Workers’ Comp Blues : High Costs for Often Bogus Claims Undermine Many in Business, Owners Tell Panel

Lee Arnone, the owner of a 15-year-old Los Angeles demolition company, boasts that none of his employees has ever suffered a serious accident.

All the same, Arnone says he is close to being driven out of business by his firm’s skyrocketing expenses for workers’ compensation insurance--the system responsible for compensating employees for workplace injuries.

Seven times over the last five years, Arnone says, his firm has been hit by workers’ compensation claims from former employees who maintain they suffered job-related stress. That included claims from two brothers who worked for Arnone for less than a week.

And the cost of processing and paying off those claims--all of which Arnone contends are bogus--ultimately is paid by his firm. “Who is worried about my stress?” Arnone asked. “I think the system stinks.”

Arnone, along with other owners of small and medium-size businesses, appeared Tuesday at a pair of hearings conducted by the Council on California Competitiveness, where they lodged their grievances about the state’s controversial workers’ compensation system.

One after another, they told business horror stories. Nearly all of them, like Arnone, griped about laid-off workers who file allegedly illegitimate claims, generally for stress or difficult-to-assess soft-tissue injuries. Others assailed the doctors and lawyers who profit from the system.

Many also directed their anger toward workers’ compensation insurance companies that, Arnone asserted, “really don’t care. They don’t fight the cases that stink of fraud, they just pass on the cost to guys like me.”

The rising resentment over California’s tangled workers’ compensation system is expected to lead to major reform legislation this year. Pending in the state Senate and Assembly are dozens of reform bills--by one count, 84 proposals.

Serious debate on the proposed reforms is expected to begin in the Legislature after the Competitiveness Council, headed by Peter V. Ueberroth, delivers its recommendations for revitalizing the state economy in mid-April.

Although the cost of workers’ compensation insurance is a national problem, the situation in California is particularly acute. The state’s employers pay high rates--they ranked sixth-highest in a 1989 survey of 46 states and the District of Columbia.

According to that survey, California employers spent 3.1% of every payroll dollar on workers’ compensation, versus a national average of 2.2%.

At the same time, the benefits received by seriously injured workers in California are low. The maximum weekly benefit for a totally disabled worker in California is $336, which ranked 35th among the 50 states and the District of Columbia in a 1991 study.

Injured workers also are often subjected to long delays before they can collect needed benefits.

In California, “you get real winners,” said John F. Burton Jr., a Rutgers University expert on workers’ compensation. But mostly, he said, they are “doctors and lawyers who are prospering handsomely off the system”--and not seriously injured workers.

Another reason for the high cost to California employers is that state law provides for workers’ compensation to employees who, in many cases, wouldn’t receive benefits in other states. Stress claims, for example, are covered by workers’ compensation insurance only in California and five other states, Burton said.

Burton contends that fraudulent claims also contribute to rising workers’ compensation costs, but he calls “exaggerated” estimates that as many as 20% of all cases involve cheating.

Still, many of the business owners at Tuesday’s hearings maintained that bogus workers’ compensation claims are placing huge burdens on them. Arnone, the owner of the demolition firm, said his workers’ compensation insurance costs climbed from around $15,000 in 1988 to close to $75,000 last year.

That increase came, he said, even though he has diligently conducted training sessions for employees, provided the latest in safety equipment and pulled workers off jobs where he feared they were in danger of getting hurt. But as a result of the weak economy and workers’ compensation costs that he expects to jump again this year, Arnone said he might shut down by May 1, a move that would put his roughly two dozen employees out of work.

Gary Daitch, president of B & G Apparel Inc., had a similar story to tell. His apparel sewing firm, which employs more than 200 workers, has been hit by five stress claims. The result, he says, is that B & G’s annual workers’ compensation insurance expenses over the last year jumped from $58,000 to $214,000.

“If it happens again, obviously, the doors would have to close,” Daitch said. “We couldn’t handle another increase.”

“It’s our highest cost of doing business,” added Brenda Daitch, secretary and co-owner of B & G. “It’s higher than our rent. It’s higher than anything else. It’s why a lot of people are going out of business.”

Marvin Orenstein, chief financial officer of the women’s swimwear firm Apparel Ventures in Gardena, said his firm has been hit by “ridiculous” workers’ compensation claims.

Partly because of these complaints, Orenstein said, $5.60 of every $100 his firm spends on payroll costs in California goes to cover workers’ compensation. But at the company’s plant in Utah, workers’ compensation accounts for only $1.75 for every $100 of payroll expenses.

“We’re not going to go out of business because of this, but the money is being ill-spent,” Orenstein said.

In fact, the company recently closed one of its two Utah plants, but remains committed to keeping most of its manufacturing in Southern California despite workers’ compensation problems. Operating plants in Southern California, near the company’s headquarters, “offers us the opportunity to run over, to see what’s going on and to make corrections in a timely manner,” he said.

Costly Coverage

California’s soaring workers’ compensation costs . . .

The state’s employer spending on workers’ compensation in billions of dollars.

Year and amount:

1981: 3.7

1983: 4.2

1985: 5.4

1987: 7.8

1989: 9.8

1991: 11.0 *

* Projected

Source: California Workers’ Compensation Institute

. . . put the state among the 10 most expensive

Most expensive workers’ compensation states based on percent of payroll spent on workers’ compensation claims:

State Rank Percentage Spent Montana 1 4.402% Texas 2 3.551% Oregon 3 3.528% Florida 4 3.464% Maine 5 3.380% California 6 3.112% New Mexico 7 2.918% Rhode Island 8 2.818% Hawaii 9 2.766% Kentucky 10 2.719%

Source: John Burton’s Workers’ Compensation Monitor