Overview of Reform Legislation

On July 16, 1993, Governor Pete Wilson signed a package of bills that enacted major reform of California's workers' compensation system. These bills, AB 110 (Peace), AB 119 (Brulte), AB 1300 (W. Brown), SB 30 (Johnston), SB 484 (Johnston), SB 983 (Greene) and SB 1005 (Lockyer), together with cleanup legislation enacted later that year (SB 223, Lockyer), produced a sweeping reform of the system.

This legislation was designed to rein in the cost of a workers' compensation system that many believed to be out of control, causing too much to be spent on litigation, medical and medical-legal costs and causing too little to reach the pockets of injured workers.

The primary purposes of the law were to reduce insurance costs by deregulating workers' compensation insurance rates and eliminating the minimum rate law; decrease the cost of medical care by tightening the medical fee schedule and increasing the use of managed care for workers' compensation cases; cut the cost of medical-legal evaluations and reduce the number of evaluations obtained in disputed cases; decrease overall compensation costs by requiring a greater emphasis on workplace safety, especially among high-hazard employers; limit the cost of vocational rehabilitation by capping the benefit at $16,000; streamline adjudication procedures; reduce the compensability of psychiatric and post-termination claims; and increase penalties for workers' compensation fraud.

These changes were estimated by the Legislature to produce at least $1.5 billion in annual savings for California employers. Half of these savings (about $750 million) were to be returned to injured workers in the form of higher temporary and permanent disability benefits phased in over three years.

Impact of Reform on Workers' Compensation Community

The Commission believes that the workers' compensation reform legislation has made significant positive changes, including a decrease in the number of claims, a decrease in fraud, reduction in medical-legal vocational rehabilitation costs, reduction in psychiatric claims, and reduced premium levels.

The Commission believes that further innovations are needed to make improvements in the quality of benefits and services to injured workers, in the quality of medical report used for disability evaluation, in medical quality and cost control, and to meet the Constitutional mandate to provide service to injured workers which is "expeditious, inexpensive, and without encumbrance of any kind."

Impact of Reform on Workers

The Commission is concerned with the impact of the workers' compensation reform legislation on California workers. The Commission is taking several approaches to monitor how changes in the workers' compensation system are serving injured workers.

Temporary and Permanent Disability Benefit Increases

The workers' compensation reform legislation directly affected injured workers by providing benefit increases estimated to amount to $750 million over three years.

The maximum weekly disability payments increased as follows:

Pre-reform	7/1/94	7/1/95	7/1/96
$336	$406	$448	490

Disability Rating	Pre-reform	7/1/94	7/1/95	7/1/96
Below 15%	$140	$140	$140	$140
From 15 to 24.75%	$140	$148	$154	$160
From 25 to 69.75%	$148	$158	$164	$170
From 70 to 99.75%	$148	$168	$198	$230

Benefit Delivery

The Commission realizes that, if the injured worker is to be served well by the system, he or she must be aware of his or her rights and responsibilities under the changing workers' compensation program. To address this issue, the Commission decided to evaluate information services provided to injured workers by the Department of Industrial Relations and other participants in the workers' compensation system.

The Commission contracted with UC Berkeley's Labor Occupational Health Program (LOHP) to evaluate these services.

Information Services to Injured Workers project

The Information Services to Injured Workers project includes represented and unrepresented injured workers and examines information services provided by all parties and organizations, not just by the state government.

The objectives of this project are to:

• assess the efficacy of information services designed to help the injured worker get through the workers' compensation system,
  

• analyze strengths and areas needing improvement in current information services,
  

• recommend ways to improve those services, and
  

• systematically collect information from injured workers about their experiences with all aspects of the workers' compensation system.
  

The Commission and project team worked with a volunteer project advisory committee consisting of Information and Assistance officers from DWC, other representatives from DIR, Labor union representatives, injured worker organizations, applicant and defense attorneys and employer and insurance company representatives.

The project team interviewed a randomly selected group of injured workers to determine their experiences with the workers' compensation system and the information and assistance they received during that process.

The project also included a determination and analysis of information services provided in other states' workers' compensation programs.

The project team found that:

• Workers need to know at time of employment and again at time of injury what the workers' compensation program is, what steps they need to take, what they can expect in the process, and how they can receive information and assistance.

• DWC Information and Assistance services need improvement and the role of the I & A Officer needs clarification. The study report cites inconsistencies in information provided and in the level of service provided by the various DWC district offices.

• Some represented injured workers report that they have difficulty obtaining information from their attorney. Represented injured workers are precluded from obtaining information from DWC Information and Assistance Unit.

• Some injured workers believe that they were not treated with respect when they attempted to obtain information from claims administrators.

• Injured workers and system stakeholders both indicate that the workers' compensation system is too complex and very difficult to understand.

• Lack of coordination between state agencies and service providers in information provision appears to result in confusion and incomplete information needed by injured workers.

• Small employers may need additional information to assist them in carrying out their obligations in the complex workers' compensation system.

• Injured workers reported delays in the resolution of their cases due to backlogs in the DWC Disability Evaluation and Claims Adjudication Units.

• Job insecurity and potential discrimination in employment are cited as major concerns of injured workers.

Pursuant to its findings from the "Information Services to Injured Workers" study, UC Berkeley's Labor Occupational Health Program proposed projects to create an informational video for injured workers and written information on workers' compensation for all workers. The Commission voted unanimously at its May 1996 meeting to contract with LOHP for those projects.

Workers' Compensation Video for Injured Workers

The workers' compensation video for injured workers project was initiated in June 1996 and is expected to be completed in early 1997.

Assisted by a project advisory committee, the LOHP is supervising and coordinating the production of a 15-minute informational video for injured workers. The video will explain the basic terms, acronyms, and benefits in workers' compensation; the chronology of a typical claim; steps the injured worker should take; and available resources.

The project team is developing a fact sheet to accompany the video. The fact sheet, in both English and Spanish, will enable injured workers to retain some of the essential information shown in the video. This information will include definitions of common terms and a list of agencies and other resources.

The project also includes the development of a plan for disseminating the videotape information to injured workers.

Workers' Compensation Fact Sheets for All Workers

UC Berkeley's Labor Occupational Health Program is producing instructional written material about workers' compensation for all workers, including teenage workers. The project was started in June 1996 and is expected to be completed in March 1997.

LOHP, assisted by an advisory committee composed of interested members of the workers' compensation community, is developing seven fact sheets in both English and Spanish:

1. Introduction to Workers Compensation --including terms, acronyms, types of benefits, and the basic chronology of a claim

2. Medical Treatment and Evaluation, including the right to predesignate one's treating physician, changing the treating physician if necessary, and the purposes of medical evaluations

3. Attorney Services -- when and how to choose an attorney

4. Problems and Disputes -- options and instructions

5. Settling Your Claim -- understanding the terms of a proposed settlement and understanding the options

6. Resources -- a list and explanation of resources for injured workers

7. Workers' Compensation for Young Workers -- targeting all working teenagers. Includes basic introductory information about the workers' compensation system, basic medical treatment issues, and the initial steps teenage workers should take when injured.
   

The project includes development of a plan for disseminating this information.

Impact of Reform on Employers

The reform legislation affected California employers in two significant ways. The elimination in the workers' compensation minimum rate law has resulted in lower premiums and the passage of a group of provisions known as the "employers bill of rights" has given employers more information and control over workers' compensation claims.

Employer Bill of Rights

The provisions of the 1993 reform legislation known as the "employer bill of rights" are summarized as follows:

• Limits the grounds for cancellation of a workers' compensation insurance policy;
  

• Requires insurers to provide employers with certain information about claims, loss experience and rates;
  

• Creates the position of policyholder ombudsman to help employers obtain policy information;
  

• Requires employers to notify insurers of information that may help disprove claims;
  
  

• Requires insurers to provide employers with information regarding claims, reserves and offers to settle claims;
  

• Permits employers to insure themselves for workers' compensation obligations through a group self-insurance mechanism.
  

Before the implementation of these provision, insurers would not disclose its reserves on workers' compensation cases to employers. Yet the larger the reserve, the larger the employer's experience modification would be resulting in a higher premium charged.

Premium Rates

Workers' compensation insurance premium rates for California employers have fallen significantly since mid-1993, even before the elimination of the minimum rate law.

The California Insurance Commissioner ordered a seven-percent reduction in the workers' compensation minimum rate on July 16, 1993, then a 12.7 percent cut effective January 1, 1994 and another 16 percent cut on October 1, 1994.

The reform legislation repealed California's 80-year-old minimum rate law as of January 1, 1995, and replaced it with an open-competition system of rate regulation in which insurers set their own rates based on advisory loss costs developed by the Workers' Compensation Insurance Rating Bureau. This transition to what is termed "open rating" has intensified competition among insurers and so far appears to be driving rates down even further.

Elimination of Minimum Rate Law (Open Rating)

The potential impact of the elimination of the minimum rate law to the California economy has been predicted to be in the millions of dollars by lowering total workers' compensation premiums paid by businesses. The Commission is concerned with the effect of the elimination of the minimum rate law on both employers and employees.

Some observers question how long insurers can maintain such low rates before concerns about profitability push rates up again. Industry analysts also worry that in order to offer competitive rates, insurers are feeling pressure to cut expenses in areas that help contain workers' compensation costs, such as loss control services, fraud investigation and claims adjustment.

It is difficult to gauge the impact of repeal of the minimum rate law on the workers' compensation system since only policies that have been renewed since January 1, 1995 have been affected. Insurer representatives further note that many changes have impacted the state's workers' compensation insurers in recent years (including new requirements for loss control certification and new procedures mandated by the "Employers' Bill of Rights", and so there are many contradictory pressures on workers' compensation carriers.

Pure premium vis-à-vis minimum rates

At the Commission's request, David M. Bellusci, Senior Vice President and Chief Actuary for the Workers' Compensation Insurance Rating Bureau (WCIRB) made a presentation on the role of the WCIRB subsequent to the workers' compensation reform legislation and the elimination of the minimum rate law.

The WCIRB is a non-profit association of insurers, licensed by the Insurance Commission and funded through insurer assessments. WCIRB develops a workers' compensation premium rate proposal and submits it to the Insurance Commissioner who holds a public hearing, assesses input from other parties, and then makes a decision.

There are two principal differences from full rates and minimum rates formulated under the old system and the pure premium rates developed now.

First, the pure premium rates are advisory only and an insurer is under no burden to utilize them. Insurers can use the pure premium rate, deviate off them, make their own independent filings. Under the old system, the WCIRB calculated minimum rates which were the minimum an insurer could charge for a particular industry.

Secondly, the pure premium rates are not full rates -- they don't contemplate all expenses. By statute, the pure premium rates reflect losses, the costs of benefits, both medical and indemnity benefits including vocational rehabilitation, and all the costs to insurers of administering the claims. Unlike the old minimum rate, the pure premium rate does not include provisions for commissions, the fees that insurers pay to agents to acquire business, nor does it include other acquisition expenses, overhead expenses, or premium taxes.

Commissioner Rankin asked what the insurers are actually charging relative to the pure premium rates. Mr. Bellusci responded that on average, insurers are charging about 7% more than the pure premium rates. There are insurers that are charging 20-30% more than the pure premium rates, and there are some that are charging less.

1996 Pure Premium Rate

The Department of Insurance held a public hearing in San Francisco in August 1995 on the Workers' Compensation Insurance Rating Bureau (WCIRB) proposal for an average increase of 18.7% in the pure premium rates for 1996.

The Bureau attributed the increases to the additional reporting requirements of the reform, the special investigative units, the increased need for medical bill review, and to additional documentation required by the employers' bill of rights. WCIRB also advised that the medical inflation in Workers' Compensation was higher than the Consumer Price Index.

At the hearing, representatives from the California Chamber of Commerce, the California Manufacturers Association, and the California Applicants' Attorneys Association, all felt that the 18.7% recommended increase was much too high, particularly since the numbers of claims are going down.

At the Commission's October 1995 meeting, Mr. Bellusci explained that the proposed pure premium rates for 1996 reflect what the cost of losses and the cost of adjusting those losses are estimated to be on 1996 policies. To project the cost for 1996 policies, the WCIRB used historical information from 1994, the latest year for which data was available.

Mr. Bellusci emphasized that the Bureau is not saying is that losses are going up 18.7% -- in fact, losses are essentially flat in 1994. In the WCIRB's opinion, the 1995 pure premium rates weren't adequate by about 14%. He said that the 1995 pure premium rates assumed that indemnity, mostly because of reforms that went into effect in 1994, would drop by 6% when in fact it dropped by 9%. It also was assumed that medical would drop by 9 points and yet the loss level is flat. The pure premium rates are about 35% less then they were a couple of years ago. He said that the rates just dropped a little too far and a little too fast with respect to losses.

Commissioner Rankin noted that the WCIRB assumed that the benefit utilization would increase in 1996 when it actually decreased in 1994. He also pointed out that the WCIRB public member's actuary estimated that maybe there should be a 7.3% increase rather than an 18.7% increase.

On October 13, 1995, Insurance Commissioner Chuck Quackenbush approved an 11.3% increase in the advisory pure premium rate for 1996.

1997 Pure Premium Rate

As of July 1996, WCIRB is recommending a 2.6% decrease in the advisory pure premium rate to be effective January 1, 1997.

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