AIA Says Calif. Workers’ Comp Reforms Need More Work

Recently passed workers’ compensation reforms should reduce costs for California employers, but “now is the time to finish the job and completely fix what has become the most expensive, dysfunctional workers’ compensation system in the country,” states American Insurance Association (AIA) Western Region Assistant Vice President Mark Sektnan.

Responding to the flurry of reform activity since Gov. Arnold Schwarzenegger (R) took office last week, Sektnan praised the new administration and those who are working for comprehensive reform. He also admonished individuals and groups seeking to sidetrack the public policy debate, prevent implementation of last session’s reforms, and stop consideration of much-needed additional reform.

“The Schwarzenegger administration’s immediate focus on identifying and enacting fundamental reforms to reduce costs and restore the financial integrity of the workers’ compensation system is laudable,” he said. “Unfortunately, other interest groups are ignoring the public outcry for more reform. These individuals are now trying to deflect the debate in order to protect the costly status quo – and as a result, their own interests.”

Sektnan said that California employers would be experiencing significant increases in workers’ compensation costs if policymakers had not approved legislation this summer to reign in out-of-control medical costs. As a result of these limited reforms, most employers will experience level or slightly lower rates. However, significantly more reform is needed before employers will see dramatic premium reductions.

“Legislative remedies contained in AB 227 (Vargas) and SB 228 (Alarcon) have brought some light into what was a bleak situation,” said Sektnan. “They caused the Workers’ Compensation Insurance Rating Bureau (WCIRB) to withdraw their nearly 20 percent recommended rate increase and revise their recommendation downward to a 5 percent rate reduction. That is significant movement in the right direction, but California’s workers’ compensation system was not overhauled overnight. The legislature addressed some of the problems on the medical side of the system; now they must finish the job to control medical costs and tackle the problems on the indemnity side before employers will see the dramatic price decreases they want.”

In order to finally cure the ills that afflict the California workers’ compensation system, Sektnan urged policymakers to focus on the root causes of skyrocketing costs, such as bringing equity to the permanent partial disability rating system, ending over-utilization of medical services, and overhauling a dispute resolution system that encourages litigation. “Once comprehensive legislation is approved (including some clean-up of AB 227 and SB 228) and insurers see that the remedies are not going to be thrown out by the courts, insurers will be able to set prices based on the new reforms,” Sektnan noted.

Sektnan directed sharp comments at personal injury lawyers who have insinuated that the most recent fiscal quarter’s profit increases by insurers somehow obviates the need for systemic reform, saying “they are engaging in a cynical – and harmful – attempt to distract attention from the real, fundamental problems plaguing our state’s workers’ compensation system. A single quarter of profits cannot, and does not, erase years of sizeable losses.”

The latest profitability data from the National Association of Insurance Commissioners shows that California insurers suffered their sixth straight year of negative operating results in 2001. California workers’ compensation insurers averaged a 3.9 percent operating loss over the period 1992-2001, compared with a 1.4 percent operating profit nationwide. Although recent reports indicate that operating losses may be declining, California’s workers’ compensation system remains far from financially stable.

In addition, Sektnan noted that nearly one-third of the system is self-insured – and self-insured employers are experiencing the same skyrocketing costs as traditional, private-sector insurers. “Ask the risk manager of any city, county or school district in California, and they will confirm that, in fact, the core problem of California’s workers’ comp system is runaway claim costs.”