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The report from the National Council on Compensation Insurance issued last month showing the second straight year of underwriting profitability for the workers' compensation line in 2007 was cause for limited celebration. The squeaker of a 99 combined ratio figure represented an increase of six points from the previous year.

The figures track roughly those for the property/casualty industry in general. Workers' comp industry stakeholders must keep a closer eye on state lawmakers because no line is generally thought to be more dependent on their actions, especially when it comes to benefits.

Those reforms signed into law in the first four years of the decade generally favored insurance industry interests, says Jay Chase, senior vice president for MarketScout, the nation's largest online distributor of multiline insurance.

At the federal level, terrorism risk coverage remains the chief concern, while in state houses across the nation, lawmakers might be tempted to take a second look at how reforms impact their working constituents, he says.

PREMIUMS, COSTS DOWN IN CALIF.

Just how significant California is can be seen by the fact that its exclusion from the 2007 NCCI figures would put the overall combined ratio figure in red territory at 104.

While the jury is still out on the overall long-term impacts of the reforms to the California workers' compensation system, legislated between the years 2002 and 2004, both insurers and businesses groups seem satisfied for the time being. Labor groups have some concerns.

Sam Sorich, president of the Association of California Insurance Companies, calls the current market for workers' comp coverage "vibrant and very competitive."

Likewise, Jason Schmelzer, a spokesman for the California Chamber of Commerce, says businesses have prospered from the reforms. "Premiums have come down, objectivity has been established and a sense of balance has been returned to the California workers' comp system," he says.

So what exactly was the nature of the legislative measures that straddled the Gray Davis and Schwarzenegger eras in Sacramento, and how did they come about?

For the past two decades, workers' comp costs and their purportedly stifling effect on economic development have served as one of the most contentious political issues in the capital with labor and the applicants' attorneys on one side pitted about business groups and insurers on the other.

"Prior to recent reforms, California's workers' comp system was out of control," Schmelzer says. "It harmed employees by creating an adversarial system focused on litigation and disability instead of reasonable and appropriate medical treatment and return to work, and did so at incredible cost to employers."

The California Workers Compensation Insurance Rating Bureau projected that, over the 11-year period between 1992 and 2002, the average ultimate medical cost per workers' comp indemnity claim increased 265 percent from $8,693 to $31,767.

To remedy the situation the governor signed into law in 2004 legislation that, according to Alex Swedlow, executive vice president for the California Workers' Compensation Institute, sought to improve patient care "by requiring the use of medical utilization standards that incorporated scientific, evidence-based peer-reviewed standards of medical care, as well as a 24-visit cap on physical therapy and chiropractic care."

It addition, legislation bolstering the use of medical networks was part of the package

For Stephen Hackenburg, senior vice president for Aon, the reforms put a halt in California to what he called "doctor shopping."

"It was a situation where you just kept going to a doctor until you got the answer you wanted," he says. "Now employers are better able to manage the doctors the workers go to by putting them in the approved network of doctors."

Swedlow says that two of the most controversial aspects of prereform medical care--physical therapy and use of chiropractors--showed the most dramatic change. "By all accounts, the use of these services had drifted too far from objective clinical findings and recommendations for reasonable levels of use," he says.

WCIRB figures indicate that the $12.6 billion in written premium for 2007 represents a 23 percent reduction from the comparable 2006 figure, while the $6.3 billion in accident year losses represents a 50 percent reduction from the same figure projected for the accident year 2002.

Robert Hunter, insurance director for the Consumer Federation of America, says the state got into trouble in the first place as a result of deregulation of workers' comp rates in 1993. The result was a free-for-all to grab market share that in turn led to spiraling premiums in the first years of the new decade after a number of insolvencies.

"The unregulated industry did very well in the following years, saving money but passing on a fraction of those savings to employers," Hunter says, noting the 55 percent loss ratio through 2007 was the lowest in recent times.

Labor interests hope to revisit some issues this year, particularly in the area of disability benefits.

State Senate President Don Perata, D-Oakland, introduced a bill earlier this year aimed at rectifying what he sees as some of the main injustices of the reforms by doubling the number of weeks a permanently disabled worker receives benefits, while not altering eligibility conditions.

Perata says that studies indicate the reforms have resulted in benefit cuts totaling more than 50 percent.

Sorich says that may be the case, but it does not take into account the fact that workers are getting back on the job sooner. "So workers are not suffering an overall loss of compensation," he says.

Schwarzenegger has vetoed two previous iterations of the bill, supposedly because it was too soon to measure the full impact of the reforms.

"We have jumped through every hoop the governor has asked for," Perata says. "It is time for the governor to sign this bill."

ALL EYES ON FLA. COURT

All stakeholders in the Florida workers' compensation arena are anxiously awaiting a ruling by the Florida Supreme Court this summer in the case of Emma Murray v. Mariner Health, which challenges the cap on hourly attorney fees the legislature imposed in 2003.

William Stander, Tallahassee, Fla.-based regional manager for the Property Casualty Insurers Association of America, says that the cap has played an important role in keeping loss costs down in the past couple of years.

"And given the current make up of the legislature and different governor, I don't think we will be able pass a new bill if the court says we have to," Stander says.

In a report issued three weeks ago, the Workers Compensation Research Institute reported that, in 2005 to 2006, the average total cost per claim in Florida increased 5 percent, in comparison to the 5 percent decline the previous year, which represented the first post-reform reporting period.

That same 2005 to 2006 figure, when drilled down to those payments involving seven or more days of lost time, rose 8 percent, due in part to the increase in the medical fee schedule approved in the 2005, the report asserted.

The 2003 legislation included revisions to the medical fee schedule and new limits on chiropractic visits and attorney fees.

Average attorney payments per claim remained stable in 2005-06 compared with double-digit increases in the two years prior to reforms, the WCRI noted.

TEXAS, N.Y.: VEDICT OUT

Earlier this year former New York Gov. Eliot Spitzer signed into law a series of reforms that imposed a loss cost system that gave carriers more leeway in setting rates, which the industry viewed as a positive development. In addition, the law imposed caps on partial permanent disability benefits but raised the total amount of benefits.

Three years ago, Texas lawmakers approved measures that merged the workers' comp regulatory machine into the Texas Department of Insurance and promoted the use of medical provider networks.

In both instances, any dollars-and-cents impact on either costs or rates has yet to be determined, says Rita Nowak, vice president of workers' comp for the Property Casualty Insurers Association of America.

Peter Burton, NCCI senior division executive for state relations, says that last year state lawmakers expanded benefits, particularly for first responders. As for 2008, Burton quotes industry experts who expressed concern about the changing political demographics of the country's state houses, which may potentially cause increased liabilities for the insurance industry.

"The shift was experienced in many state houses in 2007 with regard to workers' comp initiatives, and is likely to continue in 2008," he writes.

STEVE TUCKEY has written on insurance issues for a decade for several national media outlets.

June 1, 2008

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