States of change: workers' compensation claims frequency has been coming down steadily, but medical costs are still on the rise, all but obliterating the possibility of getting ahead. Some states are using aggressive strategies to rein in costs.

Just how much are medical costs rising? In the National Council on Compensation Insurance's latest publication, "Workers' Compensation Market Snapshot," NCCI President and CEO Stephen J. Klingel pointed to a survey by Towers Perrin that showed that U.S. employers are facing an 8 percent increase in their health-care costs. In 2006, Klingel says, employers expect average health-care spending per employee to reach a level that is 140 percent greater than a decade ago.

In addition, NCCI says medical costs made up 57 percent of total losses in states in which it makes filings. Workers' comp medical costs grew more than 10 percent in 2004, the latest data available. Klingel says more states, as well as employers, are working to control health-care costs by "aggressively managing vendor selection and performance, and controlling prescription drug expenditures through generics, care management initiatives, and employee communication and engagement."

Keith Bateman, vice president of workers' compensation for the Property Casualty Insurers Association of America, says many states are trying to control costs by focusing on medical treatment standards.

"Texas and California will give us the chance to answer the question, 'Are the new networks better than the old ones in controlling costs?'" he says. "There are a lot of folks that are pushing their particular treatment. On the medical side, they are still trying to cope with the rapid pace in change of technology--most of which is high-cost technology. My guess is, based on what is likely to happen on the general health side, that people need to keep more of an eye on hospital costs than in the past. That's the area where you may see a larger cost increase than others."

A number of states have enacted or proposed reform legislation in recent years. While the savings and positive effects generated by these actions are beginning to take hold, several of these states are facing legal and legislative battles that threaten to derail reform efforts.

"Once the ink is dry (on the legislation), it is not over until it is over," says John Burton, professor emeritus in the School of Management and Labor Relations at Rutgers University. "The parties that lost something in the reform process are trying to regain what they lost in the court system."

Some of the states facing challenges include:

* California. The state Division of Workers' Compensation recently released a study indicating that reforms enacted in California have cut insurance rates for 2006 by 46 percent. The study, which was conducted by Bickmore Risk Services for the DWC, examined the effects of the 2003 and 2004 legislative reforms on insurance rates.

However, opponents say the implementation of the reforms radically changed the state's workers' comp laws, in effect shifting control to the employer and imposing significant restrictions on medical treatment and short- and long-term disability. A package of three ballot initiatives has been filed with the state attorney general's office and could go before the voters in November.

The main thrust of the initiatives is to restore injured workers the right to make decisions about their medical treatment and substantially increased benefits.

"California is such an important state to employers," Oxfeld says. "Right now, there are efforts at every turn to undo the reforms. This is a major concern of the national business community. The workers' comp system in California was totally dysfunctional prior to the reforms. In order to bring stability to the system and achieve the savings, we must let the reforms work. It must not be under constant attack."

Bruce Wood, assistant general counsel of the American Insurance Association, says the opposition to the California reforms represent one of the most significant challenges in the workers' comp industry. "There is an ongoing effort to turn the clock back," he says. "There is always the day-to-day regulatory warfare, but it is important we ensure that the reforms that have been adopted stay on track."

Burton says that if reforms are dissolved or altered, it will likely make workers' comp coverage more expensive nationwide.

* South Carolina. In June, NCCI recommended a 33 percent rate increase. That announcement led Gov. Mark Sanford to convene a special panel to address the rising costs and create a reform plan. The panel's recommendations, which included tightening disability definitions and eliminating the Second Injury Fund, are being reviewed by the governor.

In 2000, the state had the second lowest premiums in the nation. South Carolina's workers' comp premiums increased 17.3 percent in 2003, compared to a national average increase of 6.65 percent. Last year, they rose another 11.4 percent compared to an average decrease of 6 percent nationally. Experts say that South Carolina's problems are a result of sharp increases in medical and indemnity costs, attorney involvement and Second Injury Fund assessments.

Legislative efforts are being discussed that would lower workers' comp premiums for employers while making it harder for injured workers to collect benefits.

AIA says that reform of the South Carolina workers' comp system remains a top priority for the organization in 2006.

The group says it would support passage of a comprehensive package of reforms that will stabilize the market, reduce unnecessary costs and streamline operations of the system.

* New York. Workers' comp reform legislation introduced by New York Gov. George E. Pataki as a means of cutting employers' costs and boosting job creation has spawned a rising tide of opposition. The goal of the legislation, which is a follow-up to the governor's unsuccessful bid for reforms in 2004, is to halt the exodus of manufacturing jobs from the state. Pataki says his plan would cut premium costs by an estimated 15 percent per year.

However, as more details of the proposal emerge, attorneys and labor groups are mounting opposition efforts.

In question are sections that would end lifetime medical and cash benefits for workers with permanent partial disabilities and allow employers to require employees to have diagnostic tests from specific medical networks and obtain their prescription drugs from named pharmacies. There is also concern about the administration's drive to increase use of the conciliation process to settle claims.

"Our real belief is that very little is going on in workers' compensation," says Art Wilcox, spokesman for the New York AFL-CIO. "The governor has a reform proposal that we find unsuitable. The proposal blames the disabled (for rising workers' comp costs), and that is not a solution to the problem. Unless there is a move to put labor and management in a room and attempt to work out a solution, I don't think it goes anywhere this year."

* Missouri. Changes to Missouri's workers' comp law enacted by the General Assembly are being challenged as unconstitutional. A coalition of labor unions is seeking a declaratory judgment and injunction against the legislation. The nine-count suit alleges Senate Bill 1, signed into law on March 30, 2005, violates both the state constitution and the 14th Amendment of the U.S. Constitution. The counts range from deprivation of due process to violation of the supremacy clause of the Constitution.

Experts says the progress of the suit will be watched closely by other states interested in attracting more business and industry by reducing workers' comp costs through stringent regulations and tighter administration.

JOSHUA CLIFTON is a writer based in Chicago. He can be reached at [e-mail].