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By JOSHUA CLIFTON, a Chicago-based writer who covers workers' comp and disability issues

Five years after the California legislature enacted sweeping reforms to right a ship that many experts believed was veering wildly off course, economic upheaval and a ballooning state deficit are threatening to sink the significant gains in the state's workers' comp system.

This suggested rate hike, combined with lawmakers' plan to sell off a portion of the State Compensation Insurance Fund assets to shore up a $24 billion state budget shortfall, has left experts wondering what is in store for California's workers' comp system.

"We are at a crossroads," said Nicole Mahrt, director of public affairs for the American Insurance Association's Western Region. "The reforms have made a tremendous impact on the system. However, now that the economy is hurting ... we are beginning to see cost increases in the workers' comp system. These are difficult circumstances, and insurers have to keep an eye on costs and solvency by making sure they are reserving enough for future claims."

Mahrt said lawmakers also need to consider certain cost-containment measures that weren't properly addressed in the 2004 reforms. These potential solutions--which include the implementation of pharmacy networks and regulations to require the prescribing and dispensing of generic drug equivalents--have also been touted by Insurance Commissioner Steve Poizner, who rejected the rating bureau's initial recommended increase on 23.7 percent earlier this year. Poizner outlined 27 recommendations that he expects the insurance industry to implement before he will consider a positive rate change.

"Instead of striving to control medical costs, I found that insurers were attempting to pass unsupported costs along to employers in the form of rate increases," he said. "They must work to be as efficient as their self-insured counterparts."

(Read more about the reaction to Poizner's statement in our previous article here.)

COURT'S IMPACT

Another factor that weighed heavily in the WCIRB's filing was the anticipated cost increases stemming from three Workers' Compensation Appeals Board decisions: Ogilvie v. City and County of San Francisco, Almaraz v. Environmental Recovery Services, and Guzman v. Milpitas Unified School District.

The decisions, experts say, could have far-reaching impacts on the amount of permanent disability awards, which were targeted under the reforms. The board has since announced that it would reconsider its decisions, based on the urging of Poizner and Gov. Arnold Schwarzenegger. However, Steve Suchil, AIA's assistant vice president of state affairs for the Western Region, said that, when the board issues its decision, it will likely be appealed and could end up in the California Supreme Court and take several years to sort out.

THE SELL-OFF

In the midst of the battle over rate increases, lawmakers passed a plan that would sell off part of SCIF's assets to a private insurer but allow the fund to retain its role as a workers' comp insurer of last resort. Officials estimate that the sale could generate as much as $1 billion.

Jennifer Vargen, communications director of the SCIF, said legislators have sought to privatize the state fund in the past, but that the idea was dismissed after considering the practical and legal ramifications.

Poizner has raised concerns that the fund might go bankrupt if it loses the ability to write voluntary business; Vargen said fund officials believe that the idea to sell the assets doesn't gel with the fund's fiduciary responsibility to state policyholders.

Regardless of whether the plan comes to fruition, Vargen said it is important to remember that trends in workers' comp are cyclical.

"California is seeing tremendous competition for premium," she said. "The comp world is like a pendulum that swings back and forth. There are definitely times that reform has been in employees' camp and times when it has swung more in favor of employers, which is what we saw in 2004. Now, I think you are seeing mounting pressure from folks who are pushing that pendulum back."

August 21, 2009

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