California’s troubled workers’ compensation insurance system has been riddled in recent years with high costs, delays in dealing with injured workers and increasing litigation. Recent reforms may have positioned the market for improvement, but a lot remains to be done, experts on the subject told the Casualty Actuarial Society (CAS) annual meeting in New Orleans.
For many insurance companies, the average workers’ comp claim cost in California is reportedly often double that of the rest of the nation and is continuing to grow rapidly. The state’s workers’ comp costs are out of control for both insurers and those who self-insure.
The Department of Insurance has ordered the State Compensation Insurance Fund to curtail its writings because of an over-leveraged position, leaving many small employers with no coverage. And Insurance Commissioner John Garamendi said recently that the system is destined to crash if serious structural change is not enacted.
From the perspective of businesses that have to buy workers compensation coverage, the system clearly is in crisis, said David Bellusci, senior vice president and chief actuary for the Workers Compensation Insurance Rating Bureau of California.
Workers’ comp written premiums, prior to deductible credits, took a big drop from around $9 billion in 1993 to around $6 billion after the state went to competitive rating in the mid ’90s and stayed low until 2002 when it started to take off to a projected $20 billion for this year, he said.
“Not surprisingly, what has driven that is rates,” Bellusci said, “the average insurer rate per $100 of payroll plummeted from about $4.50 in 1993 to about $2.27 in 1999, where it bottomed out, but since then it has more than doubled with very sharp increases. We were projecting that by the first quarter of next year that if there hadn’t been this last set of legislation (reforms) it probably would have been over $7.00”
A study reportedly found that employers in California who do business in multiple states were paying two to four times as much for comp coverage in California as they were paying in other states. It is a significant drag on the state’s economy, Bellusci said, and many businesses cited workers’ comp as a major reason for moving or curtailing their operations.
The system was not working well for injured workers either, he pointed out, with lower benefits than most other states, even though it a high wage state with no indexing for inflation which have left some maximum benefits unchanged since 1984.
Insurers writing workers’ comp in California saw their accident year combined loss and expense ratios skyrocket from a combined ratio of 85 in 1993 to a peak of 180 in 1999. This resulted in significant reserve deficiencies and loss of equity and caused 17 workers’ comp insurance groups to go into liquidation and 5 others to consolidate or reduce their business.
The State Fund, the workers’ comp insurer of last resort for businesses unable to purchase coverage in the private market, took up most of the loss of that 40 percent of the private market and grew from writing 10 percent to 15 percent of the market to more than 50 percent.
Even though there was a rapid rise in benefit costs paid by insurers from $7.1 billion in accident year 1993 to a projected nearly $25 billion next year, the frequency of injuries was not the driving factor, said Bellusci. The dollars were really going into medical benefits, rapidly growing throughout the ’90s from about 50 percent of benefit costs to what was projected to be as high as 70 percent this year, except for the changes made by a bill (AB 749) passed last year by the state Legislature, he said.
The reforms of AB 749, supported by labor groups, increased benefits to injured workers and is estimated to cost about $3.2 billion when it is fully implemented in 2006. But AB 227 and SB 228, which were passed earlier this year, make changes to the medical fee schedule and medical utilization, and repealed vocational rehabilitation.
The impact of this year’s reform measures will result in a reduction of 13.3 percent to 15.7 percent of the pure premium rate level or a projected rate decrease of 2.9 percent to 5.3 percent instead of a 12 percent increase, the rating bureau official said. “The WCIRB now estimates the shortfall in reported insurer losses as of December 31, 2002 will be reduced from $12.5 billion to between $8.5 billion to $9.7 billion because of impact of these reforms,” said Bellusci.
Commissioner Garamendi recently evaluated the savings at about 18 percent and approved a 14.9 percent decrease in rates.
These reforms are very difficult to evaluate because they involve all kinds of implementation, administrative, judicial interpretation and behavioral issues, but we have appointed a task force to develop a monitoring plan and will be doing so as we go forward, Bellusci concluded.
The Executive Vice President for Research and Development at the California Workers Compensation Institute (CWCI), Alex Swedlow, agreed with Bellusci about the difficulty of evaluating reforms because there have been so many and “they have covered virtually every aspect of the system, including benefits, medical care, privacy, administration and oversight, fraud, permanent disabilities, legal alternatives and dispute resolution.”
Medical costs in the system are the single highest concern, he said, tripling and quadrupling in recent years. Updating the medical fee schedules, dealing with the variability of outpatient surgical facility fees – which have been reduced by a significant 88 percent just by addressing the unit prices of such services – have been the most important reforms enacted.
“The rapid growth in medical utilization has been one of the strongest cost drivers in California’s workers’ compensation,” Swedlow said. SB 228 limited the number of chiropractic visits to 24 after statistics showed that claims with greater than 24 visits represented 29 percent of claims and 72 percent of payments. The effects of the 24-visit cap actually reduced the average number to 12 and reduced the average paid claim by about 45 percent, he said.
Physicians who treat workers’ comp claimants was another area that CWCI studied and found that 9 out of 10 providers treat less than 1 percent of the state’s workers’ comp claims per year. And comparisons between those most experienced with treating such claims and those least experienced, revealed a 56 percent lower average cost per case and 58 percent lower levels of attorney involvement for the most experienced physicians.
“California’s workers’ compensation system is more complicated than ever, reforms must go beyond conventional wisdom and quick fixes and there must be collaboration between all the stakeholders in the system,” Swedlow concluded.
Lawrence White, workers’ compensation insurance policy advisor in the California Department of Insurance (DOI), said from his personal, but experienced-based, perspective, “the DOI sat on its hands for eight years — from 1995 when workers’ comp rates were deregulated until Commissioner Garamendi returned for his second term this past January after serving as commissioner in the early ’90s.
“Because of the radical deregulation of workers’ comp rates in 1995, there was no provision requiring that rates be adequate. The DOI issued advisory loss-cost rates, insurers charged less than those advisory loss-costs and the department had no authority to do anything,” White pointed out.
Problems with rising workers’ comp costs caused many private insurers to reduce or stop writing business in the state which caused the State Fund – the insurer of last resort – to grow from 20 percent of the market to 50 percent. This caused the Fund to get into serious financial trouble, with a shrinking surplus and possible insolvency, White said.
The problems continued, he added, causing many employers to be driven out of business and creating a severe workers compensation crisis. “And because labor is so strong in California and controls the legislative process, phony reforms were enacted that caused a credibility issue when what was needed was for labor and business to find common ground for real reform,” the DOI official emphasized.
The California gubernatorial recall effort earlier this year sent a shock through the state Legislature, White said, and resulted in quick workers’ comp legislative action in September on what all parties involved agreed was real reform.
The state needs another round of reforms, addressing permanent disabilities, White noted. But he said that, in his opinion, it is a great time for workers’ compensation insurers to return to the state because “the tide has turned.”
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