Back to the Future: Preventing a Collapse in the Workers’ Compensation System

Legislators are often criticized for delayed reactions to inevitable crises. Those legislators would likely counter that only hindsight is 20/20, but sometimes it’s crystal clear that everyone should have seen a disaster coming.

For example, all involved in the California workers’ compensation debate agree that our beleaguered system is unsustainable, and employer costs will someday increase so dramatically that major, sudden reform will be necessary.  (Experts estimate that workers comp costs will grow 18% in 2012 alone). As workers, we’ve seen this movie before, and we’re painfully aware that such a rushed fix will put our benefits on the chopping block. Rather than sit around and wait for that inevitable reckoning, though, legislators this year should seize a rare opportunity to prevent such a crisis. 

A coalition of labor and employer representatives has spent months negotiating proposed legislation to reform California’s workers' compensation system. The coalition argues that massive cost savings within the bill mean lower overall system costs and lower employer rates. In fact, rising costs associated with processing and reviewing claims were a key reason negotiations began, as both sides agreed that these “frictional” cost increases mean employers are paying more and injured workers are getting less.

How much money will employers save if this bill passes? We’re about to find out.

First, a little bit of background. For decades, a private non-profit called the Workers’ Compensation Insurance Rating Bureau (WCIRB) has calculated premium rates California employers should be paying for adequate workers' compensation insurance. The WCIRB analyzes recent data—submitted by insurers—to determine the current and future cost of claims, and from there, the WCIRB produces a set of numbers called the “advisory pure premium rates.”

The advisory pure premium rates tell insurers how much they should be charging employers to insure a specific set of workers. For example, right now the advisory pure premium for armored car drivers is $9.73 for every $100 of payroll. So, if you’re an armored car company, your insurer assumes that for every $100 you pay in wages, workers comp claims will cost $9.73 in health care and cash benefit expenses. (That $9.73 figure also includes “loss adjustment expenses,” which are mainly claims processing and defense attorney costs.)

At least once a year, the WCIRB reviews insurer data and decides whether or not to raise these rates, and if so, by how much. This review just happened last week, and the news was not good: according to WCIRB actuaries, in 2012 workers' comp loss costs shot up 18%. Come January 1, 2013, this 18% increase will be reflected in new advisory pure premium rates, with additional rate hikes a near certainty for 2013.

A wide variety of issues are to blame, but a key driver has been the frictional costs—and other wasteful spending—targeted by the legislation.  In fact, the bill’s cost saving provisions loom so large that the WCIRB has delayed these rate hikes in part to account for either the passage or failure of our legislation.

No one yet knows exactly how the bill will affect rates, but we do know that no action means major cost increases for employers. We know that no action means fewer dollars for injured workers and more for endless legal disputes, medical treatment delays and various other forms of unnecessary spending.

Employers and labor rarely agree on reform this comprehensive, and even less often do legislators enjoy the ability to so directly minimize a future cost of doing business in California. Neither injured workers nor struggling employers can afford to wait for a spike in costs to collapse the system, but that’s likely the outcome that will someday follow a failure to pass this legislation.

No one can predict the future, but it’s a safe bet that history wouldn’t look too kindly on that failure. With any luck, legislators will approve the bill, and no one will ever find out.