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One of the first things Arnold did as Governor, and among the few good things, was a very effect reform of the Workers Compensation system?saved California businesses north of $10 billion, so far.
Now under Jerry Brown and Democrat leadership, the rates are going up by 45%.? How many jobs will that cost?? How many more businesses will not start or leave the State?
?Many observers of California?s workers? compensation system attribute the increase in workers? compensation costs to litigation, including the litigation over medical liens, legal rulings,[1] and the rapidly rising costs and overutilization of pharmaceuticals (particularly in the use of opioids) and surgeries.
These increased costs are reflected in increased workers? compensation rates. In fact, with the combined rate increases approved by the Insurance Commissioner, Dave Jones, in January and May of this year, some employers renewing their workers? compensation policies in July faced a 45.3% rate increase.?
Add the flailing Workers Comp system as another reason California will stay in a Depression.
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Briefing Report: The Status of California?s Workers? Compensation System: Reforms and Rumors of Reforms
Republican Caucus, California State Senate, 8/8/12
?? medical utilization appears to be the main driver of overall cost increases?workers? compensation system changes are needed to control and reduce cost. ?
California Insurance Commissioner, Dave Jones
A System, Once Again, in Need of Reform
Workers? compensation costs in California are on the rise once again. In fact, according to the Workers? Compensation Institute, costs have risen to the levels that existed prior to the reforms of 2003 and 2004. These spiraling costs are putting substantial pressure on the system. Many observers of California?s workers? compensation system attribute the increase in workers? compensation costs to litigation, including the litigation over medical liens, legal rulings,[1]and the rapidly rising costs and overutilization of pharmaceuticals (particularly in the use of opioids) and surgeries.
These increased costs are reflected in increased workers? compensation rates. In fact, with the combined rate increases approved by the Insurance Commissioner, Dave Jones, in January and May of this year, some employers renewing their workers? compensation policies in July faced a 45.3% rate increase.
Given the state of the economy, the increase in expenses related to new regulations and the potential for new taxes, the increase in worker?s compensation rates could not come at a worse time.
Who Is Up for Reform?
Obviously, increasing workers? compensation costs and rising rates are causing concern among employers and insurers, who argue that the increases are a result of an erosion of the 2003 and 2004 reforms and the unintended consequences of people exploiting loopholes in the system. Accordingly, employers (which can be divided?between large self-insured employers and those who are not self-insured) and insurers would like to see reforms enacted to bring down unnecessary costs.
Labor groups would also like to see reforms to the workers? compensation system, but they are mainly concerned with increasing permanent disability (PD) payments, arguing that the reforms of the last decade went too far in reducing PD payments and injured workers are still owed more reasonable benefit levels.
While the Brown Administration has expressed concern about what it believes to be inadequate PD benefit payments, it has also expressed concerns about increasing the workers? compensation costs of employers in this economic climate.? Accordingly, it has expressed a desire to see some sort of agreement between labor and management that would combine both PD benefit increases with cost saving reforms.
Other interested groups, which include the applicant attorneys and representatives of various medical providers, are mostly interested in reforms unrelated to bringing down cost.? These reforms include eliminating delays in treatment and speeding up the process for payments.
An Environment Favorable for Reform?
Employer groups and insurers concede that PD benefits in some circumstances are inadequate.? As a result, these employer groups are reported to be willing to support some increases to PD benefits as long as it does not increase overall cost to the system and as long as other reforms are enacted to reverse the spiraling up costs within the system.? It has also been reported that labor groups may be willing to support cost cutting reforms to the system that will simultaneously reduce costs and offset any PD benefit increase.
As alluded to above, the Administration has signaled that it favors this approach.? In fact, last year, the Governor vetoed a number of Democrat authored bills that would have raised costs to the system.? In his veto messages, he said that he favored comprehensive reform over a piecemeal approach.? The Governor is also reported to be concerned about raising costs to employers in this bad economic climate, especially given his desire to close the budget gap with voter approved tax increases in the Fall.
With the apparent willingness of employer groups, insurers, labor groups and the Administration to strike a deal balancing PD increases with cost cutting reforms, it should not be a surprise that there are reports of an effort underway by labor groups and large self-insured employers to work out some sort of a deal by the end of this session.[2] Accordingly, no one should be surprised by the introduction of a significant workers? compensation reform bill package in the waning weeks of this session.
It is important to note that there is a huge impetus for employers and insurers to get behind a reform effort this year as the political climate may not be as favorable in subsequent years.? There are basically two reasons for this.? First, the economy is in such a dire condition that there is a reluctance by the Governor to increase workers? compensation cost to employers. Second, next year, there will be a large group of incoming legislators who are new to the complex world of workers? compensation.? Each one of these new legislators will have to be educated about the workers? compensation system and then convinced that reforms to the system must reduce frictional costs. This could be a daunting task.
The Anatomy of a Good Deal
While reports of negotiations occurring between large self-insured employers and labor groups may be an encouraging sign that California?s workers? compensation system is on the verge of important, timely and necessary reform, the fact that insurers, and non-unionized, non-self-insured/smaller employers are not at the negotiating table[3] should be cause for some concern. Unionized large self-insured employers would be able to better absorb an increase in costs associated with an increase in PD payments that is not sufficiently offset by reforms to the system that reduce unnecessary costs. With this in mind, it is important to contemplate what consideration should go into an agreement that would reform the system enough to stop the spiraling unnecessary increases in costs for all employers (not just large unionized self-insured employers) while at the same time offsetting the increased cost related to an increase in PD payments.
Generally speaking, the ultimate goal for any agreement reforming California?s workers? compensation system would be to promote a balance that provides fair benefits to injured workers at reasonable costs to employers, while minimizing fictional and unnecessary costs to the system. To accomplish this goal, the agreement should include the following: 1) two dollars in reduction of unnecessary costs for every one dollar of benefit increase;[4] 2) savings that are quantifiable and scored based upon empirical data; 3) provisions that ensure quality, effective medical treatment according to evidence-based standards; 4) provisions that promote the resolution of claims with fewer disputes and litigation to reduce costs and speed resolution; 5) provisions to improve the return to work process; 6) a provision to eliminate the abuse of liens and reduce the burden of liens on the court system; 6) provisions to improve consistency and predictability for permanent disability benefits; and, 7) provisions to close loopholes that prompt abusive practices.[5]
A Zero Sum Game
Any agreement that reforms California?s workers? compensation system without increasing cost to employers will mean that some ?stakeholders? within the system will be very unhappy. Simply put, the money to pay for PD benefit increases has to come from somewhere, and if it is not going to come from employers then it has to come from within the $15 billion system, a system that is comprised of employers, insurers, injured workers, advocates for injured workers (e.g. applicant attorneys), and providers.? Reducing benefits to workers is a non-starter and insurers would simply pass any increased costs targeted at them on to employers.? This leaves applicant attorneys and providers as the ?stakeholders? who may be the targets of reforms that reduce frictional and unnecessary cost within the system.
Conclusion
There is little disagreement that California?s workers? compensation system is in need of reform.? The question remains as to the timing of the reform and what the reform will include. As mentioned above, employers and insurers would like to see reforms done this year and there are reports suggesting that there is such an effort underway to this end.? This would mean the introduction of a very significant workers? compensation reform bill package in the waning weeks on this session.? In the event that such a package is introduced, policy makers must evaluate whether the reform package actually accomplishes the goal of promoting balanced benefits to injured workers at reasonable costs to all employers (not just large unionized self-insured employers), while minimizing fictional and unnecessary costs to the system.
For more information on this report or other tax related issues, contact Cory Botts, Senate Republican Office of Policy at 916/651-1501 or cory.botts@sen.ca.gov.
[1] In two recent decisions (commonly known as the Almaraz/Guzman) the Workers? Compensation Appeals Board undermined the savings that resulted from previous reforms by allowing parties to rebut their permanent disability (PD) ratings.
[2] An April 12, 2012 Los Angeles Times article by Marc Lifsher, an April 10, 2012 article in the Insurance Journal and two recent Worker?s Comp Executive articles discuss the effort by labor and large employers to hammer out an agreement that would reform the workers? compensation system to reduce frictional costs and to allow for PD increases.
[3] As reported in the June 20th edition of the Workers? Comp Executive.
[4] This is the ratio that employers and insurers have stated is necessary to ensure that the system is reformed in a manner to stop the spiraling increase in costs while offsetting the costs associated with an increase in PD benefits.
[5] While this list mostly lacks specific proposals, Christine Baker, the director of Department of Industrial Relations, has suggested that resolving the liens crisis, eliminating the pass through for implantable spinal hardware (SB 959 (Lieu) from this year), and changing the methodology for ambulatory surgery centers will eliminate major cost drivers that do not help injured workers.
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