Oakland, CA (WorkersCompensation.com) – Legislative reforms have resulted in $3 billion in annual savings to the California workers’ compensation system. The latest report from the state’s rating organization said while California still has one of the highest cost workers’ compensation systems in the country, it is no longer the highest.
“Many key cost drivers have come down over the last few years,” said David Bellusci, executive VP and chief actuary at the Workers’ Compensation Insurance Rating Bureau, during a webinar on the latest report this week. “Medical costs have had the greatest impact of recent reforms [with] dramatic reductions in pharmaceutical costs.”
Payments for drugs decreased by 75 percent from 2013 to 2018 — from 10 percent of paid medical benefits to 2 percent. Several provisions of reforms are credited with reducing the amount spent on pharmaceuticals, including:
- Independent medical review
- Fewer spinal surgeries
- Anti-fraud efforts
- California’s recently imposed drug formulary which “has been a very positive impact,” Bellusci said.
Also driving the decreased spending was a reduction in opioid use. The average cost per claim on opioids went from $15,897 in 2013 to $1,746 in 2018 — a nearly 90 percent reduction. The report also credits the use of the California Controlled Substance Utilization Review and Evaluation System, CURES, California’s prescription drug monitoring system, for helping to reduce spending on opioids.
Premium rates continue their three year decline, and are expected to be 8 percent lower in 2019, or $15.78 billion in calendar year 2019 compared to $17 billion in CY 2018.
Average charged rates per $100 of payroll have decreased by one-third since 2015, and are $2.04 for the first six months of 2019. “Compared to the rest of the country, California is still a very high cost state,” Bellusci said. “It had been the highest; now New York is a bit higher.”
Largely driving the higher costs are frictional ependitures, including defense attorney expenses, medical cost containment program costs, applicant attorney fees, medical-legal costs, other allocated loss adjustment expense costs, and unallocated loss adjustment expenses. “Many key cost drivers have come down over the last few years, but not frictional costs,” Bellusci said.
The frequency of indemnity claims, while still decreasing, has been “relatively flat” over the past several years. It went from 14.6 claims per 1,000 employees in 2018 to 14.4 so far in 2019.
Reforms enacted in 2004 caused a dramatic reduction in frequency, much mores o than in NCCI states. While both NCCI states and California had a bump in frequency after the Great Recession, “California and NCCI states’ frequency has recently diverged, as California has stayed relatively flat while NCCI states have returned to the historical rate of decline,” the report said. Geographical differences are seen in frequency numbers. “Frequency is highest in the Los Angeles basin, and lowest in the Bay area,” Bellusci said. “There’s a significant differential. LA had a 32 percent higher rate that the state average.”
One of the big drivers, especially in the LA area: cumulative trauma claims.
Unlike a specific injury, cumulative trauma is a repetitive event; a culmination of many movements that would not, by themselves cause an injury. These are not unique to California; however California’s regulations lend themselves to more of these claims than other states.
The threshold requirements in California are lower than other states. Where others impose a higher causation standard or more proof, California requires just a 1 percent causation threshold and uses a simple preponderance of evidence standard of proof.
Also, there is no specific date by which CT claims must be filed in California. The law says the claim date of injury is when “the employee first suffered disability there from and either knew, or in the exercise of reasonable diligence should have known, that such disability was caused by his present or prior employment.”
“About 18 percent of all indemnity claims are CT claims, much higher than other states,” Bellusci said. “The percentage of CT claims by region [shows] all growth in the LA basin, and recently in San Diego.”
CT claims “are often reported late, are frequently denied in part or while, almost always litigated, and 40 percent are filed after a worker is terminated,” he added. “So these have unique characteristics.”
Where average indemnity severities had been relatively stable for several years, that changed. “There was a sharp increase in 2018,” Bellusci said.
“The 6 percent increase … for 2018 is preliminary but may be indicative of shifting severity patterns,” according to the report. “Higher-than-average indemnity costs in California are largely driven by the high proportion of indemnity claims involving permanent disability and high wage levels.”
The proportion of claims that involve permanent disability is “more than 250 percent higher than the national median,” Bellusci said.
- Costs to deliver benefits. The report shows it cost $0.54 to deliver $1.00 of benefits in the California workers’ compensation system. That compares to $0.02 for Medicare, $0.18 for private group health insurance, and $0.24 for the average median workers’ compensation cost nationally. “California claims administrative costs are more than double the cost to provide $1 of benefits compared to the median state workers’ compensation system.” The report said.
- Healthy insurance market. It’s a non-concentrated market. Rates continue to decline, but remain among the highest in the nation.
- Claim closing rates continue to increase.
- Loss adjustment expenses are still among the highest in the nation, with those in the LA basin among the highest compared to other regions
- Combined ratios remain relatively stable and are still under 100 percent.