The Great Workers’ Comp Revolt

Companies successfully fought the law in California. Will they target other states as well?

Safeway’s vice president of workers’ compensation, William Zachry, concurs. “In the pre-reform days, an injured worker would think, ‘I am disabled, therefore I am,’” he says. “Now it is based on a true, objective finding of disability.”

The various medical guidelines have combined to reduce unneeded, expensive treatments. “Outpatient surgery was rampant prior to the reforms; doctors charged whatever they could, even though in some cases the surgery could be performed in the doctor’s office at much less cost,” says Debbie Michel, chief operating officer of business market at Boston-based insurance company Liberty Mutual Group, one of the largest workers’ comp insurers in the country. Michel estimates that outpatient-surgery facility costs are down 60 percent since the reforms.

So are trips to the chiropractor and physical therapist. A study by the California Workers Compensation Institute found that the average number of chiropractic and physical therapy visits were 50 percent and 44 percent lower, respectively, in 2004 than they were in 2002. Total costs per claim also fell 60 percent and 48 percent, respectively, over the period.

Welcome Competition

Despite these reductions, injured workers have little dissatisfaction with their treatment. According to the California Coalition on Workers Compensation, applications by injured workers appealing their workers’ comp claims to state regulators are down nearly 50 percent since the reforms.

Nevans, of the state’s workers’ compensation division, notes that more workers are returning to work earlier than they did before the reforms, assisting employee morale and employer productivity. “Obviously, when someone is injured at work it is an emotional issue, but the reforms have allowed us as a state agency to be more objective, using data and science, not emotion and anecdote, as the basis for decision-making,” she says.

The new laws also have revived insurance-industry competition. The state fund’s share is down from 52 percent to a respectable 26.5 percent. Several insurers have either moved their operations back to the state or increased their willingness to underwrite risk.

Others, such as Midwest Insurance and FirstComp, are entering the market for the first time. Intensified competition has not only resulted in lower premiums, but many insurers are now willing to write unlimited coverage. Pre-reform, obtaining more than $25 million in coverage limits excess of the self-insured deductible was virtually impossible.

Although some further reforms are stalled in the state’s legislature, companies say that by and large the system has been fixed. Other states faced with rising workers’ compensation costs — Marriott International vice president of casualty claims Bob Steggert cites New York and Illinois as “troubled,” while Hartwig points to South Carolina — can take a page from California’s experience, particularly as it relates to evidence-based treatment guidelines and the use of medical-provider networks, both relatively new concepts. “Many states watch what California does,” Liberty Mutual’s Michel says. “Several, like Texas, are just beginning to adopt similar reforms.”

Galanti, who has spent the past 25 years as Costco’s finance chief, does not expect to cite California’s workers’ compensation costs in a quarterly report ever again. “If there is one takeaway from all we went through, it’s that when a system allows for abuses to go unchecked it costs everyone more — employers, injured workers, regulators, and citizens,” he says. “Ultimately, we were able to gain the trust of employees, legislators, and regulators, but not until we raised our voices loud enough.”

Russ Banham is a contributing editor of CFO.

Total nonfatal workers' comp cases for private industry

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