California Dreaming

Will the recently-signed California workers' comp reforms actually succeed in increasing benefits to workers and lowering employer costs? Time will tell.

By Mark Walls

I recently attended and spoke at the California Workers' Compensation & Risk Conference, held September 19-21 in Dana Point, Calif. The main discussion topic at the conference was S.B. 863, which was signed into law by Governor Brown the day before the conference started.

The 119-page bill was crafted after months of negotiation between large employers and labor unions. Going into the negotiations, labor felt that the prior reforms enacted under Governor Schwarzenegger went too far in cutting permanent disability benefits. Employers pointed out that even with the reforms, costs continued to rise and were now higher than before the prior reforms were passed.

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The bill was introduced near the end of the legislative session, and the final negotiations took place in two short weeks. There was significant criticism regarding the speed and secrecy of the negotiations, but much of this came from special interest groups who are known to consistently drain money out of the workers' compensation system in California. In the end, both sides felt comfortable that the bill achieved the desired outcomes and it passed through the legislature on a landslide vote.

When the bill was being debated by the legislature, one of the selling points was that this bill would significantly reduce employer costs. At the time of the debate, the Workers Compensation Insurance Rating Bureau of California was recommending a rate increase of 12.6 percent. The hope was that this bill would eliminate the need for any rate increases. Thus far, carriers have not shown an inclination to cut rates as the result of this bill. In fact, one of the largest writers of workers' compensation in California recommended a premium increase of more than 20 percent after the bill was passed.

An analysis of the bill shows why carriers are being cautious about lowering rates. The increases to permanent disability benefits are immediate and certain. Over a two-year phase-in period, permanent disability benefits are expected to increase by approximately 40 percent. The savings components of the bill are mostly tied to changes in fee schedules and the medical dispute resolution process. These will take time to implement, with the first step being to develop the rules and regulations that will define the processes.

Mark Wilhelm, the CEO for Safety National, was asked during a conference session what impact the bill would have on rates. "There's definitely a cost associated with the benefits provided in this bill, and we're going to approach [the bill] as a cost and not necessarily a savings," he responded. Wilhelm also pointed out that the savings piece was "theoretical" and it would take time to actually see the savings materialize.

So, will there be savings? Under the Schwarzenegger reforms, there was an immediate and significant reduction in costs. However, within six years, the costs rose above pre-reform levels. This happened because providers found loopholes in the new legislation and litigation eroded the savings impact of the bill.

The parties that opposed S.B. 863 are already lining up to challenge it in court. These groups are basing their attacks on the grounds that components of the bill are not in compliance with the California constitution. Further litigation attacking the rules and regulations will follow once those are in place.

This exact scenario has recently played out in two other states. In 2006, Illinois passed a reform bill that promised higher benefits for injured workers but no cost increase for employers. However, the cost savings components never materialized as expected and the reforms did not offset the higher permanent disability settlements. This left Illinois employers with some of the highest workers' comp costs in the country. The Illinois legislature passed another reform bill in 2011, which was again supposed to lower employer costs. But the rules and procedures that are necessary for implementing the savings have not yet been approved. Because of this, employers in Illinois continue to see their workers' comp costs climb.

New York passed a substantial reform bill in 2007 that was designed to increase weekly benefits to workers and lower employer costs in other areas. The benefit increases were immediate, but the cost savings pieces were contingent on substantial implementation. The final regulations for all of the savings components of that bill were not in place until 2012, almost five years after the bill was signed into law. Rates were lowered after the bill passed back in 2007, but because the savings have not yet materialized these lower rates were not appropriate. As a result, the workers' comp marketplace in New York has changed significantly, with New York State Insurance Fund now writing almost half the market.

Will S.B. 863 produce long-term cost savings for California employers? Given the history with the Schwarzenegger reforms, it is hard not to be skeptical. S.B. 863 has an immediate increase in costs, and a savings component that will take time to materialize. While regulators are working hard to develop the rules and regulations that will govern the new law, attorneys are already preparing lawsuits to punch holes in it.

I know many of the people who worked on this bill, and they are some of most intelligent people I have met in the workers' comp industry. These people assure me that the savings are there and that they will materialize. I sincerely hope they are correct. If not, employers' hope for reduced workers' comp costs in California will be nothing more than a dream.

October 4, 2012

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