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Sacramento Bee
Mar 24, 2004 - 01:00 AM

by Gilbert Chan, Bee Staff Writer

Rate regulation key hurdle in workers' comp pact

Under pressure by Gov. Arnold Schwarzenegger to reach a workers' compensation agreement by Friday, top Democratic lawmakers are toughening their stand on regulating insurance rates in what could become a deal breaker.

Democratic state Insurance Commissioner John Garamendi introduced what he called a compromise on the issue at a meeting with the governor on Tuesday.

While Garamendi said the plan would force insurers to pass any savings to employers, the insurers are calling the proposal a financial "straitjacket."

Under the plan, insurers would be prohibited for three years from increasing their expenses or profits from the levels reported to the state on July 1, 2003. Instead, they would set their yearly rates based on the cost of claims.

Garamendi said the governor was noncommittal during the meeting, but Schwarzenegger's press secretary nixed the idea.

"The governor wants a free-market approach," press secretary Margita Thompson said. "Rate regulation is not going to address the cost drivers in the system."

A number of proposals for rate regulation have surfaced from legislators frustrated that employers' premiums didn't substantially drop despite last summer's legislation, which cut the cost of medical treatment.

The legislation remedied some of the problems with the troubled $17.9 billion workers' compensation system run by the state, but lawmakers and the governor say more changes are needed.

Repairing the system is a cornerstone of Schwarzenegger's economic recovery plan. Employers complain that high premiums are forcing them to put off business expansion or even cut jobs while injured workers complain about long delays in receiving benefits and treatment to help them return to the job.

The regulation of insurance rates - scrapped by lawmakers a decade ago - presents a major hurdle in workers' comp negotiations between Schwarzenegger and legislative leaders. If there's no agreement, the governor will go to voters with an initiative in November.

Thompson said Schwarzenegger wants a deal by Friday and legislative action on the overhaul before April 2, when lawmakers leave for spring recess.

"We are making considerable progress. The only sticking point is: How do we ensure that insurance companies pass on the savings (so) they translate to premium reductions for employers?" Assembly Speaker Fabian Nunez said. "We need to make certain that the mistakes made last year aren't repeated."

Sen. Richard Alarcon, D-Sun Valley, is more blunt: "We must reduce the rates. It (regulation) will be part of the package."

Republicans call it a diversionary tactic that fails to tackle issues driving up the costs of the state-run system to treat job- related injuries.

The governor, legislative leaders and their staffs have met daily. Schwarzenegger has met with influential labor chiefs and attorneys that represent injured workers. Insiders say other key issues are how to determine permanent disability benefits and who chooses the treating physician.

In recent days, however, insurance rate regulation has become a focal point. Some groups are calling for more drastic rules, such as rate rollbacks or a freeze.

The Foundation for Taxpayer and Consumer Rights today plans to propose regulations similar to those under the groundbreaking Proposition 103, a measure approved by voters in 1988 that slashed property and auto insurance rates.

Sen. Charles Poochigian, R-Fresno, said rate regulation won't fix the workers' compensation system since private insurers cover just a quarter of employers.

The remaining companies won't see any benefit because regulation won't apply to them. They rely on self-insurance, special policies with high deductibles or coverage from the quasi-public California State Compensation Insurance Fund.

"It would be tragic if they (Democrats) politicize the reforms that need to be done to fulfill some goal that will have little to do with fixing the system," said Poochigian, who is carrying the governor's package in the Senate.

Before Garamendi's proposal, legislative leaders had put forward a number of other plans for rate regulation. Among them:

* Giving the insurance commissioner authority to approve rates submitted by each carrier - a practice similar to that used to decide automobile rates.

* Creating an agency like the public utilities commission and allowing the administrator to issue rate decisions.

Insurers are bracing for a rate regulation plan.

"We are used to being regulated. It comes down to how do you define regulation," said Nicole Mahrt of the American Insurance Association. But if price controls won't allow insurers to cover their costs, the regulation "is going to threaten the financial solvency of companies."

The insurance industry points to statistics released by the National Association of Insurance Commissioners in January that show carriers have lost money for seven straight years through 2002, making California one of the least profitable states for workers' compensation insurers.

In the past, Garamendi maintained that regulating the industry isn't the answer and could keep new carriers from entering a tight market dominated by State Fund, which covers more than half the employers in the state.

Critics, though, ask why insurers didn't follow Garamendi's recommendation last fall of a 14.9 percent rate cut due to new workers' compensation laws passed in 2003. Instead, insurers cut premiums an average of 3.6 percent this year. State Fund reduced rates an average 2.9 percent.

Sylvia Compton doesn't believe last year's legislation helped her commercial linen business much. Her workers' compensation premiums rose 44 percent this year.

"We didn't have any big claims. I didn't expect an increase. I was totally shocked," said Compton, owner of Dust-Tex Services Inc. in Sacramento.

Nunez said the workers' compensation package is still being shaped, but major issues such as uniform medical guidelines for disability benefits have been worked out.

Insiders are betting an accord can be reached within a week. That could hinge on the outcome of talks among business and labor leaders during meetings in the Governor's Office.
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The Bee's Gilbert Chan can be reached at (916) 321-1045 or gchan@sacbee.com





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