California: There’s Gold In Them Thar Hills!

December 18th, 2006 by

It was George Santayana, the Spanish born American philosopher, poet and humorist, who wrote, “Those who do not remember the past are condemned to repeat it.”
With that in mind, I’d like to suggest how the history of California’s pioneers and prospectors is an allegory of its workers’ compensation ups and downs over the last 20 years.
Donner Party StormFrom 1840 to 1860 more than half a million people made the dangerous, often perilous, journey from eastern America to California to hunt for prosperity. It was one of the greatest migrations in human history, and, for the most part, it was about gold and humankind’s ancient fascination with it.
Gold means wealth. In the late 1840s, California’s gold was found lying on the ground, just sitting there waiting for someone to pick it up; today, it’s found in the state’s workers’ compensation insurance companies. Right now, those companies are seeing a lot of gold just waiting to be picked up and pocketed. They’re the ones who have survived the perilous economic journey of the last 20 years, or they’re the start-ups taking advantage of the newest gold rush. But from 1995 to 2003, 28 companies died on the quest.. As in the 19th century, only the strong survived.
The First Trek West
During the early and mid-1840s, thousands of people had already made the 2,650 mile journey from east to west, specifically, from Springfield, Illinois to Oregon and from there to California. In early April of 1846, the Donner family was one such group. The Donners weren’t heading to California because of the gold, just for the potential of a better life.
In Independence, Missouri, the Donners joined a number of other migrating families, eventually growing their number of men, women and children to 87. The wagon-train party elected George Donner and Frank Reed its leaders and continued west. It was just outside Fort Bridger that the group made its big mistake: relying on faulty advice, it made a left turn, instead of a right turn, and that made all the difference. That wrong turn took them 125 miles, or 21 days, out of their way. After traveling 2,500 miles in 150 days, the party missed getting over the high Sierras and into California by one day, reaching the steep base of the mountains on 31 October just as an early blizzard arrived. Ultimately, 41 of the 87 perished, the survivors resorting to cannibalism. The Donner party’s calamity showed just how perilous the journey to California could be. Those rescued finally made it to Sacramento in February of 1847, 11 months before the first discovery of gold was to happen very nearby.
Nuggets on the Ground
Gold was discovered in California on the cold, raw morning of 24 January 1848 when James Marshall, building a saw mill for John Sutter, spied a few small nuggets on the banks of the American River at Coloma near what is now Sacramento. Shortly after that, General John Bidwell and Major Pearson Reading discovered gold in the Feather and Trinity rivers, respectively, and the Gold Rush was on. Ultimately, more than half a million people made the difficult journey to California to seek fortune, most of them retracing the Donner party’s footsteps, up until the fateful left turn, that is. At its height, between 1848 and when it came to a crashing end in 1860, prospectors were turning out an astonishing $81 million a year.
After it was over, the prospectors took themselves, their winnings and their women to the next mother-load in Alaska. And the California economy declined for a while.
Getting to the New Boomtown
Like the period from 1840 to 1860, California’s workers’ compensation market has seen huge up and down swings in the last 20 years. 1993 was the year that the legislature and the Commissioner decided to begin tinkering with the state’s 80 year old Minimum Rate system. In that year, California’s direct written premium had peaked to $9 billion, but a series of rate decreases caused premium to drop to $5.7 billion by 1995. And that’s when the state made its own fateful left turn – the minimum rate system gave way to open rating, but without any restraint on medical or legal excesses or abuse. Piranha-like competition drove the system crazy. By 1997, direct written premium was again rising and heading north in a hurry. In fact, during the following seven years, premium rose to nearly $24 billion, and, were it not for a rate decrease of 2.9% ordered in the waning days of the Davis administration, it would have topped $25 billion. Rates had become the highest in the nation averaging more than $6 per hundred dollars of payroll, while benefits to injured workers were among the lowest. By 2005, absent any serious reform, total premium was projected to hit $29 billion, Moreover, the state had suffered through 28 insurer insolvencies making the state fund California’s largest insurer. California’s total premium was higher than many western European nations.
Things had gone from great to terrible. In the late 1980s the profitability of California’s workers’ compensation insurers was almost three times the national average; by the late 90s profitability was non-existent; it had become the lowest in the nation.
Enter Arnold Schwarzenegger. What a difference getting serious about the law can make. Three highly-targeted law changes produced a few gored oxen littering the side of the road, a gargantuan decline in losses and a drop in premium of more than $6 billion. California’s Division of Workers’ Compensation is producing reports to explain how the law changes have worked so well (and, in some cases, how they have not), and I commend all of it for your reading enjoyment.
But here’s what I find interesting – total premium remains in excess of $18 billion, still double the level of 1997.
And that is why there’s a Gold Rush of sorts happening again in California right now. After an eight year, long dark night, California’s workers’ compensation system has become the economic equivalent of Boomtown. Because of those still high rates, insurers (with new entries flying over the Donner Pass by the planeload) are enjoying a combined ratio of less than 80% (64% in 2004, alone; it makes one have a greater appreciation for just how obscene abuses in the system really were). The biggest problem their senior managements have is figuring out if they can get trucks large enough to carry all the money to the bank.
Like the original Gold Rush, these good times will last for a few more years, maybe one or two, three, if everyone’s lucky. After that, we’ll see if carriers, being unable to withstand their newfound and over-the-top profitability, drive the market from feast to famine and, like the Donner Party survivors, once again take to eating their young.
History of UR in CA (PDF)
History of Official Medical Fee Schedule – 1999 to present
Background leading to California reforms (PDF)
Lynch Ryan article on California reforms