The following article is the fifth in a series on national trends in workers' compensation. Part 1 reviewed the "The Social Contract," Part 2 discussed the Unicover debacle, part three reviewed deregulation of the market in California and the fourth part of the series looked at the stock market and funny money schemes that assisted in creating the workers' compensation financial delusion. This installment looks at the convergence of these market conditions with the politics of the era to create the "perfect workers' compensation storm."

The basis of this article series is a presentation that was given to the California Association of Rehabilitation and Reemployment Professionals at their annual conference in San Diego October 15, 2005. The presentation has also been adapted as a professional continuing education course at WorkCompSchool.com in a multi-media format including video, audio and supplementary reading materials, and has been approved for, or is pending approval for (depending on the accrediting agency) 2 hours of CE units.

DON'T JUST READ THIS ARTICLE, GET CONTINUING EDUCATION UNITS BY TAKING THE COURSE AT WORKCOMPSCHOOL.COM.

Convergence - Collision of Forces

- As a consequence of Unicover, deregulation, an overheated stock market and unusually intense market competition resulting in the demise of competition, billions of dollars were removed from the system almost overnight, at least in financial terms. The shock to the work comp community was enormous, and the ultimate affected stakeholder - employers - were most affected. Employers at first experienced a euphoric drop in rates in California, and then a schizophrenic change to meteoric increases that produced a shocking ripple throughout the economy.

At the time that all of this economic turmoil was occurring, the perfect storm was fed through a dramatic change in the political winds of not only the state of California but in national politics as well, where Democrats ended up on the losing side of both executive and legislative branches of government. Business voices got louder, fueled by insurance industry funded media campaigns that frightened the populace with death doom and destruction scenarios.

Basic economics finally brought the market back to reality in 2000. The billions of dollars that disappeared had to be made up somehow. The few remaining multi-line and multi-jurisdictional carriers that were left became increasingly picky about the risks they chose to write, putting a huge burden on California's State Compensation Insurance Fund (SCIF).

SCIF went from a California market share of under 20% in the 1990s to over 50% by 2002, making it the largest workers' compensation insurance company not only in California, but in the Nation, by a considerable amount.

The rush of business in to SCIF put increasing pressure on the finances of the carrier, causing the California Department of Insurance to issue warnings both about its growth and its capital structure, spawning lawsuits between the two entities as to whether California's risk based capitalization statutes were applicable or not. The end result to the consumer was a loss of consumer choice, dramatic premium increases, and complete frustration.

What was not communicated to the state's employers was that this was a national phenomenon. While other states, notably Nevada and Arizona, touted their lower costs to business, what wasn't disclosed was that just 10 years ago Nevada was a complete workers' compensation mess until it privatized bringing fresh unencumbered capital into that state, and that Arizona was (and is) among one of the stingiest states in terms of covering and compensating for injuries.

Policy papers and studies bombard the media and legislators about increasing "utilization" and increasing medical costs at 15 to 20 percent per year. But what wasn't explained was that medical comprises about a third of the cost of a claim, and critics pointed out that the math didn't add up. In addition, while workers' compensation medical costs were increasing at double digit rates, the "civilian" medical system likewise was experiencing similar increases, largely as a result of the increasing burden of administration due to managed care. No one addressed the other half of the cost of premium increases. The studies did not adequately explain the total cost of the employer's premium and the constant focus on "rates" misdirected attention - remember, rates are not the only part of the premium equation...

A big part of the reform agenda was the focus on the state, as opposed to the nation, which made sense in part since workers' compensation is a state-by-state system. The problem with that analysis is that, as we have seen, national issues are ignored.

The rapidly escalating costs of workers' compensation, in particular in California, fueled a growing economic malaise with businesses as costs increased and reliance on the capital markets erased liquidity. In addition, reports of employee and medical fraud were rampant, there were numerous delays in claim processing due to an under-funded Division of Workers' Compensation, and employers as a consequence were ready to embrace a radical climactic change.

Arnold Schwarzenegger was elected and became the first Governor of California to make workers' compensation a top campaign issue, threatening a voter initiative versus an essentially closed door back room deal (SB 899). Worried that a voter initiative would pass, since injured workers comprise a small percentage of the voting population, versus the many small employers in the state whose livelihoods were on the line because of work comp costs, the measure passed with very little objection. This was the real start of the national reform wave because the feeling was, and still is, if conservative politics can pass in California, conservative politics can fly anywhere.

I'm not saying that reform of some of the more basic elements of the work comp system was not needed - bottom line is that the system had become burdensome, slow, unresponsive to its stakeholders, and as a consequence expensive.

In an interview I had with Texas Senator Burt Solomon, the sponsor of that state's radical reform bill, HB 7, he said that a "stakeholder" in workers' compensation was the employee, employers and the state. Everyone else is a "vested interest." This is important when remembering the political process behind "reform."

Reform proponents were successful in defining everyone in the system as a stakeholder - regardless of whether they were earning a living off the system or not. Because of this, certain segments of the easiest targets were vilified: doctors, attorneys and voc rehab specialists. Everyone hates doctors and attorneys, and voc rehab specialists had no voice in Sacramento.

But, the problem with the national reform agenda was that the root of workers' compensation cost increases was not adequately addressed, or if it was known to those who guided our legislators, was not revealed to them. Without an adequate definition of just what the problem was, there was a knee-jerk, quick fix political reaction that will have many unintended consequences in to future.

You know you have a problem when lawmakers all of a sudden profess to have knowledge of workers' compensation beyond paying an insurance bill every month or sending an injured worker to the doctor. We had people like Republican Representative Tom McClintock, from Thousand Oaks, pitching that California should change their comp system to the Arizona model - without fully understanding the implications of that. We had self professed experts such as Richard Alarcon and Chuck Poochigian claiming they had the answers, but their information was fueled by "studies" promulgated by insurance industry "institutes." There are no independent studies of university quality subject to national peer review that examine the economic, legal, social, and financial implications of any particular policy adjustment.

This is not to say that the insurance industry studies were worthless, or entirely biased. However, as in any social policy determination, consideration must be given to the source of the information and translation of the data. For example, the Wall Street Journal recently released an investigation ["Ghost Story; At Medical Journals, Writers Paid by Industry Play Big Role" Wall Street Journal, 12/13/05, Page One] reflecting that an alarming number of medical journal articles are funded by drug companies with vested interests in the outcome of the studies, and that the physician authors were actually ghost writers on drug company payrolls hired to ensure that the information published cast the company in the most favorable light - calling in to question not only the medical journal articles, but the medical and policy decisions that are made in reliance on that information.

Instead, panic set in at the political level fueled by the unprecedented voter recall of former California Governor Gray Davis, who was viewed as passive and not interested in fixing things. Arnold Schwarzenegger was elected on an "action" agenda, and one of the first things on that agenda was to push through a workers' compensation reform bill in record time and the crying call was medical over-utilization, medical over-billing, inefficient adjudication of claims, and ineffective ancillary benefits such as vocational rehabilitation. But while there was scientific evidence of over-utilization, there was no long term study of the correction of the problems, and exactly how they should be instituted. Reason was replaced by emotion because it was easier to sell - in essence, SB 899's approach to work comp reform was (and is) one big "scientific wild assed guess" [Table 18 - Matthew Bender's "Workers' Compensation Laws of California", 2005 edition, page 1390].

Texas Senator Burt Solomons, when he introduced HB 7's medical network system said that the difference between the Texas and California systems is that the California model keeps bureaucrats meddling and micro-managing the medical care component rather than adhering to a group health model [WCC News 9/22/05].

What the California reform model did, and what was mirrored around the country, was alienate a huge population of vested interests - the very vested interests that are necessary to make a for profit, privatized social system run. In particular, doctors received the greatest hit. Under reform, physicians do not "practice" medicine anymore - they are held to published cookie cutter standards. If they wish to go outside those standards they need to spend time and money, for which they are not reimbursed, to defend their position. Add to that a pay cut and additional paperwork, and we have begun to see the erosion of medical care in the work comp community. This won't happen overnight, but Texas tried this in the early 1990's, and ended up with only 3,000 physicians in the entire state that would provide any work comp medical services, and most of those were not MDs but chiropractors.

What reform has done is told a large group of people that you can not be trusted, so we have to micromanage you - doctors, attorneys, injured workers, other vendors. Reform has sent one big message: "The Law Hates You."

Perhaps the most troubling of the reform movement is that savings were reported almost instantly. Why is this important? Because it shows that reform was not alone responsible for carrier savings - but that market recovery was in place before reform. This gave the illusion that reform was responsible for market savings, when in fact that was not the direct case. The reform agenda will in fact result in carrier savings, but it is a supercharging of savings that started with the recapitalization of the market following the losses created by the previously described perfect storm.

The reform trend was so pervasive last year that 23 states enacted 40 new laws in 2004-05, the majority addressing specific benefit or claims eligibility, or the role and authority of the state workers' compensation regulator [National Association of Mutual Insurance Companies 2/2005 survey], constituting one of the most significant workers' compensation trends since the introduction of the concept in 1908.

Notable reform states included Illinois, Alaska, Missouri, Texas, Oklahoma and West Virginia. Some of these states needed reform, for reasons entirely different than California, and some of them didn't. Some states were really in need of reform, such as West Virginia, which previously was a mono-line state run system that ran up a $4 billion unfunded liability for permanent total disability, mostly for coal mine workers. That state is in the process of securitizing its liability with a bond measure and privatizing its system. Alaska is a state that seemed more like a bandwagon reform state - most of that state's industrial injury liabilities rest with marine risks - i.e. Longshore and Jones Act risks. Federal energy workers reform had been in the works for many years after numerous reports of inadequate benefits and bureaucratic mismanagement. Ohio reformed even though they had one of the lowest premiums in the lower 48 - and the media attention ended up launching an investigation into the agency's finances with political turmoil ensueing as it was discovered that the BWC was the subject of politically driven financial mismanagement!

States that tried reform agendas but failed were just as notable. Hawaiian Governor Diane Lingle pushed hard for a reform agenda, but was rebuked twice by a Democratic legislature because reform would have cut benefits. It turns out the state didn't need reform as evidenced by the latest rate recommendation by NCCI to slash rates 18.2% - NCCI said the rate cut was due to improved loss ratios, but this was in the midst of increased employment in the state, particularly in the construction industry, one of the most hazardous job classifications according to Bureau of Labor Statistics numbers.

Oregon's attempt at reform was an attempt by Liberty Mutual's subsidiary, Liberty Northwest, to eliminate state competition by seeking the abolishment of SAIF, which they said was unfairly competing against them by offering insurance lower than what Liberty could provide. Despite bloody lawsuits that resulted in several executive changes at SAIF and some embarrassing disclosures of misdeeds, intensive legislative lobbying, and ultimately a voter initiative, SAIF continues and Liberty still is the largest private carrier in the state.

As noted above, after Hawaii's reform agenda was defeated, NCCI came out with a recommendation of an 18.2% decrease in Hawaii's workers' compensation premium rate. The stated reason was because of improved loss costs, demonstrating that the state did not need reform to control costs and adding fuel to the implication that workers' compensation costs were more of a national issue than local medical frequency issues. This recommendation was also indicative of the national trend towards dropping costs, which would have to call in to question the basic premise of the worker's compensation reform agenda across the nation - it simply isn't plausible that every state in the nation all of sudden experiences lower claims frequency and medical cost control. An example of this troubling issue was the pronouncement by California's WCIRB in September, 2005 that combined loss ratios plummeted 62%, but that rates had come down just 19% since 2004.

The reform agenda continues, though along different and surprising lines.

Arizona's business community is now feeling the pressure from the labor market - businesses simply are having a tough time attracting workers because benefits are so stingy. The business community in Arizona has recently been talking of a benefits increase, in order to gain leverage for some other items they would like to institute, such as a constitutional amendment defeating benefits for anyone testing positive for drugs, or denying benefits to illegal aliens. Pennsylvania is struggling with its own medical utilization issues, though many of those issues are the same that plagued West Virginia, tied to mining and related long term medical issues. The California Commission on Health Safety and Workers' Compensation is about ready to recommend a significant change to the permanent disability rating system that was instituted as a part of SB 899 because of the radical declination in the value of benefits that resulted. What we are seeing is the beginning of the swing of the pendulum, which seems to be swinging faster and further than at any earlier point in the politics of workers' compensation.

The final sixth part of this series will examine what the impact of this short history will have on the future of workers' compensation over the course of the next five to ten years.

Article by David DePaolo. This article series is an adaptation of a continuing education course that starts with the hypothesis that the reform movement in California was the product of a national workers' compensation crisis, and that California was not alone in its reform agenda. This course also takes the hypothesis that the workers' compensation crisis that spawned reform had less to do with medical costs and utilization, and more to do with the confluence of a dubious reinsurance scheme, stock market losses, and blatant high end financial cheating. This course is pending 2.5 hours of continuing education units from various administrative agencies, and has been approved for 3 hours of CLER, 2 of which are approved for Certification. This course is available as an on line multi-media presentation at WorkCompSchool.com.

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