Admittedly, Benoliel was heartened by the recent spate of reforms to the beleaguered system implemented by former Gov. Gray Davis in his waning days in office. The reforms (SB228 and AB227) included the establishment of fee schedules for outpatient surgical centers, a limit on the number of visits to chiropractors and the repeal of a vocational rehabilitation program for injured workers.

But as Benoliel and almost every other businessperson in the state will tell you, it is not nearly enough to turn around a system built on faulty economics and rules. "The recent reforms are like applying a Band-Aid here and there to stop a hemorrhage," says H. David Wood, regional executive officer in insurance broker Willis NA's Los Angeles office. "What is needed is a full revamping of the system–a 'start from scratch' strategy. Not that the Band-Aids aren't pragmatic or sensible. They are. But they simply tend to add more bureaucracy to a system that is incredibly bureaucratic to begin with."

Making matters worse

And Stan Long, chairman of workers compensation at New York-based insurance broker Marsh Inc., suggests that many earlier reform efforts even ended up compounding the problem because they were too narrow in scope. "If you look back at the history of workers compensation reforms in the state over the last four years, they have been fairly discrete efforts that disappear into ever higher rates," Long notes. "Taking on the consequences of the California system one issue at a time is not likely to produce the results people want."

So what needs to happen to create a system that works over the long haul for employers and employees? Most of the system's critics nominate permanent disability as one of the most troubled areas. For instance, it galls Benoliel that a worker disabled in California can "go out for disability and get a rating for permanent partial disability [with] a lifetime benefit of 25% of what this person is earning. Then they're allowed to go back to work at the same job and same pay. Is this fair?" Benoliel asks.

Garamendi has echoed this analysis and is pressing for a uniform standard to determine how much disability benefit to award. Recently, he acknowledged that there are countless instances of workers with minor injuries actually receiving more compensation than very seriously injured workers. "It seems that the major factor in determining the level of disability often comes down to the skill of the attorney hired," Garamendi noted.

Robert Hartwig, chief economist at the New York-based Insurance Information Institute, says California needs to take the cue of other states and establish a system of worker disability impairment ratings. "In most states, if you're injured, the severity of the injury is assigned a rating that corresponds to a dollar value for the treatment you would receive," Hartwig explains. "This prevents more money being spent on less severe injuries and less money being spent on more severe injuries. It applies consistency where today there is little."

The insurance industry obviously has a stake in what happens in California. Carriers fear that they will be forced to lower premiums before costs are actually weeded out of the system, and there is evidence that their fears may not be totally unreasonable. The Workers Compensation Insurance Rating Bureau of California, an insurance industry-sponsored research organization, has calculated that the recent reforms will produce about $4 billion in annual savings. It translates this into a rollback on premiums of 5.3% for policies renewing after Jan. 1. But Garamendi has insisted that the reforms should allow insurers to cut premiums by an average of 14.9% next year.

Round Two for Reforms

The rate recommendations, in either case, are purely advisory, and insurers are free to charge whatever they consider appropriate. As it turns out, the rating bureau was closer to the mark: A survey by the California Department of Insurance in December indicates insurers have lowered their rates by only an average of 3.6%. Little wonder that the state's governor, insurance commissioner and business community are now seeking another round of reforms.

The new batch of reforms is expected to draw the ire of the plaintiffs' bar, long the nemesis of the insurance industry. "One of the weaknesses of the first round of reforms is that it excluded a cap on attorney fees," says Hartwig. "Schwarzenegger has indicated he supports incentives to reduce attorney involvement in the system by capping their fees. The truth is that injured workers do not need a lawyer to protect their rights–that is what 'no fault' workers compensation from its very inception was intended to do."

As they await further reforms, many midsize employers are following the lead of their larger compatriots like Costco and putting more "skin in the game"–buying high-deductible programs to lower the cost of their workers compensation insurance or self-insuring as Costco does.

Organizations like the Visiting Nurse Association of the Inland Counties, scorched by a 252% increase in workers compensation premiums between 1999 and 2001, had little choice when its insurance broker, Willis, was putting together its program. "We were told our premiums would rise another 62% for 2002," explains Rosalie Rowe, CFO of the 72-year-old, Riverside-based nonprofit home-care and hospice provider, with 1,000 nurses, doctors and social workers in its employ. "Had we kept going with first-dollar coverage [all claims fully insured], our annual workers comp premium would have been $2 million last year. We just don't have enough money coming in to pay this kind of money going out. A lot of our revenue comes from the government via Medicare and they just don't give us big honking increases."

Rowe was fortunate. A strict emphasis on worker safety and claims management resulted in only a 6% increase in overall workers compensation costs last year–not the 62% her company would have forked over in premiums. Of course, were staff members to suffer major injuries or illnesses in 2002, things could have gone the other way given the deductible, an amount Rowe declined to divulge.

CFO Todd Tyrrell of Preferred Framing Inc. is pursuing a similar remedy. "We went with a high-deductible program because frankly there was no other alternative," says Tyrrell, who has been CFO of the Rancho Cucamonga, Calif.-based framing company for the past year and a half. "We've got roughly 1,500 employees here depending on the season and about $75 million in revenue. Had I not switched from first-dollar coverage to the high-deductible plan, my straight dollar costs would have tripled. I know we have more potential risk to manage because of the $300,000 per claim deductible, but I'm confident our safety teams, risk management culture and discipline will keep that in check."

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AND THEY CALL NEW YORK NUTS!

How did California find itself in the mess it's in? The culprit is a cavalcade of calamitous decisions. "California is unique in that it has an immense state workers compensation insurance fund, which actually is the largest workers comp carrier now in the United States," says Robert Hartwig, chief economist at the New York-based Insurance Information Institute. "Unfortunately, the fund systematically underpriced its business, and commercial carriers hoping to maintain market share lowered their prices, as well. As claim costs jumped, in terms of medical and indemnity [wage replacement] payments, the fund and the commercial carriers basically lost money that they then had to recoup through higher premiums."

How high? "What I can tell you is that over the past three years, rates in California have gone up by nearly 100%, whereas in the rest of the country on average they have risen 50%," Hartwig replies.

Treatment Excess

The state fund, which currently provides coverage for more than half the state's employers, is just one problem contributing to astronomical costs. Another is the lack of effective controls, measures that are de rigueur in the rest of the country. "There are no treatment protocols in California," Hartwig charges. "If someone is injured at home, traditional health insurance prescribes certain treatment protocols–you break a leg and get two X-Rays, three doctor visits and one follow-up. But if the same person breaks a leg at work in California, they get 20 X-Rays, a handful of MRIs, unlimited doctor visits, 32 treatments by a chiropractor, plus massage therapy and Jacuzzi treatments. Most other states adopted reforms to prevent this kind of abuse a decade ago. California didn't, and now it's paying the price."

Spending more and getting less

"The system is not fair or affordable," says Stan Long, chairman of workers compensation at New York-based insurance broker Marsh Inc. "California has more cases lasting longer than seven days than any comparable state, creates disability awards in a higher percentage of cases than any comparable state and spends more money on medicine than any comparable state. You would think a state that spends more money on medicine would have more cures, not fewer. But in this irrational environment, spending more and getting less has been the general trend."