At the WCIRB Annual Meeting, President and CEO Bill Mudge talked about the history of California Workers’ Compensation and the concerns for the future.
The session started with a review of the history of California workers’ compensation. Due to a combination of unintended consequences of legislation and case law, carrier combined ratios skyrocket during the late 1990s, eventually reaching over 180% in 2000. The biggest culprit in this was the “presumption of correctness by treating physician” which had the unintended consequence of causing medical costs on claims to increase rapidly as unscrupulous physicians were virtually unlimited in what they could do. During this spike in costs, 31 different insurance carriers went bankrupt creating a capacity crisis in the marketplace. The State Fund saw it’s market share increase to over 50% as private carriers exited the California marketplace.
The state passed a variety of workers’ compensation reforms to address these costs. When Governor Schwarzenegger signed SB 899 in 2004 started lowering claims costs dramatically while also taking steps to increase benefits to injured workers. It changed the permanent disability rating system and also implemented a number of medical utilization reforms. Unfortunately the savings started to be eroded by court decisions causing costs to rise again.
In response to this, Governor Brown signed SB 863 which took effect in January 2013. SB 863 focused on adjusting the permanent disability rating system to be more fair to workers, but it also included significant reforms including the creating of an Independent Medical Review (IMR) process that had a significant impact on reducing inappropriate medical treatment. Subsequent bills also helped to significantly diminish the volume of medical liens seen in the system.
The results of the SB 863 and subsequent reforms have been unprecedented. Injured workers have received over $800 million in additional PD benefits. At the same time, the medical cost savings have resulted in a statewide average 25% reduction in premium rates for employers. For carriers, there has been 6 consecutive years of combined ratios under 100%.
But in spite of the positive results, challenges remain in California workers’ compensation. It is still the 2nd most expensive system in the country based on a recent report. There are significant regional differences seen in costs across the state, which leads to concerns about fraud and abuse in certain areas. The percentage of cumulative trauma claims is increasing and those a unique cost driver in California. The duration of medical payments in California is also much longer than other states, making it more susceptible to medical inflation. Finally, the frictional costs in California including claims handing and dispute resolution costs are higher than any other state.
Going forward, stakeholders in the California workers’ compensation system must remain diligent to ensure these reforms remain in place. Any legislative changes that significantly impacted the reforms could lead to significant cost increases for employers.