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
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
Temporary and Permanent Disability
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
|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|
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
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:
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:
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
Workers' Compensation Video for
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' 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:
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
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
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
Elimination of Minimum Rate Law (Open
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
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
Pure premium vis-à-vis minimum
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.