Friday, July 13, 2012

Stop the Talk of Costs - Talk About Volatility

While lobbyists told attendees at the California Coalition on Workers' Compensation (CCWC) 10th annual Political and Legislative Forum that reform may not occur in 2012 due to various reasons, the message that was delivered was that some proposal either this year or next year will make it to the governor's desk.

Again the discussion during the presentations was trimming costs in order to raise the level of benefits (specifically revising the permanent disability rating schedule to increase indemnity to injured workers).

For instance, presenter Jason Schmelzer, a lobbyist for CCWC, said while benefits should be increased, it's important to avert cost increases that would put employers out of business and leave workers without jobs. Any reform proposal should be based on the goal of identifying $2 in savings for every $1 increase in benefits, he added.

Mike Herald, a lobbyist for the California Applicants' Attorneys Association, said using an "arbitrary number" such as $2 in savings for every $1 in benefit increases is the wrong approach.

Department of Industrial Relations Director Christine Baker said the cities of Stockton and San Bernardino filing for bankruptcy demonstrates how precarious the current economic climate is. She said she promised Gov. Jerry Brown that any changes to benefits won't drive up costs for private or public employers.

Okay people at the "reform negotiation table" - first off, jobs don't disappear because of workers' compensation. There are a whole host of other reasons why an employer trims the work force, and I can almost guarantee that while workers' compensation premiums may be a part of the equation, the reality is that work comp premium (or self insured retention) is for most employers (unless you're a roofing company or other high risk employer) only about 1% of the cost of labor.

By far and way the biggest cost to most employers is SALARIES AND WAGES.

Employers trim jobs because of salaries and wages, not because workers' compensation premiums went up another two percent.

So, lobbyists, please stop talking about workers' compensation costs as a reason why an employer may dislodge workers from the payroll. A private employer's workers' compensation costs are factored into the pricing of goods and services sold. A public employer's workers' compensation costs are factored into the tax rolls and the risks experienced by public employers are decidedly different than private employers - as was told to me in the past, while private employers tell their employees to run away from a fire, public employers pay their workers to run into fires!

Employers do much better in controlling their premiums when they know how risks get factored into their experience modification factor - the ex-mod is the single biggest "cost" component to an employer's workers' compensation premium.

Bill Cobb at CompMetrics has made available to the public a spreadsheet work book that provides a nice determination of how the experience modification rating factor affects premium - it can be downloaded (after registration) at While the California Workers Compensation Rating Bureau has one available too, Cobb's provides more complete analysis and ‘what-if’ scenarios.

Evaluating risk appropriately is how employers save money on their workers' compensation bills.

Costs, as described by the lobbyists and the current administration, inure to the benefit of insurers. Those savings may, or may not, trickle down to employers. Private self-insured employers, have more sophisticated methods of controlling their workers' compensation costs, and generally those are more tied into risk management practices than other techniques. Public self-insured employers may not have the benefit of those risk management practices due to various labor issues (i.e. unions) but those are issues that are a small part of the overall financial issues of those entities.

Stockton and San Bernardino's financial issues have very little to do with workers' compensation and have much more to do with a hugely reduced tax basis because the housing market is worth half of what it was 5 years ago, as well as commitments made by governmental officials via union contracts for benefits, pensions, etc. that have accumulated over the years without adequate reserving.

If those who are driving the "reform" discussion want to make a big, long term, impact on workers' compensation then they need to talk about stability and volatility. If employers KNOW that their premiums, or self-insured retentions, are going to rise consistently at 2% per year then there is no crisis and those expenses can be more accurately financed.

Market volatility is what employers complain of and what drives them nuts.

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