California Launches New Round of Workers’ Comp Reform

Published February 1, 2004

In early January, California Governor Arnold Schwarzenegger renewed his call for dramatic reform of the state’s workers’ compensation insurance program, warning “California employers are bleeding red ink” from the system.

“I call on the legislators to deliver real workers’ comp reform to my desk by March 1st,” Schwarzenegger said in his January 6 State of the State Address.

“Modest reform is not enough,” he continued. “If modest reform is all that lands on my desk, I am prepared to take my workers’ comp solution directly to the people and I will put it on the ballot in November.”

Researchers for the San Francisco-based Pacific Research Institute (PRI) could not agree more on the need for substantive reform.

“Legislation was signed in fall 2003 to fix flaws in the system,” said Dr. Lawrence McQuillan, who with Andrew Gloger is author of How to Fix California’s Broken Workers’ Compensation System, a PRI report released on December 17, 2003. “But it did not go far enough. A second round of reforms is needed to fix this broken system.”

Schwarzenegger convened a special session of the state legislature on November 18 to address the crisis, and legislation reflecting the governor’s desired reforms has been introduced. California Insurance Commissioner John Garamendi, a Democrat, also has released a reform proposal.

“Clearly, both political parties recognize the gravity of the problem,” noted PRI.


California’s workers’ compensation system was launched in 1913 as a no-fault system to provide medical treatment and disability benefits to employees injured on the job and to protect employers from liability and litigation. Employers are required to purchase insurance, or to self-insure, to cover the medical costs of injured workers and to indemnify workers disabled by work-related injuries for lost wages and impairment.

The system has worked well, notes the PRI study, until recently. Workers’ compensation costs in the Golden State have tripled since 1997, accounting for up to 40 percent of payroll expenses. California employers now pay the highest workers’ compensation premiums in the nation, yet injured-worker benefits rank almost last.

“Given these cost differences, it is no surprise that California has lost 250,000 manufacturing jobs since 2000,” report McQuillan and Gloger. “Rather than pay these steep premiums, firms are moving out of state or going out of business. Buck Knives, Countrywide Financial, Fidelity, and 3Com have sought greener pastures outside California, citing soaring workers’ comp costs. Whether for-profit, nonprofit, or government, almost every entity has been hit by staggering premium increases,” they note.

Thomas Magowan, president of San Francisco-based Club Minibar, reports his company’s workers’ compensation rates in California went from “6 percent of payroll in 1999 to a hefty 17 percent in 2002, a nearly 200 percent increase in only three years, despite having just one claim in that period for less than $2,000.” In 1999, Magowan paid 11 percent more in California than he did in Illinois. In 2003, he paid 408 percent more in California than Illinois, and 520 percent more than in Washington, DC.

Round One of Reform

In the final days of the 2003 session, the state legislature passed a workers’ compensation reform package signed by Gray Davis on October 1, just days before voters recalled him from office. The reforms became law on January 1, 2004.

The first round of reforms targeted skyrocketing medical costs, which account for nearly 60 percent of workers’ comp premiums. Limits were placed on the number of allowable chiropractic visits and physical therapy treatments. Guidelines for medical treatments were established and employers were required to monitor compliance with those guidelines. Fees for outpatient surgery centers were tied to Medicare rates and pharmaceutical prices were tied to Medi-Cal rates.

According to the Workers Compensation Insurance Rating Bureau (WCIRB), the agency designated by state officials to compute premium recommendations, the 2003 reform package will provide $4.2 billion in ongoing annual savings for employers. WCIRB recommended premium rate cuts of between 2.9 percent and 5.3 percent on January 1.

Round Two

The California Labor Federation has called for price controls on insurance premiums as the next step in workers’ comp reform. Federation President Tom Rankin backs price controls because he believes “there is not much else that can be done in other areas [of workers’ comp reform] without hurting injured workers.”

State Senator Richard Alarcon, a Democrat and chairman of the Labor and Industrial Relations Committee, which handles workers’ comp legislation, has threatened to provide regulatory authority to the insurance commissioner to force carriers to lower premiums. He added he would like to see voluntary rate reduction, “but if you force our hand, we will do it.”

“But price controls always create more problems than they solve,” warned PRI’s McQuillan and Gloger. “Instead, further structural reforms are urgently needed that will cut premiums for employers, yet not reduce benefits for deserving injured and disabled employees.”

“This objective can be achieved by bringing together the best features of the Garamendi and Schwarzenegger plans and incorporating ideas from legislators and system insiders,” they noted.

Susan Martin is public relations associate for the Pacific Research Institute. ( Her email address is [email protected].