Are California’s Workers’ Comp Troubles Over? SB 899 One Year Later

It was about one year ago, on April 19, 2004, that California Governor Arnold Schwarzenegger signed SB 899 into law, giving the state’s beleaguered workers’ compensation system a tremendous overhaul. Although the reforms are still currently being implemented, the evidence of lowered premiums and a number of new carriers entering the California marketplace suggest that the legislation is a success.

“There’s steady progress being made,” said Senator Chuck Poochigian (R-Fresno), who authored SB 899. “Obviously there are some bumps along the road. We knew that would be so from the very beginning. No one believed it was a perfect solution but it does represent major systemic reform to the system. Savings is the whole point. We can continue to do quite well with good will by the participants and a focus on trying to achieve the goals of SB 899.”

Poochigian said that the success of SB 899 will depend on its full implementation. He said that there is still a considerable level of agitation against reform implementation. The Division of Workers’ Compensation is currently holding hearings on the implementation of new permanent disability regulations to replace the temporary regulations that the state has followed since the beginning of the year.

“It’s taken some time to get all of the pieces in place, but it’s working,” said Nicole Mahrt, public affairs director of the Western region for the American Insurance Association. “It takes time to implement such major reform but as it’s being implemented properly, we’re really seeing positive results and that was what everyone was after. SB 899 has been successful. We’re just now starting to see the real impacts of the bill.”

Poochigian and Mahrt agreed that premiums overall have trended downward. “There has been considerable progress made in terms of lowered rates,” Poochigian said.

“Since the passage of this bill and since the passage of AB 227 and SB 228 we’ve seen a dramatic shift in what the Workers’ Compensation Insurance Rating Bureau is recommending for rates,” Mahrt said. “Employers were facing between a 12 and a 19 percent increase in July 2003. But the passage of 227 and 228 made that unnecessary. Since then we’ve seen on average a 16 percent reduction in rates.”

The WCIRB has recommended an additional 10.4 percent decrease in pure premium rates starting July 1. In May 2004, the WCIRB evaluated SB 899 and found that the legislation would reduce benefit costs by 15 percent, or $3 billion, and loss adjustment expenses by approximately 9 percent, or $300 million. Jack Hannan, director of marketing and communications for the WCIRB, said that the Bureau has not re-evaluated SB 899’s impact on system costs, but expects to do so soon. “We have not yet completed our review of the new permanent disability schedule that was recently adopted,” he said.”Once the evaluation is complete, sometime in early May, we will have an estimate of the schedule’s impact on system costs.”

“The fact that California’s costs for workers’ comp were two and a half times greater than the national average was the impetus for the [reform] movement to begin with,” Poochigian said. “There are certainly examples from some particularly small businesses where they have not received any substantial cost reduction and that’s very disappointing to me. My hope is that the insurance carriers will sharpen their pencils and continue to drive costs down particularly as competition is restored to the marketplace.”

Mahrt said that the fact that a dozen or more insurers have entered or re-entered the California marketplace is the strongest evidence that SB 899 is working. “People are recommitting capacity to this market,” she said.

“The market is improving and that competition is returning,” Mahrt continued. “That’s really what we need so that the State Compensation Insurance Fund will shed some of their book of business and go back to being what they were intended to be and not the two-ton gorilla that unfortunately they had to become. [We need] a healthy, functioning, private insurance marketplace where employers can get competitive rates and have different choices.”

Despite the apparent success of SB 899, reform opponents continue to assert that premiums have not come down far enough. The idea of rate regulation is still alive in the form of SB 46, a bill authored by Senator Richard Alarcón (D-San Fernando Valley). The bill would create a commission of three elected officials (the governor, the insurance commissioner and the attorney general) who would determine if an insurance company can raise rates.

“That’s a bill that the industry has serious concerns with because it will dampen all of the progress that we’re seeing,” Mahrt said. “It’s an artificial pricing scheme and it’s certainly going to send the wrong message to carriers trying to get into the market.”

Mahrt said that the applicant attorneys and labor groups are balking and trying to reopen the deal that they made with the Legislature. “That is unfortunate because the system is actually doing what the reforms intended for it to do,” she said. “I’m hopeful that they’re not successful in their efforts to chip away at the reforms.”