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Press Release · January 13, 2005

What Caused The Workers’ Compensation Crisis In California?

New Publication Illuminates One of State's Most Complex, Pressing Issues

SAN FRANCISCO, California, January 13, 2005 — In recent years, the cost of workers’ compensation in California has tripled—by far the highest run-up in the nation. But reforms aimed at cutting costs have been stymied by the complexity of the problem and the difficulty of understanding the system itself. A publication released today by the Public Policy Institute of California (PPIC) presents a clear description of the crisis and its possible causes, provides a basic primer on the workers’ comp system, and describes the state’s recent reform measures and their potential effects.

This report is the first issue of California Economic Policy, a new PPIC quarterly series focused on California economic policy topics. PPIC Senior Fellow David Neumark is the series editor and author of this first issue, The Workers’ Compensation Crisis in California: A Primer.

Why did workers’ comp costs for California employers triple between 1999 and 2003? Why haven’t the benefits paid to injured workers increased nearly as much as the insurance premiums that employers are charged? Will recent reform measures reduce costs by 20 percent, as current best estimates predict? In answering these and other questions, the study points to insurers’ projections of increasing medical costs and to cases of permanently disabled workers as most responsible for rising costs. The study also cautions against thinking that reform measures have solved the crisis and concludes that effective reform may require years of fine-tuning, research, and evaluation.

Other major facts and statistics about workers’ comp outlined in the report:

  • At its core, the crisis is a function of sharp increases in employer premiums, beginning in about 2000. Cost increases through 2003 have averaged over 30 percent per year.
  • About two-thirds of claims are for medical treatment only and result in no payment for lost wages. A small number of cases account for a large share of costs: 80 percent of all medical benefit dollars go to the low share of workers whose injuries result in permanent disability.
  • Between 1997 and 2002, medical benefits increased in California at more than twice the rate of benefits in the nation as a whole. Benefits for lost wages also grew faster.

The Public Policy Institute of California is a private, nonprofit organization dedicated to improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. The institute was established in 1994 with an endowment from William R. Hewlett.