Workers’ Comp: System Having Negative Impact on Calif.

If you are a commercial insurance broker in California, you know first-hand the frustration and concern of your customers when you offer quotes for workers’ compensation coverage.

Average employers with good claims history are seeing 40 to 60 percent increases in their premiums. Current estimates project that California’s businesses will pay $20 billion for workers’ comp insurance in 2003. In fact, system costs and accompanying premiums are up significantly from 2002, and are projected to continue escalating.

The business community is already struggling under California’s slow economy. The ongoing dramatic increases in workers’ comp costs are taking larger and larger chunks out of the bottom line for California’s small businesses. Employers have no choice but to find the money for these higher costs, because workers’ comp coverage is mandated by law. After businesses overcome the sticker shock of workers’ comp coverage, they begin to ask the next logical question: why are costs going up so high and so fast?

Those unfamiliar with California’s workers’ comp system might think insurers are overcharging. This is far from reality. Insurers are struggling to manage the unpredictable losses that are driving up costs. California’s cost-drivers—the highest frequency of permanent partial disability in the country, excessive medical treatment utilization, excessive dispute and litigation—are jeopardizing the stability of the state’s workers’ comp system. The Workers’ Compensation Insurance Rating Bureau (WCIRB) recently estimated that California insurers are under-reserved by $13.7 billion.

A recent study released by a non-profit, nonpartisan public policy research organization took a closer look at why California’s workers’ comp benefit delivery system is so much more expensive than other states. The Workers’ Compensation Research Institute (WCRI) found that California and Florida have higher benefit delivery costs compared to other states’ systems, even among states that are generally considered to be higher-cost states. Medical management costs, litigation and claims adjusting expenses are the reasons that California and Florida’s system costs are three times higher than Connecticut and Wisconsin, two states not otherwise considered to be lower-benefit cost jurisdictions.

These nagging problems—which workers’ comp experts have noted for years—continue driving up employer costs, imposing on California employers an ever-higher “tax” on doing business, and contributing to an economic climate increasingly hostile to job creation and retention.

Today, California’s workers’ comp system continues to struggle under inefficiencies and skyrocketing costs, despite intense negotiations for the last four years. Since 1999, Gov. Gray Davis (D) and state legislators negotiated legislation to give injured workers a benefit increase and enact cost-saving reforms. California’s maximum benefit levels were among the lowest in the nation. However, overall benefit costs—what it costs to pay claims—were, and continue to be, among the highest in the nation. After vetoing bills three years in a row, Gov. Davis signed a bill in early 2002 to give injured workers a benefit increase. The bill, AB 749, authored by Assemblyman Tom Calderon (D), also included some systemic reforms intended to partially offset the impact of these higher benefits on total system costs. However, in contrast to these “hard” cost increases, the “savings” were “soft” savings—”promises” to promulgate regulations implementing outpatient and pharmaceutical fee schedules, for example—”promises” that now will not be met any time soon because of the inability of the Division of Workers’ Compensation (DWC) to implement them.

Unfortunately, because of budget constraints, last year Gov. Davis vetoed implementation funds and personnel earmarked for the Division of Workers’ Compensation.

During the 2003 legislative session, policymakers will address the technical cleanup changes that need to be enacted following implementation of AB 749. The legislature will also consider a proposal by Governor Davis to shift more of the funding of the DWC onto employers.

The next time policyholders ask you what they can do about their rising workers’ compensation costs you should encourage them to talk to their local legislators. California’s business community must urge policymakers to correct long-standing flaws in California’s workers’ compensation system, streamline the system and give employers and their insurers the tools to better-control the skyrocketing medical and litigation expenses that are making workers’ compensation unaffordable.

Mark Sektnan is AIA assistant vice president, Western Region. The American Insurance Association (AIA) is the advocate for property-casualty insurers. AIA represents 423 major insurance companies that provide all lines of property and casualty insurance and write more $99 billion annually in premiums. The association is headquartered in Washington, D.C. and has representatives in every state. Find out more about AIA by logging onto http://www.aiadc.org.

Topics California Workers' Compensation