Commission on Health and Safety and Workers’ Compensation

Workers’ Compensation Costs and Benefits After the Implementation of Reform Legislation

August 1999

 

 

 

Introduction

This report was prepared in response to the joint request from Senator Hilda Solis and Assembly Member Jack Scott that the Commission prepare background information on the impact of the reform legislation on workers’ compensation costs to employers and benefits to injured workers.

 

The 1993 reforms instituted several changes that had a significant impact on costs and benefits:

·        Abolished minimum rate law for Workers’ Compensation insurance premiums

·        Increased Temporary Disability (TD) and Permanent Disability (PD) benefit levels

·        Instituted medical cost containment

-         Managed care

-         Fee Schedule reform

-         Restrictions on mental stress claims

-         Promotion of the role of the Primary Treating Physician

·        Capped Vocational Rehabilitation benefits at $16,000

·        Implemented the Cal-OSHA High-Hazard Targeted Inspection Program and Loss Control Certification Program

·        Established anti-fraud protections

·        Provided a ‘carve-out’ option for the construction industry for alternative workers’ compensation programs

·        Created the Commission on Health and Safety and Workers’ Compensation (CHSWC)

 

In a changing environment, it is difficult to isolate the impact of the reforms.  Since the reforms were enacted, there are numerous other variables that also affect costs and benefits significantly, such as changes in the economy and wage rates.  For example, from January 1993 to May 1999, the unemployment rate in California has fallen from 9.7% to 5.2%, while wages in manufacturing have increased about 18%.  A decline in workers’ compensation injuries and claims frequency has also been observed nationally. 

 

To isolate the savings to employers and benefits to workers due to the 1993 reforms would require a more extensive study than time and resources permit.  A comprehensive study would use multiple approaches to cross-check estimates, adopt a study design that accounts for simultaneous changes unrelated to reforms, and would incorporate information from state and national data that are not readily available to CHSWC.  Given this, it is highly recommended that this accounting of workers’ compensation costs and benefits subsequent to the reforms be cited and utilized with caution.  

 

Estimated Changes in Employer Costs

It is difficult to estimate with certainty the savings for employers.  The Workers’ Compensation Insurance Rating Bureau, in the “WCIRB Bulletin No. 99-01” published on March 16, 1999, provides two estimates of changes in employer costs between 1992 and 1998.  Neither estimate attempts to isolate the impact of the 1993 legislative reforms.

 

The WCIRB estimated that insured California employers saved $2.8 billion in workers’ compensation net premium costs in 1998 when compared to 1992.  However, this drop in premium costs may be due to factors other than the reforms, including changes in injury frequency, prior cost reductions, and insurer expectations of future losses based on past experience.  Moreover, many believe that the workers’ compensation premiums since ‘open rating’ do not represent actual costs during that period, but are reflective of pricing competition and the transitional nature of the current market.  Note that this WCIRB estimate of premium savings does not include self-insured employers.

 

The WCIRB estimates that the costs of medical and indemnity benefits paid to injured workers of insured employers was $0.9 billion less in 1998 than 1992.  Again, this reduction could be due to many factors, including the 1993 reforms and changes in the economy.  By extrapolation, the WCIRB then estimates that reductions in benefit costs for all employers (both insured and self-insured) was approximately $1.3 billion in 1998 when compared to 1992.

 

The Commission utilized the WCIRB estimates as a basis for further analysis that attempts to assess the impact of the 1993 reforms on workers’ compensation cost savings for all California employers, both insured and self-insured.

 

Frank Neuhauser of the Survey Research Center of UC Berkeley made modifications to the WCIRB data which

 

·        incorporated labor force growth and changes in wage rates since 1992

·        adjusted the WCIRB baseline to more closely correspond to the beginning of the reform period and

·        incorporated improved estimates of premium savings to insured employers from open rating. 

 

Mr. Neuhauser’s analysis estimates that the savings to all California employers due to the results of the reforms were approximately $1.3 billion in 1998. 

 

Mr. Neuhauser’s methodology and estimates of reform savings for employers are displayed on Table 1 on the following page.

Table 1:  Changes in Cost Savings to Employers from 1993 Reforms, 1994-1998

 

 

 

 

 

1994

 

1995

 

1996

 

1997

 

1998[i]

 

Expected premium cost under   pre open rating conditions

(Av. Prem./expected loss = 1.35)

 

 

 

$6.06

billion

 

$6.99

 billion

 

$8.01

billion

 

$8.01

billion

 

Expected premium cost under post open rating conditions[ii]

(Av. Prem./expected loss = 1.15)

 

 

(Open rating not yet in effect)

 

 

$5.20

billion

 

 

$6.00

billion

 

 

$6.86

billion

 

 

$6.86

billion

 

Savings on premium cost as a result of open rating (calculated for insured employers only)

 

 

 

$0

 

 

 

$0.88

billion

 

 

$0.99

billion

 

 

$1.14

billion

 

 

$1.14

billion

 

Savings on premium cost as a result of benefit cost savings.[iii]

 

 

$0.7 billion

 

$0.7

billion

 

$0.7

billion

 

$0.7

billion

 

$0.7

billion

 

Total cost savings each year

(Before increases to TD and PD rates)

(Includes an adjustment for self-insured employers)

 

 

$0.7

billion

 

$1.58

 billion

 

$1.69

billion

 

$1.84

billion

 

$1.84

billion

 

Impact of TD & PD benefit increases on employer cost savings each year.

 

 

($0.098

billion)

 

($0.255

billion)

 

($0.375

billion)

 

($0.454

billion)

 

($0.474

billion)

 

 

Total cost savings each year

(After increases to TD and PD rates)

 

 

$0.602

billion

 

$1.325

billion

 

 

$1.315

billion

 

$1.386

billion

 

$1.386

billion

 

Cumulative cost savings for

California employers

 

 

$0.602

billion

 

$1.927 billion

 

$3.242

billion

 

$4.628 billion

 

$6.014

billion

 

 

 

Estimated Changes in Worker Benefits: 

 

Frank Neuhauser of the Survey Research Center of UC Berkeley, with some discussions with David Bellusci of the WCIRB, developed the estimates of changes in worker benefits. Data were derived from the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) and from the California Workers’ Compensation Institute’s (CWCI) Industry Claims Information System (ICIS) system.

 

The 1993 reforms made several adjustments to the levels of benefits that are received by injured workers. Temporary Disability Benefits (TTD) were raised for workers with relatively high average weekly wages.  The reforms also increased the maximum weekly permanent disability payments to disabled workers with impairments rated at greater than 15%. 

 

Table 2 below includes the impact of the growth in average wages (derived from the Labor Market Information Division of the Employment Development Department) and incorporates several assumptions about the impact of the reform legislation on possible increases in utilization.  For further details, see the working paper by Frank Neuhauser entitled “Impact of the 1993 Reforms on Payments of Temporary and Permanent Disability,” available from CHSWC. 

 

Table 2 shows that by 1998, workers received an increase in temporary disability benefits of $198 million and in permanent disability benefits of $276 million.  Thus the total increases in benefits to workers from the TD and PD benefit increases in the 1993 reforms (line 3) equals $474 million in 1998. 

 

These estimates of employee benefits do not take into account reductions in injuries that may have occurred as a result of the reforms. The WCIRB estimates (as of September 30, 1998) that the indemnity claim frequency for employees of insured employers dropped from 58 per million on-level premium dollars in 1991 to 35 per million on-level premium dollars in 1998.  These reductions may be driven by heightened safety efforts motivated by targeted inspections or by the higher TD benefits required under the legislation.  Reductions in injuries are counted as savings to employers, but they also represent a significant benefit to workers. 

 

The table also reports estimates (adapted from the WCIRB estimates) of the impact of several changes in compensability adopted in the 1993 reforms.  We estimate that these changes reduced employer costs by $500 million per year. The changes include capping vocational rehabilitation, eliminating post-termination claims, and restricting psychiatric claims. If the full amount were to be counted as a reduction in benefits to workers, the total payments to workers in each year would be negative.  Between 1994 and 1998, the cumulative reduction in benefits to workers would be $844 million, as reported in the last line of the table.

 

However, the changes in compensability should not be counted equally with the changes in TD and PD benefits.  These changes were made to remedy perceived excesses in the pre-reform system.  In particular, it was believed that benefits were not being paid to the appropriate injured workers.  If the changes reduced benefits to workers who did not deserve them in the first place, this should not be counted.  Since evaluating whether these changes improved the targeting of benefits in California is beyond the scope of this report, we suggest simply that the total of $500 million is an overestimate of the benefit reduction associated with the changes in compensability.

 

Since we cannot determine what fraction of the change in compensability represents a reduction in benefits to workers, we conclude that -$26[iv] million is a lower bound on the benefits to workers attributable to the reforms in 1998.  The upper bound is $474 million, which is directly attributable to changes in PD and TD. 

 

 

Table 2:  Changes in Benefits to Injured Workers from 1993 Reforms, 1994-1998

 

 

 

 

 

1994

 

1995

 

1996

 

1997

 

1998

 

 

Increases in Temporary Disability

 

 

$43

 million

 

$107

million

 

 

$153

million

 

$187 million

 

$198

million

 

Increases in Permanent Disability

 

 

$55

million

 

 

$148

million

 

 

$222

million

 

$267 million

 

$276

million

 

Total TD+PD benefit increases for each year.

 

 

$98

 million

 

 

$255

million

 

$375

million

 

$454 million

 

$474

million

 

 

Legislative changes in compensability: restrictions on vocational rehabilitation, psychiatric injuries, and post-termination claims.[v]

 

 

 

($500

million)

 

 

($500

million)

 

 

($500

million)

 

 

($500

million)

 

 

($500

million)

 

Net benefit change (decrease) each year

 

 

($402

million)

 

 

($245

million)

 

($125

million)

 

($46

million)

 

($26

million)

 

Cumulative benefit change (decrease) since 1994

 

 

($402

million)

 

 

($647

million)

 

($772

million)

 

($818

million)

 

($844

million)

 

 

Conclusion

Our summary of relevant analyses indicate that there have been significant changes in both costs and benefits:

·        Employer savings from the 1993 reforms are estimated to be between $1.3 billion and $2.8 billion in 1998[vi].

·        Increased benefits to injured workers in 1998 are estimated to be between -$26 million and $474 million. 

The large range in both estimates illustrates the difficulty associated with this exercise. The data are subject to multiple interpretations, and the assumptions behind the estimates are controversial. Any estimate of either employer savings or benefits to injured workers must be treated cautiously, including those cited in this report.

 

Future Considerations

 

The legislative reforms of the 1990’s made significant modifications and additions to the health, safety and workers’ compensation systems in California.  Since its inception in 1994, the Commission on Health and Safety and Workers’ Compensation, established by the reforms, has been engaged in ongoing evaluations of these critical programs. 

 

Information gathered through CHSWC meetings and projects indicate that the reforms have improved the system in some areas.  Workers’ compensation premiums and the number of claims have decreased; medical-legal costs have fallen sharply; and abusive claims practices have been reduced. 

 

However, serious problems linger.  Many stakeholders agree that the system remains excessively complex and delivers modest benefits at high costs.  CHSWC and the community recognize that these difficulties adversely affect employers, employees and all parties involved with the system.

 

The CHSWC ‘Permanent Disability Study’, an ongoing project by RAND under contract with the Commission, also looks at outcomes for injured workers.  The initial RAND study found that workers of insured employers who suffer workplace injuries resulting in a permanent disability experience large and sustained wage losses. 

 

Researchers concluded that the permanent partial disability benefits, on average, compensate 40 percent of those lost wages.  Severely disabled workers, prior to benefit increases legislated in 1993, had approximately two-thirds of their wage loss replaced.  Contrary to the expectations of policymakers, those workers suffering less serious disabilities also have large wage losses, but wage loss replacement rates are as low as twelve percent.  It is important to note that these results were obtained during a period of economic recession in California.

 

The CHSWC Permanent Disability Policy Advisory Committee – composed of CHSWC members representing employers and labor and interested members of the workers’ compensation community – was formed to make recommendations on further action and future direction of the Commission’s efforts.  The PD Policy Advisory Committee adopted the following goals: 

§         Efficiently decrease uncompensated wage loss for disabled workers in California.

§         Increase the number of injured workers promptly returning to sustained work.

§         Reduce transaction and friction costs, including “costs” to injured workers.

 

The CHSWC Permanent Disability Study is continuing in several areas, including data gathering and analyses of wage-loss and replacement rates of injured workers of self-insured employers and impact of the economy on those rates.  Future activities will include suggesting revisions to the Permanent Disability Rating Schedule with respect to the economic consequences sustained by permanently disabled workers.

 

The CHSWC Permanent Disability study will provide considerable data on the adequacy and equity of indemnity benefits for injured workers in California.  While not yet complete, these estimates and the methodologies developed to obtain them will provide a critical tool to improve the targeting of benefits to workers with the largest wage losses in California. 

 

CHSWC believes that further improvements can and need to be made to achieve optimum system performance to serve all of the employees, employers and taxpayers in California.  CHSWC looks forward to continuing its work with the community in striving to fulfill these goals.

 

 

For Further Information

 

The WCIRB Bulletin No. 99-01 entitled “Evaluation of the Impact of the 1993 Legislative Changes on Pure Premium Rates” formed the basis for deriving the cost savings estimates.

 

The report by Frank Neuhauser of UC Berkeley entitled “Impact of the 1993 Reforms on Payments of Temporary and Permanent Disability” discusses the effect of these adjustments on the amount of indemnity payments made to injured workers in each year since reform.

 

The Commission’s reports of studies and projects and its annual report are accessible on the web at www.dir.ca.gov.  From the Department of Industrial Relations’ home page, select ‘workers’ compensation’ or ‘occupational safety and health’ and then the Commission.  Printed copies of reports are available by contacting the Commission office.

 

 



Endnotes

 

[i] Estimated cost data from 1998 not available –1997 estimated data was utilized.

 

[ii] ‘Expected premium under post open rating conditions’ includes adjustments for increases in employee earnings, increases in employment levels, employee benefit increases, decreases in claim frequency, and increases in average cost per claim.

 

[iii] The 1993 reforms such as limits on medical-legal evaluations, limits on stress claims, and the cap on vocational rehabilitation benefits resulted in savings to employers of approximately $500 million per year starting in 1994.  (See the following endnote.)  In addition, there were approximately $200 million in savings attributable to other factors such as anti-fraud efforts, changes in medical-legal costs, and fee schedules.

 

[iv] Based on a calculation using the benefit estimate of $474 million and 100% of the benefit reductions.

 

[v] After adjusting the WCIRB estimates to reflect 1998 labor market conditions, our analysis shows estimated benefit reductions of $260 million (Vocational Rehabilitation), $195 million (Psychiatric Claims) and $52 million (Post Termination Claims) for a total of $507 million.  We use an estimate of $500 million in benefit reduction each year.  We note that employment terminations may have decreased due to improvements in the economy.

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

 

[vi] $2.8 billion was chosen as an upper bound for the estimate of employer savings.  This WCIRB estimate includes factors outside the reform, but it also does not include the self-insured.  Given that we do not expect that the self-insured had the same savings as the insured, and that the self-insured are less than half the number of injuries as the insured, we expect that the factors outside of the reforms (declining injuries, economy, etc.) at least cancel and most likely outweigh the omission of the self-insured.  Therefore, we regard this as an upper bound.