$2.40 in Costs to Deliver $1 Of Benefits: Your SDI Deductions Subsidize Workers’ Compensation in California

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Is California’s State Disability Insurance system subsidizing California workers’ comp? Are California workers partially funding the comp system?

Yes, according to an important report unveiled this week by CHSWC (the California Commission on Health, Safety and Workers’ Compensation). Although the report is a draft at this point, it is posted on the State of California Division of Workers’ Compensation website.

This study finds that 8.4% of work injuries and two-thirds of occupational diseases (66.2%) are being misclassified as non-industrial.

Among the startling findings in the study done by UC Berkeley faculty are these nuggets:

• 13.1% of SDI claims should be defined as industrial, including 7.4% of SDI claims for illness and 21% of SDI claims for injury

• 9.7% of employee SDI contributions are going to subsidize occupational claims that are misclassified as industrial.

• This represents a transfer of about $400 million, which is .08% of employee wages in California.

Bottom line? A massive cost transfer is happening. Workers are subsidizing employer workers’ comp costs in California. State Disability Insurance (SDI), meant to cover working Californians for non-industrial injuries and illnesses and consditions such as pregnancy that disable them from performing their work for extended periods, is being used in this way never intended.

Frank Neuhauser, the study’s co-author, noted that he was surprised by the results. He had expected to find that workers were over utilizing the comp system, putting many non-industrial claims through the comp system. He expected to find workers’ comp was subsidizing SDI.

Not so.

Workers’ comp is a costly vehicle to deliver benefits. SDI delivers benefits at a cost of about $.05 per dollar of SDI benefits paid.

Let’s do a double take on that. Five (5) cents to deliver a dollar of wage replacement benefits. Not bad.

The real shocker is the expense of benefit delivery under workers’ comp. The UC Berkeley researchers find that averaging from 1995 to 2007, benefit delivery costs were $.80 for each $1 of benefit delivered, some 17 times the costs under SDI. Costs after the 2004 SB 899 reform may have gone as high as $2.40 for each $1 of benefits delivered.

That’s appalling. But it’s hardly a surprise, given figures over the last several years that show less than half of insurer premiums actually being paid out to or on behalf of disabled workers.

One cautionary note: To this author, it was not clear whether the UC Berkeley researchers were claiming to be able to separate out costs of benefit delivery for income replacement (temporary disability) from costs of benefit delivery for medical treatment and permanent disability. That’s an important point, because medical treatment disputes and disputes over permanent AMA impairment and permanent disability require much of the same carrier overhead costs. So even if there is an integration of SDI and comp, would loss adjustment expenses really be that much lower? Before this report becomes final, that point needs to be clarified by the authors.

I attended the CHSWC meeting where Frank Neuhauser presented the study results.

Neuhauser’s presentation didn’t sit well with some of the insurance industry lobbyists attending the CHSWC session. Leaning forward to consult with colleagues, at least one industry attendee muttered that “this is bullshit” as his colleagues nodded approvingly.

The Neuhauser-Mathur study should eventually be peer reviewed. It may be subject to arguments on its methodology. But for now, the draft report serves as a provacative argument for further workers’ comp reform.

The report argues for integration of SDI and workers’ comp TD into one system. There are significant differences in SDI and TD, of course:

-SDI is limited to one year, while TD can extend for 104 weeks
-SDI pays only 60% of wages (within maximums/minimums) while
workers comp pays 66% within the maximums/minimums
-SDI is tied to base earnings in a way that does not apply to TD

But the UC Berkeley study projects net savings to both employees and employers by integrating the systems. Specifically, the authors make the following claim:

“Employers could fund the current portion of SDI that workers are subsidizing and still save $750 million annually by integrating all temporary disability under the SDI program instead of retaining separate temporary disability programs under SDI and workers’ comp”.

Despite differences in the systems, the UC study argues that the savings would be sufficient to entice labor and California employers to compromise on issues regarding integration of the benefits.

This is, of course, merely one debate which is raging about the direction of the comp system. Also under study by some is the idea of folding workers’ comp medical treatment into a comprehensive healthcare reform. Healthcare reform efforts died in the 2007 legislature, and with California’s budget troubles, it’s unlikely we’ll see any grand healthcare reform emerging from Sacramento in the next couple of years. It’s starting to appear that Obama is unlikely to make a move on a grand healthcare reform right now, for many of the same reasons (Obama is likely to move incrementally, offering first a children’s health bill).

The integration of SDI with comp is actually more practical than the comp/group health integration.

But injured worker advocates will be seeking to restore the right of workers to receive more than 104 weeks of TD, a cause that may be championed by a future governor. Before 2004, workers who remained disabled (for example, workers who had repeated surgeries) could receive at least 5 years of TD if the facts warranted payment. So locking in an SDI/workers comp integrated benefit may have a downside for workers that needs to be highlighted.

Labor union leaders should think carefully before agreeing to such a deal. Perhaps the “cost savings” in an SDI/workers’ comp integrated benefit could go towards funding extra years of benefits for those workers who are severely disabled for long periods.

The draft by Frank Neuhauser and Anita K. Mathur of the UC Berkeley Survey Research Center is titled “The Impact Of Occupational Injury and Ilness on Pricing an Integrated Disability Benefit“.

Starting in 1979, Julius Young has represented thousands of individuals who have sustained life-changing injuries or illnesses while on the job. His goal is to secure the medical treatment his clients need and the maximum benefits they are allowed so they and their families can survive potentially devastating injuries. A partner of Boxer & Gerson since 1988, he practices workers’ compensation and disability law in Oakland. This article originally appeared in his blog. Workerscompzone.com which focuses on California’s workers’ compensation law, its politics, and culture. It is republished with his permission.

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