Calif. W-C Reforms On Track

"Earlier this year, the legislature overwhelmingly passed workers' compensation reforms to fix a broken system in which costs were out of control," said Victoria Bradshaw, Secretary of the Labor and Workforce Development Agency, which oversees the DIR. "Once these regulations are in place, California's disability rating system will, for the first time, be based on objective medical findings instead of subjective factors and work restrictions manipulated by the legal system, just as intended by SB 899."

That objectivity, according to Nicole Mahrt, a spokesperson for the American Insurance Association in Sacramento, is crucial for an industry that has seen a lot of red ink over the past decade.

"These regulations are a critical component of SB 899," the bill passed last year to reform the workers' compensation system," she said.

California's workers' comp market, she noted, grew from $9 billion to more than $20 billion over the past 10 years, primarily due to a system that is largely subjective. As an example, Ms. Mahrt noted that under California's system, three employees with the exact same characteristics, suffering the exact same injury, could be given three different disability classifications. This uncertainty, she said, made predicting costs extremely difficult both for insurers and for self-insureds.

"They did not know how much to charge for their products or how much to reserve," she said. "These regulations will take away the subjectivity that makes the system so difficult to price and predict."

Under the new regulations, once a worker's injury has stabilized and is unlikely to change significantly, an evaluating physician will rate the worker's impairment based on American Medical Association guidelines. That impairment rating is converted to a "whole person impairment standard," which is then adjusted to account for the worker's diminished future earning capacity using such factors as occupation and age at the time of injury to obtain a final permanent disability rating. The diminished future earning capacity adjustment, according to the DIR, is based on a numeric formula using the empirical data from the December 2003 study by the Rand Institute for Civil Justice.

"This new schedule represents a fundamental shift in the way disabilities are rated and promotes consistency, uniformity and objectivity," said Ms. Bradshaw. "As a result, the new rating method will bring about the cost savings desired by an overwhelming majority of the Legislature and the Governor."

The workers' comp issue loomed in the forefront of California politics during 2004, along with expectations that rates will decrease substantially. Ms. Mahrt noted that it is important to ensure that the reform process continues on schedule, so that insurers can meet those expectations.

One major potential roadblock, she said, is the California Applicant Attorneys Association, which has provided strong opposition to the reforms throughout the process by claiming that the changes will lower or even eliminate benefits for workers.

The Office of Administrative Law has up to 10 days from the filing date of the regulations, Dec. 23, to approve them, and Ms. Mahrt said the applicant attorneys were expected to mount a challenge in the administrative process.

"It's important that the applicant attorneys not thwart these reforms," she said, adding that the subjectivity of the system has allowed the attorneys to increase their income. "They don't want the reforms implemented because they make money off the flaws in the system."