California Blueprint for Workers’ Comp Reform

Published February 1, 2004

Workers’ compensation is a worthwhile program that works well in most states. California’s program, 90 years old, should be salvaged.

But lawmakers must rewrite workers’ comp rules before more damage is done to the state’s economy. Every dollar spent on increased workers’ comp insurance premiums is one less dollar available to hire new employees or provide better benefits to existing employees.

The Pacific Research Institute has proposed a comprehensive structural solution to the state’s workers’ compensation crisis without the need for price controls on insurance premiums. If enacted, it would save employers billions annually and put the workers’ compensation system on sound financial footing. This would encourage new hiring, return luster to the Golden State’s business climate, and promote future prosperity for all Californians.

The following points summarize major recommendations in five key areas.

1. Benefits, Eligibility, Administration The first action should be to defer scheduled benefit increases until average workers’ comp premium rates in the state fall to the national average.

2. Medical Spending Since 1997, average medical costs per California workers’ compensation claim have increased nearly 20 percent per year. Over that same period, by contrast, the Consumer Price Index for medical services has increased, on average, less than 4 percent per year. Further reforms must be made to control medical costs.

3. Disability Claims Process The number of disability claims in California is almost three times the national rate. In 2002, California saw 1,221 claims per 100,000 workers, compared to 434 nationally. Permanent disability payments per injured worker in California are also three times the national average.

4. Vocational Rehabilitation The workers’ comp reform passed by the legislature in late 2003 repealed the previous vocational rehabilitation benefit for disabled employees, replacing it with a $4,000 to $10,000 education voucher for those who are not offered re-employment. This new provision also should be repealed. Disabled employees are fully indemnified for lost earnings by disability benefits. The employee, not the previous employer, should pay for any retraining or skills-enhancement education. To do otherwise would allow some to gain from their disability. Moreover, if employees pay for their own vocational rehabilitation, retraining success rates would rise.

5. Litigation and Penalties California’s workers’ compensation system was originally designed to minimize litigation. But something went wrong along the way.

Of the roughly one million workers’ comp cases filed each year, about 20 percent are contested. By contrast, Arizona litigates only 6 or 7 percent of its cases. Worse yet, 76 percent of Californians’ permanent disability cases end up in litigation.

Implementing the above recommendations on medical and disability benefits would inject greater objectivity into the system and help reduce litigation costs. But other changes also must be made:

  • Compensate only those injuries that are predominantly caused by the workplace–meaning more than 50 percent caused by the job–not proximately caused.
  • Change the medical care standard from cure and relieve to “medically necessary,” the same standard that applies to group health insurance.
  • Restructure the permanent disability rating system according to American Medical Association guidelines for determining physical impairment, used by most states.

Lawrence McQuillan is director of, and Andrew Gloger is a policy fellow in, PRI’s Business and Economic Studies department. They can be reached by email at [email protected] and [email protected], respectively.

For more information …

The full text of How to Fix California’s Broken Workers’ Compensation System, released by Pacific Research Institute on December 17, 2003, is available from the PRI Web site at