Former University of Texas football coach Darrell Royal observed, "Potential just means you ain't done it yet." Such is the case with the agreement to reform California's workers' compensation system, embodied in SB 899. It holds great promise for employees and employers, but its administration is crucial. Fortunately, Governor Arnold Schwarzenegger understands this.

If strictly interpreted by administrators and appeals judges, injured workers will receive better care and businesses will receive substantial relief from skyrocketing insurance premiums. Together with earlier reforms, SB 228 and AB 227, fairness, consistency and objectivity would be returned to the state's troubled 91-year-old, $17.9-billion workers' compensation system. Many of the key changes, however, hinge on the interpretation of a specific word or phrase and the enforcement of the rules.

It is no coincidence that 10 days after the bill's passage, Schwarzenegger appointed a new administrative director (AD) of the Division of Workers' Compensation, replacing Davis appointee Richard Gannon. In a statement lauding the appointment of Andrea Hoch, Schwarzenegger said, "I have every confidence that Andrea will ensure the reforms ... will be implemented swiftly and properly." He should hope so because the potential savings, estimated at $4-6 billion, depend on it. Consider the key reforms and potential trouble spots.

Reducing medical costs
Last year's bill, SB 228, requires the AD to establish a medical treatment utilization schedule to reduce medical costs. This schedule guides physicians, limiting inappropriate treatment, and guides judges in the evaluation of medical/legal issues. The AD must approve a schedule by December 1, 2004. Until then, the American College of Occupational and Environmental Medicine (ACOEM) guidelines constitute the presumptively correct standard.

SB 899 mandates that the schedule the AD approves reflect "practices that are evidence- and scientifically-based, nationally recognized, and peer-reviewed." This requirement leaves room for interpretation. We hope the AD will adopt the ACOEM guidelines, creating more consistent and objective treatment for injured workers.

Another medical reform where the AD will have discretion is the establishment of medical-provider networks for treatment of injured employees, which will reduce costly and litigious "doctor shopping." Employees will now choose a provider from a pool of qualified physicians selected by their employer and approved by the AD.

Employees are guaranteed immediate medical care, an important reform that will improve California's abysmal return-to-work rate. If an employee is dissatisfied with the quality of care after three opinions from within the network, he or she can request an independent medical review from a physician. These physicians are contracted by the AD to work as reviewers. Will reviewers be truly independent? A lot depends on AD oversight.

Disability
SB 899 requires permanent disability impairment ratings based on American Medical Association guidelines. These nationally recognized, scientifically based guidelines will bring consistency to determinations of permanent disability. No longer will similarly injured workers receive radically different disability awards.

When determining percentages of permanent disability, physicians must now "apportion" the injury, meaning employers will only pay for the injury they caused, or a portion thereof. Also, as originally intended 91 years ago, only work-related injuries will be compensated under the new system.

Previously, if an employer caused, contributed to, or aggravated a condition, the employer paid the full disability and medical treatment. Now, the treating physician must determine "what approximate percentage of the permanent disability was caused by the direct result of injury arising out of and occurring in the course of employment."

This is a huge, positive change, yet ripe for interpretation. If an employee works 30 years and is exposed to asbestos during that time from multiple employers, how does one accurately determine the disability percentage caused by each employer? Physicians are now charged with this difficult, but important, task. The bill also makes two other important disability changes. First, it limits temporary disability to two years. This will cut abuse by unscrupulous workers and encourage them to return to work. Second, the bill adjusts the benefit schedule to better indemnify seriously injured workers by reducing indemnity benefits to the least injured. A positive consequence of this reform is that it will reduce incentives for workers to falsely claim minor injuries to receive substantial compensation.

SB 899 establishes a two-tier permanent disability schedule that increases benefits 15 percent if a comparable job is not offered by the employer within 60 days of the disability becoming "permanent and stationary." It decreases benefits 15 percent if a comparable job is offered. This two-tier approach encourages employers to rehire and encourages employees to accept re-employment offers. Today, about 14 percent of employees who receive permanent disability benefits remain off the job after three years.

Penalties
Before SB 899 was enacted, if an employee's total claim was $5 million, for example, and the insurer was late reimbursing a $100 prescription-drug bill, the insurer could be fined 10 percent of the total claim, not simply the late bill, meaning they could be fined $500,000 for a $100 late payment, even though the employee received his/her medication. It sounds farfetched, but this actually happened to Safeway. Irrational fines for tardy payments discouraged insurers from properly investigating questionable claims, which drove up system costs.
Under SB 899, if a late payment is self-reported, the insurer pays a 10 percent penalty on the specific late amount. If not self-reported, the penalty is 25 percent of the late amount. The new system is rational and allows for the proper investigation of questionable claims, vital for cost containment.

Let's not go through this again
California should establish a system that keeps it from descending into workers' compensation hell again. The key is to include at the table the only parties the system was designed to help: employees and employers.

All others are not true stakeholders. California should adopt a modified Oregon model. Future legislative changes to workers' comp should originate inside a labor-management committee consisting of five labor and five management representatives appointed by the governor. All proposals for change would have to be unanimously approved by the committee, and the state Legislature would vote thumbs up or down without amendment. This process would rightly exclude non-stakeholders and put the focus where it belongs.

The Workers' Compensation Insurance Rating Bureau has estimated it could take five years to determine the true impact of the legislation. The Bureau expressed concerns about how the legislation will be implemented, how regulations will be promulgated by the AD, and how legal challenges will play out. These concerns are valid, but there is room for cautious optimism.

If strictly interpreted by all parties, these reforms will bring substantial rate relief to employers, improve care for truly injured employees, and help revitalize California's slumping job market. These reforms will bring more insurers to California, providing needed competition, and driving rates down. Competition works, contrary to the belief of Assembly Speaker Fabian Nunez, who admittedly "does not trust market forces." Price controls will only drive insurers away.

California is already seeing benefits from the workers' compensation reforms, but it will take proper administration to realize full potential. All eyes will be on Ms. Hoch.