April 16 (Bloomberg) -- California lawmakers approved an overhaul of the state workers compensation system, allowing Governor Arnold Schwarzenegger to fulfill a campaign promise and saving as much as $7 billion for companies such as Costco Wholesale Corp.

The 101-page bill cuts costs by mandating that doctors from a pool hired by companies must declare whether a worker is eligible. The new law seeks to fix a system with benefits that rank in the lowest third among U.S. states while employers pay the nation's highest premiums.

Schwarzenegger, winning his second victory in as many months, pushed legislators to compromise by backing a petition drive for a workers compensation measure on the Nov. 2 ballot. A Schwarzenegger-sponsored referendum last month won 63 percent of the vote to allow the state to sell as much as $15 billion in bonds to finance record budget deficits.

Workers compensation insurance ``has been a poison on our economy,'' Schwarzenegger told reporters in the Capitol. He will sign the bill Monday. ``When I came to Sacramento the first thing I heard was: This couldn't be done. Working together here, we've shown that we're bigger than our problems.''

Companies that pay into their own internal workers compensation program, known as self-insurance, may see some savings immediately. The overhaul of the 91-year-old system doesn't include any regulation capping premiums charged by insurance underwriters.

The system, which treats 800,000 workers annually and had $18 billion in claims last year, would save as much as $7 billion annually, according to Assembly Democrats' estimates.

Immediate Savings

The Assembly passed the bill 77-3 with the Senate following it by a vote of 33-3, both above the two-thirds majority that allows it to become effective immediately after Schwarzenegger signs it, according to California law.

``California businesses have been locked in a purgatory of partisan politics for far too many years,'' said Republican Assemblyman Rick Keene before the vote on the floor of the statehouse in Sacramento. ``But with Governor Schwarzenegger's leadership pounding on both sides, we've been able to forge a compromise that is going to provide significant relief.''

Democrats compromised on the overhaul by dropping their insistence that the state must regulate how much underwriters can charge for premiums and had balked at Republican insistence that companies should have more say in what doctors injured workers should visit.

Republicans agreed to allow injured workers to receive care immediately rather than waiting until classified and agreed to benefit increases for severely injured workers.

Campaign

Lowering insurance costs was a centerpiece of Schwarzenegger's plan for keeping businesses in California, something he promised during last fall's recall campaign would help boost revenue and ease budget deficits that have faced the state since the stock market slipped from a peak in 2000.

The California Chamber of Commerce and the California Business Roundtable, groups that have criticized the high cost of doing business in the state, applauded Schwarzenegger's bill. Schwarzenegger's financial adviser is billionaire friend Warren Buffett and he has received financial support from companies such as Intel Corp., whose chief executive officer, Craig Barrett, has characterized California as hostile to business.

``Anything that makes the business climate more friendly is a good thing,'' said Tracy Koon, a spokeswoman for Intel, with 14,000 workers in California. ``So, we've been supportive of reform, anything that will make the cost of business less onerous.''

Lagging

California, home to almost one-sixth of the companies in the Standard & Poor's 500 Index, was being battered by insurance costs driving employers elsewhere, Schwarzenegger complained during the campaign.

The home of Intel is showing signs of lagging behind the nation in the recovery, producing 5,200 new jobs last month while the unemployment rate rose. Businesses nationwide added 308,000 jobs, the biggest gain in four years. The state accounts for about one-tenth of the U.S. economy.

The new law reduces penalties on insurance underwriters, lowers the amount paid to workers if they have a pre-existing condition, narrows the definition of permanent disability and creates incentives for employees to return to work.

Lawyers

Some workers compensation lawyers said the bill placates big business and insurers at the expense of injured employees who will have worse medical care and fewer options. Trial lawyers groups argued that the state should cap insurance rates.

``It's using this political clout without any real understanding of what the real problems are to create an artificial reduction in rates by taking away the rights of injured workers,'' said San Jose lawyer Bruce Sutherland in a telephone interview from his offices. ``The so-called savings, which are not guaranteed, are the inability of injured workers to get to doctors for care, who will be interested in providing that care, instead of just company doctors.''

California's premiums soared to the highest in the U.S. over the past three years. In early 2003, California's workers' compensation cost per $100 of payroll was $5.85 while the national average was $2.46. Current costs for California are estimated to exceed $6.33 per $100 of payroll, according to the state Senate Republicans.

Even though premiums rose fast, costs rose faster, driving at least 18 private insurers to stop writing new business since 2000. That left the State Compensation Insurance Fund as the largest underwriter with control of more than half the market.

Competition

The state's largest underwriter, Superior National Insurance Co., was deemed insolvent in 2000. Two years later, Fremont Compensation, the second largest, left the state, according to the California Department of Insurance. Since 2000, 12 insurers in all have either been put under conservators or liquidated, including Sable Insurance Co. and Reliance Insurance Co., according to the department.

Schwarzenegger's compromise is designed to make the system cheaper without crimping profits of insurance companies as a way to lure underwriters back into the state. More competition should force the insurers to pass on competitive premium rates to business, the governor has said.

Passage by the Legislature averts a costly election campaign by groups that sought to change the state's workers compensation system by placing proposals before California voters in November. Schwarzenegger, a 56-year-old whose ascent to office was paved by a signature-gathering effort, had pledged to appeal directly to voters should the Democrat-led legislature fail to act on his plans.

Costco

During a break from negotiations in the Legislature this week, Schwarzenegger appeared at signature-gathering drives at a store owned by Costco, the discount retailer whose profit last year fell short of forecasts because of a jump in workers' compensation insurance bills in California.

Costco's shares last August dropped 19 percent, the biggest decline in more than three years, after the Issaquah, Washington- based retailer cut its profit forecast because of higher insurance costs.

``If this even reduces the costs of an injury in California to twice the national average, it could be a big positive for their earnings,'' Patricia Edwards, who helps manage about $5.8 billion at Seattle-based Wentworth, Hauser & Violich, including Costco shares, said of the retailer. ``Of course, it will take a minimum of six to nine months to see it hit the bottom line.''

To contact the reporter of this story: Michael B. Marois in Sacramento, California at mmarois@bloomberg.net.

Last Updated: April 16, 2004 18:50 EDT