WC Cost Trends

Bright Spot in California’s Costly WC Landscape

California payers still face exorbitant premiums and claims costs, but a drop in the rate of medical inflation is a welcome piece of good news.
By: | August 3, 2015

The mere mention of California usually causes workers’ compensation claims payers to cringe.

Yet there is one bright spot where the Golden State outshines other jurisdictions despite its infamously exorbitant claim expenses and workers’ comp insurance costs.

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California’s workers’ comp medical inflation is growing at 40 percent of the rate of increase that most other states are experiencing, according to a Workers’ Compensation Insurance Rating Bureau of California report published July 29.

The “State of the California Workers’ Compensation Insurance System” report summarizes several forces shaping a system insuring more than 500,000 employers and generating the highest insurance rates in the nation.

Those 500,000 insured employers fund medical and wage replacement benefits for nearly 800,000 injured workers annually. During 2014, California’s employers paid a total of $16.5 billion in premiums, or 27 percent of the nation’s total.

On average, employers nationwide pay workers’ comp insurance rates of $1.85 per $100 of payroll while California employers pay more than $3.00 per $100 of payroll.

Factors contributing to California’s markedly higher rates include the highest frequency of permanent disability claims in the nation, medical costs driven by prolonged treatments and larger than average costs for claims handling and benefit delivery.

The high cost of delivering benefits is documented by a ratio of loss adjustment expense to losses of 28.2 percent for California, nearly 10 percent greater than the nationwide median.

California’s 2014 workers’ comp costs would be nearly $3 billion greater had it posted similar growth in medical inflation as the other states did.

California’s greater-than-average proportion of permanent disability claims, excessive litigation rates, and a high frequency of independent medical reviews contribute to its disproportionate loss adjustment costs.

Expenditures for medical cost containment programs also drive California’s high loss-adjustment costs, the WCIRB reports. The state’s total medical cost containment expenses reached $471 million during 2014.

Bill review and utilization review services comprise the largest components of WCRIB’s calculation of medical cost containment expenditures, said Dave Bellusci, the rating bureau’s executive VP, chief operating officer and chief actuary.

The WCIRB did not include expenses such as nurse case management in its calculation of cost containment services.

While California’s spend on medical cost containment services has nearly doubled over the past seven years, rising from $245 million in 2007 to the $471 million in 2014, the spending contributes to the state’s bright spot of lower than average medical inflation.

California’s average annual cost of medical inflation per indemnity claim grew only 1.9 percent between 2001 and 20014. In contrast, a similar measure for 35 other states showed an average annual growth of 5 percent in medical inflation.

California’s 2014 workers’ comp costs would be nearly $3 billion greater had it posted similar growth in medical inflation as the other states did.

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The lower medical inflation over the past decade is narrowing the gap between workers’ comp medical expenses paid in California and those paid in other states, Bellusci said.

Yet California is still no bargain.

The WCIRB report shows that California’s average medical benefit per claim cost exceeds 90 percent of the countrywide median despite more than a decade of the lower rate of medical inflation.

California still has such high medical costs per claim because its medical expenses rose more than in other states before California workers’ comp reforms in 2003, 2004 and 2012 helped tackle the inflation, Bellusci explained.

“California started from a very high level,” he said.

Roberto Ceniceros is senior editor at Risk & Insurance® and chair of the National Workers' Compensation and Disability Conference® & Expo. He can be reached at [email protected] Read more of his columns and features.

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The R&I Editorial Team can be reached at [email protected]