California Insurance Commissioner John Garamendi outlined the second phase of his workers’ compensation reform plan Oct. 21. The reform legislation that he helped shape during the first phase of this effort is expected to deliver $4 billion to $6 billion in ongoing savings by reining in medical costs within the $29 billion system. Now Garamendi is tackling the unfair rating system for permanent disability; pushing to institute “24-hour care,” which will eliminate the costly blame game that occurs in determining who pays for the treatment of an injury; weeding out fraud in the system, a $1 billion to $3 billion burden on businesses; and seeking other reforms that will help provide appropriate treatment for injured workers while giving relief to overburdened employers.
The following is the text of Garamendi’s speech delivered to the Los Angeles Treasurers Club on Oct. 22:
“In our great state of California today there is perhaps no greater peril to jobs and future economic growth than the burden of our broken workers’ compensation system. Soaring costs led Costco Wholesale Corp. to seriously consider moving some of its 29,000 jobs out of California. Before that, premium increases drove Buck Knives to Idaho in search of relief. I recently learned that the Los Angeles Unified School District’s workers’ compensation costs are so high that the premiums could pay for 10,000 new teachers. And if you’re in the market for a brand new home, start planning now to come up with $4,500 for the added cost of workers’ compensation coverage for construction workers….
“That’s why we’ve worked so long and so hard to reform this system since I took office in January. We recognized early on that it was a crisis of massive proportions that needed all of our immediate attention. So I created two task forces, I convened experts to study the problem, I talked to people on all sides of the issue from all over this state, and I worked to bring labor and business together to solve the crisis.
“The result is significant reform legislation that was signed last month by Governor Davis, promising to bring billions in savings to the system. On Sept. 29, my Department held an administrative hearing to determine the amount of the savings, and initial estimates indicate $5 billion in one-time savings and, more importantly, $4 billion to $6 billion in ongoing annual savings to the system.
“Furthermore, after analyzing the evidence presented and quantifying the cost savings in the reforms, we were able to halt the pending request for a 12 percent pure premium rate increase for 2004 and reduce the existing pure premium rates….
“I’m now moving on to Phase II of the reform. While the first phase tackled the medical portion of the system, the second phase will address a number of other areas, most notably the permanent disability rating system. This is a contentious, controversial aspect of our workers’ compensation system, but it must be changed immediately. I have already begun examining the options through close analysis of all available information, and I have directed the staff of the Department to develop strong legislation that solves the problem. What’s essential is a more uniform standard to determine how much disability benefit to award, otherwise this wildly subjective and inconsistent rating system will continue to lead to more costly litigation and case settlements that make absolutely no sense. Giving seriously injured workers less in benefits than those who have only minor injuries is ridiculous, but it does happen. In fact, it seems that the major factor in determining the level of disability often comes down to the skill of the attorney hired. If you’ve hired a good one, you get good benefits. A bad one and you’re out of luck.
“I am also currently awaiting an important study from the Commission on Health, Safety and Workers’ Compensation which will recommend a new, more objective method of determining permanent disability. This will be an important part of the restructuring of this unfair rating system. We’re also studying the best practices of other states that have had more success delivering appropriate compensation to injured workers in a rational manner.
“But in order to tackle this issue I need help from you. The permanent disability rating system is something of a sacred cow, and as with the previous stage of reform, special interests will fight to keep the status quo. I have already begun building the grassroots coalitions and support groups that will help us push this important reform through the legislative process. Your help is needed.
“Next, we’ll move on to the concept of what is often called 24-hour care. Our insurance system at this very moment is providing you with multiple health policies. Many of you are covered by employer-provided health coverage. The manufacturer of the chair in which you sit bought you a policy just in case it collapses and you are injured. You have a health policy from your auto insurer, who will pay for coverage in case you’re injured on your way home. And the maker of the breakfast you ate this morning will provide you coverage if it turns out the food was tainted.
“It’s a nonsensical approach that only adds to the cost of the system as lawyers get involved to bicker over who pays for what injury and when. There’s a simpler answer, and it is 24-hour care. Bundle all of that coverage into one policy that covers you for illnesses or injury no matter where you are or what you’re doing. Whether your injury happens on the job or at the playground, your own physician will treat you because you have coverage that follows you 24 hours each day.
“One of the most valuable benefits from this approach is that it eliminates much of the cost incurred in determining the cause of the injury. There would be no need for lawyers to argue over whether a lower back problem was caused by lifting a box at work, or moving furniture at home. This would lead to an immense cost savings as more litigation would be removed from the system. This is sound fiscal policy and it’s an idea that would bring coverage to more people without an added burden on the employer, who could eventually see most of the costs of workers’ compensation phased out altogether.
“Those are two of the main points in this second phase, but they aren’t the only ones. We also need to continue to hammer away at fraud and abuse. Every year some $1 billion to $3 billion is added to the cost of the workers’ compensation system by fraud. Whether it’s the worker who defrauds us by faking an injury and taking the benefits, or the employer who cheats by misclassifying his workers to save money, fraud hurts all of us. I am putting the emphasis on fraud at my Department, pushing our 200 law enforcement officers and assisting local District Attorneys in the effort to root out these schemes and show that there’s a high price to pay for cheating the system. I will personally use the exposure of this office to shine the spotlight on these criminals who are defrauding our system.
“We also need to address administrative inefficiencies within the system that delay treatment and payment to injured workers. This causes more and more costly litigation, making it nearly impossible to determine the actual cost of a claim. By the time the settlement negotiations are concluded on any given claim, the cost has sometimes soared to much more than the original bill. I want to see effective training standards put into place for the people who process and adjudicate the cases, and I want rational penalty structures that accurately reflect the errors and the cost of the errors made by those within the system.
“I also aim to finish the job we started in the first stage of reform by expanding the Medicare fee schedule to every aspect of the medical portion of workers’ compensation, and we will focus on methods to get injured workers back to work more quickly. Currently, once a claim is filed the insurer has up to 90 days to accept or deny the claim, leading to an inordinate amount of waiting for the injured worker before treatment—and before he or she can return to work. Statistics show that upwards of 90 percent of these claims are approved rather than denied. The solution I propose is to give the worker the treatment right away, and allow the insurer up to a year to review the claim and decide on the appropriate payment action.
“But perhaps most important of all, we will focus on reforming the State Compensation Insurance Fund (SCIF). Originally created as a fallback for employers who couldn’t secure coverage on the private market, the collapse of more than 25 workers’ compensation insurers in recent years has forced SCIF to assume much of the business left behind. Today, it has become the single largest workers’ compensation carrier in the nation, writing policies for nearly 60 percent of all California employers. Any premium relief that will eventually be enjoyed by employers must start with SCIF. If it implements the reforms properly, then there is a real chance that employers will see premium relief soon.
“Without a healthy SCIF, we cannot hope to see more insurers enter the market, as they fear being exposed to the massive responsibility of picking up the pieces should SCIF not succeed. A financially solvent SCIF with appropriate reserves and surplus would go a long way toward encouraging more insurers to come write business in California. Then SCIF could reduce its book of business through competition from other carriers.
“I have worked with SCIF management since I took office in January, trying to help it deal with the enormous growth it has experienced in a relatively short period of time. I will continue to do so as we implement the pending reform, and as we work to push through Phase II.
“As I said earlier, I do not have the power to set rates in this market. Insurers are free to charge what they see as financially appropriate. I do promise to use my bully pulpit and every resource within my power to push insurers to pass along all appropriate savings to employers. But it is just as important for all of the groups that pushed for the first phase of reform to continue and even redouble their efforts. I ask you to write to your legislators, write to the Governor, and make your voices heard. Workers’ compensation was created to provide appropriate treatment and benefits to injured workers, while protecting employers from unfair litigation. For the health of our economy and the creation of future jobs, it is imperative that we change this system now and allow it to fulfill its original purpose.”