What ails workers’ comp?

Already struggling to cope with the recession, California businesses recently learned that their workers’ compensation insurance premiums could swell this summer. Last month, a state board that tracks workers’ comp costs recommended a rate increase of more than 24%. The reason: higher medical expenses and the threat of increased payments to permanently disabled workers. Gov. Arnold Schwarzenegger called on Insurance Commissioner Steve Poizner to reject the board’s findings and issue an advisory rate more in line with the current charges.

The dispute exposes a troubling problem in the workers’ comp overhaul that Schwarzenegger pushed through the Legislature in 2004. The measure, which gave employers and insurance companies significant control over workers’ treatment, drove rates down steadily. Today, workers’ comp insurance adds a little bit more than 2% to a company’s payroll expenses, less than half of what it was in 2003. The number of claims has dropped steadily too. But in the last couple of years, the system’s costs have started rising again, especially the medical costs. In fact, the board projected that medical costs for injuries last year will be higher than they were before the reforms were enacted.

Among the factors driving up those costs, according to the board, are sharp increases in expenses related to “medical cost containment” and “medical legal costs.” In other words, the mechanisms that insurers use to keep a lid on healthcare expenses are becoming increasingly expensive. And no wonder -- in the overhauled workers’ comp system, more people are likely to review an injured worker’s paperwork than his X-rays. Insurers can require doctors to submit treatment plans to one set of reviewers to make sure it complies with national standards for care, then have a second set scrutinize the bills once the treatment is performed -- even when the doctors were handpicked by the insurance company. Critics say the review process not only can delay treatments but can pad costs. For instance, an insurer might charge the system more for reviewing a treatment plan than it pays a contractor to do the work.

The increased “cost containment” expenses account for only part of the swift rise in medical charges. Analysts say treatment bills per injured worker are rising unusually fast, as are pharmaceutical costs. Clearly, the system is still adjusting to the changes made in 2004. Nevertheless, policymakers should scrutinize why healthcare costs in the workers’ comp system are outpacing the rate of healthcare inflation, and why the mechanisms that were intended to hold down costs are contributing to their rapid growth.