NCPA - National Center for Policy Analysis

Will California Fix Costly Workers Comp?

March 4, 2004

California's workers' compensation system is in crisis, observers agree. In all the states, workers' comp programs provide cash benefits and pay for medical services to workers injured on the job. Awards are limited and workers give up the right to sue their employers. Research has found that most workers' compensation costs -- financed by a payroll tax -- are shifted to workers in the form of lower wages.

The costs paid by California employers are the highest in the country, while the benefits received by workers are about average.

  • Total costs for California employers rose from $11 billion in 1998 to $29 billion in 2003.
  • By one estimate, the average employer there pays 5.2 percent of payroll for workers' compensation insurance, more than twice the average of other states.
  • California has one of the lowest state rates of workers who return to work.

The high costs are partly due to disputed award decisions:

  • Thirty percent of claimants who miss more than a week of work hire a lawyer -- much higher than in the other states, according to Robert Reville, director of the Rand Institute for Civil Justice.
  • Lawyers are involved in three-quarters of permanent disability cases, and their legal fees average 20 percent of combined medical and cash benefits.
  • Partially disabling injuries are often litigated, and account for almost 90 percent of benefit costs in California and 70 percent nationwide.

Additionally, medical costs are high because doctors and patients have little incentive to restrain costs, and health care providers are shifting medical costs to workers' compensation by prescribing more or charging more.

Among the suggested reforms are limits lawyers' fees and restrictions on compensation for impairments not predominately caused by work.

Source: Alan B. Krueger (Princeton University), "Schwarzenegger's Next Big Challenge," Economic Scene, New York Times, March 4, 2004.

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