Troubled

The message I heard at the California Workers' Compensation Insurance Rating Bureau's Annual Meeting yesterday in San Francisco was a mixed one, but my ultimate conclusion isn't positive.

The bottom line - frictional costs associated with the most recent reform effort seem to have introduced more frictional costs than savings, and the likelihood is that when Oregon does it's rate normalized bi-annual survey, California may just come out on top as the most expensive state with a troublesome delivery history and questionable profitability for carriers.

Ugh...

Here's a sort of good news, bad news synopsis, not necessarily in any particular order:

While there has been a dramatic reduction in claim frequency (fancy insurance-speak for the number of injuries per given period), down some 80% over the past 40 years, California has seen frequency level off and even grow a small percentage where the rest of the nation continues to experience continuing declines. It seems that this frequency deviation is attributable to the Greater Los Angeles area - a geographic bubble driving the state's negative claims picture.

It seems that the frequency trend in indemnity claims in the LA area is attributable to continuous trauma claims. Los Angeles carries the highest percent of CT claims - about 82% higher than rest of state and 50% higher than Bay Area. There's still speculation about why this anomalous situation exists, with blame going to a larger attorney population than the rest of the state, or a larger overall population in the state, or limits on post termination claims driving more creative pleading, or attempts to make up for the decimation of PD indemnity after SB 899's routing, or physician's requirement to report anything apportionable which raises the specter of earlier indications of potential industrial exposure, or ....?

The one exception to the frequency trend is 2010 when both national and California experienced a sudden spike. One industry researcher I spoke with believed that spike is attributable to the recession - as unemployment benefits ran out people suddenly remembered that injury they had at work...

That explained 2010, but what remains troublesome is that after 2010 frequency continued on its downward trend (based on National Council on Compensation Insurance stats) but California frequency, though down from 2010, is bucking the trend.

According to Berkeley Research Group's study more recently, 85% of injured workers in California were able to see a doctor within 3 days of reporting an injury and 80% said they were satisfied with the care and attention they received.

And while the statistics reflect that nearly 90% of all injured workers return to work post injury, the issue is how long it takes them to get there; significantly longer than the national average - California workers are out of work and on temporary disability 36% longer than the national median, based on Workers' Compensation Research Institutes' numbers.

Though California has the third most generous temporary disability payments in the nation, when adjusted for cost of living California is down around 30th of all states.

The average rates carriers charged employers was $2.91 per $100 of payroll, which is just under the those charged in 1978 ... but rates have gone up 35% since 2008 (when rates bottomed) and is 70% higher than the national median.

California's work comp market is by far and away the largest in the nation, which explains the attraction to carriers and others vending to the system, comprising 25% of the total market with an estimated 2014 written premium of $12 billion.

This premium growth is partly from increasing payrolls as the economy recovers and more people return to the work force, but some of it is just carriers increasing rates as investment returns sag and carriers take advantage of the current market's willingness to absorb increases.

In terms of diversification of carriers, there's no threat of monopolization by any single carrier, though State Compensation Fund continues to be the largest, albeit slipping considerably since 2004 with private carriers nipping the heels of SCIF for the top spot.

And since open rating began in 1996 national carriers have come to dominate the California market.

But if the California workers' compensation market were examined by a rational Wall Street it would not survive financier's scrutiny, with a terrible historic return on capital rate, the system being called "return challenged" when the industry is compared to other industries on a return on net worth basis.

Payments on the medical side of the balance sheet comprise nearly 67.5% of all claims dollars now, but California has the sorry distinction of being among the slowest of all states to pay the doctors - with days to payment nearly twice as long as the national average.

But inflation for workers' compensation medical treatment, though existent, has remained far below the inflation experienced in the general health system (where premiums have tripled since 2001).

The system spent $15.5 billion at the last measure, 2/3rds going to benefits and the other third spent on administration of benefits. This ratio is not appreciably changed from prior years though.

Lou Shields, part of the afternoon panel on the real world experience with SB 863, and Vice President IT Application Integration for Maximus Federal Services, corrected the WorkCompCentral report of the other day telling me that while the overall payroll of Maximus' doctors reflected 40% from California, 70% that do the California work are California licensed presently and that they intend to increase that ratio.

So if I had to describe my perceptions of California workers' compensation following this meeting it would be, "troubled."

While Christine Baker, Director of the Department of Industrial Relations and at the meeting but not part of the presentation, said that SB 863 needs to be given time, the short term prognosis is not good.

Still we have to remember that there are a lot of balls up in the air: lien process challenges pending at the appellate court level, adjustments to the IMR process, roll out of the $120 million supplemental fund, interpreter and copy service fee schedules, etc.

From my jaundiced view though, what is pending doesn't represent any meaningful chunk of system savings, and if, for example, the lien fee challenges are upheld costs will actually increase.