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There have been several special interest groups in the work comp industry that have requested I write an editorial about
the inequities occurring as a result of SB 899. Much of what has been discussed I agreed with, and have felt compelled
to editorialize about.
But every time I started writing I would encounter severe writer's block.
What was it about the subject that put my brain on freeze? My opinion is that SB 899 did a lot of good, that it
addressed some seriously flawed issues with the comp system. But it is also my opinion that SB 899 went too far, shifted
too much of the burden to sectors that have no place in occupational injury management, and that insurance carrier
profits margins are now viewed as almost criminal.
Finally, this past weekend, I realized that just complaining isn't my style and that is why I was having such a hard
time with this topic. It just doesn't suit me to point fingers and complain because nothing constructive comes of that
activity. If I'm going to spend energy on a problem, then I feel I should have a solution or at least a good alternative.
First, my perspective.
I agree with the applicant attorneys that permanent disability indemnity is far too low for any purpose which it is to
accomplish.
I see every day on our Forums injured workers who are not getting the medical treatment they not only deserve, but is
required to return them to work.
I see outside news reports, such as the one that was recently published by the San Diego Tribune, about workers with
very serious industrial injuries getting the shaft. To read the article,
click here.
I see carriers making record setting underwriting profits where the standard for years has been underwriting cash flow
sto create investment profits.
And I see a state government that appears either unwilling, or powerless, to make incremental changes necessary to
restore equity.
Sometimes when I'm relaxing at home, sitting in a comfortable easy chair watching waves break and listening to mocking
birds sing I have to ask myself, why the heck should I even care? Life is good. I'm not injured. I don't have a
permanent disability. My company's rates have gone down. My employees are all healthy and working. Profitability has
returned to the workers' compensation market and Republican leadership can no longer blame work comp for California's
economic woes.
I'm feeling secure.
Well, strike that last statement.
I'm not feeling secure -- not about this industry.
It is very well settled that this is a cyclical industry. That point was made very graphically at the last NCCI
Symposium in Orlando in May. Every seven to ten years the industry convulses through profitability shake down and rate
increases, and every seven to ten years we have a wave of "reform."
The present demise of the California workers' compensation system began in 1994, when our legislators removed the rating
floor, and created a "free market" with "open rating." Sure, price competition was a factor in the failure of several
carriers leading to a capital crunch (though to this day I dispute that carrier defaults and rate inflation had less to
do with price competition than blatant market manipulation by unscrupulous reinsurance brokers), but I'm talking about
the deterioration of the bargained for exchange and the protections of workers and employers that were the promise of
the original Boynton Act.
The rating floor ensured competition by allowing small specialty niche carriers to exist, and provide service to
neglected industries. It was a service industry where premiums were kept in check by safety management, consultation and
expert claims handling. Carriers did not experience underwriting profits, but were ensured adequate cash flow for decent
investment income. There was true competition before the rating floor was removed and the number of carriers in the
market proved that point.
Yes, there was pressure on the system from all directions -- rates, benefits, medical, fraud -- and California was near
the top of the cost of work comp among the 50 states. Certainly not news though. The cost of living and doing business
in California has always been near the top. Everything costs more in California. Market rates -- it's what people are
willing to pay for great weather year round.
Now the alarms have sounded. With a Republican Insurance Commissioner who doesn't act very Republican, the insurance
community is coming under even greater scrutiny than when it was regulated by a Democrat. Regulations have passed that
impose huge penalties on carriers for egregious behavior, and may be the demise of some.
But this isn't what worries me. What worries me is the boomerang effect of politics. Eye for an eye, tooth for a tooth;
when the political winds change SB 899 will be slaughtered, hung, gutted, eviscerated, skewered, bar-b-que'd, and
otherwise turned so far around that any semblance of order in the workers' compensation market will disappear again.
So much for rate savings. So much for carrier profitability. So much for employer premium reductions. So much for a
healthy workers' compensation market.
Unless something is done NOW, California will have the biggest workers' compensation mess the country has ever seen, far
worse than the tough years of 2000 - 2004.
I said in the beginning of this editorial that I have a hard time just complaining. I like solutions. I like paths to
success. I like to know where I'm going to go and how I'm going to get there.
I like that for this industry too.
I think the answer is very clear. There are two things that need to happen for the system to be stable: incremental
compromises on permanent disability indemnity and medical treatment reimbursement, and a return to "closed rating."
The Schwarzenegger Administration has said time and again that they will not budge on attempts to dilute SB 899, and
this is a huge mistake. Remember the eye for an eye thing above. Failure to compromise now will result in a complete
devastation of the progress made with SB 899.
And that would be a very bad thing. The Administration cannot ignore the cyclicality of work comp. It cannot ignore that
at some point in time it will no longer be in power, and that there will be another group of perhaps more radical
thinking and a different agenda at the helm, steering the system back to a position of retribution to make up for all of
the past wrongs brought upon the people by SB 899.
It is time now to compromise and stop hiding behind frankly BS arguments that there isn't sufficient data to adjust PD
rates. There is sufficient data. There is a clear road to compromise that will balance the system and provide some
stability.
Even famously conservative industry publications have opined that the cuts in PD have gone too far and that more harm
will fall upon the work comp market in the future if this isn't corrected now. Sure, permanent disability indemnity is
no longer about benefit adequacy, but the problem with defining PD as one of benefit equity is that there isn't any
present equity in benefits.
The Administration says that there is no problem with access to medical care, that there are plenty of physicians willing
(or forced) to treat injured workers, and yet every day the anecdotal evidence refutes those arguments.
How many Administration officials actually talk to doctors out in the real world? The ones that tell me they are no
longer accepting work comp patients? The ones that don't know they are in an MPN as a part of their group care contract?
Or the injured workers who are smart enough not to tell their physician that it was a work injury so that they can get
decent medical care provided through their group insurance?
Yes, medical inflation out paces overall inflation, but you can reduce a person's pay only so far before they just stop
working. There is a breaking point, and we've passed it. The entire medical reimbursement system needs rethinking -- for
instance, why is 100% paid medical so sacrosanct? Why not have deductibles?
Finally, the rating floor needs to be reinstated. Carriers need to be accountable to the Department of Insurance for
what they propose to charge and support their profit margins. Protection from predatory pricing needs to be in place.
The floor provided stability and enabled specialty carriers to provide true service to their customers. Until the floor
is reinstated this industry will remain unusually exposed to extreme volatility and abuse.
All I'm arguing is that this industry needs some original thinking. If those involved in the industry don't do the
original thinking, then others who are not so well versed in the privatized social benefit system will do the thinking
for us, and the result will be another extreme swing in the pendulum.
It took me weeks to get this editorial off my chest. I hope only that our politicians and regulators take my message to
heart and begin a serious dialogue of true workers' compensation reform -- one that will be long lasting, enduring and
provide the protection to workers and employers that was originally intended when this thing was created.
Texas Senator Burt Solomons told me once that he considered their to be only three stakeholders in work comp: employers,
workers and the government. All of the others are profit interests. It's time that the stakeholders take back control of
our system and stop the cycle.
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David J. DePaolo is the president and CEO of WorkCompCentral.com, a web based subscription newsite that deals with
everything Workers Compensation. David is also an attorney, and has been a member of the California Bar since 1985. He
is a graduate of the Pepperdine University School of Law.