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Workers' Comp Crisis Worsens

The California system's soaring costs place a staggering burden on employers, workers and the economy. Some predict a meltdown.

May 25, 2003|Marla Dickerson | Times Staff Writer

Ten years after the passage of landmark legislation meant to fix California's troubled workers' compensation system, the $15-billion industry is in turmoil.

The system is so broken that the state finds itself in a perverse predicament: Employers in California pay more for workers' comp coverage than in any other state, yet their injured employees receive some of the skimpiest benefits in the nation.

Cutthroat competition and soaring medical costs have sent nearly two dozen workers' comp carriers into insolvency, while the state-run insurance program of last resort is facing financial troubles of its own. With ailing insurers jacking up rates to recoup their losses, total workers' comp premiums paid by California businesses were 69% higher last year than in 2000.

Because workers' comp costs are directly linked to the size of payroll, some employers are responding by freezing the size of their staffs, reducing hours or laying off workers.

Los Angeles businessman Mitchell Greif is going further -- to Las Vegas. The owner of a bag-making plant, Greif decided to move his operation after getting socked with a $570,000 workers' compensation premium, more than double what he was paying two years ago. From neighboring Nevada, he figures he still can easily serve his large customer base in California, while shaving his workers' comp costs by at least two-thirds and reaping big savings on labor, insurance and electricity.

"I never thought I'd be leaving California," said Greif, chairman of Coast Converters Inc., which will be cranking out bread bags, magazine wrappers and potato sacks from a newly renovated facility in Las Vegas by midsummer. "The workers' comp was really the last straw."

The hefty increases in workers' comp premiums are coming after years of artificially low insurance prices, placing a staggering new burden on companies at a time when the economy is struggling. And it's not just the private sector. Government budgets are feeling the strain. So are the managers of nonprofit organizations, who have joined angry businesspeople at public hearings statewide to denounce a system they view as costly, inefficient and rife with abuse.

"It's just totally out of control," said Fred Robinson, executive director of Arc Ventura County, a nonprofit organization serving the developmentally disabled that has cut staff and closed a group home to finance a $327,000 hike in its workers' comp premiums this year. "Everybody knows it and nobody is doing anything about it."

Economists say the speed and magnitude of the workers' compensation insurance increases are helping undermine the state's fragile recovery. The extra $6.3 billion that California businesses paid in workers' comp premiums last year compared with 2000 is as big a burden as the corporations tax, California's largest business tax. That's bad news for a state that hasn't added any net jobs this year.

"It's basically a tax on employment," said Ted Gibson, former chief economist for the California Department of Finance. "If you want a recipe for discouraging hiring, this is how you do it."

Workers' comp insurance pays for the medical care, rehabilitation and some lost wages of injured workers, as well as death benefits for employees killed on the job. California's maximum disability benefit is $602 a week.

California's 90-year-old system was among the first wave of state programs established in the early 20th century in response to dangerous working conditions in the nation's shops and factories. The "no-fault" system is a tradeoff: Employers agree to cover the medical costs for workers injured on the job, even if the company wasn't to blame. In exchange, workers give up the right to sue their employers for workplace injuries.

More than 14 million California workers are covered by the system, which is paid for by the state's employers. Companies are required by law to buy coverage or set up their own self-insurance programs.

Workers' comp costs have been rising nationwide, fueled by spiraling medical expenses. But by nearly every measure, California's system is the costliest, most cumbersome and closest to meltdown in the U.S., according to industry studies and experts.

* California employers pay the highest premiums in the nation, an average of $5.23 for each $100 of payroll, according to research by the Oregon Department of Consumer and Business Services. Runner-up Florida was $4.50, while 40 states average less than $3. Yet weekly benefits to injured California workers rank in the bottom third of all states, in part because a large chunk of dollars in the system is being squandered inside a vast network of middlemen, as well as being lost to fraud and abuse.

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