Employers Hopeful for California Workers’ Comp Reform

By | December 3, 2012

Editor’s Note: This is the third in a series of articles to look at California’s workers’ compensation reform law in detail and what must be done to implement that law by Jan. 1, 2013.

Looking forward employers seem to have weathered the latest round of workers’ compensation reforms well – although the cliché “the devil is in the details” is apropos enough to be tossed out.

Like the seven-year itch, the system requires massive, sometimes painful, reform every so often. The last reforms in 2003 and 2004 were ushered in by Gov. Arnold Schwarzenegger’s administration. This time it was Gov. Jerry Brown who issued a mandate to Department of Industrial Relations Director Christine Baker to get a deal done in negotiations that were limited to labor and a group of large, self-insured employers.

The result was Senate Bill 863, and many employers expressed optimism that the new law can save them on their workers’ comp premiums and that regulations needed to give the law teeth can be hammered out by the Jan. 1 deadline.

In the last few weeks seven regulations have been made public, though they are far from being approved, and some of those regulations are nearly as complex as the massive workers’ comp reform legislation itself, which at one point was more than 150 pages long.

Sean McNally, one of the employers who sat in on negotiations and helped hammer out a deal that was approved just as the year’s legislative session was ending, was obviously bullish on what the new law promises.

In fact, he believes the new law “could just be a real game changer,” and said that if it works the way it’s designed, “I think could be just a paradigm change, really.”

McNally, vice president of corporate and government affairs for Grimmway Farms in Bakersfield, was also involved in the Schwarzenegger negotiations. Grimmway, a large agricultural producer with about 4,400 workers in California, saw significant savings following the passage of Schwarzenegger-backed Senate Bill 899 in 2004.

Not long afterward, however, those savings began to erode, McNally said.

“I’d say we had a 50 percent reduction in cost after 899,” said McNally, who noted the self-insured company manages its workers’ comp cases “aggressively and proactively.”

Despite taking a tough stance on workers’ comp cases as a company policy, costs began to escalate for firms like Grimmway as reform savings were eroded by judicial decisions, changes to the system and escalating medical costs, he said.

“I think that we lost probably almost half of the savings of what we accomplished with 899,” McNally said.

McNally declined to give actual costs, but offered a hypothetical comparison of Grimmway’s workers’ comp costs that he said were to scale. Hypothetically Grimmway’s workers’ comp costs following the Schwarzenegger reforms went from $10 million down to $5 million, he said. Then they slowly began to grow, reaching from $7.5 million to $8 million this year, he said.

“I’m hoping we get back to $6.5 million,” he said.

Big Savings

Kathy Pipis, chief financial officer and administrator of claims for Carson Landscape Industries, a commercial landscaper based in the Sacramento area with 165 employees, is looking at actual cost savings of $100,000 in the near future if McNally’s estimates hold true.

Carson Landscape pays on average between $375,000 to $400,000 per year in workers’ comp premiums. Prior to reforms, the company’s premiums peaked around 2003, a year during which the company paid about $700,000 for workers’ comp insurance, Pipis said.

Some of the savings they achieve today is through keeping both the ranks of their workforce and their expenses low, she said. “You’re trying to do more with less, and you’re trying to do more with less employees, because you’re trying to contain costs,” she added.

SB 863 is designed to contain costs in several ways, while increasing permanent disability benefits for workers. Two prime goals the bill had in attempting to reduce costs were to change the way in which the system deals with permanent disability, and how medical liens and billing disputes are handled.

“To me one of the good things could be to streamline the formula of the permanent disability ratings,” Pipis said.

On average Pipis said she usually has between 10 to 15 claims each year to deal with, and of those she ends up with about one a year that becomes a disputable problem. That one dispute can consume a great deal of her time, she said.

Lost time and lost money are what William Zachry hopes SB 863 will yield. Zachry is vice president of risk management for Safeway Inc. The Pleasanton-based grocer employs 178,000 workers in the U.S., and is one of California’s largest employers.

Like McNally, Zachry was among the handful of employers personally involved in the negotiations for SB 863.

Zachry credited the success of the negotiations to the fact they were limited to the two groups most directly involved in workers’ comp and that the goals of both – labor and employers – were in the end very similar.

Both employers and labor complained the system was too complex and tough to navigate. Employers were concerned there were non-medical professionals making medical decisions, liens were driving expenses up, unnecessary medical treatment was too often easily authorized, unauthorized and unknown medical treatment was being provided and delays in claims often led to a year or more to get a qualified or agreed evaluation.

Additionally employers argued workers’ comp decisions from the courts, including the Ogilvie case, Almarez/Guzman and the Valdez case, were deteriorating savings achieved in the Schwarzenegger reforms, and they wanted psychological disorders off the table when considering workers’ comp claims.

Labor’s primary goal was to increase permanent disability benefits, which they felt were inadequate, to address poorly managed medical provider networks and to fix delays in benefits deliveries.

“I think the compromised achieved by and large everything we were trying to achieve,” Zachry said.

The new law promises to increase benefits for injured workers while generating a system wide savings that some say could be anywhere from $500 million to $1 billion in the first year.

Zachry would have liked to see those savings slightly higher, “but overall we think there are some major savings that will offset any increase in benefits,” he said.

One thing most employers agree on is that less litigation may be chief among those things producing cost savings.

“By getting the judges and other non-medical professionals out of making medical decision we think this will not only be good for injured workers, but get people back to work quicker,” Zachry said.


Along with the new law must come a handful of new regulations. The clock has been ticking on some of those new regulations, which must be drafted and implemented before the start of the year.

In late November the Department of Workers’ Compensation finally released a draft SB 863 regulations for independent medical review, one of the largest changes made by the new law.

Essentially the changes establish an independent medical review (IMR) program that is designed to allow employees to obtain an expedient review of utilization review decisions that deny, delay, or modify a medical treatment request made by the employee’s treating physician.

IMR must be in effect on Jan. 1, 2013, for all occupational injuries occurring on or after that date, and on July 1, 2013 for all dates of injury. IMR will be conducted by qualified physicians selected by an independent review organization designated by the DWC, according to the draft proposal.

Currently, the division is negotiating with Maximus Federal Services Inc. to administer the IMR program, according to the department.

The proposed regulations will revise existing utilization review regulations to conform to the workers’ compensation reform law.

The IMR regulations include: a proposed request for authorization form for use after Jan. 1, 2013, designed to assist in defining medical treatment issues in the initial utilization review process; a provision to defer utilization review until other issues affecting liability are resolved; the mandatory application for independent medical review; the procedure for submitting documents for IMR; and proposed costs of IMR which, under SB 863, must be paid by claims administrators.

“We all know the devil is going to be in the details,” said Nick Roxborough, with Roxborough Pomerance Nye & Adreani, which represents a number of employers, including several large staffing companies.

The Department of Workers’ Compensation had just over two months to write the regulations, he said, adding, “So you know there’s going to be things written that are not going to be able to be made clear and are going to be subject to litigation.”

Other regulations written but yet to be approved address liens, supplemental job displacement vouchers, ambulatory surgery centers, changes to fees for spinal implants, limitations on when chiropractors can be a treating physician, and an expansion of workers’ ability to designate which doctor they want to see.

“That’s the key is, this stuff’s actually got to work,” said Jerry Azevedo, a spokesman for the Workers’ Compensation Action Network, a group that represents the interests of employers.

And Azevedo believes those reforms may already be having an impact.

California Insurance Commissioner Dave Jones on Friday approved an advisory pure premium rate increase to $2.56 per $100 for employers. Through July 1 the average was $2.38 per $100, and of California’s workers’ comp insurers that made filings over last 60 days have come in at an average of $2.49, according to statistics from the California Department of Insurance.

“What the commissioner said on Friday was measuring from where insurers are right now compared to where he thinks average pure premium rates should be to covers costs come 2013, he’s advising that the average pure premium needs to come up by an average of 2.8 percent come January,” Azevedo said.

And that filing does take into account the anticipated impacts of 863.

Therein lies Azevedo’s key point on behalf of the state’s employers: “Although rates continue to increase to reflect the increase in workers’ comp costs, we do know that those rate increases aren’t nearly as high as they would have been had this new law not taken effect.”

Savings from the new law vary depending on with whom you speak. Most expect the savings to be $590 million in savings more than the law spends through 2014 on increased benefits for injured workers. In the first year only portion of increased benefits go into effect and most of the cost saving take effect, so expected savings in the first year hover around $1 billion. In 2014 the second portion of benefits increase kicks in and that brings down the savings.

“Bottom-line,” Azevedo said, “the Bureau and commissioner say it saves more money than it spends.”

But for employers the law also has provisions that if not understood could prove costly. One aspect of SB 863 reforms an independent medical review process that in that past went through several steps, including utilization review and eventually a workers’ comp judge. The process is now expedited, but under the new review process employer failing to authorize treatment within 10 days can get smacked with a fine of $5,000 per day.

Roxborough noted one set of employers in California may not be too pleased with the new reforms – although the change represents more potential clients for workers’ comp insurers and agents.

Part of 863 decrees that staffing firms can no longer be self-insured for workers’ comp.

“Staffing companies will no longer be issued certificates of self-insurance as of Jan. 1, 2013,” Roxborough said, adding that those who are already self-insured will have those certificates revoked on Jan. 1, 2015.

“We don’t know why they’re being kicked out,” he said.

He hypothesizes that a few staffing companies suffered financial failure in the last few years, prompting the new decree in the law. “But why are you singling out the whole industry since only one or two had bankruptcy problems,” he said.

See also:

Calif. Workers’ Comp Reform Law at ‘Halftime’

Calif. State Fund May Recommend Workers’ Comp Rate Drop in Days

Topics California Legislation Workers' Compensation Commercial Lines Business Insurance

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