Hitch in Workers’ Comp Reform

As the task of turning a tentative pact on workers’ compensation reform into legislation continued over the weekend, a divisive question remained unanswered.

How can lawmakers ensure that the savings generated by an overhaul of the system are passed on to business owners besieged by rising workers’ comp insurance premiums?

The way to do that, say Democrats and allies such as labor unions, attorneys and consumer advocates, is to regulate the rates insurers charge employers for workers’ comp coverage.

Republicans and the business community, however, are adamant that price caps on insurance rates would aggravate the crisis and drive insurers out of California.

Gov. Arnold Schwarzenegger and key Democratic lawmakers reached a tentative agreement Friday on the key points of a plan to reform the system for caring for injured workers. And despite earlier signs that the pact would include limited regulation of workers’ comp insurance rates, the issue is expected to be a major sticking point in talks scheduled for today between key aides to Schwarzenegger and the Senate’s top Democrat, President Pro Tem John Burton (D-San Francisco), a source familiar with the talks said.

Even talk of re-regulating the California market makes Stanley Zax, president of Woodland Hills-based Zenith National Insurance Co., nervous.

“We expanded to other states because the trend was away from regulating rates,” Zax said. “If I thought there was going to be political interference in rate making, I wouldn’t do business here.”

California deregulated workers’ compensation insurance in 1995. That is one of the major reasons the workers’ comp system is such a mess, said Douglas Heller, executive director of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

“Without regulation,” he said, “insurance companies can’t handle themselves.”

Indeed, deregulation sparked cutthroat competition that many in the industry couldn’t survive, especially as medical expenses soared.

Premiums in California fell 26% to $2.59 per $100 of payroll during the first year of deregulation, according to the Workers’ Compensation Insurance Rating Bureau. And they continued to fall, hitting a low of $2.30 per $100 of payroll in 1999.

By 2001, they had bounced back to pre-deregulation levels and continued to climb, reaching $6.30 by the third quarter of 2003 -- more than twice the national average.

About two dozen carriers have become insolvent or stopped writing policies in California since deregulation. That has forced employers to the publicly owned State Compensation Insurance Fund, which now writes coverage for more than half the market. The casualties included Superior National Insurance Group Inc., once the state’s largest private workers’ compensation writer.

Heller contrasted workers’ compensation with other forms of insurance that became regulated with the passage of California’s Proposition 103, the 1988 initiative that created controls over home, automobile and several other types of insurance.

After 16 years, Heller said, Proposition 103 has demonstrated how the insurance industry can be successfully regulated without disruptions in the marketplace. The consumer activist contends that it created a stable environment that has held the line on premiums and allowed insurers to make money in the state.

In testimony prepared for the federal hearings on insurance deregulation, California Insurance Commissioner John Garamendi agreed with Heller.

Garamendi pointed out that average auto insurance premiums in California declined to $689 in 2001, a drop of 7.9% from 1989. During the same period, unregulated rates in Illinois rose 35% to $682.

“In fact,” Garamendi wrote, “over the past decade, California has been more profitable than Illinois in every major line of insurance with the exception of workers’ compensation, which was deregulated in California.”

Still, there is other evidence that price controls don’t work.

Price controls, whether for gasoline, electricity, insurance or even bread, have long been a controversial subject for economists, who generally say the mechanism disrupts the marketplace and creates supply and demand gaps, said Lynn Reaser, a Banc of America Capital Management economist in St. Louis.

For instance, the Nixon administration’s 1971 experiment with wage and price controls was deemed a failure by many economists. Reaser noted that economic policy took an opposite tack in the decades that followed, when deregulation increased competition and pushed prices lower on everything from airfares to telephone service.

If the effort to slash billions of dollars of expenses from the workers’ comp system succeeds, employers will see savings without price controls, said Anthony Barkume, a federal research economist who studied deregulation of the workers’ compensation insurance industry for the U.S. Bureau of Labor Statistics.

“Insurers might not want to pass on systemic cost savings, but they are forced to by competition,” Barkume said.

In a study of 19 states that lifted controls in the 1990s, Barkume and another researcher found that premium prices fell an average of 9% in the first year after deregulation.

That’s why only six states -- New Jersey, New York, Florida, Arizona, Wisconsin and Utah -- still have some form of government-imposed price controls, according to the American Insurance Assn.

The bottom line, said Zax, the president of Zenith, is that when left alone, competitive pricing works and is in the interest of public policy.

“People with the worst results should pay the most,” Zax said. “People with the best should pay the least.”