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A major overhaul in California's system of compensating workers for job-related illnesses and injuries took effect in mid-decade, dramatically cutting costs for medical care and direct payments, and profits of workers' compensation insurers soared.

In 2006, according to the Workers' Compensation Insurance Rating Bureau, insurers earned nearly 27 percent on employer-paid premiums of $17.3 billion. The rising profits fueled demands by labor unions, medical care providers and workers' comp attorneys that the overhaul, pushed through the Legislature by Gov. Arnold Schwarzenegger, be modified.

Since then, however, premiums have plummeted to $9.1 billion in 2009 and costs, especially medical costs, have increased sharply. And the result, the rating bureau says, is that insurers lost $1.5 billion on workers' compensation policies last year after breaking even in 2008.

The bureau's annual report is new ammunition for insurers, who have been clamoring for sharp increases in premiums to offset their losses. While the insurers are free to set their own rates, the state insurance commissioner, Steve Poizner, has advisory power, and he's steadfastly rejected all but fractional premium increases, saying a big boost would erode the state's recession-wracked economy by raising employers' costs.

Poizner and Schwarzenegger have been in sync on that point but both will leave office in a few months and a new governor and a new insurance commissioner will face the perennially thorny, four-sided workers' comp issue involving employers, insurers, labor unions (aligned with workers' comp attorneys) and medical care providers.

Although the Legislature passed Schwarzenegger's overhaul in 2004, expanding on milder reforms enacted earlier under then-Gov. Gray Davis, the most controversial aspects are contained in administrative rules that the Schwarzenegger administration later adopted. Thus, the next governor could undo much of the overhaul without going through the Legislature, making it a key, if little known, aspect of the gubernatorial duel between Democrat Jerry Brown and Republican Meg Whitman.

The full rating bureau report on insurer income and outgo can be found here.



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