Estimating the Workers' Compensation Reform Impact on

Employer Costs and Employee Benefits


Prepared for the Commission on Health and Safety and Workers' Compensation by: Frank Neuhauser, Survey Research Center,

University of California at Berkeley




The Commission on Health and Safety and Workers' Compensation was asked by the Senate Industrial Relations Committee and by the Assembly Insurance Committee to provide estimates of the impact of the workers' compensation reform legislation on costs to employers and benefits to workers.


The following analysis is based upon estimates prepared by the Workers' Compensation Insurance Rating Bureau of the impact of the 1993 reforms on the costs faced by employers and the benefits that accrued to injured workers.  While the WCIRB estimates are a valuable assessment of the impact of the reforms, some of the underlying assumptions could be subject to different interpretations.  These different interpretations lead to somewhat lower estimates of both cost savings and benefit increases. 


This effort is not meant to be a complete evaluation of the impact of the 1993 reforms on costs and benefits.  Rather, it is meant to build upon the good work already performed by the Rating Bureau.  In the end, policy makers will have a range of estimates along with the underlying assumptions.  This will assist policy makers in understanding the impact of the 1993 reforms and the need for and impact of any future reforms. 


Estimates of Cost Savings to Employers:

For these calculations, we will use the WCIRB estimates of cost savings to employers.  To these estimates, we will suggest several adjustments.


The WCIRB states "In 1992 (the last year unaffected by the 1993 legislative changes), we estimate the benefit cost per covered employee (full-time equivalent) was $732.  In 1997, we estimate the benefit cost per covered employee was $618, or $114 (15.6%) less than 1992.  If it is assumed that the number of employees of self-insured employers is one-third the total number of employees statewide and the cost of benefits per employee of self-insured employers is similar to that of insured employers, this $114 per covered employee reduction in benefit costs would result in annual reductions in benefit costs of about $.9 billion for insured employers and $1.3 billion for all employers."


1.      The WCIRB relies on data from the 1992 policy year because that is the last year in which all policies were unaffected by the reforms.  (Many policies incepting in 1993 had injuries occurring in 1994.) However, total benefit costs were declining even before the 1993 reforms came into effect.  Between 1992 and 1993 claim frequency (on an accident year basis) declined by 17.6% while the average cost per claim (on an accident year) basis rose by 3.4%. Therefore the pre-reform costs used as the baseline for comparison should be lowered by 14.8% to more accurately reflect conditions just prior to reform. This lowers the baseline average cost per covered worker to $624. ($732 * .826 * 1.034)


2.      The average earnings of employees increased approximately 20% between 1992 and 1998.  Given the maximums in place on benefit levels in effect before reform, the 20% increase in average wage translates to a 6% increase in TTD payments and a 1.7% increase in PD payments.  TD and PD benefits comprise only part of all direct costs.  Consequently, the impact of wage growth would have been to raise all direct costs 1.7% higher than the baseline costs estimated above.   $624 * 1.0.17 = $632.   Consequently, the cost to employers, under pre-reform rules, would have been $632/per covered employee in 1998.  This yields a savings to employers based on 1992 employment levels used by the WCIRB) of:

$14/covered employee * 7.8 million employees * 1.5 (for self-insured market) = $163.8 million.


3.      The WCIRB bases the total dollar savings estimate on cost savings per employee and the employment level in 1992 (7.8 million FTE for insured employers).  To reflect current conditions, one should use the employment level in 1998. (Here we assume the average savings per employee did not change between 1997 and 1998.)  Employment increased 11% between 1992 and 1998.  Consequently, an estimate of total savings based on 1998 employment could be obtained by multiplying the new estimate by a factor of 1.11.  This yields a new estimate of savings:

$163.8 * 1.11 = $181.8 million


4.      Fourth, for some purposes the legislature is interested in estimating the cost savings to employers independent of the benefit increase to workers and then estimate the percentage of the employer cost savings that is represented by the benefit increase.  To estimate employer costs savings independent of the benefit increase, one needs to calculate the benefit increase and reduce employer costs by this amount.  This has the effect of raising estimates of employer savings (exclusive of the benefit increase) by the estimated amount of the benefit increase.  Employee benefit increases are estimated in a separate memorandum.  For insured and self-insured employers, the increase in benefits is estimated to be $475 million for 1998.  This yields an estimate of employer cost savings (exclusive of the benefit increase) of:

$181.8 + $475 = $656.8 million


5.      Fifth, if one wants to use the WCIRB benefit cost calculation to arrive at a total estimate of employer savings, one must adjust for the cost of administration, marketing and profit.  These expenses are usually expressed as a percent of direct costs.  In the years before competitive rating, these were estimated as approximately 28% of benefit costs.  This may have been high because of the noncompetitive nature of the market.  The WCIRB currently estimates allocated loss adjustment expenses at 8.4% of benefit increase and unallocated loss adjustment expenses at 12.8% of benefit increases. If one uses the more conservative estimate of 21.2%, then employer costs would be 21.2% greater than the direct cost savings estimated in (4) above. However, since we will not apply this overhead to the benefit increase in the next section, we will not apply it to the savings in this section.  The overhead savings reflect only the savings net of the benefit increase. Therefore the estimate should be

181.8 * 1.212 + 475 = $695.3 million


This is an alternative to the Rating Bureau estimate of savings to employers using more conservative assumptions about the baseline year employer costs and more liberal assumptions about the increase in labor force and wages. 


Estimate of Benefit increases to Injured Workers:

In a separate analysis, an estimate has been made of the benefit increase to workers as a result of changes in the maximum Temporary Disability and Permanent Disability rates.  That analysis estimates the increase at $475 million.[1]


The estimate of the benefit increase to workers could take into account the negative impact on benefits to workers represented by reductions in the vocational rehabilitation benefit, the compensation of psychiatric injuries and the exclusion of many post termination claims.  Without arguing the merits of these claims for compensation, reforms did have the effect of reducing compensation to workers who would have received compensation under the pre-reform statutes. 


The Rating Bureau estimates the reduction in benefit payments for these three reforms as a cost reduction per worker.  Using 1998 labor force figures, the Rating Bureau estimates of benefit reductions to workers in benefit payments to workers are: $260 million (Vocational Rehabilitation), $195 million (Psychiatric Claims) and $52 million (Post Termination Claims) for a total of:[2]

            260 + 195 + 52 = $507 million


Again, these estimates are based on per/worker savings estimated by the WCIRB.


Given an estimate of $475 million in benefit increases due to changes in the TTD and PD scheduled rates, this would leave the absolute benefit increase to injured workers at approximately -$30 million.  That is, total benefits were no higher (and maybe slightly lower) in 1998 than they would have been if no benefit changes had been made.


Open Rating:

Open rating was another product of the 1993 reforms and went into effect for policies incepting on or after 1/1/1995 had the effect of increasing competition in the workers' compensation insurance market.  This has resulted in substantial reductions in premium costs for employers. 


As a measure of the impact of open rating on employer costs, we calculated the average premium/loss ratio before open rating (1989-94, avg. premium/loss = 1.49) and after open rating (1995-97, avg. premium/loss = 1.15).  The Rating Bureau states that the difference in dividend practices pre and post open rating should be reflected in an 11% reduction in pre open rating premiums to make open rating premiums comparable to premiums from 1989-94. This results in an average premium/loss ratio for pre open rating of 1.35.  Using these ratios (pre open rating = 1.35 and post open rating = 1.15) and losses calculated for 1995-1997 we estimate the difference in premium that resulted from the price competition allowed by open rating.










Expected premium under pre open rating conditions (avg. prem./loss = 1.35)


$ 6.06 Billion


$ 6.99 Billion


$ 8.01 Billion

Expected premium under post open rating conditions (avg. prem./loss = 1.15) [3]


$ 5.20 Billion


$ 6.00 Billion


$ 6.86 Billion

Savings on premium as a result of open rating


$ 0.88 Billion


$ 0.99 Billion


$ 1.14 Billion

 Data for 1998 is not yet available.




Bottom line:

Based on WCIRB data and analysis, employer costs were approximately $700 million lower for the 1998 policy year than would have been the case if there had been no reforms in 1993. 


If one combines the impact of open rating with the impact of other 1993 reforms and projects premium savings in 1998 similar to those in 1997, the savings to employers in 1998 as a result of reform were:

$1.14 Billion (premium savings) + $700 million (benefit cost savings) = $1.84 billion



On net, benefit increases to injured workers in temporary and permanent disability were cancelled out by benefit reductions in the form of restrictions on vocational rehabilitation, psychiatric injuries, and post-termination claims. The reform involved transferring benefits from one group of workers to another group of workers.


The best estimate of future employer savings and benefit increases to workers are those estimated for 1998,

[1] By Comparison, the Rating Bureau estimate of $56 per worker as the benefit increase translates to $655 million (1992 employment) or $727 million (1998 employment).  The differences in these results could be the result of slight differences in the methodologies.  The rating bureau uses as the baseline injury data from 1991 while this study uses as a baseline injury data from 1993 and 1994.  Also, the Bureau may be estimating the benefit increase from 1992 on while this study looks at the impact from 7/1/94 on, which is coincidental with the first benefit change. 

[2] This calculation takes the dollar savings per worker, multiplies the saving by the number of covered full-time equivalents for 1992, multiplies that by the growth in the labor force (1992-1998), times 1.5 for the portion of the workforce covered by self-insurance.  For example, for Vocational Rehabilitation:

$20 (WCIRB estimate of VR savings/worker) * 7.8 million (FTE 1992) * 1.11 (11% growth in labor force) * 1.5 (WCIRB estimate that self-insurers represent 1/3 of market) =

            $20 * 7.8 million * 1.11 * 1.5 = $260 million

[3] Note: Expected premium differs from actual premium because expected premium is calculated as a percent of estimated loss using the average ration of premium/losses over the open rating period.  This tends to even out year to year pricing fluctuations and reflect a longer-term estimate of the impact of open rating.