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Comments Delivered by Insurance Commissioner John Garamendi
at Governor Gray Davis’ Daily Press Briefing
on Workers’ Compensation Reform.
April 22, 2003 – 10:00 a.m.
Governor Davis, I am very happy to work with you on the critical challenge to fix California’s Workers’ Compensation system. Your active involvement is crucial to the mission that we share, which is to provide Californians with an insurance system that is efficient and effective. If California is to regain, and sustain its economic vitality, it cannot afford to have the highest workers’ compensation costs in the nation, while giving workers benefits that are among the lower third of all states.
Ninety years ago, the state of California established workers’ compensation as a no-fault system to protect two of its most valuable economic assets - employers and employees. Today we face a crisis in that $15.4 billion dollar system - it is hurting the very people it was designed to protect. California’s workers’ compensation system is drowning in a tidal wave of rising medical and legal costs, gross inefficiencies, outright fraud, and abuse of the system by workers, employers, insurance companies, and providers.
Since 1995, when the minimum rate law was legislated out of existence in this state, close to two-dozen workers’ compensation insurance companies have been placed in regulatory conservation, liquidation, or supervision. With no law forcing them to charge sufficient rates to meet financial obligations, workers’ compensation companies serving the state viciously priced each other out of existence. The California Insurance Guarantee Association has subsequently paid claims for these bankrupt companies, but it too is now threatened by a rapid rise in the cost of claims. And the fear of these unpredictable costs, terrorism, and earthquakes has driven the large national workers’ compensation insurance companies out of the California market.
As these companies failed and competition dwindled, the State Compensation Insurance Fund picked up the slack. It grew from $1.6 billion in premiums in 2001 to over $5.6 billion in 2003. That is a recipe for trouble in any company. Now, this last source of insurance for 54% of the California market is in very serious financial trouble, and under regulatory control. To right this ship, I am requiring the State Fund to undertake a series of difficult, but necessary adjustments to prevent it from following the other companies into bankruptcy.
Almost four months ago, when I took office, I pledged to take on this tough issue and to do whatever is necessary to bring relief to employers who are being driven from California by the high cost and uncertainty of the existing workers’ compensation system. The only way to fix it is with immediate, quantifiable, and concrete legislative reform. This reform must specifically target the cost drivers in the system. Unless, and until this is done, costs will continue to rise and insurance companies will continue to fail.
California cannot allow this dire situation to worsen. So next week, Governor Davis, legislators and I will present a comprehensive reform package to address these issues. Our priorities will be as follows:
MEDICAL COST CONTAINMENT
While some medical services have fee schedules, other critical and rapidly growing medical services do not. Within the workers’ compensation system, medical expenses grew by 70% between 1995 and 2001. Today, the medical inflation rate in the system is boosting costs at a 14% annual rate. Of particular concern are the uncontrolled costs in outpatient medical and surgical services, pharmacy, and physical medical services, including chiropractic treatment. There is a fundamental flaw in a system that has no controls on costs. Therefore, medical costs must be tied to a fee schedule and the system must have reasonable utilization controls for all medical services.
This medical cost control reform must go hand in hand with prompt payment by insurers for medical treatment provided.
The result of instituting such controls would be immediate, quantifiable, and concrete. The California Commission on Health & Safety and Workers’ Compensation estimates that medical costs control measures that peg fees at 120% of Medicare/Medi-Cal fees, and provide utilization controls, would reduce medical costs by $1.2 billion annually. This would allow insurers to reduce their reserves by $4 billion.
The second target of reform is inefficiency. All too often, a worker must hire a lawyer for assistance in getting proper medical care and indemnity payment. The use of medical fee schedules with proper utilization and quality control systems will reduce the need for costly legal arguments. The prompt payment of medical bills will further reduce litigation. Penalties for improper claims handling must also be adjusted to reflect the actual misdeed, not the entire award.
All too often in this broken system, the claims adjusters in insurance companies are ill equipped to do their jobs. Many do not know the difference between a workers’ compensation claim and an auto insurance claim. It is time to require the certification of claims examiners and to bill review companies. With certification of these functions, we will increase consistency, efficiency, appropriate claims handling, and we will reduce the number of disputes brought before the Workers’ Compensation Appeals Board.
WORKERS’ COMPENSATION MEDICAL DELIVERY SYSTEMS
In the decade since the 1993 workers’ compensation reforms which established health care organizations, alternative dispute resolution systems and carve-outs, we have learned that these processes deliver better medical care, reduce litigation, get insured workers back to work faster, and reduce fraud. The reform package should include measures that accelerate the use of these processes.
PERMANENT DISABILITY
The totally incomprehensible, wildly subjective process of determining permanent disability must also be changed. The unpredictable variation that results from the current system is unfair, unequal, litigious, and unnecessary. The California Commission on Health & Safety and Workers’ Compensation is in the final weeks of a study that has the promise of creating a new methodology to reform the permanent disability system. The proposals emanating from this study should be a part of the comprehensive reform.
FRAUD ENFORCEMENT
Whether it’s an individual fraudulent claim, the work of a multi-level mill, or an employer gaming the system, fraud is a black hole that drains resources, drives costs further upward, and hurts everyone it touches. We are working with legislators to enhance the tools to fight fraud at every level. Furthermore, I am personally increasing collaboration among state, federal, and local agencies in the fight against fraud. For example, we are now coordinating our fraud investigation with the Attorney General’s Medi-Cal Fraud Unit, and the Labor and Workforce Development Agency’s enforcement units. Under new authority provided by the Legislature last year (AB 749), we are prioritizing our crime fighting efforts and taking a much more strategic approach to eradicating fraud.
TECHNOLOGY
While AB 749 partially addressed the problem of outdated technology within the system, there is no reason except inertia, to wait for new studies. A mandate that all workers’ compensation billings and treatment codes be Health Insurance Portability and Accountability Act (HIPPA) compliant within one year is possible and necessary. Electronic filing of bills, records and reports are also very possible and very necessary so that accurate statistical data, fraud control and management accountability are achieved.
REGULATORY
The payment of claims by insurance companies is a consistent problem that we will address with a regulatory change that will include workers’ compensation insurance companies in the Unfair Claims Practices regulations.
IMPACT OF IMMEDIATE, QUANTIFIABLE, AND CONCRETE REFORM
What I have laid out for you today is an outline of our plan to address the workers’ compensation crisis. The reforms we propose are immediate, quantifiable and concrete, and they will dramatically change the disaster that confronts us today. If enacted now, they can turn this nightmare into a positive situation resulting in stable, and even lower prices for workers’ compensation insurance. They can bring health back to the insurance companies in this troubled market.
This can happen quickly because of the relationship between reserves, both old and future, and the surplus that an insurance company is required to have. Increased costs have forced insurance companies to restate old claims reserves, thereby reducing surplus and creating bankruptcy. The estimate I mentioned earlier, showing that medical cost containment legislation will cut annual medical costs by $1.2 billion and reduce companies’ existing reserves for old claims by $4 billion, is very good news. This means that reserves for insurance companies like State Fund can be reduced, automatically increasing surpluses as soon as the legislation is signed. The result could be a financially healthy insurance industry, including State Fund and lower prices for employers. But this will happen only if the enacted legislation goes far enough, and is quantifiable and concrete.
HARD AT WORK
My Department, Governor Davis and his administration, and legislative leaders are in the final stages of developing a comprehensive reform of the workers’ compensation system. With fundamental and meaningful reforms, I am confident we can survive this tidal wave and continue to meet the legitimate needs of injured workers with quality medical care and sufficient payment for lost wages, all at a cost to employers that is far less than today’s unreasonably high premiums.
last updated: April 30, 2003
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