Work-Injury Cost Savings Are in Doubt

A key insurance rating organization Monday cast doubt on whether California’s pending workers’ compensation reforms would generate the hefty savings and premium rollbacks trumpeted by the legislation’s backers.

The Workers’ Compensation Insurance Rating Bureau said its actuaries identified about $4 billion of annual cost reductions in the reforms -- far less than the $5 billion to $6 billion projected by lawmakers who pushed through the overhaul this month.

Based on the new calculations, the bureau said it would recommend that insurers reduce workers’ comp rates by 2.9% next year. Although that would provide some rate relief for employers -- who were facing a 12% premium increase in 2004 before the legislation -- it’s still well below the double-digit reduction that the bill’s architects had been looking for to meet their goal of restoring premiums to their December 2002 levels.

Workers’ comp premiums in California have more than doubled since 1999, and the spiraling costs have been a particularly sore point with many businesses in the state. Some employers said they had cut back hiring partly because of the rising costs to cover employees injured on the job.

The rating bureau’s findings were presented Monday at a hearing in San Francisco. Backers of the overhaul legislation immediately raised objections to the report and called for further analysis.

The bureau agreed to convene a panel of experts as soon as possible to help it come up with more-complete cost-savings projections. Still, the preliminary findings are likely to provide more political grist for recall candidates such as Arnold Schwarzenegger who have criticized the pending reforms, which Gov. Gray Davis is slated to sign with much fanfare today.

The governor, insurance commissioner, legislators and insurers all look to the bureau as their principal source for reliable statistics and analysis.

At least twice a year, the agency actuaries issue guidelines on how much they believe workers’ comp rates should be increased or decreased to reflect changes in claims, medical costs and other expenses in the system. Although the bureau’s function is strictly advisory, insurers pay close attention and tend to follow its general recommendation up or down.

For weeks, insurers have said that they believe the $5 billion to $6 billion in anticipated savings that supporters of the workers’ comp overhaul have been touting were inflated. On Monday they pointed to the bureau’s analysis as vindication of their suspicions that the cuts might not be enough to bring immediate and significant relief to the state’s employers.

“The reforms likely will be enough to slow the dramatic rate increases, but they won’t be sufficient to result in deep rate cuts,” said Mark Sektnan, assistant vice president for state affairs with the American Insurance Assn. “It’s important the businesses have a realistic expectation of what to expect.... That appears to be the message from the [bureau].”

But officials at the state’s Insurance Department and others said the rating bureau needed to do more number crunching. They noted, for example, that the bureau was unable to calculate cost savings on at least half a dozen reform proposals, such as medical utilization review and anti-fraud provisions that supporters say would easily wring billions more from the troubled $29-billion system.

“It’s inconceivable that there are no significant savings in those areas,” Insurance Commissioner John Garamendi said. “This is critically important to the economy of California.”

The agency’s actuaries acknowledged that there could be significant additional savings in some of the items they left out of their analysis. But lacking the time and hard data to put a price tag on some of the most complex proposals, they preferred to err on the side of caution and omit them.

“A lot of these things are very subjective, and people can look at them differently,” Dave Bellusci, the rating bureau’s chief actuary, said in explaining the conservative estimates. “We didn’t want to give a number that we couldn’t quantify with some degree of certainty.”

Monday’s hearing was the most recent attempt by the rating group to quantify the projected savings from AB 227 and SB 228, the reform bills approved by the Legislature on Sept. 12 to overhaul the state’s crumbling workers’ compensation system. The combined legislation seeks to reduce costs by, among other things, establishing fee schedules for outpatient surgical centers, capping visits to chiropractors and repealing a vocational rehabilitation program for injured workers.

The rating bureau is an unincorporated, nonprofit association composed of more than 400 companies licensed to transact workers’ compensation insurance in California. Though closely aligned with the insurance industry, the agency is a respected authority on the state’s workers’ compensation system.

Backers of the legislation said the agency’s omissions of the potential cost savings could result in insurers reaping a windfall from reform rather than passing the savings along to businesses.

Garamendi urged the rating bureau to take another look at those areas and report back to him by the end of October with better cost estimates. Garamendi said that date was crucial because insurers needed sufficient time to incorporate the rate recommendations into their 2004 premium estimates.

Some business groups said the rating bureau would come under heavy pressure and might be persuaded to attribute more cost savings to the legislation than can be justified.

“I’d rather them be conservative than overreach,” said Willie Washington, a lobbyist with the California Manufacturers and Technology Assn.