Will the last American to leave California please turn out the lights?
Posted on 08/05/2003 7:36:19 AM PDT by Isara
Mitchell Greif, 44, is a Southern California native who loves the Los Angeles beaches and the lifestyle the city has to offer.
But fed up with skyrocketing costs at his plastic-bag making company, Coast Converters, he's packing up to go.
This past December, Greif received notice of the huge premiums he'd have to pay for his employees' 2003 workers' compensation insurance.
He doesn't own a big business with deep pockets. He employs just 150 workers, and in recent years rising workers' comp premiums have driven his profits down.
In 2001, he paid $225,000. That rose to $330,000 in 2002. This year, he's paying $570,000; if he stays in L.A., his rate would be $700,000 next year. These hikes keep coming — even with a discount he gets for providing a safe work environment.
So what's Greif doing to fix this? He's taking his firm to Las Vegas — four hours up the Interstate 15. Nevada has far lower workers' comp and other business taxes.
"If we didn't move, we'd go bankrupt in one to two years," he said.
Workers' comp affects small and large businesses in California. Created in 1913, the system is sagging under high premiums, rising medical costs, fraud and pricey legal disputes.
Too Mad To Stay
Greif invited his 150 workers to move with him. More than two-thirds have agreed. Already a few are in Las Vegas, where part of the facility is up and running. The rest of the team will join them within months. His new workers' comp rate: just $170,000 this year.
"I'm mad as hell that I have to leave," Greif said. "But we've made less money every year. You won't find a company in California that's been in our business for 40 years. They've moved. If you do (find them), they're in bankruptcy."
The California Chamber of Commerce says in the past 30 months, the state has lost 290,000 manufacturing jobs. Many factors played into that, but workers' comp rate hikes are a big share of the costs that businesses face.
The workers' comp system pays for treatment of on-the-job injuries and lost wages. Nationwide, premiums are rising at an average of 50% — the highest rate in almost a decade.
In California, the average rates have nearly doubled in the past three years. The state is among those with the highest costs per claim, and it pays out some of the lowest benefits per employee.
State legislators are starting to look at the issue. They shaved the number of workers' comp bills from 50 to 20 recently. A committee of state senators will craft a proposal to tie together these bills. But business owners fear legislators won't reduce workers' comp costs enough.
Cases More Complicated
Workers' comp was designed to be a "no fault" system, but that's changed over the years. Most cases in dispute involve lawyers.
"The original idea was to care for victims of industrial accidents — the guy who got his hand stuck in the printing press. Hand got chopped off. He couldn't work," said Daniel Mitchell, former head of the UCLA Anderson Forecast and professor of management and public policy at UCLA.
When the system was created, the only remedy was to sue the employer. But laborers could rarely afford that.
"Reformers wanted to make sure (injured workers) would get money and medical care," Mitchell said. "And businesses didn't want to be subjected to the vagaries of the legal system, so they converged and set up the workers' comp system."
Those old cases are a far cry from what the system handles today. Now many cases involve emotional trauma or injuries that are harder to define.
Of California's million workers' comp cases each year, around 200,000 are in dispute. Those files land at the California Division of Workers' Compensation — effectively the court system for disputes.
"Four out of five disputes that come to us are with attorney involvement," said Glenn Shor, the agency's chief of policy and legislation. Legal costs help keep premiums high.
Workers' comp insurance is mandatory, making the costs a challenge for businesses, especially those with thin profit margins.
"Absent the legislature responding, the only solution for businesses is to reduce payroll," said California Chamber of Commerce President Allan Zaremberg.
Insurers Dropping Out
It's not just business owners getting fed up. Insurers also are exiting the state. California's State Compensation Insurance Fund is supposed to be the insurer of last resort. But in recent years, private insurers have dropped out of the business, saying they can't make money on workers' comp policies. Thus the fund now insures 55% of the state's policies, up from 42% last year and 31% in 2001.
In 2002, insurers paid $1.30 for every $1 they collected in premiums. That's an improvement from $1.38 in 2001 and $1.62 in 2000.
"It's impossible to stay in business operating at a loss," said Nicole Mahrt, spokeswoman for the American Insurance Association. "It's common sense. You can't make up for this in volume."
And it's nearly impossible for insurers and employers to plan ahead for workers' comp costs in the same way they plan for other costs, such as medical insurance.
When medical insurers estimate how much cash to set aside to pay for care, they need only plan for one year. Medical insurance that employers buy for 2003, for example, will pay for only this year's care.
When insurers sell workers' comp policies for 2003, they pay for all the injuries that occur in 2003.
"But many of these injuries may require medical care for years, and the cases stay open for five to 10, sometimes 20 years," Shor said. Those open cases contribute to the yearly premium increases.
As if that weren't bad enough, some people are bilking the system. The cases in dispute that arrive at Shor's agency typically center on the extent of injuries and if the injuries were on the job vs. on the weekend.
"There's fraud throughout the system," Shor said. "There's fraud by workers against insurers or employers. Fraud by employers who underreport their payroll or misclassify their employees to get a better rate, fraud by medical providers and fraud by insurance companies. There's a lot of money in workers' comp and there's a lot of opportunity for people to say things that aren't true."
Much of the fraud falls in gray areas. Some people have recovered and want to stay off the job longer, or doctors order more tests than necessary. "It's too much use (of money or services) relative to what you'd logically expect," said Robert Hartwig, chief economist at the Insurance Information Institute.
Some data suggest Californians use more medical care than residents of other states. The average injured Californian, for instance, visited a chiropractor 39 times last year vs. just 15 times nationwide, AIA's Mahrt says. California caps the fees it pays per chiropractic visit, but doesn't limit the number of visits.
Economists worry about the long-term effect of California's workers' comp costs.
"It acts as a tax on new job creation and existing jobs," said Jack Kyser, chief economist at the Los Angeles Economic Development Corp. The nonprofit group works to attract and keep jobs in the city.
Not Sticking Around
"More and more firms are looking at their options," Kyser said. "Do they move to other locations in the U.S. or move offshore? It's really a challenge to try to grow the local economy when you're fighting to keep your existing business base."
For his part, Greif isn't sticking around to find out where California's future lies.
It'll cost him $800,000 to move, but he expects to recover that amount within a year through savings through workers' comp costs as well as lower utility bills and taxes.
"We tried to stay," he said. "We did layoffs, and made everybody else do more work. But now we're gone. We're toast. We're going to Vegas."
High costs => less businesses => less state revenue
Will the last American to leave California please turn out the lights?
I wouldn't be surprised that by 2010 the state with the largest GDP on a per-state basis is Texas. For example, a lot of high-tech companies have major operations in Texas (Intel, AMD, HP, and several others). They could easily move their headquarter operations to Texas, and likely prosper strongly there.
Are the workers clumsier? Are doctors more expensive? Are the lawyers' fees higher? Is fraud higher? Is the state skimming off money from premiums to put in the general fund? Is the definition of injury much laxer?
Texas's major metropolitan areas (Houston, Austin, Dallas, Fort Worth, and San Antonion) have hardly slowed down at all in growth and other numbers (unemployment, home values, etc.) throughout the economic slowdown. If they continue to grow and improve their infrastructures and other amenities as well, they will only bridge the perceived gaps that companies in the major cities in the U.S. might see in relocating to Texas.
Homer Simpson: "Hmm. Your ideas are intriguing to me and I wish to subscribe to your newsletter."
Let's do the math, shall we?
If fully 10% of this company's work force got injured and could not work for a full year, the company could hand each one of them $45,000 cash and end up spending less than it would on the annual workman's comp premium. (Rubbing eyes) do I have that right?
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