California’s Workers’ Compensation

 

 

            As you know, the California Legislature has enacted a series of reforms to the state’s workers’ compensation system in recent years, culminating in the enactment of SB 899 (Poochigian) in April 2004. Although these new laws have yet to be fully implemented, some attempts to gauge their impacts have been made recently. While these reports signal potentially emerging trends in California’s system, each one reveals two key facts:

           

            1. It is still too early in the implementation process to determine what long-term impacts these new laws will have on the system.

            2. No changes to these reforms should be made until sufficient, reliable data is in place to justify further changes.

           

            Certainly, there is a need to measure these impacts in an ongoing fashion. The State Division of Workers’ Compensation (DWC) is closely monitoring the delivery of medical care and disability benefits, as well as other issues. Monitoring is also being conducted by the California Commission on Health and Safety and Workers’ Compensation (CHSWC), which is an advisory body composed of labor and management representatives charged with recommending administrative and legislative modifications to the state’s workers’ compensation system.

 

DWC’s Insurance Rate Study

            As part of its effort, DWC published a study on Feb. 2 measuring the impact of recent reforms on the workers’ compensation insurance marketplace in California. The report---mandated by SB 899---concludes, “The cost savings from the reforms is still very difficult to quantify with a high degree of confidence. The reforms are still relatively new and it will be many years before their financial effects are fully known. This is due to legislative, regulatory, legal and actuarial uncertainly.”

 

Major findings of this report include:

 

            • Approved insurance rates have decreased by 46 percent from July 1, 2003 to Jan. 1, 2006 and are approximately 60 percent below what they would have been absent reform;

            • The rate decrease reflect claims costs savings of $8.1 billion compared to 2003 and $15 billion compared to what 2006 costs might have been absent reforms;

            • Private insurance companies are returning to the California market and increasing their market shares, while market share for the State Compensation Insurance Fund’s (SCIF)---the state’s insurer of last resort---has decreased dramatically;

            • More employers are able to get multiple bids on insurance policies;

            • California no longer has the highest average filed rates in the U.S.;

            • Charged rates do not fully reflect the current estimated savings of the reforms because of concerns related to future legislative and regulatory changes and legal decisions which may have a retroactive impact on costs, the potential return of cut-throat pricing and the unreliability of past actuarial estimates; and

            • A “very thorough and collaborative plan has been implemented to track the impact of the reforms.”

 

CHSWC’s Permanent Disability Study

            On Feb. 9, CHSWC adopted its Permanent Disability Rating Schedule Recommendations, a report wherein it recommends overhauling the new schedule for rating permanent disabilities (PD) installed barely 13 months ago (1/1/05). CHSWC’s report bases its recommendations on a limited review of cases rated under the new schedule. Concerns raised over CHSWC’s report, raised during public testimony, include the following points:

            • Case samples are not representative of the system: Because the report is limited to cases already rated under the new schedule, which are by nature the least severe injuries, the sample does not represent the range of cases present in the system at any given time. More severe disabilities, which will receive higher awards, take much longer to resolve and are not reflected in the report. Likewise, the research only compared these new cases with 12 months of data under the previous PD schedule. According to DWC, the CHSWC report only reviewed 3,400 cases out of the 120,000 cases annually that involve PD.

            • Underlying assumptions are outdated: CHSWC’s proposed changes to the PD schedule are based on how its limited research sample interacts with a wage loss study completed by RAND. RAND’s findings, however, are based on wage loss due to injuries from the 1990’s, prior to the enactment of significant reform legislation in California.

            • Report ignores new incentives to return to work: In spite of the new focus placed on getting injured workers back on the job, where they will experience the least amount of wage loss, the CHSWC report doesn’t take into account the 30-point swing in PD benefits based on whether a worker is offered permanent, modified work. If an offer is not made, the PD award in increased by 15 percent. If an offer is made, the award is reduced by 15 percent.

            • A system is already in place for reviewing the PD schedule: The regulations implementing the new PD schedule explicitly call for the DWC’s administrative director (AD) to collect and analyze ratings under the new system and revise the schedule as necessary to address “diminished future earnings capacity” if there is a statistically valid sample of data to support such a revision. The regulations state that the AD shall collect no less than 18 months worth of data and as much as necessary to perform a statistically valid evaluation.

 

            Despite these limitations, CHSWC plans to present its report to legislative leaders, fueling an uncertain environment around the stability of reforms and cost savings.

 

Conclusion

            Adding to the uncertainty are three initiatives that would rollback nearly all of the reforms enacted in recent years. Indeed, two of the three measures would eviscerate the workers’ compensation system altogether by allowing workers to pursue civil lawsuits. All three initiatives would abandon California’s new procedures for delivering better, more appropriate medical treatment to injured workers. The Secretary of State cleared these measures for signature-gathering on Feb. 15.

            Fortunately for California’s economy, our workers’ compensation system is on the mend. Those advocating a halt to this recovery by prematurely rolling back elements of recent reform should instead support the current effort to monitor their impacts so that policymakers can base future decisions on the best possible data.