Despite Reforms, Frictional Costs Remain High in Workers' Comp System

Originally published by WorkCompCentral on July 7, 2020.

Bringing California's expenses in line with those from other comp systems will require legislation "that simplifies all aspects of discovery and administration, from the filing of the claim to obtaining medical treatment to obtaining physician evaluations up to settlement or trial.” - Alan Gurvey

WCIRB officials have cited issues such as complex claims involving permanent disability or cumulative trauma as reasons for the high expenses. They also point to high rates of legal representation, drawn-out claims and a high volume of liens as drivers of loss adjustment expenses, which have remained high despite recent reforms that were intended to lower frictional costs within the state’s workers’ comp system.

The WCIRB’s data shows the state has improved slightly over 2018, when the workers’ comp system spent 54 cents to deliver $1 of benefits. But the current rate still pales in comparison to other benefits systems.

The median comp system spends just 24 cents providing $1 dollar of benefits, according to data compiled by the WCIRB. Private group health insurers spend on average 18 cents for every $1 in benefits, while Medicare spends just 2 cents for every dollar it provides.

Allocated loss adjustment expenses, or ALAE, have remained relatively flat — albeit high compared with other states — since 2009 despite recent decreases in average medical costs in California, according to WCIRB data. 

California’s average allocated loss adjustment expenses per indemnity claim were $10,473 in 2019. The average medical cost per indemnity claim was $29,545 in 2019 after topping out at $36,004 in 2011.

The state’s ratio of ALAE to losses — 22.8% — is five percentage points higher than the next-highest state and more than twice the nationwide average. The WCIRB says a high proportion of permanent disability claims and cumulative trauma claims are large contributors to this fact. 

California led the country with an incidence rate of 704 permanent disability claims per 100,000 employees. Missouri was No. 2 with 529 permanent disability claims per 100,000 workers, and the national average was 283.

The WCIRB also reported a preliminary estimate that 14% of indemnity claims filed in the 2018 accident year alleged cumulative trauma. That's down from a high of 16% in 2016, but just slightly less than double the 8% rate reported for 1998.

A high rate of representation and litigation on claims is another factor that has contributed to system expenses, according to the WCIRB. Thirteen percent of indemnity claims remained open at 60 months, almost three times the median despite recent accelerations in claim closure rates.

The WCIRB says the slow rate of closure in California is the result of high volumes of medical liens filed, higher rates of permanent disability claim frequency and a high complexity of handling and settling claims. 

Although lien filings per quarter in the state are down 70% since 2017 — a “historical low,” according to the WCIRB — lien issues are “virtually nonexistent” in other states’ workers’ comp systems. The drop in lien activity occurred after lawmakers passed Senate Bill 1160 and Assembly Bill 1244, which became law in 2017 and included reforms to lien-filing provisions. 

Alan Gurvey, managing partner of applicants' law firm Rowen, Gurvey and Win in Sherman Oaks, said California's comp system has become increasingly complex, didactic and filled with potential for misuse.

“What I mean by that is that it is so rule-laden and difficult to maneuver and navigate that it causes hefty costs in dealing with litigation and administrative issues," Gurvey said. "Just understanding the rules involved in the panel qualified medical evaluation process is daunting. The prospects for protracted litigation for simple issues are numerous and varied."

Gurvey said bringing California's expenses in line with those from other comp systems will require legislation "that simplifies all aspects of discovery and administration, from the filing of the claim to obtaining medical treatment to obtaining physician evaluations up to settlement or trial.”

“To get from point A to point B is really ridiculous, given the minutia and opportunities for delay and denials," he said. "This delay and denial is even more relevant to medical treatment.”

Diane Worley, executive director for the California Applicants’ Attorneys Association, said the state’s high rate of claim denials contributes to its relatively high workers’ comp expenses.

She said a white paper Lockton Analytics published in 2018 found claims that are initially denied are more expensive than those that are accepted from the start. Lockton found more than two-thirds of the claims that were initially denied in 2017 were later accepted as compensable. And the firm said the average net incurred value of a claim that is accepted is $10,153, while the average for a claim that is denied is $15,694, a difference of 55%.

The average expense associated with a claim that is initially denied is $5,058, compared with the average expense of $1,397 on accepted claims, according to Lockton.

"Expense on denied claims is nearly triple the amount of non-denied claim expense, making it the primary driver of the wedge between denied and non-denied costs," Lockton's paper reads.

Worley said that when an injured worker is faced with a denied claim, his only recourse for help is to hire an attorney. And she said complex claims are more likely to be denied.

"Permanent disability claims are more likely to be denied because of the costs involved. CT claims are more likely to be denied," Worley said. "In its October 2018 report on CT claims the WCIRB confirmed that over 70% of CT claims are initially denied in whole or part. So this all seems to correlate with claims behavior in California which is skewed to denying claims rather than paying benefits upfront, which makes claims more expensive.”

Frank Neuhauser, a researcher at the Institute for the Study of Societal Issues at the University of California, Berkeley, says one reason workers’ comp costs appear so high might be that the WCIRB is so successful at interpreting data compared with other state bodies.

“WCIRB probably does a better job of separating expenses from payments than other rating orgs,” Neuhauser wrote in an email. “An example would be segregating medical expense costs from medical payment costs.”

California stakeholders also might be willing to accept higher expenses due to a more complex system because it “tolerates a much broader ranch of compensable conditions,” Neuhauser said.