Workers’ Comp Crisis Worsens
Ten years after the passage of landmark legislation meant to fix California’s troubled workers’ compensation system, the $15-billion industry is in turmoil.
The system is so broken that the state finds itself in a perverse predicament: Employers in California pay more for workers’ comp coverage than in any other state, yet their injured employees receive some of the skimpiest benefits in the nation.
Cutthroat competition and soaring medical costs have sent nearly two dozen workers’ comp carriers into insolvency, while the state-run insurance program of last resort is facing financial troubles of its own. With ailing insurers jacking up rates to recoup their losses, total workers’ comp premiums paid by California businesses were 69% higher last year than in 2000.
Because workers’ comp costs are directly linked to the size of payroll, some employers are responding by freezing the size of their staffs, reducing hours or laying off workers.
Los Angeles businessman Mitchell Greif is going further -- to Las Vegas. The owner of a bag-making plant, Greif decided to move his operation after getting socked with a $570,000 workers’ compensation premium, more than double what he was paying two years ago. From neighboring Nevada, he figures he still can easily serve his large customer base in California, while shaving his workers’ comp costs by at least two-thirds and reaping big savings on labor, insurance and electricity.
“I never thought I’d be leaving California,” said Greif, chairman of Coast Converters Inc., which will be cranking out bread bags, magazine wrappers and potato sacks from a newly renovated facility in Las Vegas by midsummer. “The workers’ comp was really the last straw.”
The hefty increases in workers’ comp premiums are coming after years of artificially low insurance prices, placing a staggering new burden on companies at a time when the economy is struggling. And it’s not just the private sector. Government budgets are feeling the strain. So are the managers of nonprofit organizations, who have joined angry businesspeople at public hearings statewide to denounce a system they view as costly, inefficient and rife with abuse.
“It’s just totally out of control,” said Fred Robinson, executive director of Arc Ventura County, a nonprofit organization serving the developmentally disabled that has cut staff and closed a group home to finance a $327,000 hike in its workers’ comp premiums this year. “Everybody knows it and nobody is doing anything about it.”
Economists say the speed and magnitude of the workers’ compensation insurance increases are helping undermine the state’s fragile recovery. The extra $6.3 billion that California businesses paid in workers’ comp premiums last year compared with 2000 is as big a burden as the corporations tax, California’s largest business tax. That’s bad news for a state that hasn’t added any net jobs this year.
“It’s basically a tax on employment,” said Ted Gibson, former chief economist for the California Department of Finance. “If you want a recipe for discouraging hiring, this is how you do it.”
Workers’ comp insurance pays for the medical care, rehabilitation and some lost wages of injured workers, as well as death benefits for employees killed on the job. California’s maximum disability benefit is $602 a week.
California’s 90-year-old system was among the first wave of state programs established in the early 20th century in response to dangerous working conditions in the nation’s shops and factories. The “no-fault” system is a tradeoff: Employers agree to cover the medical costs for workers injured on the job, even if the company wasn’t to blame. In exchange, workers give up the right to sue their employers for workplace injuries.
More than 14 million California workers are covered by the system, which is paid for by the state’s employers. Companies are required by law to buy coverage or set up their own self-insurance programs.
Workers’ comp costs have been rising nationwide, fueled by spiraling medical expenses. But by nearly every measure, California’s system is the costliest, most cumbersome and closest to meltdown in the U.S., according to industry studies and experts.
* California employers pay the highest premiums in the nation, an average of $5.23 for each $100 of payroll, according to research by the Oregon Department of Consumer and Business Services. Runner-up Florida was $4.50, while 40 states average less than $3. Yet weekly benefits to injured California workers rank in the bottom third of all states, in part because a large chunk of dollars in the system is being squandered inside a vast network of middlemen, as well as being lost to fraud and abuse.
* Since the mid-1990s, the average medical costs on California’s workers’ comp claims have risen about four times faster than the rate of general medical inflation, according to the Workers’ Compensation Insurance Rating Bureau of California. Injured workers take longer to return to work in California than in most other states -- some say because of cheating, others blame bureaucratic delays -- and they are much more likely to use a lawyer to help them navigate the system. In 2002, the average projected medical cost for claims involving time off from work reached $31,120, more than double what it was five years ago.
* Overall, workers’ comp insurers in California last year paid out $1.23 in losses and expenses for every dollar they received in premiums, the eighth consecutive year that the payout has exceeded premium revenue, according to the state rating bureau. So many private insurers have gone belly up or stopped writing policies in California that the state has been forced to pick up the pieces.
The semipublic California Insurance Guarantee Assn., which pays workers’ comp obligations when carriers become insolvent, is so overwhelmed with claims that it recently required an emergency bailout to keep money flowing to injured workers. Meanwhile, the State Compensation Insurance Fund, a public, nonprofit workers’ comp insurer that by law cannot turn any California company away, now controls more than half the market. The fund hasn’t been able to grow its capital fast enough to keep up with this torrent of new business, heightening the risk that it won’t be able to pay all future claims.
“The state fund is very sick and getting worse,” said California Insurance Commissioner John Garamendi. “The entire system is broken.”
It all has a familiar ring.
In the early 1990s, California’s workers’ comp program was similarly convulsed by soaring premiums, spiraling costs, a lousy economy and rising employer anger. Then-Gov. Pete Wilson spearheaded an effort to overhaul the system. The state made it tougher for employees to win benefits for job-related stress and limited claims made after a worker was fired or laid off. It also beefed up antifraud efforts and curtailed the costly process of “dueling docs” in which workers and employers shopped for medical experts to support their claims.
But the biggest change was deregulation. For the first time, insurers were allowed to charge virtually any rate they chose. Premiums plunged as carriers competed aggressively for market share.
For delighted employers, it appeared that the reforms had worked. But experts say falling prices masked the underlying weaknesses that remained in the system as medical costs continued to climb, new abuses emerged and industry losses mounted. The premium party ended abruptly in 2000. Wounded insurers folded their tents. Skittish survivors jacked up rates and tightened underwriting standards. Employers in California suddenly found themselves scrambling in a market turned upside down.
The end result is that California’s workers’ comp system is saddled with most of the same problems it faced 10 years ago, but now with less competition, higher rates and a flimsier safety net for injured workers.
“The financial chickens have come home to roost,” said Robert Hartwig, chief economist for the New York-based Insurance Information Institute.
The fallout has been particularly painful for California’s industrial and construction trades, higher-risk sectors where premiums have soared. Some roofing firms are paying rates in excess of $99 for each $100 of payroll on their least experienced workers, said Doug Hoffner, executive director of the Roofing Contractors Assn. of California.
Hoffner says that has led some less reputable firms to game the system. Some are paying workers under the table to trim their payrolls, and thus their premiums. Others are dropping all coverage, an illegal tactic known as going bare.
Businesses that are playing by the rules say that’s making it tough for them to compete. San Francisco roofing company owner Rich Lawson says he can’t begin to count the jobs he has lost to low-cost competitors he suspects are cheating on their workers’ comp obligations, while premiums for his 100-worker firm have quintupled since 1998 to more than $1 million annually.
“Something is wrong when they’re undercutting me by 40% or more,” said Lawson, senior vice president of Lawson Roofing Co. “Our industry is in chaos.”
The crisis is taking a toll on workers as well. Calabasas painting contractor Shirley Lee said she has lost so much business to the underground economy that she has laid off half of her 12 painters and required those who remain to pay a bigger portion of their own medical coverage. Jane McFeely, who operates a catering business in Burlingame, has frozen the wages of her five employees and cut vacation benefits in half.
“I feel horrible, because these folks are like my family,” said McFeely, owner of Servers Standing By Catering. “But it’s either that or close the doors.”
The nonprofit sector has been doubly squeezed as workers’ comp expenses have soared at a time when contributions are falling. As part of Arc Ventura County’s recent cutbacks, case manager Ann Contreras has seen her hours and pay reduced 20%, but not her caseload of 50 developmentally disabled adults. She now struggles to cram five days of work into four, as lines form outside her door.
“There are days when I can’t wait to get home and take a nap,” Contreras said. “But the really sad thing is that my clients aren’t getting the services they need.”
Rate relief may not be soon in coming. California’s budget woes continue to dominate discussions in Sacramento. Legislation introduced so far addresses the workers’ comp problems in a piecemeal fashion. And special interests, including attorneys, insurers, medical providers, employers and labor unions, already are butting heads over the direction of reform.
Greif decided not to stake the future of his company on the outcome. On the factory floor of Coast Converters, which has been operating in Los Angeles for almost 40 years, bag-making equipment is being repainted and packed for the move to Las Vegas. About 60 employees have committed to relocating with the plant. A small sales and administrative office will remain in Los Angeles, but little else.
“Pretty soon you won’t hear any of this,” Greif said amid the din of humming machines. “The sound of products being made, of people earning a paycheck and being able to pay their bills and mortgage and taxes, it’s all going to Nevada.... I hate to leave. But I can’t keep putting my business at risk.”