GILROY
– Head Start Nursery Owner Steve Costa is seeing first-hand just
how hard it is to do business in California these days.
GILROY – Head Start Nursery Owner Steve Costa is seeing first-hand just how hard it is to do business in California these days.
Costa, like many employers across the state, is being forced to cut jobs. What is getting at him, though, is the fact that he has no real control over it.
Employers are feeling the end result of nearly a decade of workers’ compensation insurance problems that have turned into a huge nightmare, costing profits and jobs for companies struggling to pay skyrocketing premiums.
“Basically, in the past three years, my insurance has gone up almost triple,” Costa said. “I renew every October. … the insurance adjuster came last week and he said it’s going up 225 percent (in 2004).”
California law requires employers to have workers’ compensation insurance through a privately licensed insurer or through the nonprofit State Compensation Insurance Fund. However, a flood of problems ever since the state, in effect, deregulated the industry eight years ago are driving up costs. To make up for the lost cash, companies are cutting back on their workforce or, like Costa, even taking a look at taking their business out of the state.
“My two biggest costs are heat – energy – and labor: two things I can’t control basically because the state screwed both of them up. I don’t want to sound like a crybaby, but this is a problem that needs attention,” Costa said. “We’re doing what we’ve got to do. We were employing more than 300 people, now we’re down to 200 people. I have to reduce my labor costs 10 percent – maybe it’s not 20 jobs, maybe it’s five.”
Costa can’t raise prices due to competition coming from Arizona because costs of doing business are much lower. He said cutting back the work force is the only answer to make the quick fix to endure the rate increase.
“I hesitate to say what I will do,” Costa said. “I’m going to have to buy equipment (to replace manual labor), ship jobs out of state. … The bottom line is someone has to lose their job on some level.”
Meanwhile, Ernie Filice, owner of the Garnett Staffing temp agency in Morgan Hill, is raising his rates in order to make up for his growing costs of paying insurance for temporary employees.
“In ’98 (my cost for workers’ compensation) was approximately 1.1 percent of my gross sales,” he said. “Now it’s 6.5 percent. We’re a relatively high-risk company because of the different places we staff with. I can’t even get a competitive quote.”
These stories aren’t just a problem in South County. They’re all over the state. And State Assemblyman John Laird has met with many distressed business owners in a year that he said Sacramento focused on fixing the problem.
“Unfortunately, I’ve seen face after face that has been hit hard by this – small businesses, agriculture, government, nonprofits,” said Laird, who represents the 27th Assembly district in in Santa Cruz, Monterey and Santa Clara counties.
California’s workers’ compensation problems started in 1995, when the minimum rate law was repealed. An ensuing price war between the state’s biggest insurance carriers dropped rates so low that the insurance companies began to find that they couldn’t cover the costs from workers’ compensation claims. Before anyone knew what was happening, 25 of the largest insurance carriers went out of business, and most of those businesses turned to the the State Fund for coverage. The the State Fund was overwhelmed by an influx of business it was not prepared for, which worsened problems.
“They’re so busy and so understaffed they don’t have time to help you,” said Filice, who said the the State Fund used to offer insurance to about 25 percent of California businesses – usually high-risk companies – but now manages more than 60 percent of the state’s claims.
Meanwhile, in the late 1990s medical costs began to escalate well above inflation rates. While for the past five years medical inflation rates have held around 3.5 percent, workers’ compensation claims were going up 17.6 percent each year. The reason for the inflation is a lack of limits on the number of doctor visits and litigation costs for workers who were not getting the coverage they needed from the financially strapped companies. Insurers were pushed further into the deep hole. In order to make up for the costs, prices were forced higher and higher.
This year, the system has ballooned to $29 billion in cost for workers’ compensation, up from just $9.5 billion in 1995.
“We have a workers’ comp crisis,” said John Garamendi, who was elected state insurance chairman last year.
Garamendi, who calls the system “grossly inefficient,” has spent the last 10 months since taking office reforming the system to close loopholes and cut down on waste and costly litigation. The Legislature passed several laws late in this year’s session, including caps on visits to chiropractors and physical therapy, a one-year 5 percent reduction of physician services and lower outpatient facility fees. However, Garamendi says it is only the beginning of plans to get the problem under control.
“I proposed a roadway for reforming the system. These are a start,” Garmendi said. “They basically just scratched the surface. I believe it will (save) between $4 billion and $6 billion in 2004.”
Garamendi has met with Gov.-elect Arnold Schwarzenegger to discuss goals to cut costs and was expected as early as this week to set a new pure premium rate for workers’ compensation rates. While the rate is not mandatory for carriers to follow, it sets a standard for the the State Fund and for private companies. Garamendi said he can’t force the companies to change their rates, but he will post the top-rated carriers on the state insurance Web site (www.insurance.ca.gov) to put pressure on them to pass the savings along to the consumers.
Garamendi has increased pure premium rates twice already this year. There was a 12 percent increase in January, another 7 percent increase in July, and the rate was anticipated to climb another 12 percent in January before the new laws passed.
“The reforms will eliminate the 12 percent increase projected for 2004 and should roll back the 7 percent increase of July and cut into the January increase,” he said.
But business owners like Costa don’t necessarily see it as progress until it shows up in their books.
“(My losses in insurance costs) are in the hundreds of thousands of dollars, and I don’t see any relief,” Costa said. “It’s not going to happen in a year. It’s going to take an overhaul, and nobody’s going to do it.”
Garamendi said that there are several items lined up for next year’s legislative session to continue to cut costs These include setting a standard for determining rewards for permanent disability claims (which would cut litigation costs), giving employers the right to choose a medical provider for one year and prohibiting prisoner’s from receiving workers’ compensation.
Garamendi also is working on a system of 24-hour care, which would be an umbrella policy that covers workers 24 hours a day, whether they are at work or at home. The goal is to bundle all the different insurance premiums into one system of coverage, assuring proper health care for employees and eliminating billions of dollars lost each year in court costs used to determine whether companies have to pay for a worker’s injuries.
However, Laird said passing the next round of legislation will get much harder. Not only is there major special interests at the state Legislature – including doctors, labor unions and attorneys – but the cuts will put pressure on legislators to takes sides either for businesses or workers.
“It will be a tough push,” he said. “The program is designed to protect injured workers. (In) the next step, there’s much more of a threat to injured workers.
