The California Compensation Market

We Need to Transform Our Dialogue Around California Workers’ Comp’s “Litigation” Problem

Every three years, writers start writing again about how litigious the California workers’ compensation system is. They usually portray it as a disease. However, it’s not litigation that’s the problem: it’s something much more specific and solvable. Compared to almost every other state in America, the California workers’ compensation system generates more paperwork, more reviewers, and more procedural barriers than any other. Unfortunately, the people responsible for reading all of that paperwork do not have time to do so. Whether you are involved in claims handling, defending claims or performing medical-legal reviews within California, you have also witnessed this phenomenon. Below is why this is occurring, what the data states, and what that implies regarding your thinking for the next few years.

The Data Shows the Same Story

We’ll begin with the California Workers Compensation Insurance Rating Bureau’s recent Annual Report. For 2025, total loss and expenses totaled $15.7 billion; that translates to approximately 102 percent of earned premiums versus 99 percent last year. Also, it resulted in the combined ratio reaching the highest level in over twenty years. This is not a one-time anomaly, it reflects multiple years of medical costs growing faster than premiums.

What are the sources of funding for losses? Medical payments represent roughly fifty-two percent of 2025 losses. Medical costs per claim increased by roughly eight percent in 2024: the greatest increase in a single year since the 2012 SB 863 reforms limiting medical inflation were implemented. These costs increased as a result of rising utilization rates, amendments to fees schedules and an increase in the number of physical medicine and medical legal services per claim. Due to these factors, the State Advisory Pure Premium Rate rose 8.7 percent effective September 1, 2025: the first rise in over ten years and clearly shows through the rating bureau that the current pricing structure does not reflect current costs.

It is simply not a “litigation” issue by itself. Rather it is a matter of volume and length: More services per claim, more documentation per service, and claims take longer to resolve now than at any time previously. Litigation is where this volume becomes apparent and costly, yet it is not the root cause of this issue.

QME/AME Systems Reveal Where Pressure Becomes Apparent

Within California, disputed medical disputes are resolved utilizing two methods: Qualified Medical Evaluators (QMEs), doctors certified by the Division of Worker’s Compensation for unrepresented employees or when both parties cannot agree on the doctor they would like to utilize for evaluation, and Agreed Medical Evaluators (AMEs), doctors mutually selected by employee representative(s) and employer(s) to assess employee injury. In a disputed claim, the findings contained in a QME or AME report generally serves as the single most significant document upon which judges, adjuster(s), and opposing counsel ultimately make decisions relative to resolution of their respective interests.

Far less frequently discussed than it deserves to be: An evaluator has no option but to review ALL of the medical record prior to making conclusions pertaining to each party’s liability. Not just “Highlights.” Claims containing genuine cumulative trauma elements, several treating physician(s) or a history of substantial treatment can create large record files including supplemental reports for claims until the case is closed. The evaluator’s capacity (how many examination(s) a QME or AME may conduct during a given week reviewing the total medical record) is the foundation blocking mechanism of the system.

When WCIRB’s own reports indicate Medical/Legal Allocated Loss Adjustment Expense as among the fastest-growing expense category(s) and indicate that such expenses are directly related to litigation activity resulting from Southern California activity, then this bottleneck is evidenced in those expense figures.

Self-Insuring Creates Scale

In addition to having the largest number of carriers operating in the state of California, California also has the largest self-insured employer base in the U.S.: as of January 1st, 2026 there were 7,049 active self-insured employers with approximately 4.4 million covered employees, roughly 1 in every 8 California employees, and nearly $341 billion in self-insured wages. First three years for new self-insurers require using a licensed third party administrator for claims administration; after five years they may be allowed to manage claims administration themselves. This places a significant portion of the claims volume flowing through a relatively limited number of TPA firms (all subject to the same overwhelmed review process) as well as through the carrier firms.

The implication here is important for individuals believing California’s workers compensation system consists solely of “large insurance companies”. It doesn’t. There exists a fragmented carrier segment (with no single carrier dominating the California market like Texas Mutual does in Texas); a rapidly increasing segment of self-insured employers; and a deep level of TPAs under both segments (ultimately reliant upon the same overburdened medical/legal review process).

Regulators Actively Monitor These Issues

It could easily be inferred that regulators lack awareness regarding this pressure, however based on information available, it appears they are aware. DWC holds an Educational Conference at least two times annually in Oakland and Los Angeles respectively. Claims administrators, attorneys, rehabilitation counselors and QMEs attend these conferences specifically to receive updates on the development of the current workers comp system. Recently DWC has scheduled a session to discuss how AI is affecting the landscape of workers comp. These comments represent a fairly direct acknowledgement within the regulatory apparatus that the manual-review model currently used for QME/AME practices is being reviewed.

Rate actions provide a similar signal from the insurance perspective. An 8.7% pure premium rate increase (the first in ten years) represents more than simply a procedural act. The rate bureau is stating that loss costs have increased at a pace higher than previously anticipated when establishing current prices; further, medical cost per claim is identified as the primary component driving this upward trend. Therefore, when the regulatory agency responsible for maintaining solvency of the system is issuing rate increases due to rising medical costs, and simultaneously conducting sessions at DWC conferences discussing AI’s potential application in reducing review time related to those medical claims, it is likely that regulatory agencies will begin placing greater scrutiny and demand for tools that demonstratively decrease review time rather than less in the coming years.