As Gov. Arnold Schwarzenegger and Democrats in the Legislature try to hammer out a compromise on workers' compensation in the days ahead, one of the key issues will be whether the rates paid by California employers should be regulated by the state.

State Sen. Richard Alarcon, a Democrat from Los Angeles and chairman of the Senate's Industrial Relations Committee, predicted last week that Schwarzenegger will accept state control of workers' comp insurance premiums.

"I believe that a majority of the Legislature will send a bill to the governor, and he will sign it, that will include regulation of insurance industry pricing," Alarcon said at a panel discussion taped for broadcast this week by the public television program California Connected.
Schwarzenegger aides say the governor remains opposed to the concept because he fears that price controls would reduce the incentive for more companies to enter the market, ultimately leading to higher, not lower rates.

But Schwarzenegger and his fellow Republicans have a problem. Relying on the market, there is no guarantee that reforms adopted in Sacramento will lead to lower insurance premiums. Injured workers could lose certain rights they have now while employers wouldn't see any benefit from the change. The difference could go into insurance company profits.

In a sense, Republicans have created something of a political monster. By playing to the legitimate concerns of small business owners, they have built expectations for rate reductions to the point that nothing short of an immediate cut will convince many business people that the reforms are real.

Lee Thurston is typical. The Grass Valley furniture manufacturer has seen his rates rise steadily over the past several years, even as his factory's injury rate has been stable. He is now paying about $40,000 a month in premiums to cover a payroll of about $230,000.

"I wake up every morning and I realize that I'm going to work to pay the insurance company because the money certainly isn't going to my employees or to me," Thurston said in the California Connected taped discussion.

But the point of insurance is to share the risk, and even if the cost of injuries at Thurston's factory haven't increased, the same can't be said for the entire state. While the number of injuries is declining, the cost of medical care and disability benefits is climbing. Even companies that self-insure by setting aside a pot of money to cover workplace injuries are seeing their costs soar.

The insurance industry contends that companies selling workers' compensation coverage in California have, as a group, been losing money on the business in recent years. They point to a study by the National Association of Insurance Commissioners that says California insurers are paying out $1.17 in claims for every $1 they earn in premiums and investment income.

So where is the money going? A recent report from the Workers Compensation Research Institute found that the cost-per-claim in California was growing 15 percent annually, and that the average cost of the most serious claims, those involving more than a week's lost time from work, was 29 percent above the median of 12 large states studied.

Medical costs per-claim were 20 percent to 52 percent higher in California than the 12-state median, depending on the type of injury, and the higher costs in California were due to the greater usage of medical care, not higher prices. Temporary disability lasted three to eight weeks longer than the comparison states, and a higher percentage of claims in California lasted more than seven days. Legal costs are also higher here.

Some of that disparity is expected to shrink in the months ahead thanks to changes approved last fall, including the adoption of a medical fee schedule and controls on chiropractor visits and drug costs. But even if those costs do shrink, there is nothing to compel insurance companies to pass along the savings to employers.

Short of all-out regulation, there are a few things the state could do to try to reduce rates.

One is to do everything possible to reduce rates at the State Compensation Fund, the quasi-governmental insurer-of-last resort that now controls over half of California's market. If the state fund reduces its rates, private insurers will have to follow, or risk losing business.

Another option would be to require fuller and more frequent disclosure of insurance company costs, premiums and profits, in a format that any business owner or employee could understand.

A more intrusive alternative would be to give the state insurance commissioner the power to review rates in the private market and order adjustments for premiums that were either too low or too high, based on standards set in advance.

Schwarzenegger is unlikely to go for full-fledged regulation of the industry. But given that he is someone who likes to see quick results, don't be shocked if he agrees to legislation designed to guarantee that the fruits of any reforms will be reflected in lower premiums charged to employers, and soon.