California workers’ comp system reformed, but still needs more

Since workers’ compensation reforms were implemented in California in 2002, labor, government and insurers agree that the market has become more competitive and costs have decreased. “There’s more competition, more choice, and the marketplace doesn’t have the monopolistic look it did a few years ago,” Bill Mudge, CEO of CompWest Insurance Co. recently told insurance company and agency executives.

Mudge recently spoke on a panel with John Norwood, managing partner for Norwood & Associates, and Rich Anderson, executive vice president for the California Workers’ Compensation Institute, at the 20th annual Blue Ribbon Conference hosted by the Insurance Brokers and Agents of the West. Despite the fact that worker’s comp reforms are working, that doesn’t mean the system could not benefit from a few improvements, the panelists indicated.

“The status quo is never good enough,” Norwood said. “This is especially true when you have a constant howl of media and house of horror campaigns depicting injured workers as victims and insurers as profit companies.”

Pre-reform, the market was characterized by “fighting,” because there was no medical control, no objective standards and no apportionment, Mudge said. Post-reform, the market, he said, could be characterized as focused on “care,” with medical provider networks established, American Medical Association and American College of Occupational and Environmental Medicine guidelines, and apportionment for prior injuries.

According to Anderson, the Institute’s data shows that MPNs are successful in lessening attorney involvement in claims, and, in most cases, providing more effective treatment on cases so that workers can return to work faster. The AMA and ACOEM guidelines also have done a lot to control fraud, Norwood added.

Average pure premium rates as reported by the California Department of Insurance note that rates are below the levels they were in 1996. Without reform, Mudge said, BRS estimates that rates would be 151 percent higher than they are today. The State Compensation Insurance Fund (SCIF) market share also would be higher than it is today, Mudge indicated. According to BRS, SCIF’s market share has dropped 38 percent since reforms took effect, while private insurers’ market share has increased 163 percent.

Nevertheless, Mudge said from a capital perspective, there are concerns about the investment and attractiveness of the opportunity. He explained that this is because there is:

•Loss cost unpredictability;

•Regulatory/legislative instability;

•Legal system overrides;

•Residual market potentiality; and

•Irrational competition.

With respect to legal system overrides, Mudge voiced apprehension about pending reforms to the workers’ compensation system to push the system back to pre-reform conditions, or create new policies. “I don’t know of another industry where you rewrite the playbook after the play has already been called,” he said. “You can’t operate in an environment like that.”

Anderson agreed that there have been murmurings from various groups to shift the workers’ comp system back to how it operated in the past. Labor groups want to make changes to the permanent disability rules, he added.

“The current system improved predictability. One of the clear things the legislation tried to do was to strip out lower-level permanent disability claims. The concern is whether permanent disability got cut too much,” he said, noting that permanent disability reductions have been close to 50 percent, according to the Institute. “This is a continuing focus and will be looked at.”

Anderson also noted that drug repackaging, where the doctor also acts as the pharmacy, may be addressed in the future. And the temporary disability two-year cap is “coming like a freight train,” he said.

When workers’ comp reforms went into effect, aggregate disability payments for a single injury that causes temporary disability could not extend for more than 104 compensable weeks within a period of two years from the date the temporary disability payments began. The two-year deadline is coming up in July 2006, he noted.

Despite those concerns, the question is whether insurers and brokers are doing a better job, Mudge said. There have been 28 insolvencies since 2000, he noted. The good news, however, is that “projected reform savings are being passed to employers. Loss costs are coming down, and so are prices,” he said. “And the gap between the two is narrowing.”

Some areas he suggested could use improvement are pricing to the real cost of losses. “Is it really that hard?” he asked. He also suggested that the insurance industry has to focus on mitigating litigation. “Workers’ comp reform did not take lawyers out of the system,” he said.

Furthermore, the industry needs to do a better job of educating clients that “the true cost of workers’ compensation is more than the spot price on the policy.”

“We’ve got to do a better job of educating businesses out there to really take control of comp,” he said. “The business of workers’ comp is all about people.

Topics California Workers' Compensation