One Year Later, Workers’ Comp Reforms Paying Dividends

Today [April 19] marks the one-year anniversary of Governor Schwarzenegger signing SB 899, the bill overhauling California’s workers’ compensation system. Opponents predicted that it would not reduce insurance costs for businesses and that price controls were needed. They were wrong.

Responding to skyrocketing workers’ comp costs, the legislature passed a series of historic reforms. SB 899 granted self-insured employers and insurance carriers the option of establishing medical provider networks (MPNs) to examine and treat employees injured on the job. It mandated uniform guidelines to assess injuries and determine medical treatment and disability benefits.

SB 899 created an independent medical review process to resolve treatment disputes. And it guaranteed employees immediate medical care and established return-to-work incentives. SB 899 followed reforms signed by Gov. Gray Davis in 2003 that placed limits on the number of allowable chiropractic visits and physical-therapy treatments. Also, fees for outpatient surgery centers were tied to Medicare rates and pharmaceutical prices pegged to Medi-Cal rates. Although sweeping, opponents predicted the reforms would fail.

Steve Lopez, columnist for the Los Angeles Times, called SB 899 a “phony reform bill” because it did not force insurance companies to pass on cost savings. He quipped about insurers, “They’re working on the honor system.” This displays a lack of understanding of how markets work.

Insurers might not want to pass on savings, but they are forced to by competition. Early on, the Workers’ Compensation Insurance Rating Bureau, the agency designated by state officials to compute premium recommendations, reported that rates were 10-percent lower in the first six months of 2004 than the first six months of 2003. Rates continue to fall this year.

Bureau actuaries would have recommended a 50-percent rate increase beginning January 1, 2005, if not for the reforms. Instead, last month they recommended an additional cut of 10.4 percent beginning July 1. Significantly, this recommendation is based on actual 2004 experience data, not projections.

The State Compensation Insurance Fund, which insures more than 50 percent of California businesses, filed a rate reduction of 12 percent last January 1, the third straight reduction. And competition continues to increase. Private carriers, which insure about 30 percent of California businesses, are bullish about the state’s workers’ comp market.

Days ago, the California Insurance Company began writing policies in California, making it the third carrier to enter the market in the past seven months. CompWest Insurance was licensed at the end of 2004 followed by Warren Buffet’s Berkshire Hathaway subsidiary, National Liability and Fire Insurance. Other carriers are waiting for their licenses.

Contrary to opponents’ predictions, reforms lowered rates and increased competition. Further savings are ahead thanks to Division of Workers’ Compensation Administrative Director Andrea Hoch. In November 2004, she issued final MPN regulations. On January 1, she implemented emergency changes to the permanent disability schedule.

Last month, she proposed new medical treatment guidelines. All her regulations fully implement the letter and spirit of SB 899. It is too early to know how much more these new rules will save, but cuts will be substantial, assuming the applicants’ bar and union-backed politicians do not derail reform.

The California Applicants’ Attorneys Association has filed lawsuits to invalidate the MPN regulations and the new disability schedule. Fortunately, they lost both legal battles. They vow to return. The uncertainty created by constant challenges to the rules keeps rates higher than they otherwise would be. Price controls are another threat.

Assembly Speaker Fabian Nunez admits Democrat lawmakers “do not trust market forces.” They want to substitute state regulations for market competition. State Sen. Richard Alarcon (D-Sun Valley) has reintroduced his bill capping workers’ comp premiums. Not only would it do nothing to help self-insured employers, but it would send the wrong signal to private carriers at a time when they are returning to California.

Only six states impose price controls on workers’ comp because most states learned that controls do not help consumers long term. Lawmakers should not move backward. They should reject price controls and let the reforms continue to improve California’s business climate.

Review:

July 1, 2003
California Golden Fleece Award "Workers' Compensation System Receives California Golden Fleece Award"
(This article was adapted from a guest commentary titled "California's Other Catastrophe," National Review Online, July 1, 2003.)

August 10, 2003
Op-Ed "Workers' Comp Rules Invite Abuse"(San Francisco Chronicle)

December 17, 2003
Press Release "Five-Step Blueprint to Fix Workers' Comp in California"

December 2003
Publication How to Fix California's Broken Workers' Compensation System
(PRI White Paper, December 2003. Also published as PRI's 5th California Golden Fleece Award)

June 7, 2004
Op-Ed "The Great Compromise of 2004. Overhaul or Pitfall: Opposing Views on the Outcome of California's Workers' Compensation Agreement" (California Journal, June 2004)

September 15, 2004
Capital Ideas "When the Chips are Down" (Capital Ideas, September 15, 2004)