In 2003, California’s workers’ compensation rates led the nation, setting off a debate about the cost of doing business here. Enter former Gov. Arnold Schwarzenegger and his sweeping 2004 reforms to the system — everything from disability payments to medical care guidelines to return-to-work benefits got an overhaul.

Seven years later, debate continues about the value of those reforms.

In 2003, California’s workers’ compensation rates led the nation, setting off a debate about the cost of doing business here. Enter former Gov. Arnold Schwarzenegger and his sweeping 2004 reforms to the system — everything from disability payments to medical care guidelines to return-to-work benefits got an overhaul.

Seven years later, debate continues about the value of those reforms.

“The reforms did their job immediately following 2004, when costs came down pretty substantially and, from our estimation, things were working roughly the way they should,” says Jason Schmelzer, chief lobbyist for the California Coalition of Workers’ Compensation, a statewide alliance of employers. “It wasn’t perfect. But in large part, things were better.”

Representatives of injured workers, though, say the reforms were brutal, slashing disability payments and restricting legitimate medical care. “These reforms were billed as cost-cutting measures with minimal negative impact to injured workers,” says Mitch Seaman, legislative advocate for the California Labor Federation. “Rather, the reforms have in fact drastically reduced and in some cases denied benefits, delayed access and complicated the return-to-work process.”

The reforms reduced the cost of premiums. In the second six months of 2003, the average workers’ compensation insurance premium was $6.44 per $100 of payroll, Workers’ Compensation Insurance Rating Bureau (WCIRB) statistics show. During the first six months of 2011, that rate had dropped by 62 percent to $2.37 per $100 of payroll.

But even reform supporters admit all is not well. Though still low compared with pre-reform levels, insurance premiums have risen by about 10 percent the past four years, WCIRB statistics show.

Additionally, those premiums aren’t covering insurance companies’ losses; for every dollar in premiums they take in, they pay out $1.26, according to Mark Sektnan, president of the Association of California Insurance Companies.

Conventional wisdom holds that, despite these losses, rates remain relatively flat because of intense competition. Still, the loss ratios raise concerns over insurance company solvency and potential premium hikes for employers. And while the roughly 75 percent of employers who purchase workers’ comp insurance (the other 25 percent self-insure) might not feel the immediate impact of issues within the complex system, they could ultimately see change if premium rates rise in response.

Permanent-disability payments are considered by labor groups to be one of the highest priorities. Employer and insurance groups might disagree with that emphasis, but, “Everyone knows that, politically, you can’t do something legislatively to address costs of the system unless you’re willing to accept some type of permanent-disability increase,” says Michael Nolan, president of the California Workers’ Compensation Institute.

Schwarzenegger’s dramatic reforms changed the way permanent-disability benefits are calculated, resulting in reduced payments for most injuries. By how much those payments have been reduced is the subject of debate and depends upon the numbers used and the injuries accounted for. Seaman puts the cut at more than 40 percent. Additionally, he says, permanent-disability benefits are now completely denied to about 25 percent of injured workers who would have previously qualified.

Mark Vickness, an Oakland-based applicants’ attorney who calls the cuts “draconian,” sees the direct impact those changes have had on his clients. Emotionally, he says, low permanent-disability payments exact a huge toll on seriously injured workers who can no longer work but who are now expected to provide for their families on as little as $200 per week.

“The cuts to permanent-disability benefits, which affect the most severely disabled workers as a result of work injuries, were way overboard,” Vickness says. “My experience in representing injured workers — people seriously disabled, who’ve had multiple surgeries, who are unable to return to jobs and unable to work at all — the cuts have just been merciless, really just horrible.”

Nolan says employers, on the other hand, would likely argue permanent-disability benefits needed to be decreased in some way in 2004 because they were simply too out of sync and too high in certain areas.

There is growing consensus that rates likely will be raised — 15 percent is commonly mentioned — either administratively or legislatively. The key to any increase, Nolan says, will be to find savings elsewhere.

“My sense is that a typical employer today would say, ‘We’re willing to increase elements of PD if we can offset them, because we don’t want to see an overall increase in the system,’” Nolan says.

For every dollar in premiums insurance companies take in, they’re paying out $1.26.

Association of California Insurance Companies.

Some of those cost savings could come from reducing medical costs, which have been ticking up in recent years. Cause for the cost increases is debatable, but the general rise in health care certainly is culpable. Factors specific to the workers’ comp system no doubt also play a role.

“What we’re discovering is that physicians seem to be (reporting) the cases with more sophistication, with more services provided with each visit,” Sektnan said. “We’re not sure if that’s appropriate, but it bears more research.”

In Seaman’s view, some of the changes established by the reforms have caused increased costs to the system. He cites as an example Medical Provider Networks provisions, which allow employers to select physicians for workers who don’t predesignate a preferred medical professional. He says this system has caused an explosion of so-called utilization reviews, which typically confirm the initial diagnosis and accomplish little else other than increased costs to the system and massive delays for injured workers. Curbing abuses and delays caused by the utilization review process would help lower costs, he says.

“Allowing employers and insurers the delay tactic of re-evaluating and second-guessing these same physicians through the statutorily required utilization review process not only harms injured workers but adds huge additional and unnecessary costs to the system,” Seaman says.

Schmelzer describes the issue as going beyond the health care aspect; it’s an issue, he says, of vendors of any type finding “new and interesting ways to make money off the system.”

“Lots of employers are starting to understand the deck is a little stacked,” Schmelzer says. “It’s not necessarily these injured workers, it’s the people who try to make money off these injured workers. There’s a bunch of people basically reaching into the injured workers’ pockets and taking money out.”

Schmelzer says the way language interpreters charge is but one example of preying on the system’s weaknesses. Interpreters, who may accompany injured workers who don’t speak English, had a loose fee schedule, he says. Wiggle room allows interpreters to charge for translating an “exotic” language, even when that language is Spanish. Add in mileage, and every doctor’s visit can rack up $150 in interpreter services alone, he says. “It’s little things like that. Before you know it, you’re talking about millions of dollars in multiple areas and it adds up.”

Also adding up is the cost of liens still plaguing the system. The California Commission on Health and Safety and Workers’ Compensation has identified the backlog of lien claims as a perennial problem.

In its January 2011 Liens Report, the commission, a joint labor-management body charged with examining the workers’ compensation system in California, describes liens as “both a cause and a result of serious distress in the California workers’ compensation system.”

“As a cause, liens are choking the system,” the report states. “The presiding judge of the Los Angeles office estimates that liens consume about 35 (percent) of the court’s calendar and would consume even more if the calendar slots were not being rationed. Lien hearings take away time for the court to deal with the claims of injured workers.”

California employers and insurers are spending roughly $200 million per year on loss adjustment expenses to handle medical lien claims. The volume of liens provides an environment where indefensible delays and denials by claims administrators and fraud and abuse by lien claimants can thrive, side by side.

The report continues: “As a symptom, the billions of dollars in dispute reflect both obligations that should have been paid but which may eventually have to be compromised in order to obtain any payment, and claims that should not be paid but which may eventually have to be compromised in order to obtain closure.”

If that could be resolved, fairly significant cost savings could result, Nolan says.

Potential cost savings can be found throughout the entire system, regardless of one’s side on the debate. Whether changes occur, however, may depend on stakeholders working together on changes that benefit injured workers while cutting system costs for insurers and employers.

“The question remains as to whether employers and labor can agree on a package of reforms that would achieve both goals through some form of grand compromise,” Nolan says. “This question will make 2012 and beyond interesting for workers’ comp leaders.”

Pharma Fees

California’s workers’ compensation has seen modest reform since the system’s 2004 overhaul. This includes the passage of Assembly Bill 378, designed to address a spike in the prescription and costs of compound drugs, which are customized for patients.

The bill, signed into law in October, closed a loophole in the workers’ compensation pharmacy fee schedule that previously did not cover compound drugs. That meant physicians and pharmacists could dispense compound drugs and then charge inflated fees.

According to a 2010 report by the California Workers’ Compensation Institute, payments for compound drugs, medical foods and contract packers grew from 2.3 percent in 2006 to 12 percent in 2009. The report also found these three types of medications accounted for 3.9 percent of total prescriptions but 10.1 percent of total payments for medications during that time.

Insurers and employers have felt the impact. The State Compensation Insurance Fund, for example, reported that compounded pharmaceuticals — which were rarely billed for prior to 2007 — escalated to more than $58 million in billings by mid-2009. AB 378 is expected to provide potentially significant cost savings to the workers’ compensation program. Labor, business and insurance groups supported the bill.