Workers’ Comp Reforms Fail to Quell Discontent : Insurance: With medical and litigation costs up to 40% higher than elsewhere in the state, employers and insurers ponder whether they should stay in L.A. or even California.

Industrial Indemnity, one of the state’s largest workers’ compensation insurers, has found a cure for the headache of doing business in the Los Angeles area: It’s pulling out.

Industrial says it’s impossible to do business here because there is too much litigation, medical costs are too high and expensive mental stress claims are skyrocketing. So, beginning this month, it will decline to renew coverage of companies whose business is conducted primarily in the L.A. Basin.

Though so far it is the only insurer on its way out, Industrial isn’t alone in its harsh judgment of the workers’ comp environment in Los Angeles, where medical and litigation costs can be 30% to 40% higher than in the rest of the state. Other insurers are carefully reviewing their policies, stepping up cost-control measures and being much more selective in new underwriting.

Barely a year since a long-awaited reform to California’s workers’ compensation laws took effect, businesses statewide are warning that they, too, may leave because of high workers’ compensation costs.

And workers, ostensibly the primary beneficiaries of the system and its reforms, often find themselves even more alienated by a system that grants them fewer options for their own medical care and by employers ever more suspicious of their claims.

Simply put, in California, more than in any other state, society’s growing expectations that work should not make people sick have come smack up against the economic realities of paying for job-related injuries in a time of out-of-control health-care costs.

And yet problems in the workers’ compensation business aren’t restricted to California. “The industry as a whole has not made money nationally on workers’ comp in the past decade,” said Edgar S. (Sandy) Clark, vice president of Alexander & Alexander, a large insurance brokerage.

While some insurers are pulling completely out of other states, such as Massachusetts, the hope of reform and the demand of customers for a full line of insurance offerings keeps many companies in the workers’ comp business.

It would be difficult to pull out of California, despite its problems, because it is the largest market for workers’ compensation insurance and other types of insurance as well. And an eight-year-long process that led to some reforms to the system in 1989 has given insurers and employers hope that other changes will be made.

The reforms increased long-frozen benefits to injured, out-of-work employees from a maximum of $224 a week to $266 in 1990 and $336 this year; the minimum went to $126 a week from $112. Also, the reforms made it more difficult for workers to claim job-related mental stress, placed controls on vocational rehabilitation and curtailed the freedom of workers and employers to chose their own--often dueling--physicians to evaluate claims.

The reforms, though, were a compromise, and none of the participants--insurers, employers or labor--was totally satisfied with the results. So far, however, the most vocal advocates for a speedy return to the reform process have been employers and their insurers.

Among them is the California Business Roundtable, which in January issued a report calling for additional, extensive reforms such as further tightening the requirements for mental stress claims and virtually eliminating the right of an injured worker who is contesting the handling of a claim to chose his or her own doctor.

The Roundtable contends that, while limiting employees’ access to the health-care system, such changes could result in a significant increase in wage-replacement benefits. The coalition of businesses, insurers and municipal governments argues that such changes are needed because California has the third most expensive workers’ comp system in the country, in terms of cost to employers, and ranks fourth in claim frequency.

And trends they consider most troubling--medical costs, legal action and mental health-related claims--are rising faster in the state, and particularly in Los Angeles, than almost anywhere else.

All this is having a profound effect on area businesses, which must, in the end, foot the bill for work-related injuries. A company’s workers’ compensation insurance premiums are based on statewide risk averages for its particular business, adjusted to account for the company’s actual claim experience. Most companies wind up paying, over a few years, the actual costs of any claims against them.

Especially hard-hit are small Los Angeles-area companies who say they can’t survive without cheap labor; some threaten that they too will pull up stakes if something isn’t done to bring down workers’ compensation insurance and claim costs.

These firms say that if they go, so too will go the jobs that form the underbelly of Los Angeles’ economy: jobs that they contend offer immigrants and unskilled laborers their only opportunities for minimum wage or above earnings and a possible bootstrap to a better life.

Among them are the furniture and apparel makers, electronics assemblers and independent construction and maintenance contractors, all of whom say workers’ compensation claims are becoming an unmanageable expense. Thomas E. Hagerman, president of John H. Van Patten Co., a Santa Fe Springs furniture maker, said that unless the state workers’ comp laws are reformed to bring down the costs, “I’m not going to stay, no way.”

Hagerman, as chief spokesman on workers’ compensation issues for the Western Furniture Makers Assn., has also urged his group’s members to get out of California, or at least the L.A. area, if a heavyweight player, such as the city of Los Angeles, “does not get into the program now and push for true (workers’ compensation) reform with sense of urgency.”

Van Patten’s largely immigrant work force is paid wages ranging from slightly above minimum wage to as much as $10 an hour for minimally skilled employees. For every $100 in salary, Van Patten pays $17.50 for workers’ compensation coverage. “If I were in North Carolina,” Hagerman said, “it would be $2.50. If I lived in San Diego and the plant was in Mexico, it would be nothing--or maybe 50 cents.”

Tim Trujillo can only dream of such workers’ compensation rates. Trujillo, the owner of a small roofing company in Los Angeles, just got hit with a second rate increase in as many months. He pays close to $40 for workers’ compensation insurance for every $100 he pays out in salary to his five employees.

Although occupations like roofing carry higher risks and thus lead to higher average on-the-job injuries, Trujillo believes that the rates are out of line. “I’m a small guy with a clean safety record,” he said.

The high rates make it harder for Trujillo to raise his employees’ wages--that is, when they have jobs to do. Trujillo is convinced that he has lost many jobs to independent companies--he calls them “bandits”--who operate illegally without workers’ compensation insurance. “They can’t afford it; sometimes they can’t even get it,” Trujillo said.

In these lean times, with companies scrambling for jobs and scraping profits to the nub, he said, “everyone is bidding low. But those guys going without insurance--you can imagine the advantage they have.”

The business community’s discontent with the state workers’ compensation system was only partially mitigated by the 1989 reform act. Businesses and insurers alike say Industrial Indemnity’s withdrawal from the L.A. area, announced just a year after the reforms took effect, is evidence that not enough was done. And throughout the state, business groups are voicing increased consternation over the problems.

Though new reforms would affect the whole state, experts acknowledge that the problems are worse in the Los Angeles area, for many reasons. Job-related injuries cost more here partly because health-care costs are higher here--a fact that puts stress on the entire health-care delivery system, including other employer-provided benefits.

The high costs of health care are more problematic in workers’ compensation cases than in other employer-paid benefit plans, however. That’s because, unlike health insurance plans, there are no co-payments or built-in limits on coverage in workers’ comp. Employers contend that gives the participants, including the doctors, lawyers and employees, little incentive to help contain costs.

That’s why many of the suggested reforms seek to limit the number of evaluations that can be sought by workers or employers.

Another factor in the high incidence of cases here is that the Los Angeles area has more jobs than anywhere else in the state and, therefore, more work-related injuries. Its higher number of unskilled laborers also increases the proportion of injuries to jobs; such labor often involves operating machinery or doing highly repetitive tasks under less-than-ideal conditions, including little job training and poor communication between labor and management.

But two factors--mental stress claims and litigation--have acted like a Mixmaster in a hornet’s nest. Businesses and insurers are citing these two areas as hot spots of abuse and fraud that drive up costs throughout the state.

Mental stress claims, according to the state’s Division of Labor Statistics and Research, increased nearly 700% to more than 9,000 in 1988 from fewer than 1,200 in 1979. The average cost of such a claim in 1988 was about $13,000, for a total of $460 million. Although in 1988 such illnesses accounted for only 2% of lost-time injuries, they represented 28% of total workers’ compensation claims in the state.

New mental stress claims dropped nearly 18% to 7,706 cases in 1989 from 9,368 the year before, according to the California Workers’ Compensation Institute, a nonprofit insurance industry-supported organization. “Whether this represents a true decline in the incidence of mental stress disabilities or merely a change in the way such claims are reported in anyone’s guess,” the institute added.

Although the system is designed to be “no-fault,” nearly 12% of all claims filed in 1989 were taken to at least the first state of a complicated quasi-judicial litigation process. One aim of the 1989 reform was to reduce that figure, but Bill Molmen, general counsel for the institute, said it is still too early to measure the impact.

More significantly, in the northern part of the state, only 8.8% of new claims in 1989 reached that first stage of litigation; in the southern part, it was 13.8%.

Many employers and insurers blame both the litigiousness and the high number of mental stress claims in Southern California on what they call “claim mills” that pepper the minority press and daytime and late-night television airwaves with their advertisements. These firms, which often combine paralegal advice and medical examinations, attract great numbers of clients by offering toll-free phone numbers and one-stop help--both attractive features to poor workers, recent immigrants and those unfamiliar with the laws.

The majority of the advertisements clearly state that workers “may” be entitled to disability pay and medical treatment for on-the-job injuries or mental and emotional stress. They say they are there to help workers understand their rights and benefits under the law.

And indeed, the California law clearly states that workers are entitled to compensation benefits for such injuries, if the job in any way causes, contributes to or exaggerates an injury, and for mental stress ailments, even if the job contributes only 10% of the disabling stress.

“Other states require . . . that work be more responsible, but in California, if the work accelerates or exaggerates the injury, the employer pays for the whole injury,” Molmen said. “Employers see this as evidence of employee fraud or claimant fraud. They say, ‘That person had a bad back anyway.’ But that’s not the point. The law says if the workplace is almost any factor, the claim is compensable.”

William Orum, president of Dynamic Electronics Manufacturing in Montebello, contends that all 39 workers’ compensation claims filed by his employees last September are fraudulent and blames the tactics of one law firm. Dynamic, which makes cables and wiring harness assemblies for electronic equipment, has 96 employees, predominantly non-English speaking Latinos. Some may be required, for minimum wage pay, to repeat one operation as many as 5,840 times in a workday.

The potential costs of the claims against Dynamic and high insurance premiums led Orum to drastic action. He laid off all his employees and now “leases” them back from a third-party company. It’s “only a temporary fix,” said Orum, who frets that come this September when Dynamic will be re-rated for workers’ comp insurance, he will no longer be able to afford the lease arrangement and he may have to close shop.

However, even insurers say it’s unfair to blame claimants entirely for the adversarial climate that has existed in the state system. Employers have also had their own favored lawyers and doctors--who are often hired primarily to dispute the findings of the worker’s doctor--and have become much more aggressive in challenging work-injury claims, especially those tied to mental stress.

Such actions only exacerbate the sense of isolation, fright and desperation that injured workers--especially low-paid, non-union immigrants--often feel, one insurance industry executive said. It may be these feelings that drive the legitimate claimant into the arms of lawyers or doctors that openly offer support.

Moses Gomez, a professional investigator for the State Fire Marshal’s Office arson and bomb unit in Pasadena, doesn’t fall into that category and didn’t seek an attorney’s help in his work-related injury claim. But he said he understands why others do.

“You get no information; they give you the runaround; they help you with nothing,” he said. “I can see why people go running to attorneys. The less you know, the more scared you are.”

The 1989 reform sought to address many of these issues; the law now requires employees to respond more quickly to a workers’ claim for compensation.

And yet, even in the current call for reforms, fundamental questions remain about how adequately the workers’ compensation system addresses the issues of today’s workplace and society’s growing expectations to be protected from misfortunes of all kinds.

Job stress may just be endemic to Los Angeles, where the patina of a laid-back lifestyle does little to disguise the realities of living and working in a smog-filled, freeway-jammed and highly competitive economic and social environment.

“Why is the L.A. Basin such a horrible place when it comes to workers’ comp?” mused Charles Mitchell of C. E. Heath, a workers’ comp specialty carrier. “So many claims in L.A. are litigated. Why are they being litigated? Why do the companies seek counsel of attorney for the most minuscule kind of claim? What’s wrong with the situation in L.A.?”