Calif. Commissioner, Workers’ Comp Comm. Discuss Reform Efforts

September 3, 2003

Emphasizing the urgent need for true reform, Insurance Commissioner John Garamendi told the Workers’ Compensation Conference Committee that the Legislature must reduce system costs by at least $6.25 billion to bring premium levels back to the 2002 level.

“Let me be clear that true reform will only result from significant reductions in the medical, legal and administrative costs of the workers’ compensation system,” said Garamendi. “I know how difficult it is to tell powerful interest groups that they must take a hit, but the public, private and nonprofit employers can not continue to absorb the outrageous premium increases that are a direct result of these cost escalators,” he added.

Garamendi stressed that the reforms must be substantial and immediate. “This is not about special interests and it’s not about protecting a bigger piece of the workers’ compensation pie,” he said. “This is about jobs and economic recovery for California.”

Garamendi presented his own system reform package to the Legislature last week. Measures within the proposed legislation, if fully enacted, could reportedly save billions in system costs.

Garamendi’s Aug. 29 letter addressed to Senator Richard Alarcon stated: “You asked during the hearing on workers’ compensation reform what reductions in the system’s cost drivers would be necessary to reduce premiums. You also asked if I, as Insurance Commissioner, had the power to order reductions. I do not have that authority. Moreover, lower premiums will result only from real and substantial reductions in the costs of the workers’ compensation system.

“The system is plagued with extraordinary inflation in the cost of medical services, as well as unnecessary legal and administrative expenses. The estimated inflation rate in the pure premium (1) costs for the year 2003 alone is 20 percent. To allow insurers to keep pace with this inflation rate, an advisory pure premium rate increase of 10.5 percent was approved, going into effect on Jan. 1, 2003 for policies beginning or renewing on or after that date. An additional advisory rate increase of 7.2 percent was approved and became effective July 1 for policies beginning or renewing on or after that date. And finally, last month the WCIRB recommended yet another advisory pure premium rate increase of 12 percent to become effective Jan. 1, 2004 for policies beginning or renewing on or after that date. If approved, this latest hike would bring the total increase since Dec. 2002 to 32.7 percent.

“It is estimated that every $250 million in reduced system costs equates to a 1 percent reduction in pure premium costs. Accordingly, to eliminate the need for the prospective 12 percent increase, costs need to be reduced by 10.7 percent, or $2.7 billion. To eliminate the July 1, 2003 increase as well as the prospective 12 percent increase, costs need to be reduced by a total of 16.7 percent, or $4.2 billion. And to eliminate both of those increases plus the Jan. 1, 2003 increase, effectively returning pure premium rates to July 2002 levels, costs would need to be reduced by a total of 24.6 percent, or $6.2 billion.

“The current workers’ compensation market is dysfunctional. The return to a competitive and robust market requires stable and predictable medical, legal, and administrative costs. The committee discussion leads me to believe that it may draft a law that mandates a reduction in the premiums for workers’ compensation. There can be no reduction in premiums below the actual costs of paying claims, legal costs, administrative costs and a reasonable profit. Any requirement to lower premiums below these real expenses will create a market crisis similar to the electrical energy crisis of 2000. Furthermore, private companies will flee California leaving the State Compensation Insurance Fund, an already severely stressed organization, as the only source of workers’ compensation insurance. I strongly urge you to consider this conundrum.

“We all understand how difficult it is to achieve cost reductions of $6.2 billion. Nonetheless, I believe that we have no choice but to do so. During the hearings the committee and the public heard the serious impact that this crisis has on businesses, governments, and non-profit organizations in California. I explained in my testimony how significant cost reductions could be achieved and refer you to the interconnected proposals that I presented to the committee.

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