At a recent joint hearing in Sacramento on workers’ compensation in California with the Assembly and Senate, statistic after statistic flew out of the mouths of speaker after speaker during the nearly four-hour session.
It was titled, “Informational Hearing, Injured Workers Since SB 899: A Discussion on the Impacts of SB 899 on Permanent Disability Benefits.”
But the hearing was beyond a focus on permanent disability and the aftereffects of sweeping workers’ comp reform enacted in the last decade.
“I think we all agree that we’ve moved out of that post-reform period into another pre-reform period,” said Alex Swedlow, executive vice president of research at the California Workers’ Compensation Institute.
CWCI, a private, nonprofit organization of insurers licensed to write workers’ compensation in California, was one of many presenters at the hearing offering their taken on what problems the system has developed in recent years.
In fact the tone of most speakers suggested another reform package approaching the magnitude of Senate Bill 899, the legislation signed by Gov. Arnold Schwarzenegger in 2004 that changed or affected just about every part of the state’s workers’ comp system.
And last year Gov. Jerry Brown in signing several pieces of workers’ compensation legislation called for more comprehensive reform to be brought to his desk, saying that reform should be addressed on “a broad and balanced scale.”
Brown’s wishes were echoed at the joint hearing, where stats were given that showed just how big and unwieldy the state’s workers’ comp system is both in billions and in complexity.
Depending on who was giving the stats – applicants’ attorneys, insurers, the medical community, employer representatives – those numbers often showed different entities bearing an unfair share of the burden of a system that now seems to again be broken.
One person stated that workers’ comp medical treatment costs have been rising in excess of 10 percent each year in the wake of the systemic reform spearheaded by Schwarzenegger during his tenure.
Another speaker noted that accident year combined ratios are up around 130 percent, making those ratios well in excess of premiums. Following that, someone noted that injured workers are getting 60 percent less in benefits today than in the pre-reform era.
But the speakers and their stats had two things in common: they painted a portrait of a system that’s broken, and all seemed to agree comprehensive reform is necessary.
Senate Labor and Industrial Relations Chair Ted Lieu, D-Torrance, headed the meeting along with Assembly Chair Jose Solario, D-Santa Anna. Both have drafted successful legislation to address areas of workers’ comp.
Lieu’s SB 863 will begin the process of reforming how the hundreds of thousands of liens filed each year are handled in the adjudicatory process. Solorio’s AB 378 removed financial incentives associated with prescribing expensive compound medications.
Both legislators during the hearing indicated more workers’ comp legislation is needed.
Lieu, who spoke to Insurance Journal following the hearing, said he believes several more bills will come out of Legislature next year as part of a comprehensive workers’ comp reform package. He and others at the hearing also said regulatory changes should be part of the reform.
“My view is to deliver as much cost savings as I can to the governor,” Lieu said.
The comprehensive reform – Lieu said it’s too early to describe exactly how it would look – would have to address two issues, he said. One is permanent disability benefits, which he said were drastically cut “to an extent that even the proponents of last decade’s reform did not intend.”
The second workers’ comp must, he said, is to make sure that premium rates do not rise in the future.
“There is evidence that workers’ comp companies are paying out more than they are taking in in premiums,” he said.
Such evidence was presented in detail by California Insurance Commissioner Dave Jones, who was at the hearing to offer his thoughts on the system.
Jones, a Democrat who just completed his first term as insurance commissioner, began by noting that in 1995 the workers comp market was deregulated by Legislature, leading to opening ratings replacing minimum rates. Fierce price competition ensued, he added.
“With no minimum rate law, carriers reduced rates below solvency,” Jones said.
The Department of Insurance was forced to take over and liquidate 31 carriers between 1997 and 2006, and California’s workers’ comp insurer of last resort, State Compensation Insurance Fund, swelled and was at one point writing over 50 percent of total market, Jones said.
Ultimate accident year loss ratios were at 141 percent of premium, and by 2003 workers’ comp rates paid by employers per $100 climbed to $6.29, he added.
Then came SB 899, which ushered in sweeping change and got control of upwardly spiraling costs, but “These major changes came at the expense of injured workers,” Jones said.
Quoting data from CWCI that shows average medical expenses per claim have been increasing by at least 10 percent per year from 2005 to 2009, Jones noted that increase in utilization was the main driver.
He also spoke about the positive impact of workers’ comp reforms, but those impacts may be losing steam since the rising costs “likely signal erosion in these measures.”
In fact, Jones expressed concern the market dynamic may lead to a correction, and eventually to higher premiums due to underwriters being more cautious and raising premiums on risky businesses.
“We can’t say for certain when a market correction will occur,” Jones said, adding that it’s also not known whether a correction will be moderate or severe.
During questioning of Jones by committee members, he noted there are definitive indicators that workers’ comp insurers are experiencing ever-increasing losses.
“There appears to be significant evidence that combined ratios are in excess of premiums right now,” he said.
There are several cost savings measures being looked at, including possible enhancements or changes to medical costs containment and utilization, but DOI is not at the place to introduce them, Jones said, adding, “We need to identify what those additional cost savings measures are.”
Permanent Disability Paramount
Marty Morgenstern, secretary of the California Labor & Workforce Development Agency, testified that the need to raise permanent disability is paramount. However, that goal cannot be achieved on the backs of employers, he cautioned.
“The permanently disabled worker is not being fairly compensated,” he said, adding, “We cannot take payroll money to do it. We cannot raise the payroll costs to employers at this time.”
Like others who testified, Morgenstern said the key to achieving workers’ comp reform is reducing wasted costs by looking at inefficiencies, as well as practices and policies that need reforming.
“We think there is money within the system that can be utilized,” he said. “We need the medical and legal practitioners, the insurers, the employees in their organizations, all working together in a cooperative way to fix this system. And that’s what’s going to do it.”
Department of Industrial Relations Director Christine Baker, and Rosa Moran, administrative director of the Division of Worker’s Compensation, offered their take on fixes and talked about their efforts to gather public input. Baker and Moran have been conducting a series of public meetings across the state to provide open forum discussions on issues in workers’ comp and to gather information from stakeholders and the public on suggestions for improvements.
“We recognize the need to restore essential benefits even while working to mitigate the costs,” Baker said, noting that will likely require eliminating unnecessary costs and looking for significant savings in the system.
A consensus will “likely require legislation and regulation,” she added.
Moran said internal cost cutting in her division is already under way.
“We’ve been doing tremendous consolidations to try and bring down the costs,” she said.
Michael Nolan, CWCI president, said “there’s no doubt that permanent disability is one of the core issues.”
Looking at ultimate accident year data, it was rising to 2002 and decreased following the reforms. Now it’s beginning to rise again, he said.
“The average cost of everything associated with an indemnity claim is higher today than in 2002,” he said, adding, “it’s primarily on the medical side.”
There’s been a shift in the average claim percentage to about two-thirds expenditures on the medical side, where previously it was close to 50 percent on medical and 50 percent on indemnity.
And even with workers’ comp costs to employers at its present rate of $2.30 per $100 of payroll, “California is in the top tier,” he said.
CWCI’s Swedlow said if those involved are serious about cutting costs, there are a few places to look at and to place blame: the rising influence of attorneys, an aging work population, rising secondary injuries.
“Permanent disability has been in fact rising by about 11 percent per year,” he said, adding, “It’s harder to manage a claim in workers’ compensation relative to other systems.”
On the employer side was Sean McNally, vice president of corporate and government affairs for Grimmway Farms, considered the world’s largest carrot grower.
McNally said the cost of doing business in California is forcing Grimmway to continue to expand into other states with less problematic workers’ comp systems like Washington, Florida and Georgia.
McNally believes there is one overriding problem with California’s workers’ comp system.
“There are too many lawyers in the system; there’s too much litigation in the system,” he said.
He called for a system that’s “more administrative, more predictable, more affordable.”
But such ideology doesn’t set well with some.
Brad Chalk, president of the California Applicants’ Attorneys Association, argued that it’s workers who are being neglected and suffering the largest burden of the state’s dysfunctional workers’ comp system.
“The California constitution says that the people are supposed to have benefits, and they’re supposed to be adequate benefits,” he said. “The focus that this has taken is all about the insurance company.”
He added, “If you think that this is a hard economy, try being an injured worker.”
Angie Wei, legislative director off the California Labor Federation, blamed “unneeded speed bumps in the system that is screwing the injured workers.” She added: “permanent disability benefits got slashed much deeper than they were intended too.”
Wei suggested that while looking at inefficiencies and waste, “we should look at a minimum loss ratio. A bottom-line loss ratio. What’s good enough for the health insurers should be good enough for the workers’ comp insurers.”
She added that would shine “a brighter light into the insurance industry.”