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Labor's Edge: Views from the California Labor Movement

Back to the Future: Preventing a Collapse in the Workers' Compensation System

By Mitch Seaman, California Labor Federation

Legislators are often criticized for delayed reactions to inevitable crises. Those legislators would likely counter that only hindsight is 20/20, but sometimes it’s crystal clear that everyone should have seen a disaster coming.

For example, all involved in the California workers’ compensation debate agree that our beleaguered system is unsustainable, and employer costs will someday increase so dramatically that major, sudden reform will be necessary.  (Experts estimate that workers comp costs will grow 18% in 2012 alone). As workers, we’ve seen this movie before, and we’re painfully aware that such a rushed fix will put our benefits on the chopping block. Rather than sit around and wait for that inevitable reckoning, though, legislators this year should seize a rare opportunity to prevent such a crisis. 

A coalition of labor and employer representatives has spent months negotiating proposed legislation to reform California’s workers' compensation system. The coalition argues that massive cost savings within the bill mean lower overall system costs and lower employer rates. In fact, rising costs associated with processing and reviewing claims were a key reason negotiations began, as both sides agreed that these “frictional” cost increases mean employers are paying more and injured workers are getting less.

How much money will employers save if this bill passes? We’re about to find out.

First, a little bit of background. For decades, a private non-profit called the Workers’ Compensation Insurance Rating Bureau (WCIRB) has calculated premium rates California employers should be paying for adequate workers' compensation insurance. The WCIRB analyzes recent data—submitted by insurers—to determine the current and future cost of claims, and from there, the WCIRB produces a set of numbers called the “advisory pure premium rates.”

The advisory pure premium rates tell insurers how much they should be charging employers to insure a specific set of workers. For example, right now the advisory pure premium for armored car drivers is $9.73 for every $100 of payroll. So, if you’re an armored car company, your insurer assumes that for every $100 you pay in wages, workers comp claims will cost $9.73 in health care and cash benefit expenses. (That $9.73 figure also includes “loss adjustment expenses,” which are mainly claims processing and defense attorney costs.)

At least once a year, the WCIRB reviews insurer data and decides whether or not to raise these rates, and if so, by how much. This review just happened last week, and the news was not good: according to WCIRB actuaries, in 2012 workers' comp loss costs shot up 18%. Come January 1, 2013, this 18% increase will be reflected in new advisory pure premium rates, with additional rate hikes a near certainty for 2013.

A wide variety of issues are to blame, but a key driver has been the frictional costs—and other wasteful spending—targeted by the legislation.  In fact, the bill’s cost saving provisions loom so large that the WCIRB has delayed these rate hikes in part to account for either the passage or failure of our legislation.

No one yet knows exactly how the bill will affect rates, but we do know that no action means major cost increases for employers. We know that no action means fewer dollars for injured workers and more for endless legal disputes, medical treatment delays and various other forms of unnecessary spending.

Employers and labor rarely agree on reform this comprehensive, and even less often do legislators enjoy the ability to so directly minimize a future cost of doing business in California. Neither injured workers nor struggling employers can afford to wait for a spike in costs to collapse the system, but that’s likely the outcome that will someday follow a failure to pass this legislation.

No one can predict the future, but it’s a safe bet that history wouldn’t look too kindly on that failure. With any luck, legislators will approve the bill, and no one will ever find out.

Posted on 08/20/2012Permalink

More posts by Mitch Seaman

Reader Discussion

What is the bill mentioned in this article? There’s no info about the bill number or its sponsor.

at 7:51 pm on Mon, Aug 20, 2012Posted by Working Class

The proposed legislation has merit however it gives too much control to the insurance carriers particularly in the regulation of medical provider networks. It also fails address the biggest cost driver which is medical cost containment in utilization review; making this a bit of a lopsided legislative effort. The permanent disability increase proposed is beneficial to injured workers however that increase would be taken away by the proposed removal of age, cost-of-living, and diminished future earning capacity modifiers in permanent disability rating adjustments. In particular it would hurt older workers and low wage earners. The proposed reform targets the abusers of the system very well and I hope a compromise can be worked out that protects the permanent disability increase for injured workers as well as fairness in the medical provider network system. Removing proposals to tinker with the rating formula and creating a grievance system for doctors and injured workers within medical provider networks would be a good start to balance this reform effort.

at 9:56 pm on Mon, Aug 20, 2012Posted by Charles Cleveland

It is crazy to suggest the legislature approve this bill.  It has not been even slightly vetted.  To jam this through at the very end of the session cannot be good for anyone.  Some of it has been suggest as unconstitutional.  There isn’t even a definition of permanent disability contained the bill.  If this bill gets approved it is going to cause uncertainty and extensive litigation for years to come.

at 11:39 am on Sat, Aug 25, 2012Posted by B Arnold

Mr. Cleveland has done a good job of tactfully commenting on the problems with the proposed legislation.  The legislative changes made in 2005 severely curtailed the benefits provided to injured workers and did not result in long term cost savings to employers and insurance carriers.  The new proposals will likely further decrease benefits to injured workers and again drive long terms costs higher for employers and insurance carriers.

at 10:19 am on Mon, Aug 27, 2012Posted by Greg Wilson

Working Class: SB 863 (DeLeon).

Charles Cleveland: Nothing in SB 863 grants insurance carriers new rights to “regulate” insurance carriers. SB 863 does, however, dramatically improve overall MPN quality and responsiveness. Two quick examples: MPN’s will be required to employ medical assistance staff to help workers navigate the network, and an expedited hearing process will quickly answer questions around an MPN’s ability to treat a given worker. The bill doesn’t fail to address skyrocketing medical cost containment expenses, it attacks them head on by first eliminating 1 of 2 utilization reviews currently associated with treatment disputes. Then, through IMR, SB 863 ends the insurer’s current ability to force endless medical treatment delays by gaming the QME/AME process. The PD benefit increase isn’t “taken away” by eliminating DFEC and the add-ons, our $750 million increase dwarfs all of these added together and then some. What’s taken away is endless, needless litigation and delays that keep workers from needed treatment and permanent disability compensation. Older workers and low wage workers, along with EVERY category of worker, see a massive benefit increase as a result of this bill.

B Arnold: It’s too bad you think a $740 million benefit increase is “crazy,” we think it’s justified and necessary. And we’re not alone: the broad based employer coalition with which we negotiated—and exhaustively vetted—the bill agreed. We’ve been negotiating this bill for about 4-5 months. In addition, most of the major provisions represent reform ideas analyzed in depth by CHSWC, the RAND corporation and others over recent years. We don’t believe a one size fits all definition of permanent disability is appropriate, given the wide variety of workers and broad range of workplace injuries. Nearly every provision in this bill is designed to—and analysts confirm will—reduce uncertainty and litigation.

Greg Wilson: SB 863 will, again, increase benefits to injured workers by $740 million. SB 863 will sharply reduce immediate costs for insurers and employers and even more dramatically reduce long term costs associated with litigation, friction and delays.


at 8:34 pm on Mon, Aug 27, 2012Posted by Mitch Seaman

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