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California Faces Workers' Comp Crisis |
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The workers' compensation system in California is in turmoil: Employers pay more for workers' compensation coverage than in any other state, yet their injured employees receive some of the lowest benefits in the nation.
According to the Workers' Compensation Insurance Rating Bureau, the average medical costs for a lost-time claim in California has grown to nearly $31,000, more than a three-fold increase since 1992.
Increasing medical utilization and poor ratios of losses to premium have narrowed the playing field of insurers. Nearly two dozen workers' compensation carriers have been driven into insolvency since 1999, thus reducing the available insurance capacity and burdening the State Compensation Insurance Fund — the state-run insurance market of last resort.
"Today, we have the highest workers' compensation premiums in the country, but benefits paid to injured workers rank near the bottom of all states. Spiraling premium costs hurt small businesses that can’t absorb sharp increases without making drastic cuts elsewhere, like laying off employees or reducing employee benefits."
Assemblyman Dario Frommer, The Los Angeles Times, 9/22/2003
Now facing financial troubles, the State Fund is instituting sharp rate increases to avoid insolvency. Other workers' compensation insurers have begun to limit writing new California business for fear they will become responsible for bailing out the State Fund. As a result of the market turmoil, workers' compensation premiums have nearly doubled in the past three years in California.
In addition to legislation passed in early 2003, new laws recently were signed in an effort to bolster the ailing California system. Regardless of new state legislation or regulations, California employers still need to find ways to better manage workers' compensation costs, as they can have a direct, bottom-line impact on business profitability. For example, if a company has $100,000 in workers' compensation losses and a one-percent profit margin (such as in retail), it must sell $10 million in product to pay for related claims.
While some executives have simply begun to accept high or growing expenses as just another cost of doing business in California, there are proven ways to successfully manage and reduce these growing expenditures. Executives who want to control their workers' compensation costs should be asking several questions:
- Aside from insurance premiums, what proactive steps can I take to lower costs and reduce the number and severity of injuries?
- How do our workers' compensation costs compare to our peers'?
- How much of our workers' compensation costs relate to actual losses?
- Is there a pattern to our claims? If so, why? Are some locations performing better than others? Do we know why?
- How do we allocate workers' compensation costs? How are accountabilities for safety and workers' compensation incorporated into management's performance metrics?
- Do we have an effective cost containment program in place for managing workers' compensation expenditures?
- Can using a Health Care Organization help reduce my workers' compensation costs?
- Have we audited our workers' compensation service vendors to ensure they are meeting service quality standards? Have we confirmed their compliance with operating procedures?
- Do our management systems and approaches encourage and reinforce safe working behaviors?
- Do we conduct pre-loss and post-injury assessments to target and control workers' compensation cost drivers?
- Are we using accurate tools to manage workers' compensation costs?
State ranking for workers' compensation costs per $100 of payroll:
| California | $5.23 (highest) |
| Texas | $3.29 (6th) |
| New York | $3.13 (8th) |
| North Dakota | $1.24 (lowest) |
| National Avg. | $2.48 |
Associated Press, 9/29/2003
Companies can attack the loss component of workers' compensation costs by conducting diagnostic assessments that identify savings opportunities and appropriate steps to more effectively manage both pre- and post-injury processes. The following services may be appropriate to help control costs:
Workers' Compensation Diagnostic/Benchmarking — Analyze and compare workers' compensation data using Dimensions, a proprietary system that helps measure the total cost of risk and validates the effectiveness of loss control and claim handling interventions.
Workers' Compensation Gap Analysis — Understand the primary workers' compensation cost drivers in the workplace, identify potential gaps in processes, compare financial performance against peers', benchmark against industry standards, and prioritize efforts to lower costs.
Health Care Organization (HCO) Evaluation & Consulting — Complete a cost benefit analysis to determine if HCO benefits outweigh the expense. An HCO allows employers to extend control of an employee's medical treatment from 30 to 90 or 180 days through pre-selected medical facilities and doctors.
Behavioral Risk Improvement — Help eliminate employee risk taking and minimize injuries through a behavior-based process that is economical, efficient, and sustainable.
Ergonomics Risk Assessment — Identify and prioritize ergonomics exposures and define actions to help eliminate them.
Training and Communications — Online workers' compensation training courses help employers ensure a consistent approach to the workers' compensation process — particularly if they have high employee turnover and multiple locations.
Claims Management Process Re-engineering — Evaluate current processes for reporting, administering, medically managing, and closing workers' compensation claims, both internally and externally, and determine more efficient and cost-effective workflows.
Vendor Compliance Evaluations — Conduct audits and develop metrics and performance scorecards for claims administrators and service vendors to measure compliance with special handling instructions.
Managed Care Impact Assessment — Develop a clinically based audit to assist in measuring and improving the medical treatment and case management protocols. Studies have shown that targeted early intervention is key to reducing claim costs.
Return-to-Work Program — Build an effective return-to-work program, a key element in reducing time loss associated with workers' compensation. The program can help boost employee morale by demonstrating concern for employees' well being.
Approximately 80% to 90% of workers' compensation costs are losses or loss related, so the best way to reduce expenditures is to significantly reduce the number of incidents and limit the severity of loss. Marsh can work with you to develop and implement strategies that reduce losses — and yield direct, bottom-line results.
"For their part, insurance companies aren't ready to declare a halt to insurance premium increases because of the proposed cuts in physicians' fees and limits on medical treatment for injured workers. Many insurers say they need to wait and see how the changes play out in the marketplace, and whether they really produce the financial savings promised by lawmakers."
Sacramento Bee, 9/12/2003
If you have any questions or would like additional information, please contact us.
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