Insurers Gain Most From State Workers’ System, Study Says

It is insurance companies--not doctors, lawyers or injured workers--who are profiting most from the workers’ compensation insurance system, a new report by the state auditor general said Wednesday.

Democratic lawmakers who released the report say it “shatters the myth” that doctors and lawyers are ones most responsible for the soaring costs of the state’s troubled $6-billion workers’ compensation system.

They said they believe the report will provide the spark necessary to advance legislative efforts to reform the system.

The report concluded that of all the players who benefit from the workers’ compensation system, the injured and sick workers the system was set up to protect are the ones showing the smallest gain. Maximum weekly benefits for workers have remained at $224 since 1982 and medical and other benefits have not risen as fast as payments to doctors and insurance companies, the report said.

While workers’ compensation system costs are rising steadily--payments made by employers to insurance carriers to provide worker benefits rose from $3.3 billion in 1983 to $6.1 billion in 1987--the report said actual benefits received by injured workers are among the lowest in the nation, on a per-worker basis.

The report, drafted by acting Auditor General Kurt R. Sjoberg, recommended that the maximum benefit be increased to $296.

Assemblyman Bruce Bronzan (D-Fresno), the former chairman of the Joint Legislative Audit Committee who ordered the report, said the insurance industry’s estimated annual profit margin on workers’ compensation cases went from $240 million in 1983 to $1.4 billion in 1987, an increase he described as “startling.”

The profits were made possible by workers’ compensation insurance rate increases approved by the state Department of Insurance. The department approved rate increases for the insurance industry during all but one of the years from 1983 to 1987, the report said.

“Something has failed somewhere,” the legislator said.

Bronzan said the findings run counter to arguments by insurance companies that they are barely breaking even writing workers’ compensation insurance policies. The legislator said insurance companies have told the Legislature “over and over again that they essentially are going to the poor house.”

Edward Levy, a lobbyist for the Assn. of California Insurance Companies, called the claims that the industry was reaping excessive profits from workers’ compensation cases “nonsense.” He acknowledged that insurance companies were making a profit on their workers’ compensation policies, but said it ranged from a high of 10.5% return on net worth in 1983 and a low of 1.8% in 1987.

Legislators told reporters at a Capitol news conference that the auditor general’s report shows that there is enough money in the system to finance the weekly benefit increase from $224 to $296, which would cost between $400 million and $500 million annually.

Lawmakers for years have sought unsuccessfully to put together legislation that would both decrease the costs to employers, who bear the burden of financing the entire system, and raise the benefit levels of workers.

Legislation boosting the benefits was approved in 1985, only to be vetoed by Gov. George Deukmejian, who said he would sign a benefit increase bill only if reforms were included to make the system fairer to both employers and employees.

Private negotiations for compromise legislation are currently under way between insurers, employers and labor unions. Legislators have deliberately been excluded from the discussions.

Bronzan ordered the auditor general’s review of the workers’ compensation system to answer questions raised over the years about who is to blame for the high cost of California’s system and the low benefits received by workers. In the past, doctors have been blamed for conducting too many examinations on injured workers and charging excessive fees. Lawyers also have been accused of charging excessive fees as well as encouraging litigation.

The report, analyzing the year 1985, said that 51% of the lawyers involved in workers’ compensation cases earned less than $1,000 per case.

It also said that during 1985 only 15% of the 1.2 million work-related injuries that occurred were litigated--and 67% of those were settled before the cases went before a workers’ compensation appeals board judge.

The report found that doctors fees’ for medical reports on injured workers were rising substantially faster than physician services charged to the general public, but indicated that the fees were a relatively small part of overall costs.

Ronald T. Rinaldi, director of the state Department of Industrial Relations, which operates a state-run workers’ compensation insurance fund that competes with private insurers, said the claims of healthy profits were consistent with the experience of the state fund. The state is considered an insurer of last resort because it provides insurance for employers who have trouble getting it elsewhere. Despite that, Rinaldi said the state collected $2 billion in premiums and made a net profit of $400 million last year.