Fixing workers compensation comes down to changing the minds-and strengthening the spines-of a handful of power players in Sacramento. These powerful few must find what we pundits sometimes call the "political will" to take action that goes against their own short-term self-interest.
This point was made rather amusingly on March 10 when Democratic state Sen. Richard Alarcon of Los Angeles-who along with a few other key legislators bears heavy responsibility for dragging out California's workers compensation crisis in 2003-made a boob of himself in public.
Alarcon misunderstood an e-mail, sent to politicos whose actions will determine whether Sacramento fixes this crisis or dumps the mess in the laps of voters in November. The informational e-mail, sent by the Workers Compensation Insurance Ratings Bureau, explained that in early 2003, the WCIRB had been wrong about how many business and government entities were "self-insured"-which is one way the big employers such as Safeway or Los Angeles County try (but fail) to control workers comp costs.
WCIRB said it was wrong in early 2003 when it estimated the size of the workers compensation market at $25 billion. It turns out, the e-mail said, that the self-insured market had been $2.2 billion smaller than it thought. Moreover, the e-mail noted, piecemeal reforms signed by Gov. Gray Davis last fall brought $4.5 billion in annual savings. As a result, the workers comp market in 2003 was $18 billion, about $7 billion smaller than predicted.
Fixing the $2.2 billion overestimate, and confirming the $4.5 billion saved, is good news. It means that a huge $25 billion workers comp market, from which Gov. Arnold Schwarzenegger wanted to cut $11 billion, is actually $18 billion in size. Instead of cutting $11 billion, the challenge will be lowered.
But Alarcon, one of many legislators who often attacks business as bad and seems to not understand basic economic concepts like markets, misunderstood the e-mail. He called a press conference to blast a group he felt was getting rich off figures he did not grasp-private insurance companies. Alarcon added together apples and oranges, the $4.5 billion in savings and the $2.2 billion in overestimates, calling both "savings." He insisted that this nearly $7 billion wasn't passed to consumers.
At his press conference, he dramatically accused private insurance companies of gouging, and said the earlier overestimate created "an opportunity for insurance companies to overcharge businesses throughout the state of California." He insisted private insurers roll back their rates immediately.
It's worth noting that Alarcon needs lots of media coverage because he is running for mayor of Los Angeles.
Yet his performance was still baffling. Just as state Insurance Commissioner John Garamendi was getting ready to fly to New York to beg a half-dozen insurers who have abandoned insane California to come back, Alarcon was putting them in league with the Devil.
Two days later, I called to find out why Alarcon hadn't withdrawn his inaccurate claims about $7 billion in "savings." But Luis Patino, Alarcon's chief of staff, refused to admit an error.
"The WCIRB can argue as long as they wish and juggle the figures around, but the point is, the figure is much smaller now," he said. "Sen. Alarcon's message then and now is that something has to be done to regulate the insurance companies. He is not proposing this as a cure-all-he never said that."
Jack Shannan, a spokesman at WCIRB, countered, "Politicians are going to say what they are going to say."
Sadly for California, private insurers today account for only 25 percent or so of the market, so there's little competition. More than 50 percent of workers comp is insured by a special state fund, and 20 percent are self-insured. Two-dozen private companies fled. Proposing to regulate rates will surely drive more away.
While Alarcon attacks insurers, he avoids explaining why costs also skyrocketed in the state fund, nor why the self-insured have crazily boosted their own rates on themselves. For example, Safeway, California's second-largest employer, is self-insured. The cost of Safeway's average workers comp claim in California is seven times higher than in Texas. Rates have spiraled accordingly.
Does Alarcon believe self-insured entities like Safeway are gouging themselves?
I'm giving Alarcon a hard time for good reason. He holds a tremendously powerful position in Sacramento as chairman of the Senate Labor and Industrial Relations Committee. He actually affects millions of real people. Last year, I watched Alarcon blithely kill a package of solid bills in his committee that would have ended the workers compensation crisis in California. This travesty went largely uncovered by the media.
Instead of addressing the deep problems in 2003, Alarcon pushed half-measures to end the overuse of chiropractors and to set fees at outpatient centers.
The crisis is not caused by the admittedly impressive overcharges by chiropractors and outpatient centers. The fact is, California has the worst return-to-work rate for injured workers in the United States. Our "temporary disabilities" last about 23 weeks. This, even though we're a service state, not industrial. Our injuries are less severe than Pennsylvania, with its manufacturing, or Oregon, with its logging. In a study of 12 big states, California sent far fewer workers comp injuries to the hospital-indicating California's injuries are indeed less severe.
Yet California has the third-highest number of claims involving defense attorneys. Our average indemnity benefit paid to the partially disabled in 2002 was $21,819-double and triple that of states like Illinois, Indiana, Texas, Wisconsin, Connecticut and North Carolina.
To fatten their 12- to 15-percent cut, California trial lawyers encourage clients to demand payments not allowed in rational states. This strategy pays off handsomely. In 2002 alone, trial lawyers drained nearly $500 million in fees from the system. In 2003, Alarcon made sure none of the bills that cut the take of the trial lawyers survived his committee.
One of my favorite scams is the way trial lawyers demand-and regularly win from California judges-multiple permanent disability payments for the same injured body part.
Say you hurt your shoulder and are awarded a 70-percent "partial permanent disability" rating. You will get a fat check for being disabled, beyond medical benefits. If you get another job and re-injure the same arm-and this holds true even if you were judged 100-percent disabled-in California you can go to court and get another permanent disability on the same arm. We have citizens with necks, arms or backs that are 300 percent disabled. Each new disability means another easy fee for the attorney.
Republican state Assemblyman Abel Maldonado of Santa Maria, author of a bill containing Schwarzenegger's reforms, says that even the labor unions are involved in serious closed-door negotiations to truly fix workers comp after years of protecting the trial lawyers.
But Alarcon and some key Democrats are resisting. It's a pretty sad situation when California's normally rigid labor unions are more reform-minded than the supposedly progressive Democrats.
"I really do see some movement from labor, which is willing to cooperate with the Governor and doesn't want to see this on the November ballot," says Maldonado. "But we have people like Mr. Alarcon and members of the Legislature who don't want to buck the applicants' attorneys. That is exactly what it is all about-that trial lawyers are a big source of campaign funds."
Maldonado says the Democratic leaders, Senate President Pro Tem John Burton and Assembly Speaker Fabian Nunez, are trying to find a way to compromise. But many other Democrats fear the attorney lobby more than they fear the toll of the workers comp crisis on California.
Says Maldonado: "They need to understand the system is broken and it's hurting the workers, because if you have a small business you cannot afford to give a raise anymore, or a bonus or even a company picnic, and the choice becomes: Who do we lay off?"
It's hard to exaggerate the mess here. California has no set dollar value for a given injury, unlike Oregon and so many states. It is utterly arbitrary, and for that reason it is bitterly fought out in court. As the Governor has noted publicly, California employers are paying $5.65 cents in workers comp costs for every $100 in salaries. The national average is half that-$2.38 cents per $100. The difference is going down a huge rat hole.
No other state is so screwed up, although Texas, Illinois and Tennessee suffer from similar loopholes and middlemen sucking their systems dry.
"California has 1,350 claims per 100,000 workers while nationwide it's 400 claims per 100,000 workers," says Maldonado. "This points to litigation, litigation, litigation. Attorneys are urging people to put in claim after claim. Everybody including the Governor understands this is what is happening."
Alarcon is by no means the only obstacle in Sacramento. But he is a pointed example of the cause of gridlock. He helps explain why things don't get fixed. He shows us why, when leaders operate from fear instead of from strength, the rest of us pay.Write to jillstewart@SDcitybeat.com.