California Insurance Commissioner John Garamendi turned up the heat Thursday on workers' compensation insurers by recommending that they slash employers' premiums by an average of 14.9% early next year to reflect the effects of recently passed reforms.
If implemented, such cuts effectively would roll back average premiums to July 2002 levels and deliver much-needed relief to California employers, who have been torched by skyrocketing costs for the mandatory coverage.
Garamendi's proposed rollback is nearly three times larger than the one suggested by a respected rating bureau this week -- and drew criticism from workers' comp carriers who said California's top insurance official was pushing them too far and too fast. Many fear the reforms passed by the Legislature may not deliver promised medical cost savings when they take effect Jan. 1.
The insurance commissioner's semiannual rate recommendation is purely advisory and insurers are free to set their own rates, though they often use the recommendation as a benchmark. This year, they know they will be under intense pressure to deliver meaningful premium cuts now that Garamendi has set the bar high.
"We are stunned," said Mark Sektnan, spokesman for the American Insurance Assn. in Sacramento. "Putting a rate out there that is unrealistic is going to create a lot of tension in the marketplace.... It's going to create a great deal of frustration among policyholders if their bills don't reflect the exact percentage" that Garamendi is suggesting.
Garamendi has been at odds with the insurance industry in recent weeks on just how effective legislative reforms passed in September will be in slowing runaway medical costs in California's $29-billion workers' compensation system. The reform architects claim the changes will reduce costs by $5 billion to $6 billion a year. Garamendi concurs with that assessment and says the expected savings justify a double-digit rollback in employer premiums.
Insurers and some employer groups aren't so optimistic. The Workers' Compensation Insurance Rating Bureau of California, a respected industry-sponsored research organization that is the state's key source for workers' comp analysis, has calculated that the proposed reforms would yield just a little more than $4 billion in annual savings. Based on those figures, the rating bureau suggested this week that average rates be rolled back a maximum of 5.3% for policies renewed after Jan. 1.
At the center of the dispute are savings expected from medical utilization guidelines that are intended to curb excessive treatment of injured workers. The rating bureau has been reluctant to put a dollar figure on the potential savings of those guidelines, which would require a radical change in behavior on the part of insurers, doctors, administrative judges and other players in the complex system. Those guidelines don't become effective until April 1.
Given that time delay, and wary that inertia in California's unwieldy system won't be overcome quickly, the rating bureau discounted the potential savings from its calculations for its first round of rate recommendations for policies renewed after Jan. 1.
Other experts, however, have calculated that those utilization changes would result in big cost savings. Garamendi relied on those figures to justify his nearly 15% rate reduction.
"There is no good reason it can't take place," Garamendi told a crowd of employers and insurers at a conference on workers' compensation in Hollywood, where he unveiled his proposed rate decrease. "The economy of California depends on it."
Some in the audience gave Garamendi a standing ovation for his aggressive posture. Others were left scratching their heads over how to reconcile the huge gap between Garamendi's figures and those of a respected rating agency.
Michael Prosio, legislative director of the 20,000-member California Restaurant Assn., said his members would welcome the double-digit rate rollback touted by Garamendi. But he worried about raising the hopes of businesses if insurers were unable or unwilling to deliver the goods.
"Obviously we like the more aggressive numbers because it would mean lower premiums," he said. "But our biggest fear is they won't see any reductions."
The key player in this calculation is the publicly owned State Compensation Insurance Fund of California. So many private insurers have gone belly up or fled the California market in recent years that State Fund now provides coverage for more than half the state's employers. The carrier has experienced so much growth in the last two years that its capital position has deteriorated to levels that have alarmed the Department of Insurance.
Garamendi said Thursday that State Fund's actions would be crucial in determining whether thousands of California businesses see any rate relief. He said he would push the insurer's management hard to pass along every dime in savings from the pending reform legislation to its customers.
But some in the insurance industry say Garamendi is talking out of both sides of his mouth when it comes to State Fund. The insurance commissioner has warned repeatedly that State Fund is in deep financial trouble and desperately needs to shore up its capital position. Experts say the carrier can't simultaneously set hundreds of millions of dollars aside to fix its balance sheet while deeply slashing premiums.
State Fund spokesman Jim Zelinski said the carrier still was assessing the effect of the proposed reforms and would not release its new rate schedule until the end of the month.
Though some in the insurance industry believe that Garamendi's suggested rate rollbacks are too aggressive, many employers say he is not being bold enough. "I was hoping for something like 25% to 30%," said Kim King, owner of a San Francisco-based security service that has seen its rates double over the last two years. "Our costs are going through the roof."