Industry Needs Compromise Regarding SB 899

Saturday, June 16, 2007 | 2

By David DePaolo

There have been several special interest groups in the work comp industry that have requested I write an editorial about the inequities occurring as a result of SB 899. Much of what has been discussed I agreed with, and have felt compelled to editorialize about.

But every time I started writing I would encounter severe writer's block.

What was it about the subject that put my brain on freeze? My opinion is that SB 899 did a lot of good, that it addressed some seriously flawed issues with the comp system. But it is also my opinion that SB 899 went too far, shifted too much of the burden to sectors that have no place in occupational injury management, and that insurance carrier profits margins are now viewed as almost criminal.

Finally, this past weekend, I realized that just complaining isn't my style and that is why I was having such a hard time with this topic. It just doesn't suit me to point fingers and complain because nothing constructive comes of that activity. If I'm going to spend energy on a problem, then I feel I should have a solution or at least a good alternative.

First, my perspective.

I agree with the applicant attorneys that permanent disability indemnity is far too low for any purpose which it is to accomplish.

I see every day on our Forums injured workers who are not getting the medical treatment they not only deserve, but is required to return them to work.

I see outside news reports, such as the one that was recently published by the San Diego Tribune, about workers with very serious industrial injuries getting the shaft To read the article, click here.

I see carriers making record setting underwriting profits where the standard for years has been underwriting cash flow sto create investment profits.

And I see a state government that appears either unwilling, or powerless, to make incremental changes necessary to restore equity.

Sometimes when I'm relaxing at home, sitting in a comfortable easy chair watching waves break and listening to mocking birds sing I have to ask myself, why the heck should I even care? Life is good. I'm not injured. I don't have a permanent disability. My company's rates have gone down. My employees are all healthy and working. Profitability has returned to the workers' compensation market and Republican leadership can no longer blame work comp for California's economic woes.

I'm feeling secure.

Well, strike that last statement.

I'm not feeling secure -- not about this industry.

It is very well settled that this is a cyclical industry. That point was made very graphically at the last NCCI Symposium in Orlando in May. Every seven to ten years the industry convulses through profitability shake down and rate increases, and every seven to ten years we have a wave of "reform."

The present demise of the California workers' compensation system began in 1994, when our legislators removed the rating floor, and created a "free market" with "open rating." Sure, price competition was a factor in the failure of several carriers leading to a capital crunch (though to this day I dispute that carrier defaults and rate inflation had less to do with price competition than blatant market manipulation by unscrupulous reinsurance brokers), but I'm talking about the deterioration of the bargained for exchange and the protections of workers and employers that were the promise of the original Boynton Act.

The rating floor ensured competition by allowing small specialty niche carriers to exist, and provide service to neglected industries. It was a service industry where premiums were kept in check by safety management, consultation and expert claims handling. Carriers did not experience underwriting profits, but were ensured adequate cash flow for decent investment income. There was true competition before the rating floor was removed and the number of carriers in the market proved that point.

Yes, there was pressure on the system from all directions -- rates, benefits, medical, fraud -- and California was near the top of the cost of work comp among the 50 states. Certainly not news though. The cost of living and doing business in California has always been near the top. Everything costs more in California. Market rates -- it's what people are willing to pay for great weather year round.

Now the alarms have sounded. With a Republican Insurance Commissioner who doesn't act very Republican, the insurance community is coming under even greater scrutiny than when it was regulated by a Democrat. Regulations have passed that impose huge penalties on carriers for egregious behavior, and may be the demise of some.

But this isn't what worries me. What worries me is the boomerang effect of politics. Eye for an eye, tooth for a tooth; when the political winds change SB 899 will be slaughtered, hung, gutted, eviscerated, skewered, bar-b-que'd, and otherwise turned so far around that any semblance of order in the workers' compensation market will disappear& again.

So much for rate savings. So much for carrier profitability. So much for employer premium reductions. So much for a healthy workers' compensation market.

Unless something is done NOW, California will have the biggest workers' compensation mess the country has ever seen, far worse than the tough years of 2000 - 2004.

I said in the beginning of this editorial that I have a hard time just complaining. I like solutions. I like paths to success. I like to know where I'm going to go and how I'm going to get there.

I like that for this industry too.

I think the answer is very clear. There are two things that need to happen for the system to be stable: incremental compromises on permanent disability indemnity and medical treatment reimbursement, and a return to "closed rating."

The Schwarzenegger Administration has said time and again that they will not budge on attempts to dilute SB 899, and this is a huge mistake. Remember the eye for an eye thing above. Failure to compromise now will result in a complete devastation of the progress made with SB 899.

And that would be a very bad thing. The Administration cannot ignore the cyclicality of work comp. It cannot ignore that at some point in time it will no longer be in power, and that there will be another group of perhaps more radical thinking and a different agenda at the helm, steering the system back to a position of retribution to make up for all of the past wrongs brought upon the people by SB 899.

It is time now to compromise and stop hiding behind frankly BS arguments that there isn't sufficient data to adjust PD rates. There is sufficient data. There is a clear road to compromise that will balance the system and provide some stability.

Even famously conservative industry publications have opined that the cuts in PD have gone too far and that more harm will fall upon the work comp market in the future if this isn't corrected now. Sure, permanent disability indemnity is no longer about benefit adequacy, but the problem with defining PD as one of benefit equity is that there isn't any present equity in benefits.

The Administration says that there is no problem with access to medical care, that there are plenty of physicians willing (or forced) to treat injured workers, and yet every day the anecdotal evidence refutes those arguments.

How many Administration officials actually talk to doctors out in the real world? The ones that tell me they are no longer accepting work comp patients? The ones that don't know they are in an MPN as a part of their group care contract? Or the injured workers who are smart enough not to tell their physician that it was a work injury so that they can get decent medical care provided through their group insurance?

Yes, medical inflation out paces overall inflation, but you can reduce a person's pay only so far before they just stop working. There is a breaking point, and we've passed it. The entire medical reimbursement system needs rethinking -- for instance, why is 100% paid medical so sacrosanct? Why not have deductibles?

Finally, the rating floor needs to be reinstated. Carriers need to be accountable to the Department of Insurance for what they propose to charge and support their profit margins. Protection from predatory pricing needs to be in place. The floor provided stability and enabled specialty carriers to provide true service to their customers. Until the floor is reinstated this industry will remain unusually exposed to extreme volatility and abuse.

All I'm arguing is that this industry needs some original thinking. If those involved in the industry don't do the original thinking, then others who are not so well versed in the privatized social benefit system will do the thinking for us, and the result will be another extreme swing in the pendulum.

It took me weeks to get this editorial off my chest. I hope only that our politicians and regulators take my message to heart and begin a serious dialogue of true workers' compensation reform -- one that will be long lasting, enduring and provide the protection to workers and employers that was originally intended when this thing was created.

Texas Senator Burt Solomons told me once that he considered there to be only three stakeholders in work comp: employers, workers and the government. All of the others are profit interests. It's time that the stakeholders take back control of our system and stop the cycle.

David J. DePaolo is the president and CEO of WorkCompCentral.

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The views and opinions expressed by the author are not necessarily those of workcompcentral.com, its editors or management.