Editor’s Note: This is the fourth in a series of articles to look at California’s workers’ compensation reform law, which takes effect Jan. 1, 2013.
Insurance carriers, along with the many stakeholders who are watching and waiting as California’s workers’ compensation reform law begins to take effect at the start of the new year, are hoping the new law achieves the savings it promises.
However “uncertainty” is a common word being used by carriers to describe their feelings about the law and whether it will contain costs in the state’s unwieldy workers’ comp system.
Christopher Flatt, New York-based Marsh USA Inc.’s workers’ compensation center of excellence leader, said “uncertainty” is a word he hears from a number of carriers he works with, some of which have left California’s market or have reduced the amount of workers’ comp insurance they write in the state.
“I am cautiously optimistic that it’s a step in the right direction, but it’s the unknowns that concern everybody,” Flatt said.
Best case scenario: Costs are contained, permanently disabled workers get more benefits and California’s workers’ comp market remains somewhat viable for insurers.
Worst case scenario is a return to a period between the 1990s and early 2000s, when many workers’ comp carriers were folding, or they stopped writing insurance in California.
Thanks to workers’ comp reforms enacted nearly 10 years ago the system was stabilized, and rising costs were curbed. But that didn’t last long.
Earlier this year under the orders of Gov. Jerry Brown the Department of Industrial Relations hosted a series of secretive meetings between labor and a small group of large, self-insured employers to hash out a bill to fix the state’s workers’ comp system and deliver more benefits to injured workers.
On Jan. 1 Senate Bill 863, California’s new workers’ comp reform law, goes into effect and it promises to create system wide savings of up to $1 billion annually while increasing benefits for permanently disabled workers.
However there’s much skepticism out there about the new law, especially among carriers, who are operating at loss ratios that have been on the rise since the last workers’ compensation reforms were ushered in by Gov. Arnold Schwarzenegger in 2003 and 2004.
The Workers’ Compensation Rating Bureau in mid-December issued its report on insurer experience, and it projects an ultimate accident year combined loss and expense ratio of 139 percent for accident year 2011. The year was comparable to the 2009 and 2010 projections, with the combined ratios for those three years are the highest since 2001, according to the WCIRB report.
The 2011 year-end combined ratio published by the WCIRB was 122 percent. Consequently, industry averages for rates charged employers per $100 of payroll have crept up, rising from $2.10 in 2009 to the current $2.56 rate.
Workers’ compensation is a challenged line of business to say the least, and some carriers say a worst case scenario may again become reality if the new law doesn’t produce at least some of the promised savings. Those carriers aren’t merely being pessimistic. Past precedent shows that such reforms are often watered down by lawsuits and regulatory changes, yielding savings much smaller than what was designed.
“You look at the history of workers’ comp in California, and that is what’s happened,” said Mark Sektnan, president of the Association of California Insurance Companies.
Sektnan, who served an advisory role to those involved in negotiating for the workers’ comp reform legislation, said his advice to them was to keep one goal in mind: halting runaway workers’ comp costs.
“The best that we can hope for in reforms is that they slow down the increases in the workers’ comp system,” Sektnan said.
Otherwise the state of workers’ comp carriers in California could be headed toward a period like in the mid-1990s to the early 2000s. During that time the California Department of Insurance was forced to take over and liquidate 31 carriers between 1997 and 2006, and State Compensation Insurance Fund swelled. At one point State Fund was writing over 50 percent of the total market.
“If you look at the loss ratios workers’ comp carriers in California have right now, it’s running over 116 to 120,” Sektnan said. “Companies are not collecting the amount of money that they need.”
Among the top priorities of the new law are to increase benefits for permanently disabled injured workers, establish a $120 million return to work fund, create a new independent medical review process, and alter the way medical liens are medical evaluations are handled.
It’s Sektnan’s concern that while benefit increases are set to occur, some of the cost savings elements of the law will require regulations to be written this year and next year, and those regulations are open to lawsuits that could end up eating into the any savings that are created.
Sektnan, who has been through workers’ comp reform in California several times in the past, offered three rules he believes can be viewed as standards for workers’ comp reform laws, including this one:
“It never works out the way you think it will. The courts interpret it in ways you never thought possible. And some entrepreneur finds a loophole you never imagine.”
In California, there is a well-documented history of workers’ comp reforms being altered by court rulings. The Minnear case in 1996, for example, broadened the scope of a treating physician’s presumption of correctness enacted by workers’ comp reform in 1993 beyond medical treatment issues to disability rating issues. The case made it difficult to challenge treating physicians on any medical issue until the provision was rewritten in 2004.
There are other cases that have altered reforms, and some had such a significant impact that the names of cases like Ogilvie vs. WCAB (Ogilvie), Almaraz v. Environmental Recovery Services/Guzman v. Milpitas Unified School District (Almaraz/Guzman) have become commonplace terminology among California’s’ workers’ comp professionals.
It’s not only court cases that have affected reforms, but so called “entrepreneurs” who constantly find loopholes in the system.
Reforms in 2003 set up pharmacy fee schedule tied to the payment of the medical fee schedule. Then in 2005 companies found a way around that by repacking the drugs. That was shut down with regulations in 2007, so some of those “entrepreneurs” turned to compound drugs, which weren’t on the fee schedule.
In 2011 changes were made that to tackle compound pharmaceuticals by prohibiting self-referral and clearing up many billing issues, but now some of those same compounding concerns have moved to drug testing, so once again the workers’ comp system is being overcharged, Sektnan said.
Jury Still Out
However, at least one notable carrier early on offered an endorsement of the new law by dropping rates.
California’s largest workers’ comp carrier, State Compensation Insurance Fund, in early October announced a 7 percent decrease in its 2013 rates, a move that reflects State Fund’s anticipated savings from the workers’ compensation reform law.
Speaking at an insurance conference later that month State Fund President and CEO Tom Rowe referred to the new law to overhaul workers’ comp in California as a “combination of change we believe will substantially reduce lost cost trends in our state.”
“If it’s well implemented and it’s aggressively defended it could be much, much better than we originally believed,” he said.
Mark Wilhelm, chief executive officer of St. Louis, Mo.-based Safety National Casualty Corp., is doubtful the potential savings will be as high as the backers of the new law believe.
“From a carriers’ perspective I think the jury is definitely out,” he said. “And I’m being optimistic when I say that. When looked at from a cost standpoint, what we as a carrier will pay, there are no advantages to SB 863.”
Safety National writes a great deal of excess workers’ comp business in California, and though he’s concerned the savings may not be nearly as great as are being touted, Wilhelm doubts Safety National will shun California’s workers’ comp market.
Safety National doesn’t write much first-dollar workers’ comp, instead most of what they write have very large deductibles and self-insured retentions. So in addition to rate, Safety National has deductibles to play with.
They plan to update their filing in the spring, and may do little or nothing with their rates and adjust deductibles upward, or likely employ some combination of those two, Wilhelm said, adding that “our costs are immediate, and the savings in the bill are theoretical.”
He added, “We have to treat SB 863 as an additional cost. That is our approach. That will be our approach from an underwriting standpoint.”
New York and Illinois recently underwent changes in their systems that were similar to California’s new reform law in that they provided immediate benefit increases with promised savings.
“Neither of those materialized over time,” Wilhelm said.
In fact in New York, carriers have pulled back, creating a scenario similar to what occurred in California, Wilhelm said, adding, “New York State Fund is writing almost 40 percent of the market.”
Glass Half Full
Mark E. Webb, vice president and general counsel of Thousand Oaks, Calif.-based Pacific Compensation Insurance Co., is the glass-is-half-full type.
Webb believes the reforms will yield some savings. Without the reforms, the rate increases over the next few years that employers are now seeing would be much higher, he said.
In December, the California Department of Insurance received 60 workers’ comp filings from carriers. Almost all were rate increases, nearly half of which were for 5 percent or greater. Filings for previous months were similar, in that almost all insurers were raising rates or holding them steady.
“You look at what would have been indicated had this bill not been enacted and the increase would have been considerably higher,” said Webb, who sits on WCIRB’s Claims Working Group.
Webb backed up his assessment noting that some of the Jan. 1 hard dollar increases that are set to occur include changes to the lien filing fee, and the implementation of independent bill review, both of which will have “significant but still limited application on Jan. 1,” he said.
“The combination of lien filing fee and independent bill review will produce a number of immediate and intermediate savings,” Webb said. “As was identified in the past, there are a certain number of liens that are likely not going to be filed because of the filing fee. In addition to the filing fee, the Legislature enacted a hard statute of limitations, which will allow cases to get resolved more quickly. Also, the (independent bill review) process will create a new process to quickly resolve billing disputes for medical services that are paid under a fee schedule or a contract. Over time, as more fee schedules are adopted, this will also greatly reduce the amount of liens and the associated costs of trying to resolve them at the appeals board.”
Whether those savings are enough to immediately impact rates is another question. Webb said Pacific Compensation has no plans to raise rates, but he said some of those savings must first be realized before any rate reductions can occur.
“At this point I don’t believe we have anything planned,” Webb said. “We will as we see the implementation move forward make sure the price that we are quoting reflects how much of the savings we think are being delivered for right now.”
Indeed those savings from the new law are still in the air, and even optimists like Webb are not certain they will be as large as some have touted them to be.
Even California Insurance Commissioner Dave Jones doused some of the more optimistic in the workers’ comp crowd with a bit of reality.
Jones in December recommended a pure premium rate of $2.56 per $100 of payroll, a small increase over the current filed rate of $2.49 per $100 of payroll. Jones recommendation differed with that of WCIRB, which had suggested no change in pure premium rates.
“This is a case where the math matters and actuarial science is the critical component in determining a rate that will maintain insurers’ ability to pay claims,” Jones said in a statement. “We cannot afford to set the pure premium rate based on over estimates of the potential reform savings that SB 863 will bring when insurers are already paying out more in claims than they are collecting in premiums.”
Webb agreed with Jones’ decision.
“I think that the commissioner’s decision is consistent on how he restructured the pure premium process,” Webb said, referring to Jones’ move in 2011 to change the way the state’s workers’ compensation pure premium rate is calculated, providing more information on current insurance company rates and pricing.
Webb, who said his committee recommended a rate hike, suggested WCIRB’s recommendation to keep the rates as is may have been a political move.
“It appeared WCIRB was trying to incentivize the Division of Workers’ Compensation to make sure the regulatory implementation of the new law would deliver the benefits,” he said.
Flatt with Marsh also pointed to Jones decision to raise the pure premium as an indicator that the only certainty about the new law is it delivers a benefits increase to injured workers, and beyond that he and many of the carriers he deals with are taking a “wait and see” approach.
“It’s the unknowns that concern everybody,” he said, adding, “Obviously the big question mark is how do you pay for it,” Flatt said.
Based on Jones’ stance on the pure premium rate, Flatt believes carriers will continue to push up rates until they start seeing some savings.
“We would anticipate the carriers would take them up,” Flatt said.
However, he doesn’t believe there will be a mass exodus of carriers from California’s workers’ comp system.
“To deal with the profitability we’ve seen carriers exiting,” he said, adding “there’s been a handful” of carriers he works with, but most have instead reduced the amount of what they are writing in California.
“They’re being careful in terms of managing what their expenses are in the state,” he said.
See previous stories in this series: