Calif. Reforms Meet Stiff Resistance

Lawsuits, new legislation attempt to undermine Gov. Schwarzeneggers efforts

Just weeks after their implementation, major reforms to California's workers' compensation system enacted last year to return stability and competition to the market are already under attack in both the courtroom and the legislature.

Considered a top priority and a major success for Gov. Arnold Schwarzenegger's administration and the insurance industry last year, the last pieces of the workers' comp reform bill known as S.B. 899took effect at the beginning of 2005.

“We've really only had these laws on the books for a month now,” Nicole Mahrt, a representative for the American Insurance Association in Sacramento, noted in early February. “All the different moving parts have finally taken effect.”

Those regulations that took effect on Jan. 1, however, were only implemented by the Division of Workers' Compensation on an emergency basis and are now in the process of being made permanent. A hearing has already been held on rules regarding the establishment of medical provider networks, with others expected on treatment utilization and new regulations for establishing permanent partial disability ratings.

“The action on workers' compensation has shifted from the legislative arena to the regulatory arena and the courts,” according to Sam Sorich, president of the Association of California Insurance Companies, the Sacramento-based affiliate of the Property Casualty Insurers Association of America.

In the courts, the intent is more an issue of potentially killing the reforms rather than implementing them, Ms. Mahrt contends. The most serious threat to the reforms, she said, is a lawsuit claiming the permanent partial disability regulations were improperly enacted, filed by two groups the California Applicants Attorneys Association and VotersInjuredatWork.org. The applicants' attorneys, she said, “are worried that fixing the system will hurt their income.”

The groups behind the suit have argued that it is workers who will be hurt most, citing potentially drastic reductions to benefits under the permanent partial disability schedule enacted under SB 899.

“The consequences for injured workers are dire,” said Mark Hayes, president of VotersInjuredatWork.org. “The ratings fail to replace workers pre-injury earnings. If these drastic reductions take effect, more Californians will lose their cars, their homes and their good credit.”

The suit, filed in state Superior Court in Sacramento in January, effectively argues that the legislature improperly gave excessive authority to the administrative director of the Division of Workers' Compensation Andrea Hoch and that the regulations implemented violate provisions in the state constitution protecting the rights of an injured worker to compensation.

The suit contends that the legislature drafted SB 899 relying heavily on recommendations from the Rand Institute for Civil Justice, including a suggestion that the disability schedule be based on empirical data on actual loss of income of injured workers. In creating the new schedule, the suit contends that Ms. Hoch did not take these recommendations into account and seeks to have the permanent partial disability ratings schedule set aside or declared ineffective.

Ms. Hoch “is the most anti-worker bureaucrat to come along in the past 30 years,” according to David Schwartz, president of the CAAA. “Her proposed regulations fly in the face of the legislature's intent. There is no legal basis for what she has done, which she calls a 'policy decision.'”

Susan Gard, a representative for the Division of Workers' Compensation, said the regulator filed a response to the suit in late February. The division believes the regulations “uphold the spirit and intent of the legislature, and we are ready to stand behind them,” she said.

However, she noted that the suit does cause problems among the more important is that it will “rob the division of the time and talent to do the job we'd really like to do”namely, implementing and promulgating regulations passed by the legislature.

Ms. Hoch had no direct response to the criticism leveled by workers' comp reform opponents, although Ms. Gard said the comments were “typical” and “what we'd expect from the opposition.” The reforms passed by the legislature established some deep and serious changes to the workers' comp system, she noted. “We expect this response from people who are entrenched in the system and profit off of it.”

For insurers, the lawsuit creates the problem of uncertainty. “It does put insurers in a bit of a quandary,” Mr. Sorich said. “On the one hand, insurers are beginning to see the effects of the reform, but on the other, there is great uncertainty whether the regulations will stay in effect.”

Ms. Mahrt noted that litigation issues have undermined earlier attempts to reform the system. “It's very important that the regulations are properly implemented, so that this doesn't end up like prior efforts,” added Ms Mahrt, who said the AIA believes that the Division was very careful in crafting the disability schedule and predicts the regulations would survive the legal challenge.

“In the past we've seen litigation undermine reforms, but we really think the division did a good job with implementation and there is no basis for the lawsuit,” she said.

The dispute over the permanent partial disability ratings schedule could become a larger concern for Ms. Hoch and the Schwarzenegger administration. Her appointment to head the division has not been confirmed by the state Senate, Mr. Sorich noted, and labor representatives said they had planned to make opposition to her confirmation a priority.

While applicant attorneys and worker advocates have challenged the specifics of SB 899, the insurance industry believes that legislation introduced recently in the state Senate could effectively reverse the overall progress workers' comp reforms have achieved in the market.

When SB 899 was passed, much fanfare was made over the premium rate reductions it promised, which have not come swiftly enough for the bill's critics. In response to the perceived lack of progress, Sen. Richard Alarcon, D-San Fernando Valley, who chairs the Senate Labor and Industrial Relations Committee, in January introduced SB 46, which would establish a Commission on Workers' Compensation Rate Regulation.

The commission consisting of representatives of the governor, the state attorney general and the elected insurance commissioner would be charged with setting pure premium rates, adopting a uniform experience rating plan, issuing minimum and maximum expense multipliers to be used by insurers, and hearing appeals of rate decisions.

The bill, according to AIA's Ms. Mahrt, would “politicize how rates are set” and effectively undo the improvements to California's workers' comp market achieved by the reforms. “It would hurt the progress made and the competition coming back into the market,” she said.

The insurance industry has maintained that workers' comp, which has been in the red for the past decade, cannot be expected to suddenly offer drastic rate decreases without giving the reforms time to have an effect.

ACIC's Mr. Sorich said that Sen. Alarcon's bill is the most serious legislative threat so far to workers' comp reform but that he expected other bills to be introduced. However, he added that it is unlikely Gov. Schwarzenegger who championed workers' comp reform, and made the issue a key point in his election campaign would allow the reforms achieved so far to be reversed.

“We've seen no indication that the governor is in any way ready to back down from what has been accomplished,” he said.

Reproduced from National Underwriter Edition, March 4, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.