Numbers and More Numbers

By: Mark Webb

Last month, the Workers’ Compensation Insurance Rating Bureau (WCIRB) released its annual State of the System report.  It is an important document for those who want to see what is driving costs in this largest of state workers’ compensation systems.

It should also be required reading for those who are advocating for various changes in Sacramento. While loss ratios and return on net worth are the stuff of soundbites from critics, there is one figure that stands out above all others in this report and its predecessors and pre-Senate Bill 899 ancestors.

That is Chart 27 – Permanent Disability Claims per 100,000 Employees.

California has been at or near the top of permanent disability (PD) claims frequency for decades. The comparative chart used by the WCIRB would be even more glaring if only states using the American Medical Association’s Guides to the Evaluation of Permanent Impairment, Fifth Edition were compared. Of course, once the California Legislature and appellate courts got done with the AMA Guides, things did indeed look a bit different than from other states.

As to the actual numbers, the median PD claim frequency in states making up this comparison – which are all states and the District of Columbia in which private insurers write policies – is 256 per 100,000 employees. California’s number is 639.

We are spending more to deliver PD benefits than we are actually paying for them

That leads to another interesting comparison. Per the report, in 2020 insurers paid $1.5 billion to applicant and defense attorneys and for medical-legal costs. Over this same period, roughly $1.1 billion was paid in permanent partial and permanent total disability benefits. If you are reading the report, you will note that the amount paid in permanent disability benefits is shown as $1.5 billion (Chart 53). That number, however, includes the $400 million paid to applicant attorneys also shown under the category of “frictional costs” (Chart 45).

Pay attention now. Workers’ compensation analysis is the longest running word-math problem in our Nation’s history. It will not stop any time soon. California has high frictional costs associated with every benefit provide to injured workers. The point, however, is we need to understand the litigation premium in the system and acknowledge we are spending more to deliver PD benefits than we are actually paying for them.

The med-legal system has survived largely unchanged since its inception in 1989. It has been amended from time to time but its foundation remains virtually the same as it enters its fourth decade. Perhaps it is time to change focus from symptoms and back onto causes. If the litigation premium is going to be reduced, however, someone at the mythical stakeholder table needs to queue it up. Something to think about as people plan for 2022.

Note: The opinions expressed herein may or may not be those of Workers’ Comp Executive. Mark Webb is a former Arizona insurance regulator, insurance company chief compliance officer, and is an expert in corporate governance, risk and compliance. He is the owner of Prop 23 Advisors.