Workers' comp on the mend.

• Author: Wilkie, Dana
• Position: Workers' compensation - Includes related article

THE HANDS THAT WERE WRINGING NOT LONG AGO OVER THE WORKERS' COMP MESS ARE NOW APPLAUDING CALIFORNIA'S REFORMS.

What if one of those typically outrageous bills for the rent, the heat or the car insurance showed up in your mailbox this month asking for $50 less than usual?

Surprised? Of course. Pleased? You bet.

That, you can imagine, is the feeling of California businesses just now benefiting from reforms made to the state's long-notorious workers' compensation system.

Insurance premiums are plummeting - so much so that observers wonder about the solvency of some carriers. Major workers' comp mills, the seedy medical-legal partnerships that had driven California's insurance costs sky high, are shutting down. The number of stress claims has, in some areas, been cut by half. Checks for injured workers are getting fatter.

Much of this grand news about the effects of the reforms - the California Legislature passed the bulk of them in 1993, though some were signed earlier - is anecdotal. But most with a stake in the system agree: Changes to California's 80-year-old workers' compensation system, which were supposed to slice at least $1.5 billion out of an $11 billion system, have actually hacked away as much as $3 billion in costs. Maybe more.

"I was just shocked at how much they dropped," Sacramento day school owner Pam Barrow-Lynn said of her workers' compensation premiums, which dived from $10,842 in 1993 to $7,880 last November. "The rates were very burdensome to employers."

Robert Boucher, who manufactures parts for radio-controlled toys, said the mental stress claims of a few fired employees were what really hurt him, bumping his premiums to 30 percent of his payroll in 1990.

"I couldn't pay it," says Boucher, now thankful that California law makes it harder to file psychiatric claims. "It was impossible."

In the iron and steel construction industry where workers' comp rates are among the highest, premiums last year had gone down by $11.85 per $100 of payroll. At general warehouses, they were down $6.49. The number of claims per $1 million of payroll declined by more than 31 percent between 1991 and 1994. On average, insurers are quoting rates 25 percent to 30 percent lower than those quoted in 1993, and in some cases, far less.

RAMPANT FRAUD

"It's a new ball game," says Casey Young, administrative director of the Industrial Relations Department's Division of Workers' Compensation. "What I hear is that the rates for some companies are exceedingly low."

By the early 1990s, the workers' compensation system in California was infamous: Lengthy newspaper exposes and national television programs had turned a bright light on a system that was among the costliest in the country, yet provided some of the lowest benefits to injured workers.

The cost-driving culprits? Easily filed psychiatric claims where workers needed to prove that only 10 percent of their stress was related to their jobs. Uncontrolled medical costs, particularly in vocational rehabilitation and the expensive, sometimes numerous, evaluations that doctors made of injured workers. A minimum-rate law that guaranteed insurers remained solvent, yet stifled competition and, consequently, competitive premiums. And rampant fraud, well illustrated by boldly advertised partnerships of doctors and lawyers who lured and exploited workers, milked insurance companies and passed the buck along to businesses in the form of higher premiums.

Loudly and publicly, businesses blamed the workers' compensation system for helping them decide to move out of state.

Embarrassed by the national attention - and concerned about re-election - California lawmakers could no longer afford to accommodate the doctors, lawyers, insurers, employers and workers' advocates who had made a show of wanting to work together, but repeatedly failed to fashion effective reforms.

SEVEN KEY BILLS

In the summer of 1993, after a historic meeting of minds in the state Legislature, California Governor Pete Wilson put his pen to seven key bills designed to turn the workers' compensation system on its head.

Today, the reforms that get the most applause, and whose effects may be easiest to gauge so far, are those aimed at battling fraud.

"A lot of savings that have flowed through to employers are, in my opinion, a direct result of fighting fraud and driving criminals out of the system," said Jim Little, president and CEO of Fremont Compensation Insurance Co., one of the state's top five underwriters. "Here at Fremont alone, we're about to have our 100th arrest since 1992, so there was a lot of it out there."

Workers' comp fraud is no longer a misdemeanor in California. It's a felony with harsh penalties. Local prosecutors and the state's Insurance Department now get $25 million a year to fight fraud.

Workers' compensation mills, which invited employees to file suspect claims with the promise of large cash rewards, raked in money from the evaluations that doctors and lawyers prepare to prove contested claims. Not only did the Legislature cap the number of evaluations that workers can now obtain, it wiped out the built-in reimbursement formula that drove the cost of these evaluations higher each year, replacing it with a more modest schedule.

Where the cost of an exam once averaged $1,100, the price is now closer to $580. What's more, the exams are no longer the bread-and-butter they once were for workers' compensation mills.

"It nipped in the bud the ability of these mills to generate a claim with four or five different [medical] specialities," said William Molmen, general counsel for the San Francisco-based California Workers' Compensation Institute, a think tank funded by insurers.

Rockwell International reports a 65 percent drop in workers' compensation expenses because of this change alone: Medical costs dropped from $400,000 to $141,000 in one year.

Also inflating the workers' compensation system and providing money for mills were the so-called stress or psychiatric claims, which had, in the words of the state's Industrial Relations Department, become "the foremost symbol of what had gone wrong with the California workers' compensation system."

In 1981, there were 1,844 such claims in California. In 1990, there were 10,444. In 1991, 15,668. Driving this increase were two...