Mixed Reviews for Workers’ Comp Reform

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While the debate over workers’ compensation reform continues, its winners and losers are becoming clearer.


Workers’ comp insurance rates are dropping for businesses but not fast enough for their liking. Regulators are contending that insurers are pocketing more of the savings than they should. Meanwhile, a consensus is building among Democrats that permanently injured workers have seen too sharp a benefit cut. Doctors aren’t happy either.


“I would suggest that not all the savings have reached the employers yet because insurance companies are being careful not to pass through the savings too fast,” said Administrative Law Judge Lachlan Taylor of the Workers’ Compensation Appeals Board, which hears appeals of workers’ comp awards. “Perhaps they’re passing them through too slowly.”


The reforms, passed in 2003 and 2004, established medical treatment guidelines, lowered permanent disability payments and took other steps to root out fraud and abuse in the system. They came after several years in which businesses sometimes saw successive rate increases in the triple digits.


California Insurance Commissioner John Garamendi recently announced that since the reforms went into effect, businesses have seen their premiums reduced by nearly 38 percent on average but below the 46 percent he believes it should be. Overall, insurance premiums are now down to an average of $4.42 for every $100 of payroll, from a high of $6.46.


At the same time, the California Medical Association is backing up claims by industrial medicine specialists that the reforms have been harmful to patients and hostile to doctors, who are having a difficult time getting their patients proper care.


In a recent study, the medical association found 63 percent of the doctors interviewed said they would either stop taking workers’ compensation cases or reduce the number because of negative experiences with the state’s system.


“Doctors treating injured workers are locked in a system that is hostile to physicians and often harmful to the patients they serve,” said Dr. Jack Lewin, the medical association’s chief executive officer.


State Democrats have backed increasing permanent disability payments and making other changes to the system as a result of such concerns.



Cautious insurers


However, the insurance industry, which saw more than two dozen workers’ compensation companies go belly up when the market collapsed six years ago, claims it has reason to be cautious. During the collapse, insurers were paying out $1.39 for every dollar in premiums, and the remaining players in the market have learned hard lessons.


Stanley Zax, chairman and chief executive of Los Angeles-based Zenith National Insurance Corp., said it is far too early to tell what will be the final savings stemming from the reforms.


“We still don’t know how many claims are going to get triple the benefit. That’s not because we’re not knowledgable, but the time has not elapsed in which the complicated claims get resolved,” he said.


Zax said the most complex cases, which only account for 20 percent of the claims, consume 80 percent of the payouts, often taking four to six years to resolve, with multiple surgeries and doctors and the navigation of a complicated system. Until these claims are settled, he maintains, the total amount of savings is unknowable.


As a result, some California businesses, despite the already substantial cuts in rates, have become frustrated especially since many saw successive years of big rate increases.


The frustration has resulted in the blossoming of self-insurance groups: companies in the same industry that pool assets, hire an administrator and pay their own premiums and claims.


At the beginning of 2004, there were five self-insured groups in the state, but that number has exploded to 29. The groups are not under the jurisdiction of the California Department of Insurance as are other worker’s compensation insurance carriers but are approved and managed by the Department of Industrial Relations.


Now insurance brokers are warning about the dangers of self insurance, including the possibility of the largest company in the group failing, successive years with many serious injuries and the responsibility for paying out claims for up to five years even if a company leaves the group.


Fritz Mutter, president of Golden Pacific Insurance Services, believes the groups should only be an option for businesses with particularly high costs, such as roofing companies that pay up to $80 per $100 of payroll in premiums because injuries can be so severe. He also thinks many are giving in to the temptation to price their premiums too low.


“If they keep under pricing they’re going to fall into trouble just like the insurance groups did 10 years ago when they all went out of business,” Mutter said.


Meanwhile, Taylor said it is starting to appear clear that payments for permanent disabilities under the reforms may be too low in some cases half of what it used to be and it may be necessary to go back and tinker with the reforms.


“The old system was very unpredictable. This is predictable, but may need some fine tuning,” he said.

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