In an effort to provide relief to skyrocketing workers’ compensation premiums in California, Insurance Comm-issioner John Garamendi lowered the advisory pure premium rate by 14.9 percent, a shift that the Department of Insurance believes would return premiums to July 2002 levels.
The announcement comes on the heels of the Workers’ Compensation Insurance Rating Bureau’s (WCIRB) updated evaluation on the impact that recently passed workers’ comp legislation will have on 2004 pure premium rates. On Nov. 3, the WCIRB announced additional data and information collected after the Sept. 29 hearing led to an increased pure premium rate reduction of between -2.9 percent to -5.3 percent. The reduction, nearly three times less than Garamendi’s recommendation, would account for a potential cost savings of between of $3.5 billion to $4.2 billion. “The process is very complex. … lots of little changes affect the system as a whole,” said Jack Hannan, spokesperson for the WCIRB. But according to Garamendi, the reform legislation may yield greater workers’ comp cost savings than the WCIRB estimates.
Addressing a luncheon crowd at the California Coalition on Workers’ Compensation’s (CCWC) recent conference in Los Angeles, Garamendi said the savings from the reforms reflected in his pure premium order would not occur unless recent reform legislation is fully enacted by the industry. Garamendi said to the audience that the WCIRB ignored the potential impact of new legislation in their initial evaluation in September, adding that the rating board is dominated by the insurance industry. He went on to say “The fact is it (legislation) was of great value.”
Although some insurers use the advisory rate as a benchmark, the commissioner does not have the power to set the rates charged by insurers. However, the reform legislation includes a provision that requires insurers to file rates reflecting reform legislation cost savings. “I’ll see that the industry pays attention,” Garamendi said.
There’s no argument that the industry is paying attention. “This is the most aggressive rate reduction that could have been imagined,” said Mark Sektnan, assistant vice president western region, American Insurance Association. “No one saw it coming.” According to Sektnan, trend lines for advisory rates in previous years have usually been conservative. “We haven’t seen actuarial data that would justify such a rate decrease.” Sektnan said that some insurers use the advisory rate as a base rate, but others don’t use it at all. “CDI is anticipating the most optimistic potential cost savings from the legislative reforms,” Sektnan said. “However, many of the cost savings that the CDI is basing their recommendation upon are utilization review tools that were developed using the group health model, but are untested in the workers’ compensation system.”
But Garamendi told the CCWC audience, “There is no opportunity for failure.” He also said that if the State Compensation Insurance Fund (SCIF) and other insurers fail to fully implement the law, savings would not be passed on to small businesses. “I’m going to hold them responsible.”
Beginning in Jan. 2004, the reform legislation requires insurers to train claims adjusters to comply with new treatment guidelines set by the American College of Occupational Medicine, and by April insurers should pay medical providers based on these guidelines.
According to Jim Zelinski, spokesperson for SCIF, implementation is already underway. “We’re implementing every aspect of the reform legislation,” he said. “A special committee has been set up to review.”
Like with any change, there will be challenges. “Traditional guidelines take a period of time to implement; you need to acclimate to new rules and there are a number of treatments that fall outside of these guidelines,” Sektnan said. However, Garamendi claims that the industry will have plenty of time to adjust to the new guidelines. According to Sektnan, “The challenge is that he expects not only the insurance industry, but also every workers’ comp doctor to be trained, and that every judge at workers’ comp appeals courts to be knowledgeable and to follow the guidelines by day one,” Sektnan explained. Garamendi insists that it can be done.
In addition, Garamendi commented that without changing the cost-drivers—fraud, administrative inefficiencies, and litigation—workers’ comp premiums would continue to increase. “We’re going after fraud and we’re going to bust some big ones,” he said. According to reports, fraud accounts for $1 billion to $3 billion in added cost to the system each year.
After taking office in January, Garamendi signed an advisory pure premium increase of 7.2 percent that became effective on July 1. This change followed a previous 10.5 percent increase that went into effect six months prior.
Garamendi also stated that there is a critical need to enact cleanup legislation to deal with ambiguities and technical errors in the new law. He said the cleanup is essential for the new legislation to be carried out effectively, and to eliminate potential litigation. Gov.-elect Arnold Schwarzenegger has indicted that he will call a special session, where Garamendi plans to address the cleanup.
“As I said, there are very significant savings within this legislation that can be passed on to businesses,” Garamendi said. “It is now up to all who are involved to fully enact this new law so that our employers will see some relief.”
There was little discussion about estimates that the workers’ comp industry is under capitalized, but Garamendi did comment that the reform analysis shows a one-time savings to reduce reserves through retroactive reform efforts. Sektnan noted, “That’s a really big if,” that depends upon the enactment of cleanup legislation in the special session.
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