Workers’ Comp Bill Elicits Wary Optimism
With final passage of a massive overhaul bill Friday, Gov. Arnold Schwarzenegger and the Legislature boasted that they had fixed California’s broken and costly workers’ compensation insurance system.
But that’s the same claim made by lawmakers and governors in 1982, 1989, 1993 and just last fall -- when the complex program also underwent major changes.
During past workers’ comp crises, businesses squawked about onerous premiums while labor groups complained of paltry benefits and cumbersome bureaucracy. And each time, after a boost in benefits or a cut in rates, the system got out of whack after a few years.
Workers’ comp is too big “a cash cow” for lawyers, doctors, insurance companies and disgruntled employees to keep their hands out of the till, said Willie Washington, a veteran lobbyist for the California Manufacturers and Technology Assn.
“We fix it, but it’s temporary,” he said. “Someone figures out how to unlock the door. They open it wider and wider and eventually even the Legislature figures out the door has got to be closed.”
This time around may be no different. But many analysts and employers say the latest bill contains broad, systemic changes that could bring about far more substantial and lasting benefits.
The key question, experts say, is how the measure will be implemented. The bill left many regulations and details for administrators to hammer out.
In the near term, employers appeared cautiously hopeful that they would see cuts in their workers’ comp insurance bills, which have doubled or tripled in the last few years. At the very least, some said, this year’s further tightening of loopholes might prolong the time before another reform is needed.
“I think it’s different than the reforms of the last 15 to 20 years,” said Sean McNally, legal counsel for Gimmway Farms in Bakersfield. “I think it’s more fundamental and more comprehensive.”
The bill, approved by overwhelming margins of 33-3 in the Senate and 77-3 in the Assembly, will take effect immediately when the governor signs it, which he is expected to do Monday. Schwarzenegger on Friday declared himself “a very, very happy governor” and called the bill “a huge, huge win for California” that would significantly improve the state’s business climate and economic prospects.
Stakeholders on all sides of the issue agree that the measure makes wholesale changes to the $22-billion-a-year system. It revamps the procedure for providing medical care to injured workers by moving from an old-fashioned fee-for-service system to a health maintenance organization-type delivery. The system for calculating the severity of accident victims’ disability is intended to be more objective, with benefits based on estimated lost wages.
Also, payments are limited to the percentage of an injury incurred on the job. Under the current system, if employees had preexisting conditions that didn’t previously affect their work -- and then they got an injury at work that aggravated that -- workers’ comp always covered 100%.
The hoped-for payoff in reduced costs to the system and lower premiums for employers will be real, said Schwarzenegger. “I will assume this will create reductions of between 25% and 30%" of costs, he said. “We’re talking about billions and billions of dollars.”
More specifically, Frank Neuhauser, a workers’ comp expert at UC Berkeley’s Survey Research Center, said a preliminary analysis indicated that the bill should generate $4 billion in savings in 2006. Cost cutting from last year’s medical-cost containment measure should hit $6.5 billion, and recent projections of slower growth in workers’ comp benefits should drop costs by $3 billion, creating an overall reduction of $13.5 billion out of a total that was expected to hit $30 billion in 2006 prior to the latest changes. “That is quite a staggering change,” Neuhauser said.
Whether those savings will soon reach employers’ bottom lines isn’t clear. Insurance Commissioner John Garamendi has scheduled for April 29 a first hearing to gather information to calculate recommended premiums for bills due after July 1. The independent, industry-supported Workers’ Compensation Insurance Rating bureau has already begun to research how the new changes will affect premiums.
“There clearly are going to be savings,” Garamendi said Friday. “These reforms, when fully effective, will dramatically reduce the cost of workers’ comp in California and move us from a position where we are far ahead of any other state to a position that puts us in the ranks of other high-cost states.”
“The problem that California has had is that it has never done a holistic reform. Until now,” he said.
Business and insurance lobbyists, however, cautioned that employers shouldn’t get their expectations too high for quick rate relief. “I believe the rates will fall, but it will be gradual at best,” said Washington of the Manufacturers’ Assn. “People who think there will be huge, immediate drops [in premiums] will be disappointed.”
Democrats, who tried unsuccessfully to put price controls in the overhaul bill, are pushing a separate measure to guarantee that expected savings are passed along by insurers to employers. That measure was approved Friday in the Assembly. But if the Senate passes it, Schwarzenegger is considered likely to veto it.
“Without rate regulation, there will be continued abuse,” warned Sen. Richard Alarcon (D-Sylmar), one of three senators to vote against the broad overhaul bill.
Rate regulation was removed as part of the major overhaul package in 1993. At that time, then-Gov. Pete Wilson and others hailed the measure as a landmark deal. One lawmaker involved in that negotiation said “we have hit the issue and time will tell whether it’s a home run or a double.” It turned out instead to be a long foul ball.
That legislation hiked benefits, deregulated insurance premiums and stopped workers from filing bogus stress claims long after leaving a job. But after some initial rate cuts, the system got out of control. One of the key pieces of that overhaul was the addition of the so-called presumption of correctness of the treating doctor, which lawmakers figured would bring efficiency to the system. But then lawyers, injured workers, labor and employers all battled for control over the doctors.
“People at the time thought it was a huge thing, and lo and behold it was a disaster,” Neuhauser said.
The repeated cycles of failed changes reflect problems inherent with a government-mandated workers’ comp system -- the nation’s first -- designed 90 years ago, Neuhuaser said. It was created then to deal with traumatic injuries in a time when workers had no group health insurance or Social Security or other disability benefits.
Workplace injuries today, such as strained backs, tend to be cumulative and far more complex, and causation is often an issue, he said.
“We have a system that’s an anachronism,” Neuhauser said. “We’re going to have this system in cyclical crisis until we do away with it and integrate [workers’ comp] into one program so we don’t get into legal battles over what constitutes a worker injury.”
Ever more sophisticated legal, medical and criminal abuses are the culprits that kept past years’ overhauls from sticking, said Barry Broad, a lobbyist for the Teamsters.
A 1982 law raised benefits and gave insurers more flexibility but failed to cut costs for employers. One in 1989 criminalized workers’ comp insurance fraud, put some limits on stress and psychological claims and created a commission to oversee medical treatments.
Last fall’s overhaul restricted, for example, visits to chiropractors as part of a broad effort to lower medical costs. But “no sooner than last year’s legislation was signed than chiropractors and others were figuring out how to get around the limitations,” said Garamendi. While this year’s bill goes much further in closing loopholes, it’s unlikely to keep scammers from gaming the system, Broad said.
“I’m sure somebody is working on it right now,” he said. “People will do what people do.”
Another critical element in stabilizing workers’ comp rates long-term is having enough insurers to boost competition. Because of soaring costs, many carriers have gone out of business or stopped writing workers’ comp policies in the state.
As a result, about 60% of the market is controlled by the State Compensation Insurance Fund of California, a quasi-public insurer of last resort whose finances have deteriorated. The State Fund’s dominance in turn has discouraged some private insurers from entering the California market.
With a law that provides more predictability for the market, more private carriers should return to California, said Garamendi. “But it’s not going to be dramatic,” he said.
Analysts said that while workers’ comp systems in other states also have gone through cycles of repairs and breakdowns, California’s has been worse because of a highly litigious culture.
“What’s always been the issue in California ... is its propensity to end up with an adversarial process,” said Stan Long, chairman of the workers’ comp practice for Marsh Inc., an insurance services firm.
Long said that at first blush, the latest California overhaul package “looks deep and wide in scope and complexity.” But he said that “what hangs in the balance is how well and wisely it is implemented by administrative rule and to a certain extent decided by the courts.”
The bill, for example, calls for the creation of HMO-like networks of doctors to treat injured workers. The change would give employers more control by letting them form networks, while also providing some choice to workers by allowing them to obtain opinions from three doctors in the network. Workers also would receive immediate treatment. But, Long said, lawmakers left it up to workers’ comp administrators to define and certify these networks.
“Now the question is how they’re going to implement and follow through,” he said, noting that it won’t be easy, given the political pressures and special interests. “In workers’ comp,” he added, “you get to learn all about the unintended consequences every time you pass a change.”
Some lawyers said it was inevitable that litigation would tie up the new system.
“There’s lots of questions how it fits in with other provisions of the law and the case law that’s developed,” said Frank Russo, a workers’ comp attorney in Oakland. “There will be a lot of problems
Times staff writers Robert Salladay and Peter Nicholas contributed to this report.
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At a glance
* The massive workers’ compensation reform bill, SB 899 by state Sen. Charles Poochigian (R-Fresno), was approved Friday on bipartisan votes of 33-3 in the Senate and 77-3 in the Assembly.
* The approval by at least a two-thirds majority in both houses means the measure takes effect immediately, once signed by Gov. Arnold Schwarzenegger. The governor plans to sign the measure Monday at a Long Beach manufacturing plant.
* Four senators were absent and did not vote. They were William “Pete” Knight (R-Palmdale), Jack Scott (D-Altadena), John Vasconcellos (D-Santa Clara) and Edward Vincent (D-Inglewood).
Los Angeles Times