State Employers Reaping Benefits of Workers’ Comp Overhaul

Owners of small and medium-sized companies in California are beginning to see significant benefits from the cost savings that followed two years of retooling the state’s program for providing benefits to injured workers.

Premiums for workers’ compensation insurance fell an average of 14.6% for policies written or renewed after July 1, Insurance Commissioner John Garamendi reported Monday, reflecting renewed competition among insurers and sharp cuts in the benefits collected by workers.

Since July 2003, when the state began overhauling a program that is routinely listed by employers as the most onerous aspect of doing business in California, premiums on workers’ comp policies now have fallen an average of 26.5%.

“Do I believe we’ve turned a corner? Hugely,” said Seth Marshall, vice president of Santa Monica Seafood Co. Marshall’s Rancho Dominguez firm, which employs about 200 people, saw its workers’ comp insurance bill fall by about 45% in July.

The big reason is increased competition among insurers. Many had fled the state or gone out of business since the late 1990s as the state’s system for treating victims of workplace injuries was hamstrung by rising costs and skyrocketing premiums.

Stabilizing the $24-billion-a-year program through legislative cost cutting and streamlining has attracted 15 new insurers to the California market in the last two years.

“It’s a competitive market right now,” said Scott Hauge, a San Francisco insurance broker. “I’ve never seen the rates go down as dramatically as they did in July.”

The decline in rates, combined with another cut of at least 5% expected in January, fulfills a pledge made by Gov. Arnold Schwarzenegger, who predicted that the workers’ comp bill he shepherded through the Legislature in April 2004 would lower premiums by 30%.

The bill, which followed changes enacted in 2003 under then-Gov. Gray Davis, put new controls on treatment costs for injured workers, reduced disability payments and created medical provider networks designed to cut expenses. The aim was to alleviate the burden of a system that was forcing businesses to shed jobs or move to lower-cost states.

“The reforms have worked and costs have come down for employers,” said Vince Sollitto, a spokesman for Schwarzenegger. “We expect that to continue.”

The savings haven’t come without controversy, however. Critics contend that the benefit cutbacks included in last year’s legislation have left many injured workers without adequate medical care and unable to support themselves or their families.

Ramona Ramirez, 49, an Indian casino supervisor from Santa Maria, said she got no warning in December when an insurance company stopped making payments for pain medicine to treat her injured back. She said her benefits were cut off based on her insurer’s interpretation of the new law’s treatment guidelines.

“I think they’re pocketing the money,” said Ramirez, who started getting her painkillers again in June after a workers’ comp judge interceded on her behalf.

Indeed, Garamendi contends that insurers are still keeping too much of their savings from the workers’ comp overhaul rather than passing them on to policyholders.

“The bottom line is there’s much more relief possible for employers,” he said in a teleconference with reporters.

That argument is echoed by labor unions, which want the state to put price caps on workers’ comp policies.

“The insurance commissioner’s findings continue to provide evidence that the big winners from Schwarzenegger’s reforms are the insurance companies,” said Angie Wei, a lobbyist for the California Labor Federation.

Insurers insist that they can’t make deeper cuts in their premiums until they have more time to analyze the effects of the recent changes in workers’ comp laws.

“The question that is not answerable is whether or not this is sustainable,” said Stanley Zax, president of Woodland Hills-based Zenith National Insurance Corp.

He noted that workers’ comp carriers must maintain substantial financial reserves because they often wait three or four years to close the books on expensive claims for seriously injured workers.

Nevertheless, Zax, whose company has reduced premiums by a cumulative 22% since July 2003, conceded that cost controls have “made things a lot better,” creating “a deeper, more robust, competitive market.”

Although Zax remains cautious, new numbers released last week by the Workers’ Compensation Insurance Rating Bureau, an industry statistical service, indicate that costs of the program are coming down. Workers’ comp claims fell to $9.5 billion last year, the bureau estimated, down 17% from 2003. Moreover, both the frequency of claims and the estimated total cost per claim also declined last year.

Before the new law was passed, “if someone cut his finger, it was six months of recuperation,” said Steven Weiss, president of a Las Vegas company that operates seven Mel’s Drive-In restaurants in California. “Now we’re more in control of the claims.”

The trend is heartening for the state’s employers, said Martyn Hopper, director of the National Federation of Independent Businesses, a lobbying group for small companies.

Over the last two years, average workers’ comp premiums dropped between 15% and 20% for the federation’s 35,000 California members, Hopper said. He said he expected an additional reduction of 10% to 15% over the next six months.

“The insurance industry moves slowly, and this is no different,” Hopper said. “But it’s moving in the right direction.”