SACRAMENTO, Calif.-Sweeping workers compensation reform legislation that could slash billions of dollars in costs from the system will become law upon the governor's signature this week.

Employers hailed the legislation, S.B. 899, and applauded Gov. Arnold Schwarzenegger for helping push reforms that businesses have sought for years but that were repeatedly rejected by state lawmakers. Reforming workers comp to improve the state business climate was a key plank in Gov. Schwarzenegger's 2003 campaign.

Among the many reforms contained in the measure are provisions that would improve California's controversial process for awarding permanent partial disability benefits, said Tim East, risk manager for the Walt Disney Co. in Burbank. The current process is a major source of litigation over workers comp claims in the state.

Another key reform would allow employers to direct injured workers to physician networks.

"Employers should feel gratified that the issues they have talked about for so many years have finally been addressed," Mr. East said.

Mr. East chairs the Sacramento-based employer group California Coalition on Workers' Compensation. In that capacity, he sat alongside labor representatives to advise the governor in negotiations with Democratic lawmakers, who hold a majority in the Legislature.

After weeks of closed-door negotiations, a legislative conference committee unanimously adopted the bill at 3:45 a.m. Thursday. On Friday, the measure passed both the Assembly and Senate. It is expected to be signed into law by the governor, taking immediate effect, this week.

Gov. Schwarzenegger had threatened to put workers compensation reform before voters on the November ballot if state legislators did not produce a bill that met his goals for reforming the system. A political committee formed by the governor to engage in grass-roots lobbying for his initiatives contributed $1 million to a signature drive to put workers compensation reforms on the ballot.

Provider network

The legislation would allow employers to direct injured employees to a network of "quality" doctors for treatment of occupational claims.

Currently, California employers can direct employee medical care for 30 days following an injury, with some exceptions. Under the new legislation, employers could continue to follow the 30-day rule, or they could direct injured employees to a network within which employees could chose a doctor.

"That is something employers have been asking for for a long time," Mr. East said.

An employer's provider network would need to meet regulatory approval, and employees would be allowed to change physicians a limited number of times within the network, Mr. East explained. The legislation also establishes an appeals process for employees dissatisfied with network doctor opinions.

AMA disability guidelines

The bill would also require physicians to use American Medical Assn. guidelines to rate permanent partial disability injuries.

That would lend greater objectivity and consistency to the awarding of benefits for such injuries, Mr. East said.

Detractors of California's system have long complained that the current method of rating PPD disabilities, based on a provider's subjective opinion, helps make California's system one of the most litigious in the nation.

They also contend that the use of subjective criteria leads to excessive claim payments in some cases, while in others, injured workers do not receive fair compensation.

Disputes arising from PPD claims currently account for 80% of all litigation in the state's workers compensation system, according to the California Chamber of Commerce. Meanwhile, employers' overall costs have skyrocketed 136%, on average, during the past four years, the Chamber reports.

The new reforms "will fundamentally change the system for determining the level of injury and the amount of disability assigned to that injury," states a release from the Chamber, which applauded the governor for addressing system cost drivers in the reform measure.

Other PPD reforms

The new legislation would also eliminate a requirement that PPD benefit awards factor in an injured employee's "diminished ability to compete in the open labor market," Mr. East said.

Because that clause is vague, disputes over its meaning have fueled litigation over PPD awards, he said.

The legislation would instead require that determinations of benefit amounts include consideration of the average wage-losses suffered by workers in a similar line of work with a similar injury.

The legislation also addresses the "apportionment" of PPD injury claims. Doctors would have to assess whether pre-existing injuries contributed to a current injury claim. If so, employers would not be liable for the amount of the injury apportioned to a pre-existing condition, Mr. East said.

Under current apportionment rules, for example, a claimant might receive a permanent disability rating of 30%. At a later date, he or she could file another claim for a similar injury to the same body part and receive a rating of 40%.

Under the new legislation, the employer would not be responsible for indemnifying the entire 40% disability rating for the second claim, Mr. East explained. The employer instead would be responsible for the equivalent of a 10% disability rating; that is, a 40% disability rating minus the equivalent of the 30% disability rating that had already been compensated.

"That's huge," Mr. East said.

Employers have long complained that California's apportionment system in some cases allows claimants to receive disability ratings exceeding 100%.

In total, the legislative reforms could result in billions of dollars in savings for California employers, Mr. East said.

While praising the workers comp reform package, the American Insurance Assn. cautioned that it is premature to discuss specific savings or rate reductions the reforms might produce in workers comp premiums. The Workers' Compensation Insurance Rating Bureau would have to determine that, said an AIA spokeswoman in Sacramento.

"A lot of people are going to rush to put price tags on this," she said. "While we certainly are encouraged by the cost savings that are going to be generated by the bill, conclusive predictions are really premature at this point."

While employers praised the measures, the Sacramento-based Applicants' Attorneys Assn. said that using AMA guidelines would cut off benefits for many injuries because medical science cannot measure the full extent of certain injuries, such as back pain.

The claimant attorneys group has called for insurer rate regulation as a way to lower employers' workers comp premiums, an idea the governor has rejected.

While employers received much that they asked for in this reform measure, they still face challenges over the next year developing administrative rules that maintain its effectiveness, Mr. East said.