Increasing competition among carriers and decreasing average costs indicate that the state’s beleaguered workers’ compensation system might be on the road to recovery.
The nature of the insurance market means changes, in some cases, are slow to materialize.
But some injured workers’ advocates say the reforms are not enough.
Others, such as Patrick Tobin, the president of Real Seal, Inc., an Escondido-based manufacturer and distributor of industrial sealing products and mechanical component goods, are “cautiously optimistic about the long-term outlook,” although they have yet to see the results they had expected.
April marked the one-year anniversary of the workers’ comp reform package passed by the California Legislature and signed into law by Gov. Arnold Schwarzenegger, as part of a massive overhaul of the state’s system. Those changes were aimed at reducing skyrocketing insurance premiums, which had increased at a rate of about 30 percent per year from 2000 through 2003, while providing adequate protection for injured workers.
The reforms embodied in Senate Bill 899 granted self-insured employers and insurance carriers the option of establishing medical provider networks to examine and treat employees injured on the job. They also mandated uniform guidelines to assess injuries and to determine medical treatment and disability benefits under the American Medical Association’s Guide (5th Edition), which is already being used in most states.
“The reforms were complicated. They were greatly needed, but SB 899 was a whole lot of changes at once. I think we’ve seen some benefits already but the disappointing things for clients was that some were expecting immediate implementation of all of these benefits with immediate cost reductions,” said Linda Smith, the president of San Diego-based Preferred Employers Co., a workers’ comp insurance carrier with 17,000 policyholders statewide. The firm opened its doors in 1998.
But there have been tangible results.
According to the state Workers’ Compensation Insurance Board, a rating organization, average insurers’ rates for policies written in the second half of 2004 were 16.5 percent lower than the same period a year earlier. In April, the board’s actuaries recommended an additional cut of 10.4 percent beginning July 1.
Tobin said the modest decrease in rates he saw upon renewing Real Seal’s workers’ comp policy in April was a welcome change to the doubling in rates he experienced last year.
“We’ll take what we can get, but the size of the reduction wasn’t a lot,” Tobin said.
For her part, Smith said Preferred Employers has implemented the full reduction in rates recommended by the board since last year and intends to comply with the future rate decrease in July.
Competition in the market has also increased. Smith calls this a positive repercussion of SB 899, which offered policyholders more choice.
Private carriers, which insure about 30 percent of California businesses, are responding well to the reforms, according to Andy Barile, a Rancho Santa Fe-based insurance consultant.
“In the aggregate, from the insurance companies’ perspective, the state of California workers’ comp system has improved. If you look at the operating results of the carriers, they have done well and that has encouraged more insurance companies to enter the market in the past year,” said Barile.
In mid-April, the California Insurance Co. began writing policies in California, making it the third carrier to enter the market in the last eight months. CompWest Insurance was licensed at the end of 2004, followed by Warren Buffett’s Berkshire Hathaway subsidiary, National Liability and Fire Insurance.
This has also led to improvements in the efficiency of the underwriting process, according to Barile.
“The carriers are benefiting from the attention that’s being paid to risk selection and they are taking a closer look at the product they are writing,” he said.
Barile added that in this industry, substantive change is slow to materialize.
“The problem with the insurance industry is that implementing change is like moving the Titanic around,” Barile said. “Insurance companies can’t change the workers’ comp policies that quickly and that means everything in the industry has to be looked at as a trend. And my take is that the trend is definitely improving. You’re seeing a turnaround in the market that translates into prices dropping.”
The contending “factions” within the workers’ comp arena have different views about the effectiveness of the reform.
Michael Nolan, the president of the California Workers’ Compensation Institute, a private nonprofit organization with members that include insurance carriers and self-insured employers, said “anyone’s view of 899 is going to be directly affected by the stakeholder group they represent or feel related to: Employers in general are pleased with 899.”
“Applicant attorneys who represent injured workers, on the other hand, are very displeased,” Nolan added.
Last week, the state Senate’s confirmation of the acting workers’ comp director, Andrea Hoch, who is heavily supported by business leaders, small-business owners and nonprofit operators, reinvigorated the long-running debate surrounding the fairest way to implement enacted reforms.
Critics of Hoch and the progression of the reforms, such as union officials, injured workers and their attorneys, say that the payment schedule for permanent disabilities that has been implemented is far below what is adequate and has led to reductions in payments to permanently disabled workers by an average of 70 percent.
A Confusing Issue
“SB 899 has succeeded in leading to more confusion and more unnecessary litigation,” said Linda Atcherley, the managing partner of the San Diego law firm Atcherley & Levine and an attorney who represents injured workers.
She said the new medical provider regulations have forced some injured workers to seek new doctors, and the delays in implementing standards for treatment have prevented workers from receiving medical attention.
Atcherley said despite lower average premiums, the reforms have actually led to increased burdens on employers in some cases. A San Diego judge who recently tried a workers’ comp case related a scenario to Atcherley in which an injured worker who had undergone shoulder surgery was denied physical therapy after the operation because he had exceeded the number of sessions for which the law allots coverage.
Atcherley used a hypothetical example based on this case to describe how both the employer and injured worker lost out.
“A small-business owner has a stock clerk who suffers a shoulder injury, which he tries to treat conservatively with physical therapy,” she said. “After 24 sessions, the law says he has reached the cap and workers’ comp will no longer cover therapy. So, the worker has rotator cuff surgery authorized by his workers’ comp plan. But when the surgeon recommends physical therapy after the surgery, the worker is denied coverage for the additional therapy and remains severely limited in his physical activity.
“Let’s say there is an appeal and the expedited process takes four to six months. The employer, during this time, is paying temporary disability, which can go as high as $728 per week (the current maximum amount). During this time, what may have been a $3,000 to $4,000 (charge) for the surgery turns into a $10,000-or-more expense.
“Ultimately the effect on the employer is that he may lose the employee. Then you have the cost of retraining an individual added on and if the employer is not self-insured his premiums will increase as well,” Smith said.
San Diego attorney Scott O’Mara, who represents the San Diego Police Officers’ and San Diego Firefighters’ associations, the local Teamsters and the California Department of Forestry, said the threshold for getting benefits has been raised so high that injured workers have been prevented from receiving adequate medical care.
O’Mara, who was an underwriter for workers’ comp insurance in California in the 1970s, said “the key change that has occurred since (SB) 899 is a change in economic responsibility that has shifted responsibility away from the employer who creates the harm to us as a society.”
As a result, O’Mara said, “I think it’s going to be more pugnacious. There’s going to be denial of more benefits and we as a society are going to pick up the tab on the wrongs committed by the employer who is now inoculated. Unfortunately, Hoch’s marching orders are along those lines.”
Despite the lingering debate, the progress toward recovery of the California workers’ comp system, which only a few years ago had the highest costs in the nation, cannot be ignored.
In his weekly radio address on April 30, Schwarzenegger said the effectiveness of the reforms passed last year and the consequent drop in average workers’ comp costs “allows our businesses to create more jobs and makes our economy grow stronger. We are telling the world that California is open for business.
“Today I am very happy to report that we are already seeing great results,” the governor said.
In some cases, though, the results remain disappointing.
“Workers’ comp costs are still a huge burden because you don’t really have any control over it. When you’re met with costs from vendors, you have choices, but with (workers’ comp), there is no control,” Tobin said.