Protecting Reforms Can Maintain System Balance, Provide Timely Benefits, Minimize Employer Costs

Background Created in 1913, the California workers’ compensation system constitutionally guarantees workers the right to compensation for workplace injuries, including coverage of medical treatment required to “cure and relieve” the injury. When injured workers are unable to work or suffer severe injuries, they also may receive indemnity benefits in the form of temporary or permanent disability payments. Over the last 25 years, California’s workers’ compensation system has been in a cyclical state of reform and re-reform. In the late 1990s, the system began to experience massive cost increases. These increases resulted from overutilization of medical services, higher-than-normal indemnity benefit costs, and increased litigation. At the height of the workers’ compensation crisis in 2003, employers faced double-digit insurance premium increases, resulting in California having the most expensive workers’ compensation premiums in the nation. In the 2002–2004 legislative sessions, broad reforms were presented to reduce medical care and indemnity benefit costs in the system. The reforms focused on delivery management and treatment cost containment while also ensuring appropriate delivery of quality care. These reforms proved successful and, for the next few years, medical costs and costs per claim declined sharply. This decline was reflected in employers’ insurance rates, which dropped by more than 60%, according to the Workers’ Compensation Insurance Rating Bureau (WCIRB). This trend began to reverse in 2008 when system costs started rising once again. Data from the Commission on Health and Safety and Workers’ Compensation (CHSWC) revealed that the average cost per indemnity claim was much higher than before implementation of the 2003 reforms. Specifically, costs per claim increased 43% from the post-reform low in 2005 and were up approximately 14% from the pre-reform all-time high in 2003. In addition, overall system costs rose by almost $1 billion per year, making California the third most costly workers’ compensation system in the nation, according to the biennial national study conducted by the Oregon Department of Consumer and Business Services. Numerous cost drivers throughout the system share responsibility for these increasing costs. Not only had savings from the 2004 reforms been diluted or undercut by incomplete implementation, judicial activism, and exploitation by system vendors, but medical and frictional costs (such as litigation) also had increased since 2005. As system costs trended up, so did insurance premiums. According to the WCIRB, workers’ compensation insurance rates have climbed every year since 2009 due to rising claims costs. The average rates filed with the Department of Insurance increased by 19% between January 2009 and January 2010, and by 3% between January 2010 and June 2011 when the estimated rate per $100 of payroll was $2.37. The rise in claims costs also had an impact on employers that self-insure. The California Workers’ Compensation Action Network estimated that between 2005 and 2011, the claims costs for public entities that self-insure increased by 32%—even though the number of claims remained essentially unchanged. The post-2004 reform issues within California’s workers’ compensation system were not limited to employers as many injured workers were receiving inadequate permanent disability benefits. These benefits were reduced during the prior round of reform in response to higher-than-normal costs. As part of the 2004 reform deal, however, these benefit reductions were to be re-evaluated and adjusted within five years. This evaluation never occurred and the gap between injured workers’ wage loss and the benefits they received in permanent disability payments widened. All system stakeholders acknowledged that permanent disability benefits needed proper augmentation.