You must pay out 50% more than you can collect. Does this sound like a familiar formula for failure? Rest assured, deregulation-weary readers, this article is not about energy. Instead, it’s about California’s workers’ compensation insurance mess.
The oldest social insurance program in America, workers’ compensation has been in operation in California for more than 80 years. There is no avoiding it. Unless you are self-employed, all employers in the state are required by law to carry workers’ compensation insurance.
In exchange for the requirement, the law prohibits employees from suing their bosses for injuries sustained while working. The workers’ compensation insurance fund will pay for the medical and rehabilitative costs of injured workers as well as a temporary or permanent compensation for time away from work.
But the system is showing the type of strains that are the forewarning of collapse. The Association of California Insurance Companies says its workers’ compensation providers are shelling out $1.56 in claims for every dollar that they collect in premiums. This is not a sustainable situation for very long. In fact, 12 primarily workers’ compensation insurers have shut their doors for good.
The field is shrinking to insurers who sell other lines of financial protection, but they are rapidly tiring of using profits from them to make up for mounting losses in their workers’ compensation component.
And what of the people who pay the premiums?
On average, workers’ compensation insurance costs in California have increased 20%. But that alarming rise doesn’t even begin to highlight the problem. Workers’ compensation rates are based on the type of work employees perform. The potentially riskier the job, the higher the rate. Roofing companies pay more for workers’ compensation insurance than used-book stores, for example.
More importantly, the state’s small businesses are paying almost twice as much as larger companies. Workers’ compensation is a regulatory cost. As Professor Thomas D. Hopkins demonstrated in his 1995 report for the U.S. Small Business Administration’s Office of Advocacy, small firms with fewer than 20 workers pay an average per-employee, cumulative cost of regulation of $5,532. Businesses employing more than 500 people pay $2,979.
The health of California’s Main Street companies is no small matter. Small business is the engine of the California economy, providing a paycheck to more than six in ten working Californians. Their paramount importance to the economy can often belie their extreme fragility. The average small business owner makes between $40,000 and $50,000 a year, which means half fall below that, strugglingÑas they do everydayÑto keep meeting obligations.
Small business owners have seen their thin profit margins reduced to a hair’s breadth from double-digit increases in health care in each of the past three years and consistent rises in their unemployment insurance rates.
What kind words does Sacramento now have for mom-and-pop companies already paying 20% increases in their workers’ compensation insurance costs? ÒPay more!Ó
There are a handful of workers’ compensation bills running through the legislature at the moment. The one to get the farthest would sock California businesses with between $1.6 billion to $2.3 billion in workers’ compensation increases by boosting rates another 20%. Perhaps this will not mean much to giant agribusiness or aerospace companies. It sure will to everyone else.
Curiously, none of the spate of workers’ compensation proposals takes any meaningful stab at the incredible fraud or bureaucratic waste in the system, which is where legislators could find all the extra money they need.
Governor Davis has wisely vetoed two similar bills on his watch. He would do well to follow his own counsel once again. The latest NFIB Education Foundation Small Business Economic Trends Report showed small business owners cutting back on business expansion plans. Another hit from workers’ compensation costs could chill the California economy a few degrees more than it already has been from the energy mess.
Martyn Hopper is California state director for the National Federation of Independent Business.The NFIB is the largest small business advocacy group in the country with more than 30,000 members in California and 6,000,000 members nationwide."
