Employers Probably to Be Hit With Higher Workers’ Comp Costs
Premiums for workers’ compensation insurance--up 20% since last summer--will probably increase further in the coming months, hitting California businesses with new hikes in operating costs over which they have little control.
Several factors lie behind the increases, which come as businesses face higher costs for another necessity, energy:
* Insurers lose money on workers’ comp. According to the Assn. of California Insurance Companies, workers’ comp insurers pay out $1.56 in claims and other costs for every $1 they collect in premiums in California.
* The cost of the average workers’ comp claim shot past $34,000 in 1999, the most recent year for which numbers are available, compared with about $18,000 in 1994, according to the association.
* The benefits payable to injured California workers rank among the lowest in the country, and the state Legislature probably will increase them substantially before its current session ends.
The losses among workers’ comp insurers were severe enough to force one carrier, Superior National Insurance Co., into receivership last year and send a second, Fremont General Corp., reeling in the same direction--and the carnage may not end with those two.
Workers’ comp premiums dropped rapidly in 1995 when the state ceased controlling how insurers set rates. This spawned a fierce competition for market share among workers’ comp insurers. But although multi-line carriers--those selling other lines of property-casualty insurance in addition to workers’ comp--made up for the losses with profits on their other lines, specialty workers’ comp insurers couldn’t.
The free-for-all was good for employers, of course; after years of turmoil and ever-increasing costs for the California workers’ comp system in the 1980s and early 1990s, costs finally came down.
Then the insurance market as a whole hardened in the last half of 2000 and multi-line insurers no longer were willing to countenance the losses on workers’ comp.
It’s anybody’s guess how far premiums will go up. State officials expect the legislation now pending in Sacramento could cost employers $1.6 billion to $2.3 billion, depending on how the increases in benefits and the cuts in costs are calculated.
This would push overall costs from about 1.75% of payroll at present to something like 2%. Although that might seem reasonable, the increases in costs could match the premium increases slapped on many employers in California beginning last summer--20% on average, more for many companies.
“For some insurers, the losses are more than $1.50 for every $1 in premium, and we’re going to see premium increases based on that alone,” said Assemblyman Thomas Calderon (D-Montebello), chairman of the Assembly insurance committee, which held the first of a series of hearings on workers’ comp insurance last week in Sacramento. “Medical costs have gone way up, and the costs of administering claims is high and prescription drug costs are high. The system is pretty dysfunctional.”
The glimmer of hope in this is that the Legislature might boost the state’s certified health-care organization program, launched in 1993 in an effort to bring the cost-containment benefits of managed care to bear on the workers’ comp system. Effective but little known, HCOs give employers a crucial tool in reining in the costs of medical treatment given to injured workers--control over who treats the injured worker for as long as one year. Employers not signed up with HCOs can control treatment for only 30 days.
But the state imposes daunting licensing procedures on HCOs. The result: Only a handful operate in California, among them only one licensed in the last year.
“That’s something we’ll look at,” Calderon said, “but I don’t think it’s enough. We do know that costs for physical therapy and chiropractic [care] have gone way up, and the goal is to find a balance between adequate treatment and responsible cost control.”
The HCOs licensed to operate in California are Priority CompNet, Torrance; MedEx Health Care, Santa Monica; Medical Group at City Center, Oakland; CompPartners, Irvine; CorVel Corp., Gold River; Kaiser Foundation Health Plan, Oakland; and a newcomer, Sierra Health and Life, Las Vegas.
The state Division of Workers’ Compensation, which estimated enrollment in these HCOs at 120,000 employees statewide as of the beginning of the year, sees rapid growth ahead, especially as employers start receiving bigger bills for workers’ comp premiums. Testifying before the Assembly insurance committee last week, Bruce Carlin, chief executive of CompPartners, said his company counted 75,000 employees at the beginning of the year and expects that number to double by summer.
Prescription drugs are another factor behind the increase in workers’ comp costs, and they, too, might become a target in the legislation now pending in Sacramento. The state requires that workers’ comp physicians prescribe generic drugs but allows pharmacies to charge 140% of the wholesale cost for a given drug plus a “dispensing fee” of $7.50 per prescription.
By contrast, aggressive managed-care organizations pay 80% of wholesale cost plus a dispensing fee of $2.50, according to Christine Baker, executive director of the Commission on Health, Safety and Workers’ Compensation, a labor-management group established by the state government to advise the Legislature on the same issues.
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Recent Financing and Insurance columns are available at https://www.latimes.com/finin. Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.
