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Workers' comp on the mend.


What if one of those typically outrageous bills for the rent, the heat or the car insurance showed up in your mailbox this month asking for $50 less than usual?

Surprised? Of course. Pleased? You bet.

That, you can imagine, is the feeling of California businesses just now benefiting from reforms made to the state's long-notorious workers' compensation system.

Insurance premiums are plummeting - so much so that observers wonder about the solvency of some carriers. Major workers' comp mills, the seedy medical-legal partnerships that had driven California's insurance costs sky high, are shutting down. The number of stress claims has, in some areas, been cut by half. Checks for injured workers are getting fatter.

Much of this grand news about the effects of the reforms - the California Legislature passed the bulk of them in 1993, though some were signed earlier - is anecdotal. But most with a stake in the system agree: Changes to California's 80-year-old workers' compensation system, which were supposed to slice at least $1.5 billion out of an $11 billion system, have actually hacked away as much as $3 billion in costs. Maybe more.

"I was just shocked at how much they dropped," Sacramento day school owner Pam Barrow-Lynn said of her workers' compensation premiums, which dived from $10,842 in 1993 to $7,880 last November. "The rates were very burdensome to employers."

Robert Boucher, who manufactures parts for radio-controlled toys, said the mental stress claims of a few fired employees were what really hurt him, bumping his premiums to 30 percent of his payroll in 1990.

"I couldn't pay it," says Boucher, now thankful that California law makes it harder to file psychiatric claims. "It was impossible."

In the iron and steel construction industry where workers' comp rates are among the highest, premiums last year had gone down by $11.85 per $100 of payroll. At general warehouses, they were down $6.49. The number of claims per $1 million of payroll declined by more than 31 percent between 1991 and 1994. On average, insurers are quoting rates 25 percent to 30 percent lower than those quoted in 1993, and in some cases, far less.


"It's a new ball game," says Casey Young, administrative director of the Industrial Relations Department's Division of Workers' Compensation. "What I hear is that the rates for some companies are exceedingly low."

By the early 1990s, the workers' compensation system in California was infamous: Lengthy newspaper exposes and national television programs had turned a bright light on a system that was among the costliest in the country, yet provided some of the lowest benefits to injured workers.

The cost-driving culprits? Easily filed psychiatric claims where workers needed to prove that only 10 percent of their stress was related to their jobs. Uncontrolled medical costs, particularly in vocational rehabilitation and the expensive, sometimes numerous, evaluations that doctors made of injured workers. A minimum-rate law that guaranteed insurers remained solvent, yet stifled competition and, consequently, competitive premiums. And rampant fraud, well illustrated by boldly advertised partnerships of doctors and lawyers who lured and exploited workers, milked insurance companies and passed the buck along to businesses in the form of higher premiums.

Loudly and publicly, businesses blamed the workers' compensation system for helping them decide to move out of state.

Embarrassed by the national attention - and concerned about re-election - California lawmakers could no longer afford to accommodate the doctors, lawyers, insurers, employers and workers' advocates who had made a show of wanting to work together, but repeatedly failed to fashion effective reforms.


In the summer of 1993, after a historic meeting of minds in the state Legislature, California Governor Pete Wilson put his pen to seven key bills designed to turn the workers' compensation system on its head.

Today, the reforms that get the most applause, and whose effects may be easiest to gauge so far, are those aimed at battling fraud.

"A lot of savings that have flowed through to employers are, in my opinion, a direct result of fighting fraud and driving criminals out of the system," said Jim Little, president and CEO of Fremont Compensation Insurance Co., one of the state's top five underwriters. "Here at Fremont alone, we're about to have our 100th arrest since 1992, so there was a lot of it out there."

Workers' comp fraud is no longer a misdemeanor in California. It's a felony with harsh penalties. Local prosecutors and the state's Insurance Department now get $25 million a year to fight fraud.

Workers' compensation mills, which invited employees to file suspect claims with the promise of large cash rewards, raked in money from the evaluations that doctors and lawyers prepare to prove contested claims. Not only did the Legislature cap the number of evaluations that workers can now obtain, it wiped out the built-in reimbursement formula that drove the cost of these evaluations higher each year, replacing it with a more modest schedule.

Where the cost of an exam once averaged $1,100, the price is now closer to $580. What's more, the exams are no longer the bread-and-butter they once were for workers' compensation mills.

"It nipped in the bud the ability of these mills to generate a claim with four or five different [medical] specialities," said William Molmen, general counsel for the San Francisco-based California Workers' Compensation Institute, a think tank funded by insurers.

Rockwell International reports a 65 percent drop in workers' compensation expenses because of this change alone: Medical costs dropped from $400,000 to $141,000 in one year.

Also inflating the workers' compensation system and providing money for mills were the so-called stress or psychiatric claims, which had, in the words of the state's Industrial Relations Department, become "the foremost symbol of what had gone wrong with the California workers' compensation system."

In 1981, there were 1,844 such claims in California. In 1990, there were 10,444. In 1991, 15,668. Driving this increase were two things: Workers needed to prove that their afflictions were only 10 percent related to their jobs, and California allowed fired workers to file stress claims even if the termination was nondiscriminatory.

"This created very substantial incentives for fraud and litigation," says Richard Victor, executive director of the Workers' Compensation Research Institute in Cambridge, Mass. "There were these full-page ads in newspapers saying: 'Stressed at work? Don't like your boss? You may have a workers' comp claim.'"

Today, employment must be the "predominant" cause of stress before a claim is compensable; that is, work has to account for more than 50 percent of the employee's injury. Moreover, fired workers can no longer file stress claims for nondiscriminatory, good-faith terminations.

The number of applications for state adjudication on stress claims, which are the precursors to lawsuits, dropped more than 26 percent by last summer. In mill-soaked Southern California, the drop was more dramatic - somewhere between 35 percent and 50 percent.

At Fremont Insurance "stress claims have dropped off to nothing. I mean nothing," said CEO Little, who remembers when stress once accounted for a quarter of the company's claims.

Several lawmakers who were instrumental in the 1993 reforms see the need for more fixes in this area, principally in claims for soft-tissue injuries that can be hard for an employer to dispute.

"It's almost the perfect fraudulent environment," says California Senator Steve Peace, who was the leading force behind the reforms. "Lower back injuries, carpal tunnel syndrome - where medical providers do baloney treatments."


Not all, naturally, applaud the changes in stress claims. "It's almost impossible now to find an attorney who will agree to handle a stress claim because of the difficulty of prevailing [in court]," complains Mike Ozurovich, president of the California Applicants' Attorneys Association, which took a professional beating when the workers' comp reforms passed. "We represent a lot of police and teachers and social workers who have to deal with a violent and incorrigible element of society, and these people are prone to being involved in conflict situations that are stressful."

Ozurovich is unhappy, too, with the $16,000 cap the Legislature placed on costs for vocational rehabilitation. Before the cap, "voc rehab" was an open-ended entitlement whose costs were growing about 23 percent a year and accounting for 12 percent of workers' compensation costs.

Though it is too early to gauge the effects of this reform, Ozurovich says any savings will, in the long run, be overshadowed by the public cost of supporting people who never recover well enough to return to work.

"These caps make it more difficult to get injured workers the training they need to rejoin the work force," he said. "We're not getting much bang for our buck."

In the construction industry, large employers and labor groups can now, through the collective bargaining process, create alternatives to the workers' compensation system that may be cheaper and may avoid disputes over injury claims. Though this change is also too new to produce verifiable savings, reformists hope to expand the option to other industries.

Though injured workers now enjoy more benefits - the weekly disability check was $224 in 1989, but will be $490 next year - labor advocates are pushing for even higher payments to reflect the unanticipated savings to the system.

"The idea in 1993 was that half of the savings were supposed to go to benefit increases," said Tom Rankin, spokesman for the California Labor Federation, AFL-CIO. "[But] the savings that the Legislature projected were far, far below what the savings actually turned out to be."

Chuck Bader, executive director of California's Workers' Compensation Institute, counters: "Employers should not have to pay more in benefits because fraud's being eliminated, [and] they're being ripped off less."


The state's attempt to move workers' compensation into a managed care system, though lauded as innovative, has so far earned more criticism than praise.

Among the top concerns about the new health care organization (HCO) is the system offering employers varying levels of control over their workers' medical care for work-related injuries and illnesses.

Without an HCO, employers have 30 days to control the doctor or facility that an injured worker uses for medical treatment. Under an HCO, they have up to 90, 180 or 365 days, depending on what kind of regular health benefits the employer already provides. Critics consider this tiered approach too complicated. Moreover, they say, the period of control may vary from one employee to another even though they're working for the same employer.

"We have different thresholds and requirements for employers to meet in order to control medical treatment for more than 30 days," says Senator Patrick Johnston, who also helped craft the 1993 reforms. "In retrospect, that may be more convoluted than is helpful. It probably makes more sense to just offer one choice."

Critics complain about the so-called "opt out" element, which allows workers to decline an HCO by picking a personal doctor when they're hired, during the annual enrollment and before an injury or illness. Why, ask critics, should an employer offer a 100 percent paid HCO if there's no requirement that employees stay in the program?

Peace was pushing a bill that would have changed the tiered system. The legislation, SB 622, would have replaced it with a single, 180-day control period during which employers who already provide regular health benefits could control where their employees went for workers' compensation treatment. The bill, however, has stalled in the Legislature.

Critics see other problems.

A requirement that employers offer workers at least two HCOs places too much demand on a system still evolving in California, they say. To meet this demand, employers estimate, there must be 20 major HCOs available. Though the state has received more than 20 applications from HCO aspirants, it has certified only two. A third certification is pending.

"It's not even large enough to be considered token," said Bader. "From an employers' perspective, we are best served by a competitive market."

Julianna Broyels of the California Chamber of Commerce and others say there are several reasons for the low number of certificates.

For starters, HCO applicants must get certification from two separate commerce agencies, the Department of Industrial Relations and the state Department of Corporations. Applicants must adhere to extensive data reporting requirements that Broyels calls "absurdly over-written" and must provide extensive documentation to set up the HCO.

Further, they must provide health and safety consultation that critics say is duplicative, since employers can get the same service from insurers or from the state.

Finally, critics wonder why some employers will even join an HCO now that regular health care providers are already supplying coverage that circumvents the HCO program.

Dr. Linda Rudolph, medical director for the Department of Industrial Relations' workers' compensation division, says the application process is reasonable.

"I think it's been more difficult for [some] providers to go through the application process, not because the standards are out of line, but because they've never gone through this kind of regulatory process before," Rudolph said.

"[The application process] really is imposing on workers' compensation many of the safeguards such as access and quality of care that have operated for HMOs for decades, but is new for many of the organizations that want to get into this kind of network."


But Young, the state's workers' compensation director, acknowledges the frustration. "It's been slow getting off the ground," he says. "People have been wrestling with this and tearing their hair out. It needs to be simpler, easier to price and to market and to explain, so it will take off and produce the kinds of savings that managed care has elsewhere."

Also viewed askance is a reform that, last January, did away with the minimum-rate law, that created a floor for insurance premiums. To critics, the minimum rate practically guaranteed a profit to insurers and stifled competition.

Today, under so-called "open rating," insurers can essentially charge what they want, as long as their rates don't threaten a company's solvency or create monopolies.

By all accounts, "open rating" has had a typhonic effect on the marketplace. The state abounds with stories of premium quotes that are, on average, one-third lower than they were in 1993. In some instances, one hears of quotes whacked by as much as 75 percent.

In some cases, premiums are so low that the state's insurance commissioner has publicly worried that some insurers may go broke, leaving injured workers with nowhere to turn.

Geri Madden, spokeswoman for the State Compensation Insurance Fund, the state's largest workers' comp carrier, says she's seen "some very strange underwriting."

"We've seen quotes and heard anecdotal stories suggesting that policies are being written at below-loss costs," says Madden. "If they go too low, then the losses aren't going to be covered. Solvency is the critical component to a responsible open market."

To some, this premium low-balling is a hiccup, certain to vanish as the market absorbs the effects of open rating and the insurance commissioner's office discourages rock-bottom premiums that could threaten solvency.

"I'm not convinced at all that we've had any long-term cost savings," says Broyels of the California Chamber of Commerce. "We may have had one-time cost savings as the industry scrambles to grab a share of the market, but what we're going to see is rates going up again."

Senator Johnston agrees. "In the long term, [low rates] could risk solvency, and I would expect insurers themselves would start incrementally increasing rates to achieve a level of reserve and return that is justified."

The Industrial Relations Department still views California as a high-premium state.


"We believe that comp reform has been a success, but California continues to pay more [in insurance premiums] than competitors in other states," said John Duncan, a department spokesman who notes that California metal manufacturers this year will pay $8.13 per $100 of payroll for comp costs while those in Colorado and Utah will pay $4.87 and $3.84 respectively.

Johnston and other lawmakers who worked on the reforms see challenges for the future. Some are unhappy with the Department of Industrial Relations' slow pace in putting into place injury-prevention measures called for in the 1993 reforms.

The major reform in this area was a bill requiring the department to identify employers with high injury rates, then assess fees so it could inspect and advise these "high-hazard" workplaces. By many accounts, the department has moved slowly. "I continue to be frustrated that there's so little relationship between worker safety and workers' compensation," says Senator Bill Leonard.

Still, Leonard and others have high praise for the bulk of the reforms and what they have produced so far.

"The workers' compensation problem, most people would agree, is not nearly as critical as it was three or four years ago," says Brenda A. Trolin, NCSL's expert on labor and insurance issues. "Oregon was the first to really try to deal with the stress claims, for example, but California built on that. Other states will build on what these two states have done."

Says Leonard: "The reforms that we put in place have all the elements of what I think would be an excellent system. It's a good model to hold up to other states as a list of items that must be dealt with."


These are the key pieces of 1993 legislation that reformed California's workers' compensation system:

* AB 110 was the omnibus reform bill. Among other things, it places a $16,000 cap on vocational rehabilitation services, limits the number of employer-paid medical-legal evaluations to no more than one per side in any dispute, authorizes a managed-care approach to workers' compensation and revises the fee schedule for medical treatment. It created an "Employer Bill of Rights" giving employers more leverage in dealing with insurers, limited physician referrals to medical facilities in which they have a financial interest and developed an information system to help in better managing the workers' compensation system.

* AB 119 creates a higher standard for filing stress claims - requiring that stress be the "predominant" cause of the worker's injury. It also puts new limits on stress claims filed after a good-faith termination.

* AB 1300 provides new and tougher fraud prevention measures. The bill allows prosecutors to use half of fees recovered in fraud cases for more prosecutions, requires parties to a claim to swear under oath that the claims were not fraudulent and forbids those convicted of workers' compensation fraud from collecting benefits.

* SB 30 abolished the law establishing a minimum rate for workers' compensation insurers, replacing it with an open rating system now credited with increased competition and lower premiums. It also gave the state insurance commissioner authority to regulate rates to prevent insolvencies or monopolies.

* SB 983 allows employers and organized labor groups to create, through the collective bargaining process, alternative workers' compensation programs that could cut costs and provide better benefits. The success of this pilot program could mean similar collective-bargaining alternatives for other industries. Under the bill, the experimental rights and benefits can be no less than those provided by law.

* SB 1005 created a Commission on Health and Safety and Workers' Compensation to monitor the system and to work with businesses to create injury prevention plans. The eight-member commission includes equal representation from organized labor and employer groups.

* SB 484 provided the money needed for the state to administer the new reforms.


Oregon is another state saving money with workers' compensation reform. An omnibus reform bill (SB 1197) - passed in 1990 through the efforts of a private council of labor and management representatives created by then-Governor Nell Goldschmidt - has resulted in substantial reductions in the cost of the system.

Key provisions of the Oregon law include:

1. Better administration, enforcement and education

The Worker's Compensation Division now uses a combination of reporting requirements, fiscal and program audits, industry training and consulting services, and penalties to monitor and enforce the new law. And it offers an extensive education and training program for employers, attorneys, medical service providers and claims examiners.

2. Medical cost containment

Most palliative medical care, which treats only the symptoms and not the sources of the problems, was eliminated. Managed care organizations (MCOs) were established. An MCO is a group of medical care providers who agree to develop and follow specific guidelines when providing treatment to injured workers. The objectives of an MCO are to ensure quality and appropriate medical care for workers who suffer job-related injuries and to help employers control costs. Professional standards describe limits on duration, frequency and level of care for specific conditions.

3. Narrowed scope of compensability

Oregon law states that injuries "arising out of" and "in the course of" employment are compensable. A large body of case law further defines employment situations and exceptions. Because the statute is considered remedial, case law requires that the statutes be construed liberally in favor of the worker. SB 1197 attempted to redefine the scope. It remains to be seen if the legislature has provided the court system with the specific definitions that will achieve this objective.

4. Reduced litigation

SB 1197 created an administrative review process for resolution of determination orders (a binding order to insurers to pay a particular benefit) and medical treatment and fee disputes.

5. Encouragement of the worker's early return to work

Employers who hire injured workers are protected from future liability related to the early return to work. The risk-free period extends for three years from date of hire. Requirements for job reinstatements were expanded. The Rehabilitation Review Unit within the Workers' Compensation Division provides incentives to Oregon employers to re-employ or hire injured workers. These include subsidies for wages, worksite modifications and related purchases, and premium exemption and reimbursement for the costs of claims.

Brenda Trolin, NCSL


Connecticut is well under way toward solving another major problem for most of the nation's workers' compensation programs - cumbersome paper-based procedures, antiquated computers and inefficiencies that make fraud easy.

Part of the major reform in Connecticut in 1992 was to update and improve the effectiveness of its operations. The Workers' Compensation Commission turned to technology and a new client/server system that already has made managing claims more productive by 30 percent and should pay for itself in just one year, according to Marvin Smernoff, chief administrative officer of the Connecticut Workers' Compensation Commission. Installed in the central administrative offices and eight district offices this spring, the new equipment processes claims, tracks self-insurance and employer coverage, and monitors rehabilitation, preferred provider services and education programs. It produces up-to-date data so legislators and administrators can evaluate recent reforms. Trends can be studied and steps taken to prevent injuries from occurring in the first place.

Connecticut's workers' comp system serves 60,000 clients and last year paid out $748 million in benefits. Fraud was easy since each district office had its own, unconnected, archaic host-and-terminal setup and claims could not be cross-checked.

The new system makes everything more efficient. Data need only be entered once, but is available to everyone involved in workers' comp including local claims offices, case workers, employers and insurance carriers. Hearings are scheduled faster because case workers have information long in advance and duplication has been eliminated.

Smernoff says Connecticut is first in the country with this new technology, which was designed and installed by TRECOM Business Systems, a New Jersey-based systems integrator.

Sharon Randall


Managed care is keeping costs down in health care, so why not use it to contain costs for workers' comp treatment - notoriously overused by both doctors and injured workers? Here's how some states are doing it, giving employers varying levels of control of their workers' medical care for work-related injuries and illnesses:

CALIFORNIA - 1993 reform establishes a 24-hour-care pilot program and expands the employer's right to control medical treatment of injured workers through various health care organizations (HCOs).

CONNECTICUT - 1993 reform requires fee schedules, medical practice protocols and a review mechanism for medical cost containment. Injured workers who go outside the managed care network to receive medical treatment are not covered.

FLORIDA - Managed care will be used for most injured workers in the state starting Jan. 1, 1997. The move is based in part on the results of a three-year pilot project that involved more than 17,000 state government employees and 7,500 privately employed workers.

KENTUCKY - Medical services for workers' comp must be supervised by a single treating physician or physicians' group with the authority to make referrals.

MICHIGAN - Under rules from 1989, employers have 10 days to choose physicians for employees suffering from work-related accidents. The program uses several other cost containment measures including fee schedules, utilization review and dispute resolution.

MINNESOTA - One of the few states with mandatory managed care for injured workers. Under 1992 reform, managed care organizations must be state certified. Program uses treatment parameters, medical fee schedules and dispute resolution.

MISSOURI - Managed care organizations (MCOs) are the preferred providers of medical care for injured workers. 1993 reforms established information programs to let employers know that MCOs are available and help them select one. The state gives up to a 5 percent discount on workers' comp premiums to employers who contract with state-certified MCOs.

NEBRASKA - 1994 reform allows use of MCOs, gives employers more control over selection of medical care providers, requires workplace safety programs and dispute resolution, and establishes an independent medical examiner system to create fee schedules and treatment protocols.

NEW HAMPSHIRE - 1993 legislation authorizes employers to establish managed care programs for workers' comp. All programs must be approved by the labor commissioner and ratified by the advisory council on workers' compensation.

OHIO - Managed care was the main component of comprehensive workers' comp reform in 1994. Two programs, one state-run and the other run by individual employers or groups of employers, give employers and employees some latitude in picking a health care provider.

OREGON - A 24-hour coverage pilot program started in 1993 aims to enhance delivery and cost effectiveness of medical services for workers and employers by combining group health insurance coverage with the medical portion of workers' compensation.

SOUTH DAKOTA - 1994 legislation authorizes the Department of Labor to establish and collect reasonable fees, not exceeding $1,000, for the renewal of managed care plans for workers' compensation claims.

VIRGINIA - 1994 legislation limits health insurance policies, HMOs, health care plans and health care subscription plans issued by corporations from excluding workers' comp-related coverage.

Shelda Harden, NCSL

Dana Wilkie writes for The San Diego Union-Tribune and other California publications.
COPYRIGHT 1995 National Conference of State Legislatures
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:includes related article; workers' compensation
Author:Wilkie, Dana
Publication:State Legislatures
Date:Sep 1, 1995
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