SACRAMENTO, CA – California Insurance Commissioner Ricardo Lara issued a letter to state leaders in July 2025 alerting them to growing costs in California's workers' compensation system, which could significantly impact California businesses after more than a decade of rate stability. The Commissioner's action followed his adoption of a new Workers' Compensation Insurance Claims Cost Benchmark and an Average Advisory Pure Premium Rate reflecting an 8.7% increase over last year's approved rate—the largest single-year increase since 2011 and a sharp reversal after 12+ years of flat or declining rates.
The rate increase signals fundamental shifts in California's workers' comp landscape. While reforms enacted between 2004-2013 successfully controlled costs for over a decade, recent trends—rising medical costs, increasing claim severity, and evolving workforce patterns—are overwhelming those gains. For California's 1.9 million employers that purchase workers' compensation coverage, this translates to premium increases of 8-15% in 2025-2026, adding thousands to tens of thousands of dollars in annual costs.
Understanding what's driving costs upward and how to mitigate the impact is essential for California business owners navigating this new environment.
The Rate Increase by the Numbers
Historical Context: 12 Years of Rate Decreases
California average advisory pure premium rate history:
- 2011: $1.85 per $100 of payroll (peak)
- 2012: $1.72 (-7.0%)
- 2013: $1.58 (-8.1%)
- 2014: $1.45 (-8.2%)
- 2015-2023: Gradual declines to $1.32 (-29% from 2011 peak)
- 2024: $1.39 (+5.3%, first increase in 12 years)
- 2025: $1.52 (+8.7%, largest increase in 14 years)
Total change from 2011 to 2025: -18% (still below peak but reversing)
What the 8.7% Increase Means for Businesses
"Pure premium rate" = Expected claims cost per $100 of payroll (before insurer expenses and profit)
Actual premium calculation: Pure premium rate × Experience modification × Industry classification × Insurer expenses/profit loads
Real-world premium impact for typical California businesses:
Example 1: Small contractor (25 employees)
- Total payroll: $1.8 million
- Industry class code: Concrete work (high risk)
- 2024 workers' comp premium: $94,500
- 2025 workers' comp premium: $108,700 (15.0% increase)
- Additional annual cost: $14,200
Example 2: Mid-sized restaurant (85 employees)
- Total payroll: $3.4 million
- Industry class code: Restaurant employees (moderate risk)
- 2024 premium: $78,200
- 2025 premium: $87,900 (12.4% increase)
- Additional cost: $9,700
Example 3: Professional services firm (40 employees)
- Total payroll: $5.2 million
- Industry class code: Office/clerical (low risk)
- 2024 premium: $42,800
- 2025 premium: $46,400 (8.4% increase)
- Additional cost: $3,600
Pattern: Higher-risk industries seeing steeper increases (12-18%) than lower-risk industries (6-10%)
Effective Date and Implementation
New rate effective: September 1, 2025
Impact on renewals:
- Policies renewing September 1, 2025 or later: Subject to new rates
- Policies renewing before September 1: Continue at 2024 rates until renewal
Important: The 8.7% is an average rate increase. Individual businesses may see higher or lower increases based on:
- Industry classification (construction trades seeing higher increases)
- Experience modification (poor loss history = additional surcharges)
- Individual insurer rates (some raising rates more aggressively than others)
What's Driving Costs Upward: The Four Key Factors
Factor 1: Medical Cost Inflation Accelerating
Workers' comp medical costs increasing faster than overall healthcare:
General healthcare inflation: 6.8% annually (2024) Workers' comp medical inflation: 11.4% annually (2024)
Why workers' comp medical costs are higher:
- Specialized care for occupational injuries (orthopedics, physical therapy, pain management)
- Longer treatment durations (workers' comp covers care until maximum medical improvement)
- Higher utilization of expensive procedures (surgery, imaging, injections)
- Compound medications (custom drug formulations costing $2,000-$15,000 per prescription)
- Provider rate increases outpacing commercial insurance
Most expensive medical services in workers' comp:
- Orthopedic surgery: Average cost per surgery $42,000 (up from $34,000 in 2020)
- Physical therapy: Average course of treatment $8,200 (up from $6,100)
- Pain management: Average treatment series $14,500 (up from $9,800)
- Compound medications: Average prescription $8,700 (up from $4,200)
- MRI/advanced imaging: Average study $3,400 (up from $2,600)
Impact: Medical costs represent 55-60% of total workers' comp claims costs in California, so 11.4% medical inflation drives 6-7 percentage points of overall cost increases
Factor 2: Claim Severity Increasing
Claim severity = Average cost per claim (including medical + indemnity benefits)
California workers' comp average claim cost:
- 2020: $42,800
- 2024: $58,900 (37.7% increase)
Why severity is increasing:
Aging workforce: California's average worker age increased from 41.2 in 2015 to 43.8 in 2024
- Older workers take longer to recover from injuries
- Higher complication rates
- More likely to develop permanent disabilities
- Result: Claims cost 25-40% more for workers over 55 vs. under 35
More serious injuries: Shift from minor sprains/strains to complex conditions
- Increase in cumulative trauma (repetitive stress injuries)
- More psychological injuries (stress, PTSD)
- Complex regional pain syndrome cases (difficult to treat, very expensive)
Delayed return to work: Average time off work increasing
- 2020: 42 days off work (average claim)
- 2024: 57 days off work (36% increase)
- Indemnity benefits (wage replacement) paid for 15 additional days on average
- Each additional day off work adds $400-$600 in costs
Increased litigation: More claims involve attorneys
- 2020: 28% of claims had attorney representation
- 2024: 38% of claims have attorneys
- Attorney involvement increases claim costs 60-80% on average
- Legal fees add $8,000-$15,000 per litigated claim
Factor 3: Post-Pandemic Workforce Changes
Remote and hybrid work creating new injury patterns:
Home office injuries increasing:
- Ergonomic injuries from improper home setups
- Trips/falls in home offices
- Cumulative trauma from inadequate equipment
- Compensability questions: Is injury "arising out of employment" at home?
Mental health claims surging:
- Work stress, anxiety, depression claims up 64% since 2020
- Difficult to prove causation (work-related vs. life stress)
- Treatment costs high (therapy, psychiatry, medications)
- Long claim duration (mental health issues harder to resolve)
- Average mental health claim cost: $87,500 vs. $58,900 for physical injuries
Gig economy complications:
- AB5 (California's gig worker law) reclassifying contractors as employees
- More workers qualifying for workers' comp coverage
- Disputes over employment status increasing costs
- Independent contractor claims denied, then appealed, adding legal costs
Factor 4: Pharmaceutical Costs Exploding
Prescription drugs represent 10-12% of medical costs but growing fastest:
Compound medications driving costs:
- Custom-mixed topical creams for pain management
- Costs range from $2,000 to $15,000 per prescription
- Often prescribed for months or years
- Limited clinical evidence of effectiveness
- California attempting to regulate but growth continues
Opioid alternatives:
- Push to reduce opioid use (good for patient safety)
- Alternative pain medications more expensive
- Non-pharmaceutical pain management (acupuncture, chiropractic) covered but costly
Specialty medications:
- Biologics for inflammatory conditions
- Costs $5,000-$25,000 per month
- Lifetime use for some chronic conditions
- Single injured worker can generate $200K+ in drug costs
Example: Worker suffers back injury. Prescribed compound pain cream ($4,800/month) plus physical therapy ($1,200/month) plus anti-inflammatory biologics ($8,200/month) for 18 months = $257,400 in treatment costs. 2020: Same injury treated with OTC medications, physical therapy, and exercise programs = $14,800.
Geographic Variation: Where Costs Are Rising Fastest
Highest-Cost Regions (Percentage Above State Average)
-
San Francisco Bay Area: +38% above state average
- Highest medical costs in California
- High cost of living = higher wage replacement benefits
- Expensive housing = difficulty returning to work
-
Los Angeles County: +28% above state average
- Dense population = more attorney involvement
- Diverse workforce = communication challenges
- High medical provider density = utilization concerns
-
Orange County: +22% above state average
- Similar to LA but slightly lower costs
-
San Diego County: +18% above state average
- Growing attorney involvement
- Rising medical costs
Lower-Cost Regions
- Central Valley: -15% below state average
- Inland Empire: -12% below state average
- Rural Northern California: -18% below state average
Cost differential impact: Same industry, same payroll, business in San Francisco pays 56% more than business in Fresno
What Businesses Can Do: Cost Management Strategies
Strategy 1: Implement Aggressive Return-to-Work Programs
Early return-to-work reduces costs dramatically:
Modified duty programs: Bring injured workers back in limited capacity
- Light duty tasks within medical restrictions
- Reduces indemnity benefit costs (wage replacement)
- Faster full recovery (workers heal better when active)
- Reduces litigation risk (employed workers less likely to hire attorneys)
Cost impact:
- Average claim with immediate return-to-work: $18,400
- Average claim with 30+ days off work: $67,800
- Savings per claim: $49,400 (269% difference)
Implementation:
- Identify transitional duty tasks in advance
- Train supervisors on accommodation
- Communicate with medical providers about restrictions
- Track and document all return-to-work efforts
ROI example:
- Business experiences 12 lost-time claims annually
- Implementing return-to-work reduces average duration from 45 days to 12 days
- Medical costs similar but indemnity benefits drop 73%
- Annual savings: $187,000 (more than pays for dedicated return-to-work coordinator)
Strategy 2: Medical Provider Network (MPN) Selection
California allows employers to direct care through MPNs:
MPN benefits:
- Pre-vetted providers following evidence-based medicine
- Better communication between providers and employers
- Faster return-to-work (providers understand job requirements)
- Lower costs (MPN providers agree to fee schedules)
Cost impact:
- Claims within MPN: Average cost $51,200
- Claims outside MPN: Average cost $72,800
- Savings: 42%
MPN selection criteria:
- Provider density (sufficient providers in your area)
- Occupational medicine specialists (understand work injuries)
- Return-to-work focus (providers support modified duty)
- Cost efficiency (track outcomes and costs)
Strategy 3: Proactive Claims Management
Engage with claims immediately:
Day 1 actions:
- Report claim to insurer within 24 hours (delays increase costs)
- Contact injured worker to show concern
- Gather incident information while fresh
- Identify witnesses
- Document scene (photos, measurements)
Day 2-7 actions:
- Facilitate first medical appointment
- Communicate with treating physician
- Discuss return-to-work possibilities
- Monitor treatment plan for appropriateness
Ongoing:
- Weekly check-ins with injured worker
- Review medical bills for errors or overcharges
- Challenge unnecessary treatment
- Push for maximum medical improvement determination
Impact: Proactive claims management reduces claim costs 20-35% vs. passive approach
Example: Worker injures shoulder. Employer immediately reports claim, facilitates orthopedic appointment next day, discusses modified duty with doctor, brings worker back within one week on light duty. Total claim cost: $22,400. Without proactive management: Worker sees attorney, delays treatment, stays home 8 weeks, claim costs $78,900.
Strategy 4: Enhance Workplace Safety Programs
Prevention is cheaper than claims:
Effective safety program elements:
- Formal written safety policies
- New employee safety orientation
- Job-specific training (ergonomics, equipment operation, hazard recognition)
- Regular safety inspections
- Incident investigation and corrective action
- Employee safety committees
- Incentive programs (rewards for safe behavior)
Cost impact:
- Businesses with strong safety programs: 40-60% fewer claims
- Lower frequency = lower premiums (experience mod improves)
- Lower severity (minor injuries prevented before becoming serious)
ROI: Safety program costs $8,000-$15,000 annually (training, equipment, consultant fees). Preventing 3-4 claims saves $75,000-$150,000. ROI: 500-1,000%
Strategy 5: Challenge Your Experience Modification
Experience modification (e-mod) determines your premium relative to industry average:
- E-mod of 1.00 = Average risk
- E-mod of 0.85 = 15% better than average (15% lower premium)
- E-mod of 1.25 = 25% worse than average (25% higher premium)
E-mod calculated from:
- Your claims history (last 3 years)
- Industry averages
- Claim frequency and severity
Common e-mod errors:
- Claims incorrectly included (closed claims still showing as open)
- Duplicate claims (same injury reported twice)
- Incorrect claim amounts (estimates not adjusted for actual costs)
- Wrong industry classification (coded as higher-risk industry)
E-mod audit process:
- Request detailed e-mod worksheet from insurer or rating bureau
- Review every claim for accuracy
- Challenge errors through formal dispute process
- Correct errors can reduce e-mod by 0.05-0.25 points
Impact: Business with $120,000 annual premium and e-mod reduced from 1.15 to 1.05 saves $12,000 annually (10% reduction)
Strategy 6: Shop Multiple Carriers Annually
Workers' comp rates vary widely between carriers:
Rate spreads for same risk: 25-40% between high and low quotes
Why such variation:
- Different carrier appetites for industries
- Different claim handling approaches
- Different expense structures
- Different profit margin targets
Shopping strategy:
- Request quotes from 5-7 carriers
- Include both standard and specialty carriers
- Consider group programs (trade associations, PEOs)
- Compare more than price (claim service quality matters)
Example: Restaurant with $87,900 renewal premium shops to 6 carriers:
- High quote: $94,200
- Low quote: $68,400
- Selected carrier: $72,100 (balance of price and service)
- Annual savings: $15,800 (3 hours of work for $15,800 return)
Strategy 7: Consider Self-Insurance or Large Deductibles
For larger businesses: Retain more risk to reduce costs
Large deductible programs:
- Employer pays first $25,000-$250,000 per claim
- Insurance covers claims above deductible
- Premium 30-50% lower than guaranteed cost
When it makes sense:
- Annual premium above $200,000
- Strong financial position to fund deductibles
- Effective risk management (lower claim frequency)
Self-insurance:
- Employer assumes all risk, no insurance
- Requires California Department of Industrial Relations approval
- Must prove financial ability to pay claims
- Must post security ($200,000-$5 million bond)
- Typically requires annual workers' comp costs above $500,000
Looking Ahead: Will Costs Continue Rising?
Factors Supporting Continued Increases (2026-2027)
Medical cost inflation likely to persist:
- Healthcare inflation showing no signs of slowing
- Compound medication costs still increasing
- Aging workforce will continue driving costs
Legislative efforts to reform may fail:
- Powerful stakeholders (trial attorneys, medical providers) oppose cost-cutting measures
- Political gridlock makes reform difficult
- Previous reform successes may not be replicable
Projection: 6-9% annual increases likely 2026-2027
Factors That Could Slow or Reverse Increases
Regulatory action on compound medications:
- California considering strict limitations on compound med coverage
- If enacted, could reduce costs 3-5%
Utilization review reforms:
- Improved oversight of medical treatment appropriateness
- Could reduce unnecessary procedures
- Potential 4-8% cost reduction
Technology adoption:
- Telemedicine reducing costs
- AI-powered fraud detection
- Predictive analytics identifying high-risk claims early
- Potential 5-10% efficiency gains
Return-to-work initiatives:
- State and insurer programs encouraging earlier return-to-work
- If widely adopted, could reduce indemnity costs significantly
Most Likely Scenario
2025-2026: Rates increase 6-10% annually 2027: Increases slow to 3-6% 2028+: Potential stabilization or modest decreases
Long-term: California workers' comp unlikely to return to ultra-low rates of 2015-2023. New equilibrium likely 15-25% above those historic lows.
Key Takeaways for California Employers
The era of declining workers' comp costs is over: After 12+ years of rate decreases, California businesses face significant increases in 2025-2026.
Medical inflation is the primary driver: Rising healthcare costs, particularly compound medications and specialized treatments, are overwhelming previous reform gains.
Risk management is critical: Businesses with strong safety programs, aggressive return-to-work, and proactive claims management will fare much better than passive employers.
Experience mod matters enormously: Challenge your e-mod for errors—correcting mistakes can save tens of thousands annually.
Shop annually: Rate spreads of 25-40% between carriers make annual shopping essential.
Prevention is cheaper than claims: Every dollar invested in workplace safety returns $5-10 in avoided claim costs.
Act before September 1: Policies renewing before September 1, 2025 avoid the new rates for another full year. Consider adjusting renewal dates if possible.
The workers' compensation cost increases present challenges for California businesses, but they're manageable with proactive strategies. Employers that view workers' comp as a risk management opportunity rather than an unavoidable expense will minimize cost impact while improving workplace safety and employee outcomes.
Navigating California's changing workers' comp market? Understanding medical cost drivers, implementing effective return-to-work programs, and accessing competitive insurance markets requires specialized expertise. Work with professionals who can help control costs while maintaining compliance with California's complex workers' compensation regulations.
Sources: California Department of Insurance, Workers' Compensation Insurance Rating Bureau of California, WCIRB actuarial reports, California Division of Workers' Compensation statistics