding problem with language in SB 899.

Injury and Illness Protection Program (IIPP): Beginning Jan. 1, 2004, every insurer is required to conduct a review of each insured’s IIPP within four months of writing a new policy and to issue a written report from a reviewer that is an independently licensed California professional engineer, certified safety professional or certified industrial hygienist. This does not apply to renewal business, but only to businesses that are moving from one insurer to another. For small employers, this makes it virtually impossible to leave the State Compensation Insurance Fund, since the cost of the review in some cases would more than double their premium. Although a reasonable modification to this new law is part of SB 899, there still will be some additional costs arising from the modified IIPP program.

Bottom line: The delays, litigation and refusal or inability to implement past reforms jeopardized the savings that were supposed to be generated by the past three reform efforts, thus underscoring the need for timely and appropriate implementation of SB 899. All concerned Californians should pay close attention to the implementation of the new reforms and the development of the disability rating schedules and regulations to make sure that the projected cost savings are achieved, and to avoid the trap of failed promises.

Debra Ballen is the executive vice president of Public Policy Management at the American Insurance Association (AIA).

Topics California Carriers Legislation Workers' Compensation Talent